Bible Quote of the Day: Proverbs 22:7

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The rich rules over the poor, and the borrower is the slave of the lender. Proverbs 22:7

It seems absurd that the Bible has such verse. Many would take the first phrase in a bad way because that is what it looks like what is happening that is the rich taking advantage of the poor. 

Such is an analogy to explain the second phrase which says that the borrower is the slave of the lender. This is very true. If you are in need and you resorted to borrowing it is only logical that the borrower will submit to the terms of the lender thus the Bible renders such warning.

If such things can wait or if it is not a matter of life and death I would suggest that don't resort to borrowing.   If your need for cash is only to enjoy a vacation in Boracay or probably a day shopping in Hong Kong please only go there when you have free cash and not be borrowing. You may have enjoyed it but I assure you it is only enjoyable until your lender asks you to pay up.

The really good thing is for you to be the lender that is turning the table around but it would be more enjoyable if you lend to help others get out of debt by teaching them financial literacy.

Going Fundamental: Balance Sheet what?

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source: http://live.regnumchristi.org

I know you might ask that to me. So I might as well dedicate a post regarding this document which usually fits in a piece of paper but has a very very important information about the company you might be thinking to invest in.

Balance Sheet is one of the set of Financial Statements I discussed in my previous post What are Financial Statements?

In order for us to fully understand the value of information we get in a Balance Sheet let me share with an equation called the Balance Sheet Equation:

Basically the above equation tells us about Balance Sheet. A Balance Sheet is a list of what the company owns, owes, and the net balance which it could claim as the real value that it owns.

It has 3 components:

ASSET are resources owned by a company and which have future economic value that can be measured and can be expressed in dollars. Examples include cash, investments, accounts receivable, inventory, supplies, land, buildings,equipment, and vehicles.

LIABILITY are obligations of a company or organization. Amounts owed to lenders and suppliers. Liabilities often have the word "payable" in the account title. Liabilities also include amounts received in advance for a future sale or for a future service to be performed

CAPITAL/EQUITY is the net amount invested by the owners or the amount that is attributable to the owners or in other words the owners' part in the whole company.

source: http://accountingquickbooksexperiences.blogspot.com/

Now why do we have to know these things about company?

One thing an investor needs to know using these information is the ability of the company to continue doing business which accountants term as "GOING CONCERN". No sane investor would put his or her money on a company that has no certainty of doing further business. If company has no capability to continue doing business it follows that its ability to generate income is already questionable.

Assets and Liabilities are further sub-divided to current and non-current(sometimes it is called long term). These sub-division allows us to compute ratios that will help us evaluate the company's ability to stay afloat in the short run(basically within a year) and its ability to further expand.


Some ratios derived from the Balance Sheet are the following:

Current Ratio is computed by dividing Current Assets by Current Liabilities. It indicates the capability of the company to pay currently maturing liabilities. 

Debt to Equity Ratio which is computed by dividing Liabilities by Equity indicates the leverage level of the company. A company with a high Debt-Equity Ratio is high risk because it shows that the company is more of owned by lenders rather than investors. It also post a risk of insolvency because the company is heavily indebted.