| Assets | ||
| Cash | $ 1,000.00 | |
| Notes Receivable | 250.00 | |
| Accounts Receivable | 5,250.00 | |
| Merchandise | 8,500.00 | |
| Store Fixtures | 525.00 | |
| Total Assets | $ 15,525.00 | |
| Liabilities | ||
| Accounts Payable | $ 5,365.00 | |
| Notes Payable | 1,250.00 | |
| Total Liabilities | 6,615.00 | |
| Net Worth | ||
| Aaron Conners, Capital | $ 8,910.00 | |
One year later Conners’ financial condition is shown to be:
Aaron Conners
Balance Sheet,
June 30, 1922
| Assets | ||
| Cash | $ 850.00 | |
| Notes Receivable | 100.00 | |
| Accounts Receivable | 6,425.00 | |
| Merchandise | 10,260.00 | |
| Store Fixtures | 472.50 | |
| Delivery Equipment | 350.00 | |
| Total Assets | $ 18,457.50 | |
| Liabilities | ||
| Accounts Payable | $ 6,192.75 | |
| Notes Payable | 950.00 | |
| Accrued Salaries | 50.50 | |
| Total Liabilities | 7,193.25 | |
| Net Worth | ||
| Aaron Conners, Capital | $ 11,264.25 | |
The various types of information essential to judging the financial condition as disclosed by the above balance sheets will now be discussed.
Comparison of Balance Sheets.—A comparison of balance sheets gives more information than merely the amount of profit for the year. It indicates trends in the business. Thus a comparison of the notes and accounts receivable for the two years may give some indication of the vigor with which collections are pressed. If the volume of business done, that is, the amount of sales made, was about the same during the two years, and if there are more uncollected accounts at the close of the second year than at the close of the first, it would tend to show that collections were less satisfactory during the second year. Investigation may show that this is due to general conditions of business in the country rather than to failure to push collections vigorously. If there is any marked change in the amount of the stock of merchandise on hand it would invite inquiry. If the stock is much larger at the end of the second year than at the end of the first, it might indicate that the business man is speculating in merchandise, that he considers the buyer’s market during the year particularly favorable and has laid in an abnormally large stock. A banker with large experience in similar businesses can formulate a fairly accurate judgment of how much working capital a concern should have invested in merchandise. With that as a criterion he can tell the normal amount of merchandise the business should carry.
A comparison of current liabilities for the two periods will indicate the extent to which borrowed working capital is being used. Thus, an unusual increase in stock-in-trade may be offset by an equally large increase in current liabilities, and so would indicate that the merchant has done his buying on credit or has used borrowed working capital to increase his stock. The danger of this is apparent in a fluctuating merchandise market, particularly if the swing is generally downward. A comparison of the working capital for the two periods gives useful information. A decrease in the amount of working capital may indicate an investment of it in fixed plant which, if continued, will lead to trouble with current creditors. An increase in working capital may point to the advisability of greater sales effort.
A comparison of fixed assets for the two periods will show the increase or decrease in the plant investment. If this has been offset by a corresponding increase or decrease in fixed liabilities, no additional capital of the owners has become tied up in fixed plant, while the reverse is true if there is not that correspondence between fixed assets and fixed liabilities. Where the ratio between current liabilities and fixed liabilities has increased, it may point to the desirability of funding some of the current debt. Short-term liabilities have apparently been incurred for the purpose of extending the fixed plant. It is usually desirable to convert, that is, fund these current liabilities into long-term liabilities in order to conserve working capital to pay current debts.
Thus it is seen that a proper understanding of the items in the two balance sheets and of their various interrelationships will oftentimes give very valuable information. Banks and business houses which are called upon to extend credit, maintain regular files of credit information, including periodic balance sheets, concerning their present and prospective customers, so that they can judge fairly accurately the condition of the businesses.
The Comparative Balance Sheet—Its Content and Form.—A comparison of the above balance sheets shows an increase of net worth of $2,354.25 during the year. It shows also that this profit is accounted for by an increase of $2,932.50 in the assets, which is offset by an increase of $578.25 in the liabilities, leaving a net increase of $2,354.25.