The Balance Sheet

A balance sheet purports to show the financial condition of a company at a given point in time. The one pictured here shows what Apple’s finances looked like on September 26, 2015,* the end of their most recent fiscal year.



There are two columns of numbers on the right hand side of the balance sheet. These numbers represent millions of dollars; note the phrase “in millions” underneath the title. The currency is US dollars, of course, because Apple is an American corporation.

One column of numbers shows this year, the other shows last year. This is so people can compare the two years to see if the company is now in better or worse condition than last year. For instance, the first line of numbers shows that the amount of cash Apple keeps on hand has grown from just under $14 billion to just over $21 billion. This is a 50% increase in cash in one year.

Each of the rows is given a description on the left hand side of the balance sheet. The rows are grouped into two main sections, with appropriate headings and totals. The first section is Assets. It adds up to US $290,479 million. The second is Liabilities and Shareholders’ Equity. It also add up to US $290,479 million. The fact that these two sections balance out is where the name “balance sheet” comes from.

Assets

The assets section lists everything the company owns. This includes, amongst other things:

  • cash and things that are equivalent to cash, such as term deposits of less than three months,
  • marketable securities which are stocks and bonds that Apple owns, just like any other stock market investor,
  • inventory, such as iPhones sitting in stores or warehouses,
  • accounts receivable, which is money owed to Apple by its business-to-business customers,
  • property, plant and equipment, which means any land and buildings Apple owns, plus all the furniture, computers, photocopiers, and so forth that are being used by Apple in its offices and stores, and
  • goodwill and acquired intangible assets which are the result of Apple having bought other companies.

Liabilities

The liabilities section shows what Apple owes to other businesses. These include:

  • accounts payable, which are amounts owed to Apple’s suppliers,
  • deferred revenue, which indicates situations where Apple has been paid for something but hasn’t yet delivered it to the customer, such the future software updates for iPhones that Apple customers paid for when they bought their phones but haven’t yet received, and
  • long-term debt and commercial paper, which are amounts owed to banks and other lenders.

Shareholders’ Equity

The shareholders’ equity section is what Apple “owes” its shareholders. This is what is left after deducting the company’s liabilities from its assets. Legally, it would have to be paid to the shareholders if the company were to shut down, but unlike liabilities, the company is under no obligation to pay this wealth to the shareholders as long as the company is still viable. Equity consists of two main items:

  • common stock, which is the money Apple received when it sold shares to shareholders (who then trade the shares amongst themselves on the stock market), and

  • retained earnings, which is the accumulated profit that Apple has held onto over the years, instead of giving it to the shareholders.

The point of a company retaining its earnings is so it can grow the business. The company is expected to reinvest its profits in new products and services, or in factories and technologies that will make it more efficient. This reinvestment indirectly makes the shares more valuable, because people are willing to pay more for them in hopes of getting their hands on all this profit at some point in the future. But as I said, the company is under no obligation to share the wealth any time soon, so owning shares can be an exercise in patience.

Most shareholders make their money by the simple strategy of buying low and selling high. This strategy is, I am told, harder to execute than to understand.

So what do you think about Apple’s balance sheet? What looks good to you when you read it, and what causes you concern? Post your comments below. I’ll be discussing what I see in my next post.

 

Note

* The date is the 26th instead of the 30th because the 26th was the last Saturday of the month. Companies that depend heavily on retail sales, like Apple, traditionally choose to end their fiscal year on a particular weekday instead of the last day of the month. This is because some days, typically Saturdays in North America, have heavier sales than the rest of the week, and it is easier to compare fiscal years if they all have the same number of these heavy days.


Photo of someone's careful work taken at the Humber River, Toronto, 2012.