Using the Statement of Financial Position to make Decisions (Cambridge (CIE) O Level Business Studies)

Interpreting a Statement of Financial Position

• The statement of financial position is a key document that is part of a businesses annual accounts

• It generally follows the structure shown below

Diagram: statement of financial position

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

  • This information is useful as it can inform the decision-making process

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 of $20,000

    • This is likely to be a long-term loan

    • 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 cash, debtors and stock

    • Stock will be sold and converted to cash or debtors

  • When debtors 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 creditors and other short-term loans

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