Value Investors Tribe

Understanding business of any kind requires understanding its financials which requires understanding accounting basics. In this series of blogs focused on accounting basics, we will try to understand accounting principles required to decode financials of a business. In the previous blogs we understood the basics of income statement and from this section, we explore the balance sheet.

This is part 3 of decoding balance sheets and as customary, we’ll discuss five line items of the balance sheet, continued from part 2. Five line items from the balance sheet are explained below:

• Intangible Assets: Intangible assets comprises of assets that aren’t physical or cannot be touched. This includes patents, brand names, franchises, trademark, copyrights etc. It is difficult to value intangible assets and hence form an important aspect of valuation. Food for thought, what would you say is the value of brand Coca-Cola!?
• Long-term Investments: Investments which are held by a business for time period longer than one year are recorded under this line item. This includes investments such as stocks, bonds, real estate and maybe bitcoin!
• Current Liabilities: Current Liabilities are liabilities which are due within one year. These are obligations which a business has to pay off, this can includes things like short-term debt, accounts payable and every liability which is due in a year.
• Accounts Payable: At times, a business buys raw materials, goods or services on credit i.e., has access to the goods now but has to pay later. This amount which business has to pay its suppliers is recorded under Accounts Payable.
• Accrued Expenses: These are the liabilities which business has incurred but is yet to be invoiced for. For instance, if an employee is hired on 1^st of month and is told that he’ll/she’ll be paid on 31^st of that month; that amount which is paid off as salary is recorded under Accrued Expenses.

Action Items:

• Dig through the balance sheet of your favorite company and see what these line items look like.
• Dig through the balance sheet of the businesses we analyzed and see if you see a pattern in it!
• Do you see any correlation between numbers in income statement and balance sheet?