It can also help managers to establish policies and strategies for the future.
This paper provides information about the importance of balance sheet and its uses for investors and management. It also provides an insight into the ratio analysis that could be done on the basis of information obtained from balance sheet. The paper shows calculation and analysis of ratios from the balance sheet of Palaron Plc so as to understand the usefulness of information presented in the balance sheet for investors.
Balance sheet plays a vital role in depicting the financial position of a company. It further shows whether an investor should invest in a particular company or not. A company's balance sheet also shows the strengths and weaknesses of a company. A company through its balance sheet portrays its financial position to the investors that it is a reliable company that possesses prosperous prospect and chances to grow. It also reflects whatever the goals have been set by the company will definitely be accomplished and delivered to the investors in the shape of cash or stock dividends. Birts also says that "the company must demonstrate its ability to trade for some time into future so that customers have confidence that it will be able to meet its commitments to them" (2001, p36). Investors would learn from the balance sheet a company's long-term investments, capital structure, liquidity and gearing position so as to analyse if the company would be able to remain in business for a longer period of time.
The balance sheet at the end of the year demonstrates the total assets and liabilities made by the company. There are two types of assets; current assets and fixed assets. Current assets include all the assets that are for less than one year i.e. cash, accounts receivable (with deduction of bad debts expenses), notes receivable, prepaid expenses incurred and merchandise inventory where as fixed assets include all those fixed assets which can transcend for more than one year i.e. machinery, equipment, land, building and plant assets etc. The depreciation and amortization are deducted from these fixed assets. Liabilities are also of two types; current liabilities and non current liabilities. Current liabilities include debt which is payable in year i.e. accounts payable, notes payable, accrued expenses and insurance premium etc while long term liabilities includes bonds payable etc. These are not enough because for a complete balance sheet it also includes owner's equity which includes total invested capital and retained earnings.
The balance sheet is not only essential for the investors but also to large extent to the company itself. It gives the financial conditions of a company that where it stands at a particular time and show the real minus and plus points. In order to get the things on credit or need some credit to invest in the business to earn amplify potential gains, balance sheet items i.e. powerful fixed and current assets would help in getting the credit (Birts, 2001). With the help of balance sheet it becomes easier for a company to make decisions and prepare the plans for future and it can also know about the reason of being unsuccessful in the business, it further gives a complete outlook of the company progress which helps a company to get rid of barriers and obstacles in the way of