Balance Sheet Glossary

Essential terms for understanding what companies own and owe

How to Use This Resource: This glossary defines the key terms you will encounter in the Toys R Us Balance Sheet Analysis assignment. Keep it open as a reference while working through the case document and workbook.

A balance sheet shows what a company owns and what it owes at a specific moment in time. It is a financial snapshot.

If a company owns $500 in assets (cash, inventory, buildings) and owes $300 in debts, there is $200 left over. That $200 belongs to the owners. It is called shareholders’ equity.

Try asking your LLM

Explain what a balance sheet shows using a simple example like buying a car with a loan. Make up some numbers and make it really clear, I’m taking my first finance course.

Assets: What the Company Owns

Assets are things of value the company owns or controls.

Cash: Money in bank accounts and anything that can immediately be converted to cash, like short-term treasury bills. Called “liquid” because it is already money or can become money instantly.
A retailer with $50M in checking accounts and $10M in treasury bills has $60M in cash

Accounts Receivable: Money customers owe the company for products already delivered. Revenue that has been earned but not yet collected in cash.
If Toys R Us sells $1M to schools on 30-day payment terms, that $1M appears as accounts receivable until the schools pay

Inventory: Products the company has in stock but has not sold yet. For a retailer, this is merchandise on shelves and in warehouses.
Toys R Us would have millions of toys and games in inventory. During the holiday season, inventory peaks as they stock up for Christmas.

Property, Plant & Equipment (PP&E): Physical assets used in operations: buildings, land, equipment, vehicles, furniture.
For Toys R Us: store buildings, warehouse facilities, shelving and display fixtures, distribution trucks

Total Assets: Everything the company owns added together.
If a company has $100M in cash, $200M in inventory, and $300M in buildings, total assets are $600M

Liabilities: What the Company Owes

Liabilities are obligations the company must pay.

Current Liabilities: Money the company must pay within one year. This includes bills to suppliers and the portion of loans due within 12 months.
If Toys R Us owes suppliers $5M and has $10M in loan payments due this year, current liabilities include both

Accounts Payable: Money owed to suppliers for goods or services already received but not yet paid for.
If Toys R Us received $2M in toy shipments from Mattel on 60-day payment terms, that $2M is accounts payable until they pay

Debt: Money the company has borrowed and must pay back, with interest. Includes bank loans, bonds, and other borrowings. Can be short-term (due within a year) or long-term (due beyond a year).
A $500M loan from banks that must be repaid over 10 years, with annual interest payments

Total Liabilities: Everything the company owes added together.
If a company has $50M owed to suppliers, $100M in short-term loans, and $400M in long-term debt, total liabilities are $550M

Equity: What Belongs to Owners

Shareholders’ Equity: What is left for owners after you subtract all debts from all assets. If you sold everything the company owns and paid everything it owes, shareholders’ equity is what would remain. This can be positive (owners have a stake) or negative (the company owes more than it owns).
Shareholders’ Equity = Total Assets − Total Liabilities

A company with $600M in assets and $400M in liabilities has $200M in equity. If debt rises to $700M while assets stay at $600M, equity becomes negative $100M (the company is insolvent).

Try asking your LLM

I’m learning about finance and I’ve read that a company “uses leverage to grow faster.” Explain what leverage (debt) means and how this would work using a simple retail store example. Then help me see in those simple numbers the benefits and risks of using a lot of debt to finance growth.

Understanding Leveraged Buyouts

What is a Leveraged Buyout (LBO)?

When investors buy a company using mostly borrowed money. They might pay 20% from their own funds and borrow the other 80%.

The surprising part: The debt does not stay with the investors. It goes on the company’s balance sheet. The business itself becomes responsible for paying back the loan used to buy it.

How it works:

1. Private equity firm wants to buy a company for $1,000M

2. They put in $200M of their own money

3. They borrow $800M from banks

4. After the purchase, the $800M debt goes on the company’s balance sheet

5. The company must now make interest payments on $800M every year

The upside:

Say you buy a $100 business that grows to $120 (20% growth):

If you paid $100 cash: You made $20 profit on your $100 (20% return)

If you paid $20 cash and borrowed $80: Business worth $120 minus $80 debt = $40 for you. You made $20 profit on your $20 (100% return)

Leverage amplifies your returns when the business grows.

The downside (debt burden):

The Problem:

Company’s operating income: $150M per year

Interest on $800M debt at 7%: $56M per year

Operating income covers interest: $150M ÷ $56M = 2.7x

This works. But if the business weakens and operating income drops to $45M, now it cannot cover the $56M interest payment. The company loses money every year just from debt service, regardless of how well the stores perform.

The key question: Can the company’s operating income cover its interest payments? If not, it is in a death spiral.

Key Metrics

These ratios tell you whether a company can pay its bills and whether its debt load is sustainable.

Current Ratio: Measures whether a company can pay its short-term bills. Compares current assets (cash, receivables, inventory) to current liabilities (bills due within a year). A ratio above 1.0 means you can cover near-term obligations.
Current Ratio = Current Assets ÷ Current Liabilities

$150M in current assets and $100M in current liabilities gives a current ratio of 1.5

Debt-to-Equity Ratio: Measures how much the company is financed by debt versus owners’ money. Low ratios mean mostly equity-financed. High ratios mean heavy leverage. This ratio reveals how a leveraged buyout transforms a company’s financial structure.
Debt-to-Equity = Total Debt ÷ Shareholders’ Equity

Debt of $200M and equity of $400M gives a ratio of 0.5 (conservative). If debt rises to $2,000M and equity falls to $100M, the ratio becomes 20 (extremely leveraged).

Interest Coverage Ratio: Measures whether a company generates enough operating income to cover its interest payments. This is the critical metric for evaluating debt sustainability. A ratio below 1.0 means the company loses money just from interest expense.
Interest Coverage = Operating Income ÷ Interest Expense

Operating income of $300M and interest expense of $150M gives coverage of 2.0x (the company generates $2 for every $1 of interest owed). If operating income falls to $100M, coverage drops to 0.67x (the company cannot cover its interest, which is unsustainable).

Try asking your LLM

A company has $200M in current assets and $150M in current liabilities. Explain how to calculate the current ratio and what it tells you about whether the company can pay its bills. Give sample Excel code. Be brief and clear.