Statement of Financial Position (Balance Sheet) (DP IB Business Management)
Revision Note
Written by: Lisa Eades
Reviewed by: Steve Vorster
The Statement of Financial Position
The Statement of Financial Position shows the financial structure of a business at a specific point in time
It identifies a businesses assets and liabilities and specifies the capital (equity) used to fund the business
The Statement of Financial Position is also known as the Balance Sheet
It is called the balance sheet, as net assets should equal the total equity
Diagram: the statement of financial position
Calculating the total assets
On the stated date Packer Sports Ltd owned non-current assets worth $24,250
It owns property, plant and machinery that is valued at $22,700
These assets have been depreciated by $1,550
The value of its current assets was $15,545, comprised of cash, debtors and stock
Total assets were therefore
Calculating total liabilities
On the stated date Packer Sports Ltd had current liabilities worth $5,060, comprised of a bank overdraft, trade creditors and other short-term loans
The value of its long-term liabilities were $20,000
Total liabilities were therefore
Calculating the net assets
Packer Sports Limited's net assets were therefore
Calculating total equity
Net assets of $14,735 were funded through share capital of $1,500 and retained earnings of $13,235
Examiner Tip
In Paper 2 you may be asked to construct a balance sheet from given data.
To achieve full marks you must follow the format illustrated above and you should check that you have
Included all of the relevant headings in the correct order
Non-current assets
Current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Equity
Correctly classified items under each heading
For example, you need to ensure that you have correctly allocated cash, stock and debtors as current assets, and creditors and bank overdrafts as current liabilities
Omitted irrelevant figures that belong to the profit and loss account
For example, costs and revenues are not included in the balance sheet
How Stakeholders use the Statement of Financial Position
Stakeholders will use the Statement of Financial Position alongside the Statement of Profit or Loss to perform ratio analysis and compare performance over time or with other businesses
How Stakeholders use the Statement of Financial Position
Stakeholder | Interest in the Balance Sheet |
---|---|
Shareholders |
|
Managers & Directors |
|
Suppliers and Creditors |
|
Employees |
|
Examiner Tip
Information found in the Statement of Profit or Loss and Statement of Financial Position can be used in a range of answers.
For example, if you are answering a question about sources of finance you might be able to use the capital structure of the business to recommend whether a business should borrow or look at an alternative source.
If a business already relies heavily on borrowing, it may be more sensible to recommend seeking to raise more share capital.
Different types of Intangible Assets
Intangible assets are non-physical assets that cannot physically be held but hold value for a business
Businesses need to account for intangible assets in their annual reports as it adds to the value of the business
Diagram: intangible assets
Intellectual property
This includes patents, trademarks, patents and copyrights which protect unique ideas, inventions, artistic works, and brand names
Brand value
The reputation and recognition associated with a brand has a value
It includes the brand name, logo, slogans, and customer loyalty to the brand
Customer relationships
Long-term relationships with customers including customer lists, contracts, and customer loyalty programs
These relationships can provide recurring revenue and a competitive advantage
Software and technology
Proprietary software, computer programs and technology systems that are crucial to a business's operations or provide a competitive advantage
Contracts and agreements
Long-term contracts, lease agreements, licensing agreements and franchise agreements that have value and contribute to future cash flows
Agreements with employees or business partners that restrict them from competing with the company for a specific period which protect the company's interests and market position (non compete contract)
Goodwill
The value of a company's reputation, customer base and brand
Goodwill often represents the premium paid when one business takes over or merges with another business
Domain names and other online assets
Valuable domain names, websites, social media accounts and online platforms that drive customer engagement, traffic, and online presence
Licenses and permits
Licenses, permits, and regulatory approvals that grant exclusive rights or access to certain markets or resources, often issued by governments
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