Chapter 4 - The balance sheet. In this chapter you will learn why owners, investors, lenders, and managers all must know how to read and understand a balance sheet. You will also learn how accountants prepare a balance sheet and, most important, how managerial accountants evaluate the information contained in a balance sheet using vertical and horizontal analysis techniques. | Chapter 4 The Balance Sheet Chapter Outline The Purpose of the Balance Sheet Balance Sheet Formats Balance Sheet Content Components of the Balance Sheet Balance Sheet Analysis Learning Outcomes State the purpose of regularly preparing a balance sheet for a hospitality business. Explain the way managers and accountants actually prepare a balance sheet. Analyze a balance sheet to better understand the financial condition of your own business. The Purpose of the Balance Sheet The type of information contained on a business’s balance sheet is of critical importance to several different groups including: Owners Investors Lenders Creditors Managers Owners The balance sheet, prepared at the end of each defined accounting period, lets the owners of the business know about the amount of that business which they actually “own”. A lien is the legal right to hold another’s property to satisfy a debt. A bank’s lien is similar to a business’s liabilities. These liabilities must | Chapter 4 The Balance Sheet Chapter Outline The Purpose of the Balance Sheet Balance Sheet Formats Balance Sheet Content Components of the Balance Sheet Balance Sheet Analysis Learning Outcomes State the purpose of regularly preparing a balance sheet for a hospitality business. Explain the way managers and accountants actually prepare a balance sheet. Analyze a balance sheet to better understand the financial condition of your own business. The Purpose of the Balance Sheet The type of information contained on a business’s balance sheet is of critical importance to several different groups including: Owners Investors Lenders Creditors Managers Owners The balance sheet, prepared at the end of each defined accounting period, lets the owners of the business know about the amount of that business which they actually “own”. A lien is the legal right to hold another’s property to satisfy a debt. A bank’s lien is similar to a business’s liabilities. These liabilities must be subtracted from the value of the business before its owners can determine the amount of their own equity (free and clear ownership). The balance sheet is designed to show the amount of a business owner’s free and clear ownership. Investors Investors seek to maximize the return on investment (ROI) they receive. When a business’s balance sheet from one accounting period is compared to its balance sheet covering another time period, investors can measure their return on investment. Investors must have the information contained in a balance sheet if they are to accurately compute their annual returns on investment (ROI). Lenders Lenders are most concerned about a business’s ability to repay its debts. Lenders read the balance sheet of a business in an effort to better understand the financial strength (and thus the repayment ability) of that business. Creditors Business creditors, much like lenders, are concerned about repayment. It would not be unreasonable for vendors to .
