1. Introduction to the balance sheet
Hi, I'm Rohan, and I'll be your instructor for this course, where we will learn how to analyze financial statements in Python. Using Python to analyze financial statements comes with many advantages. It can be used to automate repetitive work such as cleaning, preprocessing, and loading data, to name a few.
2. What we'll achieve
In this course, we'll learn how to read fundamental financial statements. We will also learn about the main financial ratios from these statements, along with how to compute, interpret and analyze them using pandas.
Moreover, we will learn how to write reusable functions to reduce repetitive work. To be prepared for the real world, we will learn how to deal with missing values and make plots using Seaborn to share the results of our analysis in business meetings.
3. The balance sheet
Let's begin with the balance sheet. A balance sheet shows a company's assets, liabilities, and shareholders' equity at a point in time. Shareholders' equity is often referred to as stockholders' equity. The terms assets and liabilities are sometimes used in daily conversations. When these terms are used in financial statements, their meaning remains largely similar. Assets are anything that brings value to the business in the future, whereas liabilities are something that is a future burden to the business. Shareholders' equity is a complex topic; we will only scratch its surface in this course. It is money that the owners have invested in the company. Note that the shares you buy of, say, Apple, also fall under shareholders' equity. This is because every shareholder owns a part of the company.
4. The balance sheet
Why is the balance sheet called the balance sheet? Something in it must balance, right? The assets in the balance sheet balance with the sum of liabilities and shareholders' equity. This is one of the main equations in accounting.
Now, it might come as no surprise that the balance sheet has three main sections: assets, liabilities, and shareholders' equity. We'll now go through each of these sections in turn.
5. Assets
Assets can be further broken down into current and non-current assets, as seen in the image on the right pane of the slide.
Current assets refer to those class of assets that reap benefits to the business within one year. Accounts receivable, which is the value of goods and services that the company sold on credit, and inventory, are examples of current assets.
Non-current assets reap benefits over a longer period to the business. Examples of non-current assets are long-term investments, property, plants, and equipment.
6. Liabilities
Just like assets, liabilities can also be broken down into current and non-current liabilities.
Current liabilities are burdens of the business that must be repaid within one year.
Accounts payable, the value of goods and services that a business purchases on credit, and short-term loans are examples of current liabilities.
Non-current liabilities can be paid over a longer period. An example of non-current liabilities is long-term loans.
7. Shareholders' equity
As mentioned before, we won't go too deep into shareholders' equity. However, one way to think about it is that it's the excess of a company's assets over its liabilities.
8. Putting it all together
All the sections of the balance sheet put together are shown. Notice that the total assets equal the total shareholders' equity and liabilities. This is what brings balance to the balance sheet. Also, note that the total shareholders' equity is the excess of total assets over total liabilities.
9. Let's practice!
Now let's practice what we've learned!