Conceptually, how does an operating model balance? I understand generally the income statement flows to the cash flows statement which flows to the balance sheet last but I am trying to think how conceptually the balance sheet balances? Didn't see any other threads similar to this, my apologies if there are.
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Conceptually? A=L+E. If that equation doesn't hold, you balance sheet doesn't balance.
It's not a concept; just a pretty simple formula.
On a conceptual level, you need to make sure changes in one statement correctly impact the other two. That's really it.
But I have a feeling my answer won't really help you, given you're asking it at all...
"Conceptually? A=L+E" I remember when this actually clicked. It sounds simple, but when you are thinking about it, it can be difficult to grasp the first time.
The balance sheet balances because of the equity side. Think of this: You sell a shirt for $10. You were carrying it in inventory at $8.
Cash in = Cash account up $10 Inventory: down $8
Now A>L+E.
So Equity goes up $2.
That's a lazy and shitty way of thinking about it. Equity isn't a "plug" any moreso than Assets or Liabilities are. It all needs to fit together mathematically and logically. Your explanation does nothing to illuminate the concept; all you did was say "10=8+2"
^^^^ Worst post of the year ^^^^^^^^^^^
Actually I said 10-8=2. And never said it was a plug; Just gave a simple example of how things flow.
And you do realized that my apparent non-value add comment of 10=8+2 was simply assigning numbers to your A=L+E right.
If you want to give a nice and long GAAP example of how equity value is created feel free.
Solving an operating model balancing issue... (Originally Posted: 02/11/2012)
What methods do you guys try when having balancing issues? Any "go to" logical approach? I'm off by a little bit and this shit is killing me..........
I was being sarcastic when I said "A=L+E" is a conceptual way of thinking about it, because I don't think any of us can really help the OP if he's asking a question like this.
Step 1: Swear a lot.
Step 2: Does the difference change or is it constant? If constant, something didn't get accounted for in one year and it carried through. Main culprits for me are share and debt being issued.
If it changes across the years, then the first place I check is depreciation and amortization.
Divide the difference by 2 and multiply by 2. See if those numbers show up anywhere.
Check beginning and ending balances match on CF and BS.
Ctrl - ` and go through the formulas and see if the boxes show up were they should. Pay attention to sum formulas to make sure they capture everything.
If you're doing things quarterly and have an annual column, sum up your CF and IS across to make sure everything is captured.
Check numbers to make sure they're entered in correctly.
Step 3: Swear more
Repeat until step 4: balanced
this is very helpful, thank you.
The best way I ever heard it explained, and the easiest way to find errors in a model is:
"Your model balances when every period over period change in a balance sheet account is reflected on the cash flow statement."
Basically, every increase in an asset must be cash outflow, every increase in a liability or equity account must be a cash inflow. If you have accounted for these properly, then your model will balance.
I use this as a check along with the A=L+E on the BS.
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