Overview of the balance sheet

- We've all heard that Apple, maker of iPhones and Mac computers, has more money than they know what to do with. As of September 24, 2016, Apple reported they had over $237 billion in cash in marketable securities. $237 billion. - Well, where does that number come from? How do people know how much Apple has in cash and securities? - That information and so much more is all out there waiting for those with an interest in reading Apple's balance sheet. - [Man On Right] Let's start our journey through the land of accounting by beginning with the fundamental financial statement, the balance sheet. The balance sheet contains a listing of a company's assets, a company's liabilities, and a company's owners' equity. - [Man On Left] Now, what is an asset? Assets are economic resources that are owned or controlled by a company as a result of past transactions. Common examples of assets include cash, accounts receivable, people who owe the company money, inventory, items the company is holding to resell, and buildings. - To resummarize an aggregated on a balance sheet, each asset must be assigned a dollar amount. A balance sheet wouldn't be very useful with the following asset listing. One bank account, two warehouses full of goods, three trucks and four customers who owe us money. - The monetary measurement and evaluation of assets is an area in which accountants must exercise considerable professional judgment. - [Man On Right] So, what are liabilities? Liabilities are obligations to pay cash, transfer other assets or provide services to someone else. Your personal liabilities might include unpaid phone bills, the remaining balance on an automobile loan, or an obligation to complete work for which you've already been paid. - [Man On Left] Common liabilities for businesses include accounts payable, amounts owed as a result of the purchase of goods and services on credit, mortgage payable, amounts owed relating to the purchase of property, and unearned revenue. These are amounts owed in services or product to a customer who has paid in advance. - Now, like assets, liabilities must be measured in dollars or whatever currency is being used. And, as with assets, quantifying the amount of a liability can require extensive judgment. - For example, consider the difficulties of a company attempting to quantify its obligation to clean up a toxic waste site. When the clean up will take years to complete, the extent of the environmental damage is still in dispute and legal responsibility for the toxic mess is still being debated in the courts. Properly valuing a company's liabilities is one of the biggest, if not the biggest, challenges that an accountant faces. - So, assets are resources owned or controlled by a company. Liabilities are future obligations of the company as a result of past transactions. So, why do they call it the balance sheet? - [Man On Right] Well, assets can be funded in two ways. Through liabilities or through the use of owners' investments in the company. These investments are called owners' equity. Owners' equity is a residual amount. It represents the net assets, that is total assets minus total liabilities, available after all obligations have been satisfied. - Owners' equity increases when owners make investments in a business or when the business generates profits that are retained inside the business. Owners' equity decreases when the owners' take back part of their investment. If the business is a corporation, distribution to the owners, the stockholders, are called dividends. Owners' equity also decreases if operations generate a loss instead of a profit. - [Man On Right] Now, for a corporation, the amount of accumulated earnings of the business that have not been distributed to owners is called retained earnings. The portion of the owners equity contributed by owners in exchange for stock is called capital stock. The amount of retained earnings plus the amount of capital stock equals the corporation's total owners' equity. - Now, the balance sheet presents information based on the basic accounting equation assets equal liabilities plus owners' equity. - [Man On Right] In fact, the name balance sheet comes from the fact that a proper balance sheet must always balance. Total assets must equal the total of liabilities and owner's equity. The accounting equation is not some miraculous coincidence. It is true by definition. - [Man On Left] Liabilities and owners' equity are just the methods used to finance the purchase of assets. There are claims, creditors' claims and owner's claims, against the assets. They can also be thought of as the sources of the funds used to purchase the assets. - [Man On Right] So, another way to view the accounting equation is that the total amount of the assets is equal to the total amount of financing needed to buy the assets. The total resources, therefore, equals the claims against those resources. - So, let's have a look at Apple's balance sheet as of September 24, 2016. First, Apple's assets. Take a look at that list there. Just highlighting a couple of assets. Cash and short-term marketable securities total a little over $67 billion. Short-term securities are things like stock investments in other companies. - [Man On Right] Apple is owed $15.7 billion from those who've purchased Apple products and haven't paid for them yet. - [Man On Left] The $2.1 billion in inventory represents iPhones, iPads and Mac computers that haven't been sold yet. - [Man On Right] Now, notice that Apple owns over 170 billion in long-term marketable securities. The long-term indicates that Apple doesn't have the intention of selling these securities, at least within the next year. - [Man On Left] So, where does the number $237 billion come from with regards to Apple's cash and securities? Straight from the balance sheet. Just add up the cash, the short-term marketable securities and the long-term marketable securities. - Now, while we're at it, let's take a look at Apple's liabilities. Focusing on just a couple of Apple's obligations, accounts payable totals over 37 billion. That represents the amount that Apple owes to creditors on that day. Accrued expenses are items like rent, insurance and wages that Apple owes but has not paid yet. And long-term debt represents Apple's obligations to long-term creditors. - Finally, let's look at Apple's equity. Just over $31 billion has been invested by Apple's owners, the shareholders, and just about $97 billion represents earnings that have been retained in the business since it started. - [Man On Right] Also, note that Apple's assets of just over $321 billion exactly equals Apple's liabilities and Apple's owners' equity. Again, assets equal liabilities plus owners' equity. - And the balance sheet balances. It has to by definition.