Since Balance Sheets present the health of a company as of a snapshot in time, v
ID: 2759307 • Letter: S
Question
Since Balance Sheets present the health of a company as of a snapshot in time, valuable information will be lost if managers do not take the opportunity to compare the progress and trend of a business by regularly evaluating and comparing balance sheets of past time periods, or versus its competition. Information is power. Obtaining information from the preparation and analysis of a Balance Sheet is one financial management tool that may mean the difference between a company's success and failure. Describe one or two ways in which you would utilize your balance sheet (using historical data) to make operational and/or strategic decisions moving forward.Explanation / Answer
Three important functions of a Balance Sheet are:
1. It gives the concise summary of the firm's resources (assets) and obligations(liabilities and owner's equity)
Networth or Owner's Equity=Total Asset-Total Liability
2. It can be used to measure of firm's liquidity [Example: Current ratio and Quick ratio]
3.It can be used to measure firm's solvency [ Example: Debt to Equity Ratio ]
A firm's historical data can be used to look at the above three important parameters and then make strategic decisions. We can check , if the owner's equity is growing over the years or not. This information is important for the investors and also for the firm if they are intending to go the market for further capital. For suppliers/creditors , liquidity or company's ability to pay their dues is important. In case of long term debt holders (bond holders , banks) , the solvency of the firm is a critical factor for decision making.