FINANCIAL
STATEMENT ANALYSIS 1-5
Equity: claim
on ownership
The other form of capital is equity. Equity represents money paid to
the company in exchange for a claim on the ownership of the
company. These claims are usually called shares or stock, and owners
of claims are called shareholders or stockholders. Shares
are issued in two classifications: preferred and common.
Liability / Equity Accounts
Now that you know the difference between debt and equity, let's look at a
brief description of the accounts appearing on the
L
IABILITIES AND
E
QUITY
side of XYZ Corporation's Balance Sheet (Figure 1.1).
Current liabilities
The first group of accounts includes all current liabilities which the
company is obligated to pay within the next 90 days.
·
A
CCOUNTS
P
AYABLE
amount owed by the company for
materials they have purchased on credit
·
N
OTES
P
AYABLE
amount the company has borrowed from banks
in the form of short-term loans
·
A
CCRUED
W
AGES AND
T
AXES
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
·
O
THER
C
URRENT
L
IABILITIES
any other obligations that the
company is expected to pay in the short-term (usually around 90
days)
Long-term
liabilities /
equity
The company also has long-term sources of capital. These accounts
include:
·
L
ONG
-
TERM
D
EBT
amount the company has borrowed in the
form of bonds sold to investors or banks
·
P
REFERRED
S
TOCK
amount paid by investors to the company
wanting a priority claim on the assets of the company