The Balance Sheet Breakdown is a four part series on understanding each section of the balance sheet that is provided by public companies.  By understanding the balance sheet, you will have a gauge of the financial health of the company and whether or not it is a sound investment for you.  Start out with Part 1 (Intro), followed by Part 2 (Assets).

Continuing with our series on the balance sheet breakdown has led us to the right side of the equation.  This is where the liabilities and shareholders equity are.  This article discusses Liabilities which are what the company owes to others.  They are broken down into several categories: Current Liabilities, Future Income Taxes, Non-Controlling Interest In Subsidiary Companies, Long Term Debt and Other Liabilities.

Current Liabilities

This high level category covers many different types of liabilities which are all debts the company owes to others as a result of day-to-day operations and have to be paid in a short period of time.  Although specific items under this category may vary, some common items include:

Accounts Payable – These are unpaid bills for general supplies and raw materials
Dividends Payable – Money that has been allocated to distribute as dividends
Income Taxes Payable – Taxes that are owed to the Government and need to be paid shortly
Mortgages Due Within A Year – the portion of a longer term liability that is due in the near term

Regardless of the categories that might be individually itemized on the balance sheet, any outstanding liabilities that are due within the next year will be reflected in the current liabilities portion of the balance sheet in some form.

Future Income Taxes

The future income taxes are distinct from the income taxes payable in the current liabilities section.  The Future Income Tax is as a result of differences between the value of the company reported on the balance sheet and the amount reported for tax purposes.  The difference between these two numbers is then calculated and multiplied by a future tax rate to determine the future tax that will be required for the current period.

Non-Controlling Interest In A Subsidiary Company

Although not all companies will have a category for this specifically, it is important to be aware that many companies may have more operations than you may expect.  This item will appear in a consolidated balance sheet that combines all of the assets, liabilities and share holder equity from a parent company and all of its subsidiaries when the subsidiary is at least 50% owned by the parent.  Although not all of the subsidiary company is owned by the parent, it is required to report all of the assets and liabilities of the subsidiary.  To compensate for this an item for non-controlling interest is created to offset thein-balance in non-controlling stake.

Long Term Debt

The long term debt section of the Liabilities can often be aligned with the capital assets in the Assets column because one, funds the other.  Long term debt is usually debt that is scheduled to be repaid in instalments and over a long period of time (many years).  The terms of the long terms debts of the company should also be readily available in the balance sheet or on attached notes to the financial statement.   Any part of the long term debt that is coming due in the next year will be shown under current liabilities.

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