- Alright, the first primary financial statement
is the balance sheet.
The balance sheet is a listing of a company's assets
and its obligations, its liabilities.
The balance sheet is structured around a phenomenal thing
called the accounting equation,
assets equal liabilities plus equity.
The idea behind this equation was created
by the Italians a bit over 500 years ago.
The idea is simple.
If I've got assets, then I need to get the money
to buy those assets from somewhere.
That's the inside of the balance sheet.
We're not only going to list a company's assets,
but we're also going to list the sources
of financing to buy those assets.
Where did the money come from to buy the assets?
That's the idea behind the balance sheet.
To get an idea of what's in the balance sheet,
let's look at an actual balance sheet.
Here is the balance sheet for Walmart
as of January 31st, 2018.
Let's just look at a couple of the key numbers here.
Inventory, that's the stuff on the shelves
that Walmart has to sell you, is $44 billion
which is about $4 million per store
for the 10,000 plus stores that Walmart
has around the world.
The $185 billion amount listed for property and equipment
means that Walmart has spent that much to buy land,
and trucks, and buildings.
Now Walmart has $6.8 billion in cash worldwide.
That is cash is cash registers and bank accounts.
Walmart's total assets on January 31st, 2018
were just over $204 billion.
So our natural question should be,
where did Walmart get the money
to buy that $204 billion in assets?
That explanation comes in the other part
of the balance sheet:
the listing of liabilities and owner's equity.
There are two general sources of money to buy assets.
You can borrow the money or the money
can be invested by shareholders.
Now a large source of financing for Walmart
is supplier credit.
Walmart was allowed by its suppliers
to purchase its inventory on credit.
In fact, the $46 billion in accounts payable
means that with inventory of $44 billion,
Walmart has already sold some inventory
for which they have not paid for yet.
Walmart also borrowed a lot of money
on a long term basis, over $30 billion worth.
But, the largest single source of financing by Walmart,
$85 billion, is something call retained earnings.
Retained earnings is the amount of profits
generated by Walmart that has been kept in the company
to purchase new assets.
This retained earnings amount has been accumulating
since July of 1962 when the company started.
This is a balance sheet,
a listing of assets, liabilities, and equities.
Or in other words, the assets
and the sources of financing to buy those assets.
Now, the question that should come to your mind
as you look at Walmart's liabilities and retained earnings
is the following: is this the right mix?
Should Walmart have borrowed a little more?
This question of financing mix is a key question
of corporate finance that we're going to discuss
later in the course.