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Financial Literacy Club

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Understanding Businesses · Lesson 5

Reading a Balance Sheet

Part A. Vocabulary

Define each term in your own words.

Current ratio

Debt-to-equity ratio

Part B. Guided notes

Fill in each blank using the word bank.

Word bank: equity · liabilities · Long-term · snapshot

  1. Balance sheet = on one date.
  2. Current = within a year. = after a year.
  3. Current ratio = current assets ÷ current .
  4. Debt-to-equity = total liabilities ÷ .

Part C. Check your understanding

Circle the best answer.

  1. Current assets are $300,000 and current liabilities are $400,000.

    1. What's the current ratio, and what might it signal?

    • A. 0.75 — it may struggle to pay bills due within a year
    • B. 1.33 — very safe
    • C. $100,000 — strong
    • D. It can't be calculated

  2. 2. What's the main difference between the balance sheet and the income statement?

    • A. They're the same report.
    • B. The balance sheet is a snapshot on one date; the income statement covers a period.
    • C. The income statement shows debt; the balance sheet shows sales.
    • D. Only private companies use balance sheets.

  3. 3. A higher debt-to-equity ratio generally means a business relies more on borrowed money.

    True/False

Part D. Apply it

Show your work.

  1. 1. Current assets are $90,000 and current liabilities are $45,000. What's the current ratio?

  2. 2. Total liabilities are $200,000 and equity is $250,000. What's the debt-to-equity ratio?

Part E. Think about it

Answer in complete sentences.

  1. 1. Why might a company with lots of profit still have a weak balance sheet?

  2. 2. What would worry you more: low cash or high debt? Why?

Exit ticket

Name

What might a current ratio below 1 suggest?