How the Balance Sheet got its name

A simple way to understand the mechanics of the Balance Sheet is to use the example of owning a home. Suppose you buy a home valued at $500,000. You put 20% down and pay the rest using a mortgage loan.

Your home’s balance sheet looks like this:

• Asset ($500,000): The physical house—something of value that you control.

• Liability ($400,000): The mortgage loan you secured from the bank to finance the purchase.

• Equity ($100,000): The cash down payment you provided out of your own pocket.

Assets ($500,000) = Liabilities ($400,000) + Equity ($100,000)

The Balance Sheet reports the assets, liabilities, and equity of the business at a point in time and the value of the assets will always equal the total value of the liabilities and equity, so the Balance Sheet always balances. This is because every asset a company owns has to be paid for somehow. There are only two ways a business can pay for an asset:

1. Borrowing money from external creditors (creating a Liability, such as debt or trade payables).

2. Using capital from owners, meaning cash that was injected directly by shareholders or cash generated from cumulative past profits retained in the business (creating Equity).

Because every dollar of assets is claimed by either a creditor or an owner, Assets must always equal Liabilities + Equity.

Key Components of the Balance Sheet

Let’s take a look at corporate balance sheet. On a standard GAAP Balance Sheet, Assets and Liabilities are ordered by liquidity (how quickly they convert into cash) and classified into two primary time horizons:

• Current (Short-Term): Expected to convert into cash, be consumed, or be settled within 12 months.

• Long-Term (Non-Current): Obligations or commitments extending beyond 12 months.

This timing distinction is critical to understanding the different between a company’s long-term strategic investments versus the day-to-day operational engine funded by working capital.

Looking at the assets of Block, Inc., we see that “Current assets” are specifically categorized on the balance sheet and include cash and cash equivalents, receivables from settlement and customers, customer funds, and more. The long-term assets start with Property and equipment (also called PP&E), then goodwill and acquired intangible assets that come from buying other businesses, and other long-term investments specific to Block’s business model.

You might notice that in the “Current assets” section, Block lists “loans held for investment,” and maybe that feels a bit odd since we would typically see a loan listed in liabilities, right? This is where the unique aspects of Block’s business model show up - these specific loans are short-term loans that Block has offered to their users through Cash App Borrow and Square. So, Block expects to be repaid from their users and they list that future repayment as current asset.

Now, let’s take a look at the liabilities of Block, Inc. We see that the liabilities also start with “Current liabilities” and include customers payable (customers that have requested payout and are waiting for Block to process it), accrued expenses and other such as payroll or rent that is coming due, current portion of long-term debt meaning any part of a long-term loan use for general corporate borrowing that needs to paid, and warehouse funding facilities, current that Block uses to back their loans to consumers. The long-term liabilities start with Deferred tax liabilities, then long-term portions of the warehouse funding facilities and long-term debt that come from buying other businesses, and other long-term liabilities specific to Block’s business model.

To finish out the balance sheet, let’s look at the stockholders equity section. The first thing you can check is whether the total liabilities & stockholders’ equity matches the total assets. Then, let’s look at the line items - we several types of equity that have not been issued yet and have a zero value, then additional paid in capital which tracks the money that investors originally paid for the shares that are currently outstanding, accumulated other comprehensive loss from unrealized losses (market price shift) on the marketable debt securities that they hold, and retained earnings which tracks the cumulative net income generated by the business. Retained earnings and net income are the key links between the balance sheet and the income statement.

You will also notice that Block has multiple types of equity listed - preferred stock, Class A common stock, and Class B common stock. Block’s leadership and board of directors has to approve any new shares that the company wants to issue, so you can see that each of these types of equity say “authorized” for a certain number of shares - but none of those shares have been issued yet. More to come on the different types of stock.

The Strategic Pillars of the Balance Sheet

Running a business revolves around two primary decisions: how to raise capital and how to invest capital. Through analyzing the Balance Sheet, we can start to see how the company’s leadership executes across three critical strategic pillars: capital allocation, capital structure, and operational execution.

1. Capital Allocation: Where Management Bets Its Future

   The P&L shows what a company earned this quarter, but the Asset side of the Balance Sheet reveals where leadership has chosen to deploy long-term resources. Is the company reinvesting in organic expansion (PP&E and R&D infrastructure), buying market share through acquisitions (recorded as Goodwill and Intangibles), or hoarding cash for optionality?

2. Capital Structure & Strategic Flexibility: How Bets Are Funded

   How a business is funded will directly impact the leadership’s ability to execute on the corporate strategy. The Liabilities & Equity side exposes a company’s leverage and financial durability. A balance sheet with lots of long-term debt will show high fixed interest expenses on the Income Statement, so cash is tied up in paying the debt and will limit leadership’s ability to execute on ambitious growth strategies or strategic pivots during downturns. On the other hand, a clean balance sheet with low debt (also called “leverage”) and sufficient cash can provide the "dry powder" needed to execute opportunistic M&A or survive macro shocks.

3. Operational Execution & Working Capital Velocity

   As a business grows, cash can get trapped in operational holding areas: Accounts Receivable (A/R) from customers who still need to pay their invoices and Inventory sitting on shelves. This ‘trapped’ cash can be offset by Accounts Payable (A/P), where the business can try to hold on to cash longer by extending the number of days it has to pay its suppliers. A growth strategy can look great on a P&L, but operational execution happens on the Balance Sheet through Net Working Capital (NWC):

   NWC = Current Assets (AR & Inventory) − Current Liabilities (AP)

   Net Working Capital is a critical component to understanding how much cash the business is generating to pay its bills. For instance, if the AR balance is increasing, it tells us that customers are taking longer to pay their bills and we may need to ask our suppliers for longer payment terms. This brings us to the next core operational concept - the Cash Conversion Cycle. The cash conversion cycle tracks how how many days it takes to turn cash the business spent on inventory into cash collected from sales. There are three key metrics that drive the cash conversion cycle:

   • Days Sales Outstanding (DSO): How quickly customers pay their credit bills.

   • Days Inventory Outstanding (DIO): How long inventory sits before selling.

   • Days Payable Outstanding (DPO): How long the company takes to pay its trade suppliers.

Executive Real-World Anecdote: The Working Capital Trap

When I was in renewable energy, I saw solar install businesses grow their sales rapidly, sometimes 2-3x in a short period of time. Each install required purchasing expensive inventory (panels, inverters, batteries) that was subject to changing tariffs and paying installation labor sometimes weeks before receiving the final payments from customers. If customers were unhappy or facing issues with their new solar, the might even refuse to pay all together. From a P&L perspective, these businesses showed strong revenue growth and profitability. But on the balance sheet, AR from customers was increasing rapidly, trapping much needed cash.

Managing the Balance Sheet is the critical difference between scaling a business sustainably and running out of cash during a growth spurt.

Suggested Exercise: AI Finance Lab

Exercise: Open a notebook with your preferred model and upload the recent 10-K filings for Block, Inc. (SQ) or another company that you’re interested in. Use the following prompt to start a conversation about the company’s balance sheet:

"You are a corporate finance director interested in the liquidity and cash performance of the business. Analyze the Consolidated Balance Sheets and Statements of Cash Flows in this filing. Extract Current Assets (including A/R and Inventory) and Current Liabilities (A/P) for the last two fiscal years. Calculate the change in Net Working Capital and summarize management's disclosures in Item 7 (MD&A) regarding working capital liquidity and cash collection performance."

© Katherine Dextraze, F Avenue Consulting, 2026

The Income Statement

The Income Statement or P&L shows the total revenue generated from sales and the costs associated with those sales, ending with Net Income.

Revenue is the total money a business makes from selling products or services. Revenue must be earned from providing a product or service to a customer and does not include cash received from “non-operating” activities like cash from a loan or cash from selling shares.

Cost of Good Sold (COGS) is the total direct costs to create a product or deliver a service. COGS includes the cost of raw materials, direct labor used to physically build or create a product, and production overhead like the cost to maintain a factory. COGS will typically scale directly with the number of units that the business manufactures. Gross Profit is the total Revenue, less the total COGS.

Operating Expenses (Opex) represent administrative overhead and selling, general, and admin (SG&A) costs. These costs typically do not scale directly with the number of units that the business produces. Opex includes costs such as sales & marketing for advertising and sales commissions, administrative costs like office rent and legal/accounting services, and indirect salaries for central corporate functions such as corporate executives and HR. Operating Income or Earnings Before Interest & Taxes (EBIT) is the Gross Profit, less the total Opex.

Interest & tax expenses include interest accrued on any outstanding loans and can also include interest collected from investing in financial instruments like government bonds. Taxes refer to the income taxes that the company is required to pay based on its headquarters - in some cases, businesses with a wide international presence will pay income taxes in multiple countries. Net Income is Operating Income or EBIT, less the total interest & tax expenses.

Net Income will be the key link between the Income Statement, the Balance sheet (through Retained Earnings in the equity section), and the Cash Flow Statement (trough Cash Flow from Operations).

The Income Statement or P&L shows the classic top-to-bottom waterfall:

• Revenue – Cost of Goods Sold (COGS) = Gross Profit

  • → Gross Profit – Operating Expenses (Opex) = Operating income or Earnings Before Interest and Taxes (EBIT)

    • →EBIT – Interest & Taxes = Net Income

The Danger of P&L Tunnel Vision

The biggest trap for non-finance executives is managing the P&L in a vacuum. A company can show booming revenue and healthy Net Income while sprinting straight toward insolvency.

Why? Because the Income Statement is built on Accrual Accounting, not Cash Accounting.

• Cash Accounting: Recognizes revenue when cash is deposited into the bank, and expenses when cash leaves the account. Most smaller businesses rely primarily on cash accounting due to its simplicity.

• Accrual Accounting (GAAP Standard): Recognizes revenue when performance obligations are satisfied (when the money is actually earned),and matches expenses to the period in which they helped generate that revenue, regardless of when cash is actually deposited. Accrual accounting is required for publicly traded companies, per the Generally Accepted Accounting Principles (GAAP), and reports a clearer picture of the company’s finances.

If you focus solely on P&L metrics like Gross Margin or EBIT (or EBITDA), you miss how revenue recognition impacts the Balance Sheet and Cash Flow Statement.

Impact of cash versus accrual accounting example

Let’s say you’re running a software business and your sales team lands a major $1 million deal with a client for a 12 month subscription.

Cash accounting:

• Customer pays the $1 million up front and your revenue and profitability for month 1 look awesome.

• But next month, you will still need to pay for the engineers, server hosts, and other suppliers, and you won’t have any revenue to offset those costs.

Accrual accounting:

• Customer pays the $1 million up front, which gets reported on the Balance Sheet (more on this later).

• Revenue is recognized as the service is provided, breaking up the $1 million payment over 12 months (and reducing the value on the balance sheet).

• Expenses are reported monthly with the associated revenue and the profitability is more consistent and accurate.

The Executive Real-World Takeaway

During my time in corporate finance and later running a company as CEO, I repeatedly saw how payment terms, inventory lags, and capital commitments can dictate the survival of a business. Don’t judge the health of a company by its top-line growth or Net Income alone. Always ask: "How much actual cash did it cost to generate that profit?"

Net Income is an accounting convention—it is not cash in the bank. As an executive or financial analyst, your job isn’t just to manage the P&L; it’s to understand how every dollar on the Income Statement flows into working capital and cash generation to sustain the business.

© Katherine Dextraze, F Avenue Consulting, 2026

Why publicly traded companies are required to report financials

Publicly traded (or simply, “public”) companies don’t publish financial statements out of goodwill. After the stock market crash in 1929 and resulting Great Depression, Congress passed the Securities Exchange Act of 1934 and formed the Securities and Exchange Commission (SEC) to regulate financial markets. Today, any publicly traded company listed on a US exchange must provide transparent, audited financial disclosures to the SEC. The goal of this mandate is to ensure that capital markets operate efficiently, preventing insider trading fraud and misleading statements from company executives.

The two main financial disclosures every investor and operator tracks are:

• Form 10-K: The comprehensive annual report covering audited financial statements, risk factors (Item 1A), and Management’s Discussion & Analysis (MD&A / Item 7).

• Form 10-Q: The quarterly, unaudited update tracking performance across three individual quarters.

Introduction to the three financial statements

In both the Form 10-K and Form 10-Q, the company will report three key financial statements:

• Income statement (also called “Consolidated statement of operations” in the Forms) showing total revenue, expenses, and net income for the period.

• Balance sheet reporting total assets, liabilities, and equity at the end of the period.

• Cash flow statement showing the total cash generated from operations, from investing (or capital expenditures aka “capex”), and from financing such as issuing debt or stock.

Real world example

Let’s consider the company, Block, Inc. [ NYSE: XYZ ], the fintech company that owns consumer-facing apps like Cash App and Square and crypto platforms like Bitkey and Proto.

If we look at Block’s latest 10K, we can see the following trends:

• On the income statement, Revenue for 2025 was essentially the same (“flat”) to 2024, due to declines in the bitcoin ecosystem. After all expenses, net income profit margin was 5% for 2025, down from 12% in 2024, driven by increased operating expenses and higher interest expense.

• On the balance sheet, we can see that the main changes in assets are growth in the “loans held for investment,” originating from a new product called “Cash App Borrow” that the company launched in 2025.

• On the cash flow statement, you will see that Block has a lot of activity in the “cash flows from investing” section. For a standard widget-type company, this section would usually include only a few transactions from buying or selling large equipment (aka ‘capital expenditures’). Since Block is a fintech company that holds customer funds and offers borrowing, they use “marketable debt securities” like government bonds to manage customer funds safely and earn interest on the cash that they hold for their customers.

The Takeaway: A single financial statement only gives you a single dimension of information. To evaluate a company's financial health, you need to consider how all three statements connect.

Suggested Exercise

Try checking out the SEC EDGAR website to look up financials for a company you’re interested in. You can also use AI tools like Gemini Notebook to collect several 10Ks and 10Qs and chat with Gemini about the reports.

© Katherine Dextraze, F Avenue Consulting, 2026

Whether you’re an undergrad eyeing Wall Street, an MBA student pivoting careers, or an executive running a P&L, my unique approach to explaining finance bridges the gap between financial theory and boardroom execution.

About Katherine Dextraze

Hi, I’m Katherine. My career spans investment banking at a major bulge bracket bank, corporate finance and multi-billion-dollar M&A long-range planning at a global pharmaceutical company, and operating as CEO of a private-equity backed high-growth renewable energy business. I pivoted into finance through my MBA and I’m passionate about helping students and experienced professionals build confidence in financial concepts and understand the “why” behind the numbers.

Disclaimer: all content presented here is for educational purposes only. No posts, notes, or discussions should be interpreted as investment or personal financial advice.