Course 107:
A Tour through the Balance Sheet
In this course
1 Introduction
2 Assets
3 Liabilities
4 Shareholders' Equity


The balance sheet is usually the second financial statement you'll encounter in an annual report or SEC filing, though sometimes it comes first. The purpose of a balance sheet is to tell how much a company owns (its assets), how much it owes (its liabilities), and the difference between the two (its equity), which represents the part of the company owned by shareholders. The basic equation underlying a balance sheet is:
Assets - Liabilities = Equity This can also be expressed as:
Assets = Liabilities + Equity These three elements are crucial for evaluating a company's financial health. Companies with lots of assets relative to their liabilities are generally more resistant to setbacks than companies with lots of liabilities are. Financial leverage, equal to assets divided by equity, is one of the most common measures of financial health; the higher a company's leverage, the more it relies on debt to finance its operations. Each of these three primary elements is broken down further on the balance sheet, and these breakdowns give lots of useful information. Few balance sheets will contain all of the items listed below, and often the items that do appear will be arranged in different ways. However, below are some of the most common items that are important to know to make sense of the wide variety of balance sheets you'll encounter.

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