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Balance Sheet

Filed in: Exam Content, Series 65, Series 66, Series 7, Series 79

Balance SheetA balance sheet is one of three primary financial statements, along with the income statement and cash flow statement, used to evaluate the financial health of an entity at a given moment in time. It consists of three primary sections: assets, (what the entity owns); liabilities, (what the company owes); and shareholders equity, the difference between what the companies owns and what it owes. Since shareholders equity is the difference between the two, the balance sheet equation is: Assets = Liabilities + Shareholders Equity. In plain English, everything the entity owns is either obtained borrowing money (i.e. creating a liability) or by being owned outright by the company’s shareholders (i.e. owners).

The balance sheet must always balance, that’s what it is called a balance sheet! As a result, by definition, any corporate transaction which impacts the balance sheet must impact TWO ledgers in order to ensure the balance sheet balances. For example, if a company borrows cash from the bank it’s cash asset will increase, and so will its liabilities, in the form of a loan. Assets and liabilities will increase by the same amount, shareholders equity is unchanged, and the balance sheet still balances.

Knopman Notes:
A balance sheet can be used by both businesses and individuals. When analyzing a business’ balance sheet, an investment banking practitioner can get a good sense of the companies’ leverage (liabilities vs. shareholders equity), liquidity (cash vs. short-term loans) and net worth (shareholders equity).

For individuals, investment advisers will often help a client build their personal income to recommend a suitable financial plan. For example, an investor who has lots of illiquid assets (e.g. house or car) but lots of short-term debt (e.g. credit card debt) should make sure to keep cash in their portfolio to pay off that debt. On the other hand, an investor without any short-term debt (sometimes called current liabilities) may be able to invest in more illiquid securities, such as hedge fund units.

Relevant Exams:
Series 7, Series 65, Series 66, Series 79

Written by Dave Meshkov

Dave's mission (and job: Managing Director of Course Design) is to make FINRA exam training engaging, approachable, and dare he even say, enjoyable. Having trained and coached over ten thousand students to exam success he knows how to present complex subjects in memorable and understandable ways. Prior to joining Knopman Marks in 2011, Dave practiced bankruptcy law at Weil, Gotshal & Manages and served as a law clerk in a the Southern District of New York Bankruptcy Court working on the General Motors and Lehman Brothers bankruptcies. Building on his legal expertise and training allows him to keep all our courses updated with the latest legislative and rule-making changes. Dave currently trains for the Securities Industry Essentials (SIE) exam and the Top-Off Series 6, 7, 24, 57, 63, 65, 66, 79, 86, 87, and 99 exams. He also delivers executive one-on-one training and shares his passion for learning outside of work as a ski instructor and yoga teacher. Dave graduated magna cum laude from Fordham Law School, and cum laude with a BA from the University of Pennsylvania.

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