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Understanding Balance Sheet 

Balance sheet is one among the three documents necessary to be provided by public companies. As the name suggest, balance sheet is used to establish the equivalence between the two sides of the following equation- 

Asset= Liability+Share holder's Equity

This equation is also called the balance sheet equation. Balance sheet is created as a snapshot in time that shows the situation of a company at that moment. Both the side should be balanced at all times. The snapshot is usually taken in equal interval ,say quarterly or yearly, to compare the situation of the company at the two ends of a period. The change in assets, liabilities and share holder's equity helps to look at the overall progress in the company. 

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In business, there are different types of assets and liabilities that are being considered. Below you can find the different types of assets and liability mentioned in a balance sheet.

Assets

Current Assets (Convertible to cash within a year) 

  • Cash and cash equivalents

  • ​Accounts receivables (money owed to you by customers)

  • Inventory

  • Short-tern investments

  • Prepaid expenses (Rent, Advances)

​Non-current Assets

  • Property, plant and equipments

  • Long term investments

  • Intangible assets( patent, trademark and goodwill)

Liability

Current Liabilities(Due within a year) 

  • Accounts Payable (Bills to supplier)

  • Short-term loans

  • Taxes payable

  • Wages payable

​Non-current Liabilities

  • Long term loans

  • Bonds Payable

  • Deferred tax liaibility

Shareholder's Equity

  • Common stocks (shares issued)​

  • Retained earning (Reinvested profits)

  • Additional paid in capital (extra capital from shareholders)

  • Treasury stocks (Repurched shares)

Basis the data presented we can derive the following ratios

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Liquidity Ratios

  1. Current Ratio=Current Liabilities/Current Assets

  2. Quick Ratio=(Current Assets- Inventory)/ Current Liabilities

  3. Cash Ratio= Cash and Cash equivalents/ Current liabilities

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Solvency Ratios

  1. Debt to equity Ratio=Total Liability/Shareholder's equity

  2. Debt Ratio=Total Liabilities/Total Assets

  3. Equity Ratio= Shareholders' equity/Total assets

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Efficiency Ratios

  1. Inventory turnover ratio= COGS(cost of goods sold)/ Average inventory

  2. Account receivables turnover ratio= Net credit sales/ Average account receivables

  3. Asset turnover ratio=Net sales/Average total assets

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Market Ratios

  1. Book value per share= Share holders' equity/Total outstanding shares

  2. Return on assets (ROA)=Net Profit/Total Assets

  3. Return on Equity (ROE)= Net profit/ Shareholder's equity

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