Reading a Balance Sheet — slides
Financial Literacy Club
Understanding Businesses · Lesson 5
Reading a Balance Sheet
Why assets always equal liabilities plus equity — and what to look for.
14-minute lesson · learnwithflc.org
Reading a Balance Sheet · 1 / 19
Financial Literacy Club
Understanding Businesses · Lesson 5
Reading a Balance Sheet
Why assets always equal liabilities plus equity — and what to look for.
14-minute lesson · learnwithflc.org
Today's goals
By the end of class, you'll be able to…
- Read a balance sheet as a snapshot on one date
- Separate current and long-term items
- Calculate the current ratio and the debt-to-equity ratio
Warm-up
Is a photo of your room or a video of your week more like a balance sheet? Why?
Think, then write your answer.
The big idea
Reading a Balance Sheet
Why assets always equal liabilities plus equity — and what to look for.
Understanding Businesses · Lesson 5
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.
Understanding Businesses · Lesson 5
- 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.
Vocabulary
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.
Vocabulary
Debt-to-equity ratio
Total liabilities ÷ equity. Higher means more of the business is funded by borrowing, which increases risk when times are tough.
Understanding Businesses · Lesson 5
What analysts check first
How much cash is there? How much debt, and when is it due? Is inventory piling up? Is equity growing over time?
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
Real 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.
Activity · pairs · 10 min
Financial Health Check
- Company A: current assets $120,000, current liabilities $60,000, total liabilities $150,000, equity $300,000. Company B: current assets $80,000, current liabilities $100,000, total liabilities $400,000, equity $100,000.
- Pairs calculate each company's current ratio and debt-to-equity ratio.
- Pairs decide which company they'd rather lend to and write two reasons.
Check for understanding · 1 of 3
Current assets are $300,000 and current liabilities are $400,000.
What's the current ratio, and what might it signal?
- A0.75 — it may struggle to pay bills due within a year
- B1.33 — very safe
- C$100,000 — strong
- DIt can't be calculated
A. 0.75 — it may struggle to pay bills due within a year
$300,000 ÷ $400,000 = 0.75. Less than 1 means short-term bills exceed short-term resources.
Check for understanding · 2 of 3
What's the main difference between the balance sheet and the income statement?
- AThey're the same report.
- BThe balance sheet is a snapshot on one date; the income statement covers a period.
- CThe income statement shows debt; the balance sheet shows sales.
- DOnly private companies use balance sheets.
B. The balance sheet is a snapshot on one date; the income statement covers a period.
Balance sheet = photo. Income statement = movie.
Check for understanding · 3 of 3
A higher debt-to-equity ratio generally means a business relies more on borrowed money.
- True
- False
True
More liabilities relative to equity means more of the business is funded by debt — and more risk if sales fall.
Remember
Key takeaways
- 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.
Discuss
Talk it over
- Why might a company with lots of profit still have a weak balance sheet?
- What would worry you more: low cash or high debt? Why?
Exit ticket
What might a current ratio below 1 suggest?
Answer on your exit ticket before you leave.
Nice work today.
Review this lesson anytime — free, no account needed:
learnwithflc.org/courses/understanding-businesses/balance-sheet
Next up: finish your worksheet.