Lesson 5: Discussion Forum
You know that the accounting equation is A = L + OE. You know that the balance sheet is a “snapshot in time.” You know that it is important to study the balance sheet of a company when making a decision to invest in that company. So, if you were an investor, what would you look for in the balance sheet, and how would you know if the statement you were reading was telling the whole story?

You must post your initial response to the discussion board by Wednesday at 11:59 p.m.

You will reply to 2 peers by Sunday at 11:59 p.m. In your responses to your classmates, note if you are in agreement with their treatment. State why, and support your response with evidence. In your response to your peers, be sure to address if you agree or disagree with the information they provided. Be sure to give a detailed explanation of your position.

Richard?

Financial accounting in a firm involves the recording, analyzing, and posting of financial transactions in a firm. It is one of the most sort information across the world. The basic accounting equation provides three particulars: assets, liabilities, and capital. Looking at the balance sheet can help investors and other stakeholders know which company is worth investing money in for a good return (Climent-Serrano, Bustos-Contell & Labatut-Serer, 2019). According to accounting principles, investors are prudent, and they will put money in firms that are making a profit. Therefore, it is crucial to understand the information to use in decision-making. The balance sheet study is important because it helps determine risk and return, secure business loans and extra capital, and provide fundamental financial ratios.

Analyzing and developing of balance sheet helps determine the risk and the return. Users of information can predict the profit they will make in a certain company if they have data from the balance sheet. Suppose a balance sheet has a lot of debt in the form of short and long-term long loans and payable; in this case, it can communicate the weakness of a firm (Climent-Serrano, Bustos-Contell & Labatut-Serer, 2019). Leverage can help a company, but bad borrowing can affect a corporation negatively. The stakeholders and users of information need to collect the best data to guide them to know the balance they have in terms of capital or cash and the investment they make, and how they can affect the output and sales.

Access to loans is possible if a firm’s balance sheet is smart. Having more assets shows that a firm is stable and can repay its debts without defaulting. In contrast, when many loans and liabilities, it can signal investors that an organization is failing and not performing well (Climent-Serrano, Bustos-Contell & Labatut-Serer, 2019). Therefore, an investor will need to look at the company’s number of loans to determine their potential to repay because having many loans can make it hard to repay (Bakkar, De Jonghe & Tarazi, 2019). Having a good report can help an secure organization loans; thus, investors need to look for these figures to determine their performance in the market.

Before a person invests in a company, they do a background check which tells how the firm is performing. The balance sheet helps determine the ratios. Different ratios such as solvency, liquidity, profitability ratios, and more use the information from the balance sheet. The computation of the quick ratio shows the firm standing in terms of the short loan and how quickly it can replay the loans (Bakkar, De Jonghe & Tarazi, 2019). The computation of various ratios explains more about the organization’s performance in the market. Analysis of this information can tell more about the corporation’s capabilities. However, the users of the information must depend on the quality data sources.

The information that the people decide to use must provide correct data for management and other users. If the information shows the use of the accounting principles, it is crucial to depend on such information. It is all good until the information provides the right data and figures to the customers and other stakeholders.

Reference

Bakkar, Y., De Jonghe, O., & Tarazi, A. (2019). Does banks’ systemic importance affect their capital structure and balance sheet adjustment processes?. Journal of Banking & Finance, 105518.

Climent-Serrano, S., Bustos-Contell, E., & Labatut-Serer, G. (2019). Importance of balance sheet composition in stress test estimates. Journal of Economic Science Research, 1(1).

Sarah?

If I was an investor for a company, the things I would look for in a balance sheet are the three main accounts that make up the accounting equation which are assets, liabilities, and stockholder’s equity. To look further into these three accounts more, assets should be looked at to see if they are short-term or long-term, or if they are property, plant, and equipment that may end up depreciating in value over the year due to being used. Liabilities also need to be looked at on a short-term and long-term basis simply to identify what kind of debt will be getting paid off within a year, and what will be paid off in a year or longer. After reviewing the assets and liabilities for the year, the stockholder’s equity would then be generated which shows any kind of book value after any kind of deductions are made. I think first analyzing these three accounts help to determine what kind of financial stability, or loss the company may have, and then after doing the initial review it can be easier to observe anything else. The only way to determine if the statement that was being read was telling the whole story was to make sure that everything has been recorded, and if a description can be put in a note then that can help further explain why something for example may have been put into an other assets line, or even other liabilities. I think the main focus in the balance sheet is to make sure all transactions that happened during the year are property recorded, and that is a reason the assets and liabilities should always equal the same before moving onto completing any other kind of financial statement. Balance sheets are an important piece of a financial statement needed, especially when making financial decisions such as asking a bank for a loan. Bank’s want to know what kind of assets the company has, along with the liabilities to determine if the debts are being paid off in order to determine if the loan they are asking for will be able to allow that company to make the payments on the loan per month.

Sources:

Spiceland, J. David, et al. Intermediate Accounting. McGraw-Hill Education, 2020.