Harbor Coffee, our fictional coffee business, ends FY3 with $1,000.4 million of assets. Only $105.4 million is cash. What makes up the rest, and which claims come ahead of shareholders?
The income statement followed the year's earnings. The balance sheet pauses at year-end to show the resources Harbor holds and how they are financed. Read it from cash at the top to the owners' claim at the bottom.
One date, two equal sides
Read the date before the numbers. Harbor's reported balances are at FY3-end, in millions of US dollars. They describe one day, not a year's activity.
Assets are resources the business controls. Liabilities are its obligations. Shareholders' equity is the owners' residual claim: what remains in the accounts after subtracting liabilities from assets.
The accounting equation ties them together:
Harbor has $1,000.4 million of assets and $456 million of liabilities. Subtract them to find equity: $1,000.4 million − $456 million = $544.4 million.
The biggest asset block is property, plant and equipment (PP&E). Cash is just one slice; equity belongs on the claims side. Both stacks total $1,000.4 million.
Even a company that cannot pay its bills has a balance sheet that balances.
Start with cash and current assets
In US accounts, current assets usually cover the next year: cash, plus resources expected to be collected, sold or used up. If the normal operating cycle is longer, that longer period applies. The cycle runs from buying inputs to collecting customer cash. Assets outside this group are noncurrent.
Harbor's current assets, in USD millions at FY3-end:
| Line | Amount | What it represents |
|---|---|---|
| Cash | 105.4 | Money available |
| Receivables | 95 | Customers owe this |
| Inventory | 115 | Goods and inputs |
| Other current assets | 26 | Prepaid expenses |
Harbor's cash is unrestricted: it is available for payments. Real statements often combine cash with cash equivalents, short-term investments that convert readily into known cash amounts with insignificant risk of a change in value.
Accounts receivable are unpaid customer bills. A net receivables figure deducts an allowance for amounts the company does not expect to collect. That allowance is an estimate, not a guarantee that the rest will arrive on time.
Inventory means goods held for sale or production, including inputs such as coffee beans. Prepaid expenses are future benefits already paid for, such as insurance coverage. Harbor's $26 million of prepayments cannot pay another bill.
The three rows below cash add up to $95 + $115 + $26 = $236 million, the figure's "Other current" block. Add cash to get $341.4 million of current assets.
"Current" puts things in a time window; it does not put them in a bank account. The next lesson's liquidity ratios compare these resources with upcoming obligations.
Then read the long-lived assets
PP&E covers physical assets used over time, such as buildings, roasting equipment and shop fixtures. Harbor's $509 million net balance is the carrying amount: the recorded cost minus depreciation accumulated so far and any write-downs.
Depreciation is the cost allocation you saw in the income statement, not a fresh payment. The cash flow statement follows the payment separately.
Next comes Harbor's combined $100 million of goodwill and intangibles. Purchased intangibles include identifiable nonphysical assets such as trademarks and customer relationships. Goodwill arises when a buyer pays more for a business than the fair value of its identifiable assets minus the liabilities taken on.
For a simple example, say a buyer pays $30 million for an entire business. Its identifiable assets minus liabilities have a fair value, a market-based value, of $20 million. The extra $10 million is goodwill, not cash waiting to be spent.
A brand built inside a company can be valuable without appearing as a separate asset. A recorded asset may also sell for a different amount. The balance sheet is not a price list for the business.
Harbor reports goodwill and intangibles together. Add its $50 million of other noncurrent assets to get the figure's $150 million group. Total assets are $341.4 + $509 + $150 = $1,000.4 million.
Read what must be paid or delivered
The same time window guides the split between current and noncurrent liabilities. Harbor's current section contains:
- Accounts payable: $66 million. Unpaid supplier bills.
- Short-term debt: $30 million. Borrowing due soon; current debt also includes any portion of long-term borrowing due within the current window.
- Other current liabilities: $50 million. Real reports often group accrued expenses here: costs already incurred but not yet paid, such as wages awaiting payday.
Those rows total $146 million. The noncurrent section has $270 million of long-term debt and $40 million of other liabilities: $310 million in total. Total liabilities are $146 + $310 = $456 million.
Not every liability is a loan. Deferred revenue, or a contract liability, arises when customer payment is received or due before goods or services are delivered. The business owes the customer delivery. Harbor's balance is zero.
Finish with the owners' share
Harbor's $100 million of contributed capital appears as "common stock plus paid-in capital": capital supplied by shareholders. Retained earnings is accumulated profit after dividends and relevant accounting adjustments.
The three-statement overview traced Harbor's FY3 retained earnings to $609.4 million. Here, fit that balance into total equity.
The third component is treasury stock: the deduction for repurchased shares held by the company. Harbor records its buybacks there at cost. Its equity is:
$100 million + $609.4 million − $165 million = $544.4 million.
Subtracting Harbor's buybacks from retained earnings too would count them twice. Other companies can account for repurchases differently; use their reported equity rows. The stock market puts its own price on the owners' share, a distinction explored in price-to-book.
Next time, look first at cash and collectible assets, then obligations due soon, then the largest noncurrent assets and changes in equity.
Back to Harbor's $1,000.4 million: most sits in assets that must be collected, sold or used. Its $456 million of liabilities comes ahead of the owners' $544.4 million accounting claim. Cash available for payments remains $105.4 million.
Next, put Harbor's current assets beside its upcoming bills to test the near-term payment buffer.
In short
- A balance sheet records resources and claims on one date.
- Assets equal liabilities plus shareholders' equity.
- A current asset may still need a buyer or a paying customer before it can fund a bill.
- Retained earnings tracks accumulated profit after dividends and relevant accounting adjustments; it is not cash set aside.
- Recorded assets and equity are not a stock-market valuation.