The statement of financial position, or balance sheet, does not report earnings for the enterprise at all. Earnings are reported on the income statement.
Values of certain assets are measured at historical cost, not market value, replacement cost, or their value to the firm, for the balance sheet. For example, property, plant and equipment are reported on the balance sheet at their historical cost minus accumulated depreciation, although the assets’ value in use may be significantly greater.
Judgments and estimates are used in determining many of the items reported in the balance sheet. For example, estimates of the amount of receivables the company will collect are used to value the accounts receivable; the expected useful life of fixed assets is used to determine the amount of depreciation; and the company’s liability for future warranty claims is estimated by projecting the number and the cost of the future claims. Because these are estimates, they are by nature not precise.
Many assets are not reported on the balance sheet, even though they do have value and will generate future cash flows. Examples of these include the company’s employees, or its human resources, its processes and procedures, and its competitive advantages.
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