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“To the complaint ‘There are no people in these photographs,’ I respond, ‘There are always two people: the photographer and the viewer.’” -- Ansel Adams (1902 – 1984)

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Today’s S.A.T. question:

Balance sheet is to ____________ as videotape is to cash flow statement.

a) Solo

b) Symphony

c) Photograph

d) Red Sox

If you chose “c”, you are correct.

The balance sheet is like a photograph while a cash flow statement is more like a videotape. This analogy came to me while spending time with a good friend who is a professional photographer.

I have two amazing grandchildren and it’s awfully nice to have a professional photographer around. Catching the essence of these little people on paper is the ultimate gift.

Capturing a moment in time with photographs is much like taking a look at a balance sheet.

Each year, at least once, we have the entire family to Marco and one of the highlights is our family portrait session at the beach.

A balance sheet is like a photo session in that it captures a company’s assets, liabilities and shareholder’s equity at a specific point in time. Each of these items is made up of sub-accounts that are the moving parts of the company.

The three segments of the balance sheet will have many accounts within it that document the value of each.

Accounts such as cash, inventory and property are the assets while the liabilities may be accounts payable or long-term debt. The theorem is that assets equals liabilities plus shareholders’ equity.

This provides a picture of what a company owns and owes at a point in time.

In the world of financial information, the balance sheet is one of the most important reports issued by a company.

In contrast, the cash flow statement can be thought of as the video of a company’s financial situation. A cash flow statement is the compilation of many moving parts (think photograph with a heart beat and blood flow) that’s a continual work in progress.

The cash flow statement illustrates the fluid nature of finances. There are generally three parts to the cash flow statement: operating activities, investing activities and financing activities.

Neither statement is better than the other — rather, the financial statements are built to be used together to present a complete picture of a company’s finances.

Looking at a photograph makes it is easy to point out assets (all grandchildren are beautiful) as well as liabilities (do I really look like that!?). The balance sheet is the tool to do this when analyzing a business or taking a look at your personal finances.

After the assets, you’ll find debt on a balance sheet. Debt can come in many forms: short term, long-term, convertible and preferred stock. Debt is important because it represents a liability and an interest expense against company’s profits. Debt holders are first in line if there are liquidity problems. When evaluating an investment it is prudent to also analyze the debt a company carries on its balance sheet.

Inventory, accounts receivable and accounts payable are the three remaining line items on a balance sheet.

Inventory, found on the assets side of the balance sheet, measures the value of the product inventory that the company is holding on to. Observing inventory levels is important because you want to know that the products that a company is making are being sold, not just put in a warehouse.

Also on the asset side are accounts receivable which are related to accounts payable on the liability side. Accounts receivable are the sales a company has made but has not yet collected on. Accounts payable is the exact opposite measuring things that the company has bought but not yet paid for.

Having a basic understanding of the balance sheet is a good tool to have. All companies just like families have balance sheets that are helpful in determining worth. And just remember that a picture is worth a thousand words.

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Darcie Guerin is a financial adviser and branch manager at Raymond James & Associates Inc. at 606 Bald Eagle Drive, suite 401, Marco Island. Contact her at Darcie.Guerin@raymondjames.com, 389-1041 or toll-free (866) 343-0882.