In this video, learn how to identify the components of the balance sheet. The balance sheet needs to balance and having the right components is key.
- A balance sheet is a listing of a company's valuable resources, its assets, paired with a list of the sources of financing to buy those assets. Those sources of financing are liabilities, borrowed money, and equity items, which represent money invested by owners. If we look at the actual balance sheet for Walmart, you'll see that you already have a good intuitive understanding of the items in the balance sheet. Here is a listing of Walmart's assets as of January 31, 2019, in the left column and 2018 in the right column. Company's typically provide two years of balance sheet numbers side by side so that the balance sheet reader can detect any significant changes. Cash is the first asset listed. Cash is $7,722 million or $7.722 billion. Look at the third item in the list, inventories. Inventory is the stuff for sale on all of the shelves in all the Walmart and Sam's Club locations around the world. We're not surprised that Walmart has a bunch of inventory with a total purchase cost of over $44 billion. Now look down in the middle of the list. We see land and buildings and transportation equipment, trucks, and store shelves, fixtures. The net cost of all of these things is $104 billion. Goodwill is $31 billion. This goodwill represents the extra amount Walmart paid for the reputation, customer relationships, and employee relationships of companies it has purchased over the years. For example, in 2018, Walmart purchased Flipkart, an India-based eCommerce site. As part of this purchase, Walmart paid an additional $13 billion beyond the value of Flipkart's regular assets to pay Flipkart's prior owners for the market presence and customer relationships developed by Flipkart over the years. Down at the bottom of the list, we see that total assets are $219 billion. This is the total amount that Walmart had to spend to buy all of its assets as of January 31, 2019. Now remember that this is just an introduction to the balance sheet, so don't worry if you don't understand every line item here. You should feel comfortable in realizing that you already understand the most important items. Now where did Walmart get the $219 billion it needed to buy its assets? That information is contained in the other part of the balance sheet, the list of liabilities and equity items. Walmart borrowed some of the money and some of the money was invested by the owners, the shareholders. The first liability item listed is short-term borrowings. $5.225 billion. This number represents the amount of money Walmart borrowed that it's going to have to pay back within one year. Why did Walmart borrow the money? To buy assets. The second item is accounts payable, which is a little bit over $47 billion. When Walmart buys inventory from Proctor and Gamble or whomever else, they buy it on credit and agree to pay in 30 to 60 days. This accounts payable amount is what Walmart owes to its suppliers for inventory that they have already received, but have not yet paid for. Now take a look down the list about half way. You see long-term debt in the amount of almost $44 billion. This represents the amount of money Walmart borrowed in order to buy assets using loans that Walmart can wait more than one year to repay. The largest single line item in the list is $80.785 billion and is labeled retained earnings. Retained earnings is the cumulative amount of profits that have been generated by Walmart that have been kept in the business and used to buy assets. So from July 1962, when Walmart first started, until January 31, 2019, when these numbers were prepared, Walmart's shareholders have authorized the company to keep $80.785 billion of profit in the business to be used for expansion. Now where did Walmart get the $219 billion it needed to buy its assets? A lot of it came from retained earnings. Some of it came from long-term debt, and a lot of it came from accounts payable. We see in the balance sheet a summary of Walmart's assets, and where Walmart got the money to buy its assets.
- Describe line items that appear on financial statements.
- Differentiate between the three types of financial statements.
- Interpret current accounting issues and trends.
- Calculate the market capitalization of a company.
- Identify the most important expense for a retail company.
- Explain the use of common size financial statements.