Thread by @BrianFeroldi

Accounting is the language of business.

If you buy stocks, you MUST learn how to read a balance sheet.

Here’s everything you need to know:

The balance sheet is one of the 3 major financial statements.

It shows company’s:

▪️Assets: What it owns
▪️Liabilities: What it owes
▪️Shareholders Equity: It's net worth attributable to its owners

At a fixed point in time

That “at a point in time” part is key!

A balance sheet is a SNAPSHOT of a company’s net worth.

It is usually measured at the end of a quarter/year.

That’s different from an income statement or cash flow statement, both of which are measured over periods of time

All balance sheets follow the same formula:

Assets = Liabilities + Shareholders Equity

This formula must be in balance at all times

(Hence the term “balance sheet”)

Side Note:

This formula can be easily re-arranged into the “net worth” formula that you are already familiar with

Assets - Liabilities = Shareholders Equity (Net worth)

Companies get soe leeway in how they categorize each item on their balance sheet

This graphic shows some of the most commonly used categories & terms

Let’s start with assets, which is what a company OWNS

Assets are listed in order of liquidity

(Liquidity means how quickly a security can be turned into cash)

The most liquid assets are at the top, the least liquid on the bottom

There are two categories of assets:

Current assets:
▪️Assets that are expected to be used in <1 year

Long-term assets:
▪️Assets that a company will benefit from for >1 year

Common current assets:
▪️Cash: Checking account, t-bills, CDs w/ <3 maturity
▪️Marketable Securities: Stocks, bonds...etc that can easily become cash
▪️Accounts Receivable: Money it is owed by its customers
▪️Inventory: Unsold goods
▪️Prepaid expenses: Insurance, rent, etc…

Long-term assets come in 2 forms:

1: Tangible Assets
▪️Buildings
▪️Equipment
▪️Property
▪️Stores

2: Intangible Assets
▪️Trademarks
▪️Goodwill (premiums paid to make an acquisition)
▪️Patents
▪️Stocks/Bonds held >1 Year

Now for Liabilities, which are what a company OWES

There are 2 categories of liabilities:

1: Current liabilities:
▪️Bills that will be paid in <1 year

2: Long-term liabilities:
▪️Bills that are due in >1 year

Common current liabilities (due <1 year):
▪️Short-term debt
▪️Accounts payable (money owed to suppliers)
▪️Interest
▪️Unpaid Wages
▪️Dividends
▪️Taxes

Common long-term liabilities (due >1 year):
▪️Long-term debt (also called "Notes")
▪️Customer pre-payment
▪️Taxes
▪️Pension

Finally, is shareholders equity

This is money attributable to the business owners (shareholders)

Common categories:

▪️Retained Earnings: Net profits a company reinvests in the business
▪️Treasury Stock: Money used to buy back stock
▪️Additional Paid-In Capital: Amount shareholders have invested beyond common/preferred stock

This thread is just a broad overview of the balance sheet

Want specifics & and a helpful example?

We did a deep dive into the balance sheet on my YouTube channel using $AAPL's recent numbers as an example

Enjoy this thread?

Follow me @BrianFeroldi

I tweet about money, personal finance, & investing

Want to learn more about the income statement?

I have a thread on that too:

Want to learn more about financial statements?

These three books are excellent resources:

Sigh...

These threads take time to put together

so I super appreciate DMs like this!