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How to Read a Balance Sheet
The balance sheet is one of the primary components of a set of financial statements. It discloses the assets, liabilities and shareholders' equity of the company as of a particular date which is usually the company's fiscal year-end date. The assets are divided between current and fixed, and the liabilities are divided between current and long-term. The shareholders' equity normally discloses the issued capital stock and the retained earnings. The current assets are those that are normally less than one year in duration, including cash, accounts receivable and inventory. The accounts receivable should not be outstanding for more than a year, and the inventory should not normally be held for that long either, before being sold. Fixed assets include items like land, buildings, furniture and equipment. Except for land, these items are depreciated over their useful lives and therefore show a net book value which declines over a period of years. Current liabilities are expected to be paid within one year, and include accounts payable, loans payable and taxes payable. Long-term liabilities are expected to be paid over a period longer than one year, but the short-term portion which will be paid within one year is disclosed in the current liabilities section of the balance sheet, with the remaining portion disclosed in the long-term section. In the shareholders' equity section, the various categories of issued capital stock are disclosed, including common and preferred shares. Authorized capital stock is also disclosed. Retained earnings represent the accumulated profits and losses of the company since its inception. This item is also contained within the shareholders' equity section of the balance sheet, and discloses the opening balance of retained earnings, the current year profit or loss after taxes, and the closing balance of retained earnings.
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