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    describe the balance sheet and its importance

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    Please describe what the balance sheet is.
    a. How is it constructed/what kinds of items are included?
    b. Why is it important?
    c. How does it relate to the other two financial statements?

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    Hi there,

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    The balance sheet is a statement of your company's relative wealth or financial position at a given point in time. It's often referred to as a "snapshot" because it gives you a fairly clear picture of the business at that moment, but does not in itself reveal how the business arrived there or where it's going next. That's one reason why the balance sheet is not the whole story - you must also look at the information from each of the other financial statements (and at historical information as well) to get the most benefit from the data.

    Along with other financial information, balance sheet data is frequently analyzed and put into perspective through the construction of business and financial ratios. In many cases, ratios are constructed for each balance sheet (and income statement) for a number of years, so that you can make comparisons and spot important trends.

    The balance sheet consists of three categories of items: assets, liabilities, and stockholders' or owners' equity.

    Assets. Assets are generally divided into two groups - current assets and fixed (long-term) assets. They are usually presented in order of liquidity, with current assets (cash and those that will be converted to cash within one year) appearing first. For instance, current assets would ...