Use of the Balance Sheet Because the balance sheet provides information on assets, liabilities and stockholders’ equity, it provides a basis for computing rates of return, evaluating the capital structure of the business, and predicting a company’s future cash flows. The balance sheet helps users to assess the company’s liquidity, financial flexibility, solvency and risk.6 However, a statement of financial position can provide only a partial picture of either liquidity or financial flexibility unless it is used in conjunction with at least a statement of cash flows.7 The statement of financial position can also be used in financial statement analysis to assess the company’s ability to pay its debts when due and its ability to distribute cash to its investors to provide them an adequate rate of return. Liquidity refers to the time expected to elapse until an asset is converted into cash or until a liability needs to be paid. The greater a company’s liquidity is, the lower its risk of failure. Solvency refers to the company’s ability to pay its obligations when they are due. A company with a high level of long-term debt relative to its assets has lower solvency than a company with a lower level of long-term debt. Financial flexibility is the ability of a business to take actions to alter the amounts and timing of its cash flows that enable the business to respond to unexpected needs and take advantage of opportunities. Risk refers to the unpredictability of future events, transactions and circumstances that can affect the company’s cash flows and financial results.
Posted on: Thu, 06 Nov 2014 11:03:26 +0000
Trending Topics
Recently Viewed Topics
© 2015