The balance sheets described present financial snapshots, showing assets, liabilities, and shareholders' equity. Singleton Bank's changes in reserves and loan amounts reflect an altered business plan affecting its financial stability.
Understanding Balance Sheets
When examining the balance sheet of Ethan Allen Interiors Inc. or any other company, such as Singleton Bank, we are looking at a financial statement that provides a snapshot of the company's financial condition at a specific point in time. A balance sheet consists of two main sections: assets and liabilities with shareholders' equity. By definition, assets must equal the sum of liabilities and shareholders' equity, as this represents the accounting equation: Assets = Liabilities + Shareholders' Equity.
In the case mentioned, Singleton Bank's balance sheet indicates a change due to a new business plan, where it lists $1 million in reserves and a $9 million loan to Hank's Auto Supply. The bank also shows $10 million in deposits, which likely represent liabilities to customers.
Banks typically adjust their balance sheets to reflect changes in their asset allocation and liabilities when they alter their business strategies. These changes are crucial as they affect the bank's net worth and financial stability. It's worth noting that the balance sheet must always balance with the change in assets equaling the change in liabilities and net worth.