A classified balance sheet breaks down the totals for assets, liabilities, and equity into distinct categories. This format can help financial professionals track and analyze specific accounts more efficiently.
Classified balance sheets can be an invaluable resource for creditors and investors. They can use measurements like the current ratio to analyze a company’s financial position and leverage.
Also read: Common Size Balance Sheet to Make Income Statement
Assets
A classified balance sheet breaks down the total assets, liabilities and stockholders’ equity of a business into different categories. It is a helpful tool for creditors and investors, since they can use it to assess the company’s financial health.
The assets section of a classified balance sheet typically includes three subcategories: current assets, fixed assets, and other assets. The most common current assets are cash, accounts receivable, merchandise inventory, and supplies.
Fixed assets include land, buildings, and equipment that the company expects to use for producing goods or services in the future. They are generally depreciated over time, and they are reported at their original cost along with accumulated depreciation.
Another category is long-term investments, which include funds set aside for a plant expansion program and funds redeemable from insurance policies (e.g., cash surrender value of life insurance). This section also contains intangible assets that lack physical existence.
Finally, the other assets section lists resources that don’t fit into any of the other categories. This includes things like patents and copyrights, goodwill, rights under a franchise agreement, and other items.
Liabilities
A classified balance sheet breaks down the asset, liability and equity categories into smaller sub-categories to make it easier for users to understand each item. This format can be useful for smaller companies that want to show their financial data in more detail than an unclassified balance sheet can.
There are two primary sub-categories in a classified balance sheet: current liabilities and long-term liabilities. The former is composed of debts that will be due within a year or the company’s operating cycle, such as accounts payable and accrued expenses. The latter is made up of long-term debts, such as 5, 10, or 30-year notes. In some instances, a portion of long-term liabilities will be classified as current while the rest will be shown as long-term.
In terms of assets, a classified balance sheet is typically broken down into three primary groups: current, fixed, and other assets. This group includes a broad range of items, such as real estate, commercial equipment, and machinery. It also includes intangible assets, such as copyrights and goodwill.
The first category, current assets, are those that can be used to pay short-term liabilities or provide cash for day-to-day operations of the business. Examples include customer prepayments and dividends payable.
Similarly, the second category, fixed assets, include a wide variety of materials and equipment that can be used to produce goods or services and maintain the infrastructure of the business. These can include office furniture, computers and other equipment that are essential for the operations of a business.
Finally, the third category, intangible assets, is composed of intellectual property and other non-tangible assets that are valued for their ability to generate income. These can include patents, trademarks, and copyrights.
Equity
If you are looking for an answer to the question of what your business is worth, its assets, and its liabilities, you need to look no further than a classified balance sheet. This type of accounting report enables lenders and other interested parties to see exactly what the company is worth, how much it owns, and what it owes, all in a concise and transparent manner.
Classified balance sheets also include a section for equity, which is a portion of a company’s financials that’s not categorized as an asset or a liability. This segment includes shareholder equity, which is the residual value of assets minus liabilities.
Shareholder equity is often broken down into contributed capital (common stock, preferred stock, and any other shares that are not listed on the balance sheet), earned capital, and retained earnings. Earned capital is the total amount shareholders have invested in a company, including any dividends they have received.
Investors use equity to evaluate a company’s prospects and determine whether it is an attractive investment or not. They can use the difference between equity and the market price of a company’s stock as a benchmark for how expensive a particular purchase price might be.
When analyzing a classified balance sheet, the most intuitive way to calculate the ratio of total assets to total liabilities is to simply divide each line item by its corresponding account. This allows you to quickly assess whether the company’s debt is too high or if it has enough cash on hand to cover current expenditures.
Notes to the Financial Statements
In addition to the basic financial statements, a business may also provide notes to the financial statements, which often discuss accounting policies, major business events, pending lawsuits, and other facets of a company’s operation. The notes to the financial statements are an important part of presenting the facts and figures that affect investors’ and creditors’ judgments about the company.
Notes to the balance sheet explain why certain accounts were categorized in the way they are. They describe the accounting policy changes and any other significant adjustments that were made in the year of reporting. These notes are typically included in the filing of the company’s financial statements, but can also be presented as an appendix to the report.
For example, if a company made an adjustment in its tax structure, it would be required to include a note explaining the change. This note should also include the year in which the change was made and the period in which it will be applied to all future years of financial statements.
Similarly, if a business changed the way it reported a financial result, such as the net income or loss on the statement of cash flows, it is required to make an explanation in the notes to the balance sheet. This note should include the year in which the change was made, the period in which it will be applied to future years of financial statements, and the year in which it will be presented as an appendix to the statement of cash flows.