Technical / Accounting
Balance Sheet
Master the balance sheet: assets, liabilities, equity, and the accounting equation. Essential for IB interviews and valuation.
"Assets minus liabilities equals net worth. The rest is just accounting." — Charlie Munger
Concept
A balance sheet captures a company's financial position at a single moment—December 31st at 11:59 PM, not the year leading up to it. This point-in-time nature is what distinguishes it from the income statement and cash flow statement, which measure flows over a period. The balance sheet answers: "What does this company own, owe, and have left over right now?" For bankers, it's the foundation for assessing whether a company can service debt, survive a downturn, or fund an acquisition.
Intuition
The three financial statements form a closed loop, and the balance sheet is where everything lands.
Link #1: Income Statement → Balance Sheet Net income from the income statement flows into retained earnings on the balance sheet. If a company earns $100M in net income and pays $20M in dividends, retained earnings increases by $80M. This is the bridge between profitability and accumulated wealth.
The ending balance on the cash flow statement the cash line on the balance sheet. If your CFS shows ending cash of $500M, the balance sheet's cash & equivalents reads $500M. This is your error-check: if they don't tie, something's wrong.
Components
Snapshot vs. Period
The Core Distinction
The income statement tells you how much a company earned over Q1 2024. The cash flow statement tells you how cash moved during that quarter. The balance sheet tells you where the company stood at March 31st, 2024—not the day before, not the average, but that exact moment.
Why This Matters
This snapshot nature creates analytical challenges. A company could have $2B in cash on December 31st because it drew down a revolver on December 30th and repaid it on January 2nd. The balance sheet captures a posed photograph, not candid reality. Sophisticated analysts compare multiple periods, read the footnotes on subsequent events, and cross-reference with the cash flow statement to understand the , not just the endpoint.
Interview Script
A balance sheet captures a company's financial position at a single point in time—what it owns, owes, and has left over at that exact moment—unlike the income statement and cash flow statement which measure activity over a period. It's governed by the accounting equation: Assets equals Liabilities plus Equity, which must always balance due to double-entry bookkeeping. For bankers, it's essential for assessing whether a company can service debt, survive downturns, or fund acquisitions.