The assets, liabilities and Shareholders’ equity are related by a logical relationship in the balance sheet;
Assets = Liabilities + Shareholders’ Equity
If the company’s balance sheet does not conform to the relationship, the only one possibility is that the balance sheet is wrong.
The balance sheet tells us many things like;
- What the invested money has been exchanged for.
- The safety of the invested principal.
- The source of fund being used in the business.
- All the resources the company have, and the financial position of the company at a certain time point.
Let us study the balance of our reference company that is listed on the Nigerian Stock Exchange, and involved in similar business as Obi & Ada Enterprises.
Table 1: Balance Sheet (Statement of Financial Position) of a company listed on the Nigerian Stock Exchange, for the period ended 31st Dec. 2019
The first thing to note about the balance is that the logical relationship between the assets, liabilities and Shareholders’ equity holds true.
In answering the question about where the fund come from, we can see that the Shareholders provide almost 50% of the business principal as at 31st Dec. 2019, while debt (mostly loans and borrowings) provided the other half.
On what the invested principal was exchanged for, we can see that the principal was exchanged for two major things; Cash and Property, Plant & Equipment. According to the “Note” against the Restricted cash, it represents a debt facility specifically designated for the procurement of a key raw material.
Having seen the financial position of the company, can you answer this last question?
Is the invested principal safe?
When you have answered the question, we will be discussing the statement that matters the most in our next class; Income Statement or Statement or Profit/loss.