{"id":29388,"date":"2024-06-12T11:08:08","date_gmt":"2024-06-12T16:08:08","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=29388"},"modified":"2024-11-19T22:45:35","modified_gmt":"2024-11-20T03:45:35","slug":"balance-sheet","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/accounting\/balance-sheet\/","title":{"rendered":"The Balance Sheet: Real-Life Examples and How It Works in Financial Models and Interviews"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">The Balance Sheet: Real-Life Examples and How It Works in Financial Models and Interviews<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/balance-sheet\/#What_is_a_Balance_Sheet_What_About_the_Balance_Sheet_Equation\">What is a Balance Sheet? What About the Balance Sheet Equation?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/balance-sheet\/#Balance_Sheet_Example_and_Template\">Balance Sheet Example and Template<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/balance-sheet\/#Balance_Sheet_Items_in_Each_Section\">Balance Sheet Items in Each Section<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/balance-sheet\/#The_Balance_Sheet_in_Financial_Models_and_the_Required_Links\">The Balance Sheet in Financial Models and the Required Links<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/balance-sheet\/#What_You_Need_to_Know_About_the_Balance_Sheet_in_Interviews\">What You Need to Know About the Balance Sheet in Interviews<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>Balance Sheet Definition:<\/strong> In accounting, the Balance Sheet provides a snapshot of a company\u2019s Assets (its resources) and Liabilities and Equity (its funding sources) at a specific point in time; Assets must always equal Liabilities + Equity. The Balance Sheet is widely used in financial models, valuations, returns-based metrics, and liquidity ratios.<\/p><\/blockquote>\n<p>The <strong>Balance Sheet<\/strong> is a central part of almost any financial analysis, including <a href=\"https:\/\/mergersandinquisitions.com\/3-statement-model\/\" target=\"_blank\" rel=\"noopener\">3-statement projection models<\/a>, credit analyses, <a href=\"https:\/\/mergersandinquisitions.com\/lbo-modeling-test\/\" target=\"_blank\" rel=\"noopener\">leveraged buyout models<\/a>, <a href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/merger-model-walkthrough\/\" target=\"_blank\" rel=\"noopener\">M&amp;A models<\/a>, and more.<\/p>\n<p>You can find plenty of online sources that present boring definitions, so we\u2019ll focus here on the <strong>real-life implications and uses<\/strong> of the Balance Sheet, including how it works in financial models and what you need to know about it in interviews.<\/p>\n<p>Here are the files and resources we\u2019ll be using in this tutorial:<\/p>\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<ul>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Balance-Sheet\/105-33-Balance-Sheet-Slides.pdf\" target=\"_blank\" rel=\"noopener\">Balance Sheet &#8211; Summary and Presentation Slides (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Balance-Sheet\/105-33-Monster-Balance-Sheet.pdf\" target=\"_blank\" rel=\"noopener\">Monster Beverage \u2013 Financial Statements (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Balance-Sheet\/105-33-Balance-Sheet-Example.xlsx\" target=\"_blank\" rel=\"noopener\">Monster Beverage \u2013 Excel Version of the Balance Sheet in a Financial Model (XL)<\/a><\/li>\n<\/ul>\n<h3><strong>Video Table of Contents:<\/strong><\/h3>\n<ul>\n<li><strong>0:00:<\/strong> Introduction<\/li>\n<li><strong>0:37:<\/strong> The Short Version<\/li>\n<li><strong>5:56:<\/strong> Part 1: Balance Sheet Sample and Example Line Items<\/li>\n<li><strong>7:51:<\/strong> Part 2: Financial Model Projections and Required Links<\/li>\n<li><strong>11:37:<\/strong> Part 3: Why the Balance Sheet is Critical in Interview Questions<\/li>\n<li><strong>13:06:<\/strong> Recap and Summary<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"What_is_a_Balance_Sheet_What_About_the_Balance_Sheet_Equation\"><\/span><strong>What is a Balance Sheet? What About the Balance Sheet Equation?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>As stated above, a company\u2019s Balance Sheet shows its <strong>resources<\/strong> (Assets) and how it <strong>funded<\/strong> those resources (Liabilities + Equity).<\/p>\n<p>The Balance Sheet has many purposes, including:<\/p>\n<ul>\n<li><strong>To determine<\/strong> a company\u2019s <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/liquidity-ratios\/\" target=\"_blank\" rel=\"noopener\">liquidity<\/a> (e.g., how much cash and liquid assets does it have in case it suddenly needs to pay for something?).<\/li>\n<li><strong>To understand<\/strong> a company\u2019s long-term funding sources and the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/debt-equity\/debt-vs-equity-analysis\/\" target=\"_blank\" rel=\"noopener\">Debt vs. Equity<\/a> it uses to fund its operations. These can affect its overall risk, cash flows, and valuation.<\/li>\n<li><strong>To estimate<\/strong> whether a company will need external financing for an acquisition or expansion project.<\/li>\n<li><strong>To interpret<\/strong> a company\u2019s business policies, such as its cash-collection period and typical payment period for its suppliers, which affect its <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/change-in-working-capital\/\" target=\"_blank\" rel=\"noopener\">Change in Working Capital<\/a> and <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/how-to-calculate-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Free Cash Flow<\/a>.<\/li>\n<\/ul>\n<p>The famous \u201cBalance Sheet equation\u201d is:<\/p>\n<p>Assets = Liabilities + Equity.<\/p>\n<p>In other words, if a company has\u00a0<em>resources<\/em>, it must have\u00a0<em>funded those resources<\/em> with something.<\/p>\n<p>This equation is based on the main sections of the Balance Sheet:<\/p>\n<ul>\n<li><strong>Assets:<\/strong> These items can be sold for cash or will contribute to the company\u2019s future growth and operations (e.g., inventory or plants, property &amp; equipment). They provide a <strong>future benefit<\/strong>, even if the benefit is intangible.<\/li>\n<li><strong>Liabilities:<\/strong> These are the company\u2019s short-term and long-term funding sources needed to acquire its assets, and they represent <strong>future obligations or cash outflows<\/strong> (e.g., if a company has Debt, it will have to repay that Debt in the future).<\/li>\n<li><strong>Equity:<\/strong> These are additional funding sources; they are still obligations, but unlike Liabilities, they do not necessarily represent direct cash outflows. Also, these sources may relate to external parties (shareholders) or may be internally generated (Retained Earnings). See our tutorial on the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/statements-of-owners-equity\/\" target=\"_blank\" rel=\"noopener\">Statement of Owner\u2019s Equity<\/a> for more.<\/li>\n<\/ul>\n<p>The <strong>Assets<\/strong> and <strong>Liabilities<\/strong> sections are usually split into Current (less than 12 months) and Long-Term (more than 12 months) to reflect the length of time each item will last.<\/p>\n<p>For example, \u201cCurrent\u201d Debt is due in less than 12 months, while \u201cLong-Term\u201d Debt is due in more than 12 months, such as in 3, 5, or 10 years from now.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Balance_Sheet_Example_and_Template\"><\/span><strong>Balance Sheet Example and Template<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Monster Beverage has a good, simple example of a Balance Sheet:<\/p>\n<ul>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Balance-Sheet\/105-33-Monster-Balance-Sheet.pdf\" target=\"_blank\" rel=\"noopener\">Monster Beverage \u2013 Financial Statements (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/Balance-Sheet\/105-33-Balance-Sheet-Example.xlsx\" target=\"_blank\" rel=\"noopener\">Monster Beverage \u2013 Excel Version of the Balance Sheet in a Financial Model (XL)<\/a><\/li>\n<\/ul>\n<p>Here\u2019s an image of the company\u2019s version:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29389 size-full\" title=\"Monster - Balance Sheet Example\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110535\/01-Monster-Balance-Sheet.jpg\" alt=\"Monster - Balance Sheet Example\" width=\"2323\" height=\"1885\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110535\/01-Monster-Balance-Sheet.jpg 2323w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110535\/01-Monster-Balance-Sheet-300x243.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110535\/01-Monster-Balance-Sheet-1024x831.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110535\/01-Monster-Balance-Sheet-768x623.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110535\/01-Monster-Balance-Sheet-1536x1246.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110535\/01-Monster-Balance-Sheet-2048x1662.jpg 2048w\" sizes=\"(max-width: 2323px) 100vw, 2323px\" \/><\/p>\n<p>And here\u2019s our version with some simplifications and changes:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29390 size-full\" title=\"Simplified Balance Sheet Example\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110559\/02-Simplified-Balance-Sheet.jpg\" alt=\"Simplified Balance Sheet Example\" width=\"1304\" height=\"1447\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110559\/02-Simplified-Balance-Sheet.jpg 1304w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110559\/02-Simplified-Balance-Sheet-270x300.jpg 270w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110559\/02-Simplified-Balance-Sheet-923x1024.jpg 923w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110559\/02-Simplified-Balance-Sheet-768x852.jpg 768w\" sizes=\"(max-width: 1304px) 100vw, 1304px\" \/><\/p>\n<p>Whenever you work with a real company\u2019s financial statements, it\u2019s critical to <strong>consolidate and simplify<\/strong> the Balance Sheet because many line items are insignificant, and trying to link everything gets cumbersome when there are dozens of line items.<\/p>\n<p>We normally aim for <strong>5 \u2013 10 items on each side <\/strong>of the Balance Sheet.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Balance_Sheet_Items_in_Each_Section\"><\/span><strong>Balance Sheet Items in Each Section<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Common items in each section of the Balance Sheet include:<\/p>\n<ul>\n<li><strong>Current Assets:<\/strong> Cash, Short-Term Investments, Accounts Receivable, Prepaid Expenses, and Inventory.<\/li>\n<li><strong>Long-Term Assets:<\/strong> Net Property, Plants &amp; Equipment (PP&amp;E), Operating\/Finance Lease Assets, Goodwill, Other Intangible Assets, Long-Term Investments, and Deferred Tax Assets.<\/li>\n<li><strong>Current Liabilities:<\/strong> Accounts Payable, Accrued Expenses, Income Taxes Payable, Short-Term Debt, and Short-Term Deferred Revenue.<\/li>\n<li><strong>Long-Term Liabilities:<\/strong> Long-Term Debt, Long-Term Deferred Revenue, Operating\/Finance Lease Liabilities, Deferred Tax Liabilities, and Other Long-Term Liabilities (e.g., for pensions, employee compensation, environmental obligations, etc.).<\/li>\n<li><strong>Equity:<\/strong> Common Stock, Additional Paid-In Capital (APIC), Retained Earnings, Accumulated Other Comprehensive Income (AOCI), Treasury Stock, Preferred Stock, and Noncontrolling Interests.<\/li>\n<\/ul>\n<p>We won\u2019t explain all these items here because each one could be a separate article on this site.<\/p>\n<p>But at a high level, most of the \u201cCurrent\u201d items relate to the company\u2019s <strong>day-to-day business<\/strong>, such as collecting cash from customers, paying suppliers and the government, and purchasing supplies and product inventory.<\/p>\n<p>Most of the \u201cLong-Term\u201d Assets relate to <strong>investment and growth<\/strong>, such as the buildings and equipment required to expand.<\/p>\n<p>Finally, most of the \u201cLong-Term\u201d Liabilities relate to <strong>financing<\/strong>, such as the Debt and Leases required to buy major assets or rent buildings.<\/p>\n<p>Many of these items could have \u201cshort-term\u201d and \u201clong-term\u201d versions; classic examples are Deferred Tax Assets and Liabilities, Debt, and Deferred Revenue.<\/p>\n<p>As a modeling convention, we almost always <strong>combine<\/strong> the short-term and long-term versions to make the projection process easier.<\/p>\n<p>Also, we normally combine the first 5 items within Equity into \u201cCommon Shareholders\u2019 Equity\u201d and list only Preferred Stock and Noncontrolling Interests separately \u2013 once again, for ease of modeling.<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"The_Balance_Sheet_in_Financial_Models_and_the_Required_Links\"><\/span><strong>The Balance Sheet in Financial Models and the Required Links<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In financial models, such as 3-statement projections, you must <strong>forecast<\/strong> the Balance Sheet and estimate how individual line items will change over time.<\/p>\n<p>There\u2019s an example of this from the Monster Energy model below:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-29391 size-full\" title=\"Balance Sheet Projections\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110642\/03-Balance-Sheet-Projections.jpg\" alt=\"Balance Sheet Projections\" width=\"2074\" height=\"457\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110642\/03-Balance-Sheet-Projections.jpg 2074w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110642\/03-Balance-Sheet-Projections-300x66.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110642\/03-Balance-Sheet-Projections-1024x226.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110642\/03-Balance-Sheet-Projections-768x169.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110642\/03-Balance-Sheet-Projections-1536x338.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110642\/03-Balance-Sheet-Projections-2048x451.jpg 2048w\" sizes=\"(max-width: 2074px) 100vw, 2074px\" \/><\/p>\n<p>The projection methodology varies based on the specific line item, but in general, we use the following methods for different sections of the Balance Sheet:<\/p>\n<ul>\n<li><strong>Current Assets and Liabilities:<\/strong> Excluding Cash and Debt, most of these are linked to Income Statement metrics, such as Revenue for Accounts Receivable and <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/cogs\/\" target=\"_blank\" rel=\"noopener\">COGS<\/a> or Operating Expenses for items like Prepaid Expenses, Accounts Payable, and Accrued Expenses.<\/li>\n<\/ul>\n<p>Many people get flustered over the exact Income Statement links, but the specifics matter less than the <strong>overall impact<\/strong>.<\/p>\n<p>Specifically, you want to ensure that the Change in Working Capital remains in a reasonable range over time, consistent with the historical levels.<\/p>\n<p>If you can do that, almost anything works for these percentage-based assumptions.<\/p>\n<ul>\n<li><strong>Long-Term Assets:<\/strong> You usually want to <em>start<\/em> with the item in the previous period and then <em>subtract<\/em> the corresponding line item(s) on the Cash Flow Statement (CFS):\n<ul>\n<li><strong>PP&amp;E:<\/strong> This should link to Capital Expenditures (CapEx) and Depreciation on the Cash Flow Statement. Subtract both.<\/li>\n<li><strong>Lease Assets:<\/strong> This one is an exception; it\u2019s typically a percentage of Operating Expenses or SG&amp;A on the Income Statement.<\/li>\n<li><strong>Goodwill:<\/strong> This is normally held constant, but you can link it to Goodwill Impairment on the CFS.<\/li>\n<li><strong>Other Intangible Assets:<\/strong> These should link to the Amortization of Intangibles on the CFS.<\/li>\n<li><strong>Long-Term Investments:<\/strong> These should link to Investment Purchases\/Sales\/Maturities on the CFS.<\/li>\n<li><strong>Deferred Tax Assets:<\/strong> These should link to Deferred Taxes on the CFS.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>On the Assets side of the Balance Sheet, whenever you link to something on the CFS, always start with the item in the <em>previous period<\/em> on the BS and <strong>subtract<\/strong> the CFS line item.<\/p>\n<p>For example, the New PP&amp;E equals the Old PP&amp;E minus CapEx minus Depreciation.<\/p>\n<ul>\n<li><strong>Long-Term Liabilities:<\/strong> These are usually based on the old item <em>plus<\/em> the corresponding line on the Cash Flow Statement.\n<ul>\n<li><strong>Long-Term Debt:<\/strong> This might come from a separate Debt Schedule, or it could be forecast based on the company\u2019s expected Debt issuances and maturities in absolute dollar figures.<\/li>\n<li><strong>Lease Liabilities: <\/strong>These should change to match the change in Lease Assets each year.<\/li>\n<li><strong>Deferred Tax Liabilities: <\/strong>These are often netted against the Deferred Tax Assets (DTAs); like the DTAs, they are linked to Deferred Taxes on the CFS.<\/li>\n<li><strong>Other Long-Term Liabilities:<\/strong> This might be a percentage of Operating Expenses or SG&amp;A on the Income Statement.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>On the Liabilities &amp; Equity side of the Balance Sheet, when linking to the CFS, always start with the BS line item <em>in the previous period<\/em> and <strong>add<\/strong> the CFS line item.<\/p>\n<p>For example, New Debt equals Old Debt + the Change in Debt from the CFS.<\/p>\n<p>Finally, for the <strong>Equity<\/strong> or <strong>Common Shareholders\u2019 Equity<\/strong> (CSE) section, you generally do the following:<\/p>\n<p><strong>New CSE<\/strong> = Old CSE + Net Income from CFS + Stock Issuances from CFS + Stock Repurchases from CFS + Dividends from CFS + Miscellaneous Other Items from CFS.<\/p>\n<p>You <strong>add<\/strong> each item because some have positive signs on the CFS, while others have negative signs, which reflects whether they are cash inflows or outflows.<\/p>\n<p>Adding a negative is the same as subtracting, which explains how Dividends and Stock Repurchases work correctly.<\/p>\n<p>They are both cash outflows that\u00a0<strong>reduce<\/strong> the company&#8217;s Equity, and since they are both negative on the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/cash-flow-statement\/\" target=\"_blank\" rel=\"noopener\">Cash Flow Statement<\/a>, they are effectively subtracted in the Equity calculation.<\/p>\n<p>Here&#8217;s a quick summary of the rules for the most common Balance Sheet line items and their links:<\/p>\n<p><img decoding=\"async\" class=\"Balance Sheet Links and Rules aligncenter wp-image-29392 size-full\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110714\/04-Balance-Sheet-Link-Rules.jpg\" alt=\"Balance Sheet Links and Rules\" width=\"1496\" height=\"1626\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110714\/04-Balance-Sheet-Link-Rules.jpg 1496w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110714\/04-Balance-Sheet-Link-Rules-276x300.jpg 276w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110714\/04-Balance-Sheet-Link-Rules-942x1024.jpg 942w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110714\/04-Balance-Sheet-Link-Rules-768x835.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/06\/12110714\/04-Balance-Sheet-Link-Rules-1413x1536.jpg 1413w\" sizes=\"(max-width: 1496px) 100vw, 1496px\" \/><\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_You_Need_to_Know_About_the_Balance_Sheet_in_Interviews\"><\/span><strong>What You Need to Know About the Balance Sheet in Interviews<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In <a href=\"https:\/\/mergersandinquisitions.com\/investment-banking-interview-questions-and-answers\/\" target=\"_blank\" rel=\"noopener\">investment banking interviews<\/a>, you should know the basic definitions, the Balance Sheet equation above, and the most common line items in each section.<\/p>\n<p><strong>But the main significance is that you typically <em>finish<\/em> answering accounting questions based on changes to the Balance Sheet.<\/strong><\/p>\n<p>If you walk through an accounting interview question and find that your Balance Sheet does not balance, you\u2019ve done something wrong \u2013 so it\u2019s critical to <em>end<\/em> with the Balance Sheet to check yourself.<\/p>\n<p>For example, consider the classic \u201cWhat happens when Depreciation goes up by $20?\u201d question.<\/p>\n<p>You would start by walking through the Income Statement and Cash Flow Statement:<\/p>\n<ol>\n<li><strong>Income Statement:<\/strong> Depreciation is up by $20, so Pre-Tax Income is down by $20, and Net Income is down by $15 at a 25% tax rate.<\/li>\n<li><strong>Cash Flow Statement:<\/strong> Net Income is down by $15, but you add back the $20 of Depreciation since it is non-cash, so the Cash is up by $5 at the bottom.<\/li>\n<\/ol>\n<p>At this point, you have no idea if your answer is correct.<\/p>\n<p>To tell for sure, you need to <strong>walk through the Balance Sheet<\/strong> and verify that it still balances.<\/p>\n<p>On the Balance Sheet, Cash on the Assets side is up by $5, and PP&amp;E is down by $20 due to the Depreciation, so Total Assets are down by $15.<\/p>\n<p>On the L&amp;E side, Equity is down by $15 due to the reduced Net Income, which flows into Equity, so both sides are down by $15 and balance.<\/p>\n<p><strong>The intuition<\/strong> is that it\u2019s a reduction of $15 rather than $20 because of the tax savings from the Depreciation.<\/p>\n<p>Even for much more complicated questions, you should always <strong>finish with the Balance Sheet<\/strong>.<\/p>\n<p>Even if it balances, you could still be wrong \u2013 but your chances of being correct are much higher.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In accounting, the Balance Sheet provides a snapshot of a company\u2019s Assets (its resources) and Liabilities and Equity (its funding sources) at a specific point in time; Assets must always equal Liabilities + Equity. The Balance Sheet is widely used in financial models, valuations, returns-based metrics, and liquidity ratios.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-29388","biws_kb","type-biws_kb","status-publish","hentry","kb_category-accounting"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/29388","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=29388"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}