Statement of Financial Position (Edexcel IGCSE Business)

Introduction to the Statement of Financial Position

• The Statement of Financial Position shows the financial structure of a business at a specific point in time

  • It is included as a key financial statement in the annual report
     

• It identifies a businesses assets and liabilities and specifies the capital (equity) used to fund the business operations
  
  

• The Statement of Financial Position is also known as the Balance Sheet

  • It is called the balance sheet as the net assets are equal to the total equity

Assets & Liabilities

Assets

• Assets are items that are owned by a business
  
  

• Two types of assets appear in the statement of financial position 

  • Non-Current Assets are items owned by the business in the long-term

    • Examples include tangible assets such as buildings, land, machinery and vehicles

    • Non-current assets may be intangible such as patents, goodwill or  brand value
       

  • Current Assets include cash and items that can be turned into cash relatively quickly, usually within 12 months
    

    • The four types of current assets are cash in hand, cash in bank, trade receivables and inventory
       

Liabilities

• Liabilities are items that are owed by a business
  

• Two types of liabilities appear in the statement of financial position  

  • Current Liabilities are short-term financial obligations that a business must usually pay within one year, or as demanded by its creditors

    • E.g. Trade payables and bank overdrafts
      
      

  • Non-current Liabilities are moneys owed by a business that are due to be repaid over a period longer than twelve months

    • E.g. Long term loans and mortgages
      
      

Interpreting a Statement of Financial Position

• The statement of financial position generally follows the structure shown below

Diagram: Statement of Financial Position

The statement of financial position is sometimes called the balance sheet 

Interpreting the statement of financial position

• Several deductions can be made from the Statement about how a business finances its activities, what it owns, and what it owes

Financing its activities

• Packer Sports Limited is funded through share capital of $1,500 and retained earnings of $13,235

  • The business has long-term liabilities in the form of a loan for $20,000
    

    • This is significantly greater than share capital so its gearing is high

    • Future applications for loans may be declined as the business is likely to be seen as a lending risk

What the business owns

• On the stated date, Packer Sports Ltd owned assets worth $39,795 in total

  • Non-current assets of $24,250 consisting of property, machinery (plant) and other equipment

  • Current assets worth $15,545, comprised of inventory, trade receivables and cash
    

    • Inventory will be sold and converted to cash or trade receivables

  • When trade payables pay their invoices they will become cash

What the business owes

• On the stated date, the business had total liabilities of $25,060

  • Its current liabilities were $5,060, comprised of a bank overdraft, trade payables and other short-term loans

  • Its long-term liabilities were valued at $20,000