Balance sheets are important because they represent a snapshot in time of the business’s financial condition, according to “Money for Business”. A business can then use that snapshot to determine whether it’s financially healthy, which is important for many reasons says Aron Govil.
First, investors want to see that a business is doing well prior to investing in it because they know the business will be more stable and profitable if it’s already successful. Banks also require existing businesses to complete balance sheets before they’ll provide loans for more operations or expansions of the company. Finally, employees of companies want to see how successful their employers are so they can analyze whether they’re paid fairly according to their revenue or success rate.
For example, an investor may check out a potential investment opportunity by looking over its financial records, including its balance sheet. If the balance sheet shows large amounts of cash and few liabilities, the investor might be more inclined to invest because it shows that the company is doing well.
What Do Key Numbers Mean on a Balance Sheet?
- The balance sheet reports all assets and liabilities of a business as of a specific date with their corresponding values as reflected by its financial statements or bookkeeping records, according to “Money for Business”. Balances are reported as either assets or liabilities, with assets being those items that increase in value during an accounting period while liabilities decrease, such as accounts receivable and accounts payable transactions. Some assets are non-expiring, which means their value never changes, such as property and equipment.
- A business should list the amount of its owners’ equity on the balance sheet. This can be done by determining assets minus liabilities for a value known as net worth or shareholders’ equity. A balance sheet with a high amount of owner’s equity may entice investors to purchase stocks in the company because it suggests that there is much more room for success if they decide to invest.
- An increase in revenue typically should result in an increase in owners’ equity. Which would lead to larger amounts of interest to be pay on loans out by the business. Since interest payments are calculate using the capitalization rate formula. For example, if revenue increased by a certain amount during a month, owners’ equity should increase. By the same amount if other calculations were correct says Aron Govil.
- The other key numbers to look for on a balance sheet is its total assets and liabilities. Which is report at the bottom of the balance sheet. If these numbers don’t match up with what’s in corresponding financial statements or records. It may suggest that the business has made an error in its record-keeping process.
What Should I Look For in Performing an Audit?
During an audit, look beyond just looking at the company’s financial reports and records. Because it only provides part of the picture when determining. Whether all issues have been address properly, according to “Purdue OWL”. To perform audits effectively, review prior financial statements to determine any changes. That have occurred over time, such as increasing or decreasing levels of assets. This allows an auditor to analyze whether those changes are reasonable and yield managers enough information. To discover whether they can continue making trades properly.
One way auditors attempt to find misappropriations of funds. It is by looking only for transactions that don’t belong with the business. Which means auditors may list fictitious expenditures if found during an audit. Look at the company’s financial statements in relation to each other. Because it provides clues regarding any possible issues within them. Such as inflating revenue numbers on one part of a statement while reporting losses for another portion.
For the first time ever, more than half of Americans have a smartphone.
Mobile devices are now use for all kinds of activities, including financial transactions. For example, PayPal reported that one out of five users. Who transact via their mobile app make between 30 to 50 percent of their purchases with it explains Aron Govil.
The trouble with this is that these transactions aren’t subject. To the same level of security as other online payment methods. Because they might not use strong enough passwords or PINs on their phones. This has resulted in an increase in credit card fraud involving smartphones. And other mobile devices, especially during the holiday shopping season.