1. Section 3The Balance Sheet What You’ll Learn  The purpose of a balance sheet.  How to prepare a balance sheet.  How to analyze information on financial reports. What You’ll Learn  The purpose of a balance sheet.  How to prepare a balance sheet.  How to analyze information on financial reports.

2. Why It’s Important The balance sheet reports the financial position of a business at a specific point in time. Why It’s Important The balance sheet reports the financial position of a business at a specific point in time. Section 3The Balance Sheet (con’t.) Key Terms  balance sheet  report form  ratio analysis  profitability ratio  return on sales Key Terms  balance sheet  report form  ratio analysis  profitability ratio  return on sales  liquidity ratio  current ratio  current assets  current liabilities  quick ratio  liquidity ratio  current ratio  current assets  current liabilities  quick ratio

3. The Balance Sheet The balance sheet is a report of the balances in all asset, liability, and owner’s equity accounts at the end of the period. The Balance Sheet The balance sheet is a report of the balances in all asset, liability, and owner’s equity accounts at the end of the period. Section 3The Balance Sheet (con’t.)

4. The Balance Sheet (con’t.) The balance sheet represents the basic accounting equation; thus, the assets section total must equal the total of the liabilities and owner’s equity sections. The Balance Sheet (con’t.) The balance sheet represents the basic accounting equation; thus, the assets section total must equal the total of the liabilities and owner’s equity sections. Section 3The Balance Sheet (con’t.) Assets = Liabilities + Owner’s Equity

5. The Balance Sheet (con’t.) Section 3The Balance Sheet (con’t.)

6. Ratio Analysis Section 3The Balance Sheet (con’t.)  Ratio analysis involves the comparison of two amounts on a financial statement and the evaluation of the relationship between these amounts.  Used to determine the financial strength, activity, or debt- paying ability of a business.  Ratio analysis involves the comparison of two amounts on a financial statement and the evaluation of the relationship between these amounts.  Used to determine the financial strength, activity, or debt- paying ability of a business.

7. Return on Sales Section 3The Balance Sheet (con’t.)  Determine the portion of each sales dollar that represents profit. Net Income$1,150 net income Sales$2,650 sales Net Income$1,150 net income Sales$2,650 sales ==.434 or 43.4%

8. Current Ratio Section 3The Balance Sheet (con’t.)  Relationship between current assets and current liabilities. Current Assets$ 37,775 Current Liabilities$11,725 Current Assets$ 37,775 Current Liabilities$11,725 =Current Ratio=3.22 or 3.2:1

9. Quick Ratio Section 3The Balance Sheet (con’t.)  The relationship between short term assets and current liabilities. Cash and Receivables$ 22,575 Current Liabilities$11,725 Cash and Receivables$ 22,575 Current Liabilities$11,725 =Quick Ratio=1.92:1