Explain preparation and analysis of balance sheet.
Preparation and Analysis of Balance Sheet: Balance Sheet is one of the significant financial statements of a company providing its financial status at any given time. This is prepared at least yearly but may be done so more frequently and on specific occasions when the need exists in connection along with making decisions concerning large project investments and dividend distribution.
Balance Sheet is a statement of Liabilities, Assets and the Company's Capital (or net worth) at a specified date. This illustrates the summary of the sources of the enterprise resources and the investment of these resources in different forms of assets.
With the Profit and Loss account, the Balance Sheet is analyzed by using specific financial ratios that help to reveal the financial and non-financial health of the enterprise.
Generally, there are four categories of ratios each attempting to measure the firm's financial performance and position. These are:-
a) Liquidity Ratios -that reflect the firm's ability to meet scheduled short term obligations
b) Activity Ratios - that tell how the firm is managing different classes of assets.
c) Leverage Ratios -illustrate how much debt the firm has utilized to finance its investments.
d) Profitability Ratios - it designed to reflect profitability of such firm.