Financial Statement Analysis part 2

 

Liabilities (Debt) and Equity

Current liabilities
This includes all current liabilities which thecompany is obligated to pay within the next 90 days
· ACCOUNTS PAYABLE – amount owed by the company for materials they have purchased on credit
· NOTES PAYABLE – amount the company has borrowed from banks in the form of short-term loans
· ACCRUED WAGES AND TAXES – for wages, the amount of wages earned by the employees, but not yet paid by the company; for taxes, the amount of taxes incurred by the business, but not yet paid to the respective governments by the company.

Long-term liabilities
These accounts include:
· LONG-TERM DEBT – amount the company has borrowed in the form of bonds sold to investors or banks
· PREFERRED STOCK – amount paid by investors to the company wanting a priority claim on the assets of the company
· COMMON STOCK – amount paid to the company by investors in exchange for a claim on the ownership of the company. Often, the number of outstanding shares is included on this line.
· RETAINED EARNINGS – value of the assets of the company in excess of the claims upon those assets (liabilities and stockholders' ownership). This does not represent cash held in the company.

The stockholders' (common) equity, also known as net worth, is the residual between the value of the assets and the value of the liabilities.
Assets - Liabilities = Common Equity (Net Worth)