The Balance Sheet

One important thing to remember about the balance sheet is that it will always balance out. Total assests will always equal total liabilities plus stockholder's equity. If a company's assest increase from one period to the next, then you know the company's liabilities and stockholder's equity will increase by the same amount.

Assets are defined as things a company owns, which are expected to provide future benefits. There are two main types of assets current assest and noncurrent assets. Within these two categories are numerous other sub categories.

Current assets are things businesses own that are expected to be used up or converted to cash within a year. The most common line items in this category are cash and cash equivalents, short-term investments, accounts receivable, inventories and other current assets.

Noncurrent assets are clearly defined as anything that is not a current asset. The main line items in this category are long term investmens; property plant and equipment; and good will and other intangible assets.

When you become familiar with what a company owns, move to the other side of the balnce sheet and you will see what a company owes. Similar to assets there are two different kinds of liabilities: current and noncurrent liabilities.

Current liabilities are obligations the firm must pay in one year. The main items in this category are short term debt and accounts payable.

Noncurrent Liabilities represent liabilities that must be paid more than one year in the future. The are several items in this category but the most important one is long-term debt. Long-term debt is usually debt incurred from issuing bonds. Too much long-term debt is risky for a company because the interest on the debt must be paid regardless of how the company is doing.

Equity is total assets minus total liabilities. It represents the part of the company that is owned by the shareholders. The main two categories investors should focus on is retained earnings and treasury stock. Retained earnings represents the total profits the company has earned since it began minus whatever has been paid out in dividends. Treasury stock is how much of the company's stock that the company owns. You should pay attention to this number to see how much of its own stock a company is buying from period to period.

The Financial Reality

Admittedly, we have left out a lot of the specifics, but you now know enough to be dangerous.