Step 1: Quick Take: Balance Sheet Analysis The balance sheet of a company shows a firm's assets and liabilities (and stockholders' equity). In other words, at any given point in time, the balance sheet illustrates a firm's overall financial position. A typical balance sheet shows assets owned by the company on the left, along with the firm's liabilities and equity on the right The assets are usually organized into two major types: currents assets and fixed (or long-term) assets. Current assets include cash, cash equivalents, accounts receivable, and inventory. These are assets that are expected to be converted to cash in short order. Fixed assets include net plant, property, and equipment, along with other long-term assets. Similarly, the right side of the balance sheet is usually organized into two major categories: liabilities (money owed by the company) and stockholders' equity. Current liabilities are claims that are due within one year. These types of liabilities typically consist of things like accounts payable, accruals, notes payable to banks. Long-term debt can include bonds with maturity dates far into the future. Stockholders' equity can be written as either the sum of paid-in capital and retained earnings, or the difference between total assets and total liabilities. The various financial ratios commonly used to analyze the financial strength of a company can also be used to relate the various entries on the balance sheet together. For example, the current ratio is calculated by dividing current assets by current liabilities. Thus, in theory, if you knew the current ratio and the value of current liabilities, you could solve for the value of current assets by multiplying the current asset ratio by current liabilities. Additionally financial ratios can also be used to related items from the balance sheet to items in the income statement, such as sales or cost of goods sold. For example, the total assets turnover ratio can be calculated as sales (from the income statement) divided by total assets (from the balance sheet). In theory, if you know the total assets turnover ratio as well as the value of total assets, you can solve for sales by multiplying the total assets turnover ratio by total assets. True or False: Liabilities generally appear on the left side of the balance sheet. True False Accounts payable would generally appear under on the balance sheet. Step 2: Learn: Balance Sheet Analysis Suppose that Royval Inc has the following data: Total assets turnover 1.25 36.5 days 5 Days sales outstanding Inventory turnover ratio Fixed assets turnover Current ratio Gross profit margin on sales: 4 2 30.00% Also suppose that Royval Inc has the following balance sheet: Assets Cash Balance Sheet Liabilities Current Liabilities Long-term debt Common stock Retained earnings Accounts receivable $135,000 Inventories Fixed assets $130,000 Total assets $450,000 Total Liabilities and equity Sales Cost of goods sold Given the value of total assets turnover, along with the level According to the video, total assets turnover is equal to of total assets given, this means that Royval's sales must be . Given the value of DSO, along According to the video, DSO (days sales outstanding) can be written as with the level of sales you already calculated, this means that Royval's recevables must be Given the value of the inventory ratio, along with According to the video, the inventory ratio can be written as equal to the level of sales you already calculated, this means that Royval's inventories must be According to the video, the fixed asset turnover ratio can be written as This means that Royval has fixed assets of According to the video, cash can be written as total assets minus fixed assets, inventories, and accounts receivable. This yields a value of cash of for Royval. According to the video, the current ratio can be written as and the value of the current ratio yields a value of current liabilities of approximately . Plugging in the value for current assets According to the video, the value of total assets is equal to the value of total liabilities and equity. Given In the video, total liabilities and equity is equal to the level of total liabilities and equity, as well as retained earnings, current liabilities and the level of long-term debt, solving for Royval's common stock yields Given the gross profit margin and the level According to the video, gross profit margin can be written as of sales you have already calculated, this means that Royval has a cost of goods sold of Step 3: Practice: Balance Sheet Analysis Step 3: Practice: Balance Sheet Analysis Now it's time for you to practice what you've learned. Suppose that Royval Inc has the following data: 1.25 36.5 days 5 Total assets turnover Days sales outstanding Inventory turnover ratio Fixed assets turnover Current ratio Gross profit margin on sales: 4 2 30.00% Also suppose that Royval Inc has the following balance sheet: Balance Sheet Assets Liabilities Cash Current Liabilities Accounts receivable Long-term debt $128,250 Common stock Inventories Fixed assets asse $123,500 Total assets $427,500 Retained earnings Total Liabilities and equity Cost of goods sold Sales Use the formulas you learned about in the previous stage of the problem to answer the following questions. Given the value of total assets turnover, along with the level of total assets given, this means that Royval's sales must be $534,375.00 Given the value of DSO, along with the level of sales you already calculated, this means that Royval's receivables must be Given the value of the inventory ratio, along with the level of sales you already calculated, this means that Royval's inventories must be Given the value of the fixed assets turnover ratio, as well as the level of sales, this means that Royval's fixed assets must be equal to for Royval. Given the current ratio of 2 and values of cash, accounts receivable, and Solving for cash yields a value of cash of inventories, the level of current liabilities must be Given the level of retained earnings, current liabilities, and long-term debt, along with the relationship between total assets and total liabilities and equity, this means that Royval's common stock must be Given the gross profit margin and the level of sales you have already calculated, this means that Royval has a cost of goods sold of $374,062.50