Acid Test Ratio

finance- a la shmoop. what is a balance sheet? well it's a snapshot. a financial

reckoning of what you own ,and what you owe at a given moment in time. well note

that a balance sheet is divided into columns like this. on the left are good [balance sheet pictured]

things like things you own. on the right side are things you owe like debts or

obligations you have to pay off. well think for the balance sheet of little

brother Inc. you have total assets of $142 with current assets of a hundred

bucks .80 bucks of that current asset set is cash and twenty dollars is an IOU

from the tooth fairy ie dad ,who woke you up last night [clown next to child's bed]

replacing the tooth and since you're old enough you just winked and he said yeah

I'll get you a twenty from my wallet in the morning. note that if he'd said I'll

get it for you a year and change from now. it wouldn't be a current asset it

would be a long-term asset, because current means that a promise or a

product or whatever turns into cash within a year. you mowed the lawn for the [assets listed]

summer for mrs. garden bottom and billed her $500. she paid you four hundred

ninety dollars and still owes you ten bucks. that money lives in your balance

sheet on the assets side as an account receivable. you have four hundred ninety

seven little blue marbles as your only asset which your friend Billy has

offered you tons of times to buy for twenty four dollars so you can hold that [kids exchange marbles and money]

amount as inventory. it's an asset. since you know you deal in marbles regularly.

and you paid ten dollars for ten year rights to enter your sister Jeannie's

room anytime you want. you still have eight years to go on that paper so you'd

depreciate its value at a dollar a year worth eight bucks today. total everything [balance sheet shown]

up and you have that one hundred forty two dollars in assets on your own

personal balance. sheet okay so what about your liabilities. well you have

total liabilities of a hundred dollars. you owe Joe lunch bully thirty bucks to

learn why you'll stop hitting yourself. or rather to stop doing so you owe him

thirty bucks tomorrow and you know you'll owe him sixty bucks a year in

change from now maybe more in the future and maybe not if you grow and put on a [ laughing boy is offered cash]

few pounds. but you are conservative financially so you reserve that 60 bucks

as if it's a certain long-term debt, so it goes down there on

line 13 .you borrowed ten bucks from your boo

Amy the auditor for lunch she actually submitted to you an invoice. albeit

romantically. so you have ten bucks on line eight there .so you have one hundred

forty two dollars in total assets and a hundred dollars in total liabilities, but

wait they don't balance. oh no what shall we do ?well a balance sheet accounts for

this it's called ale and it stands for assets minus liabilities equals equity. [man gives thumbs up]

well you have assets $142 we just outlined and you can subtract your

liabilities which we just outline of a hundred bucks and you have net equity

value to your life of $42. it looks like little brother Inc doesn't have to worry

about filing for bankruptcy anytime in the near future which is good because

with Joe lunch bully in the picture, life is hard enough as it is. [kid frowns as bully pushes his own hand in his face]