E.g. Case 1:80,000 / 100,000 = .8 (80%) – more solvent (creditor more likely to lend money)Case 2:20,000 / 100,000 = .2 (20%) – less solvent (However, if funds borrowed at 10% used to produce earnings at 20% rate, Case 2 is more preferable in terms of profitability.)Module 2: Chapter 7 and 9:The Balance Sheet:A balance sheet presents a listing of an organization’s assetsand liabilitiesat a certain point in time. oThat specific moment is usually the close of the business year. To make things simple, assume December 31.oAs previously stated, the balance sheet lists the company’s assets, liabilities, and stockholders’ equity. Assetsare things of value owned by the business. They are also called the resources of the business. Examples include cash, machines, and buildings. oAssets have value because a business can either sell them for cash or use them to produce the services or products of the business.Liabilities are the debts owedbya business.Typically, abusiness mustpay its debts bycertaindates. A business incurs many of its liabilities by purchasing items on credit from vendors. The owners’ interest in a corporation is referred to as stockholders’ equity. Stockholders' equity shows the portion of the company that actually belongs to the owners. For example, if a company has $100 in the cash register but also has a debt of $80, does the owner own the full $100? Clearly not. The owner must first pay the debt before he can take the $20 residue. oTranslating this into accounting jargon, this business would have $100 in assets, $80 in liabilities, and $20 in equity. It derives that assets must always equal liabilities plus equity. This formula is referred to as the fundamental accounting equation.Balance Sheet Financial Ratios:oBalance sheet information is analyzed in two major ways:1. Relationships between balance sheet amounts2. Relationships between balance sheet and income statement amountsIn general, relationships between financial statement amounts are called financial ratios. oLiquidity Ratios:Liquidity is the ability of a firm to satisfy its short-term obligations.Common indicators of the overall liquidity of a company are the current ratio and the quick ratio.