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Chapter 5. Position > Dissecting a Balance Sheet

Dissecting a Balance Sheet

On a balance sheet, the total amount of assets must always equal the total amount of liabilities and owner’s equity. The balance sheet changes constantly. Money flows in and out of an organization as it receives payments, purchases goods, and makes other daily transactions. For this reason, the balance sheet is considered a snapshot of the mix of assets, liabilities, and owner’s equity on a single specified date.

The balance sheet shown in figure 5-1 is an extremely simplified one, used to describe the concepts involved in managing financial position. In reality, there can be many unique types of assets and liabilities that an organization can use to produce income. Senior managers must manage the relative proportion of each type of asset, liability, and owner’s equity within the balance sheet and between the balance sheet and the income statement. Whether the organization is maintaining the appropriate proportions, or balance, is tracked by calculating ratios of how big one item is relative to another.


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