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Why is it not enough for an analyst to look at just the short-term and long-term debt on a firm's...

Question:

Why is it not enough for an analyst to look at just the short-term and long-term debt on a firm's balance sheet?

Balance Sheet:

Balance sheet refers to a statement revealing the financial performance of the company during the year. It helps in analyzing the worth of a company after carrying operations. The investors take an investing decision by examining this statement.

Answer and Explanation:

The balance sheet shows the results of a company for the current year, which does not cover the future liabilities of the firm. An analyst cannot make a certain decision based on the single-year result. A firm's transparent status is identified through the footnotes available at the bottom of the statements, which shows the future liabilities of a company. The short and long term liabilities in the balance sheet are not only predictors of firm's performance as the other elements of balance sheets that are capital involved and assets also have significance in getting a fair picture of a company. It is the reason that is only looking short and long term debts are not enough.


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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

Chapter 8 / Lesson 7
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