Module 5 of 11 14 min
Reading a Balance Sheet
Why assets always equal liabilities plus equity — and what to look for.
Course lessons
Step 1
The lesson
The balance sheet is a snapshot of assets, liabilities, and equity on one specific date. The income statement is a movie; the balance sheet is a photo.
- Current assets: cash and things expected to become cash within a year (receivables, inventory).
- Long-term assets: equipment, buildings, and other things used for years.
- Current liabilities: bills and debts due within a year.
- Long-term liabilities: debts due after a year.
Key term
Current ratio
Current assets ÷ current liabilities. Above 1 means the business has more short-term resources than short-term bills. Much below 1 can signal trouble paying bills.
Key term
Debt-to-equity ratio
Total liabilities ÷ equity. Higher means more of the business is funded by borrowing, which increases risk when times are tough.
Step 2
See it
The hypothetical retailer has $600,000 of current assets and $400,000 of equipment and store fixtures, totaling $1,000,000. It has $250,000 of current liabilities and $350,000 of long-term debt, totaling $600,000. Equity is $400,000.
- Cash
- $180,000
- Accounts receivable
- $60,000
- Inventory
- $360,000
- Current assets
- $600,000
- Equipment and store fixtures
- $400,000
- Total assets
- $1,000,000
- Accounts payable
- $150,000
- Short-term debt
- $100,000
- Current liabilities
- $250,000
- Long-term debt
- $350,000
- Total liabilities
- $600,000
- Equity$1,000,000 = $600,000 + $400,000
- $400,000
Step 3
Real-world example
Reading Trailhead's snapshot
- Current ratio: $600,000 ÷ $250,000 = 2.4. It can cover its short-term bills comfortably.
- Debt-to-equity: $600,000 ÷ $400,000 = 1.5. More than half the business is funded by what it owes — worth watching.
- Inventory is $360,000, the biggest current asset. For a retailer, that's normal — but if it keeps growing faster than sales, it could mean products aren't selling.
Step 4
Knowledge check
Answer each question, then check your answer to see the explanation. Retake it as many times as you like.
Question 1 of 3
Step 5
Summary
The balance sheet is a snapshot of assets, liabilities, and equity on one date, split into current and long-term items. The current ratio shows short-term strength; debt-to-equity shows how much the business relies on borrowing. Check cash, debt, inventory, and equity trends.
Step 6
What you should remember
- Balance sheet = snapshot on one date.
- Current = within a year. Long-term = after a year.
- Current ratio = current assets ÷ current liabilities.
- Debt-to-equity = total liabilities ÷ equity.
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