Page 416 - Business Principles and Management

Chapter 15 • Business Financial Records

FIGURE 15-6 The balance sheet shows the financial position
of a company on a given date.

Crown Corporation
Balance Sheet
December 31, 20--
ASSETS LIABILITIES AND CAPITAL

Cash $ 24,000 Liabilities:
Accounts Payable $ 32,000
Accounts Receivable 8,000
Mortgage Payable 104,000
Merchandise Inventory 64,000
Total Liabilities $136,000
Equipment 80,000
Capital:
Land and Building 360,000
Stockholders’ Net Worth 400,000
Total Liabilities
Total Assets $536,000 and Capital $536,000

The amount customers owe the business is an asset called accounts receivable. It is
an asset because the business has a legal right to obtain cash for the goods sold and
can sue customers who do not pay. The store will eventually collect cash from the
customers.
The accounts payable item under Liabilities on the balance sheet is the amount
the company owes for purchases it made on credit. In this example, the store
bought jewelry worth $32,000 on credit from a manufacturer. Until the company
pays the bill, the amount remains on the balance sheet as a liability, or debt.

VALUE OF BALANCE SHEET INFORMATION
The balance sheet for the Crown Corporation provides a great deal of useful data.
It lists specific types and amounts of assets and liabilities. The balance sheet also
shows that the business owns assets of $536,000, owes $136,000, and is worth
$400,000 on December 31. The total figures on the balance sheet agree with the
basic accounting formula as follows: facts &

Assets Liabilities Capital
$536,000 $136,000 $400,000 figures
A careful look at the specific items reveals other valuable information. For
example, Crown cannot now pay the $32,000 that it owes under accounts payable
because it has only $24,000 in cash available. Ideally, the company will make Corporations whose stock is
enough cash sales and will collect cash from some of those customers listed under publicly traded are required to
accounts receivable soon enough to pay its bills when due. Even though the provide an annual report to
money owed under accounts payable is not likely to become due all at once, stockholders and to file financial
the company could possibly have trouble meeting other day-to-day expenses. information with the Securities
The company would be in trouble if a sudden emergency arose that called for and Exchange Commission. The
a large amount of cash. reports include financial state-
Crown may use its balance sheet to compare financial results with prior time ments, including an end-of-year
periods or with other companies. Because companies prepare a yearly balance balance sheet. You can review
sheet, the business can review its financial progress by comparing this year’s results the annual report of most cor-
with last year’s. It may find, for example, that the amount of capital increased over porations on their Web sites.

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