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    5.4 Statement of Financial Position

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    5.4 Statement of Financial Position

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    90 views4 pages

    5.4 Statement of Financial Position

    Uploaded by

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    © All Rights Reserved
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    Download as pdf or txt
    of 4

    5.

    4 STATEMENT OF FINANCIAL POSITION

    The statement of financial position, along with the income statement is prepared
    at the end of the financial year.

    It shows the value of a business’ assets and liabilities at a particular time. It is also
    known as ‘’balance sheet’..

    Assets are those items of value owned by the business.


    • Fixed/non-current assets (buildings, vehicles, equipment etc.) are assets that
    remain in the business for more than a year – their values fall over time in a
    process called depreciation every year.
    • Short-term/current assets (inventory, trade receivables (debts from customers),
    cash etc) are owned only for a very short time.
    • There can also intangible (cannot be touched or felt) non-current assets like
    copyrights and patents that add value to the business.

    1
    Liabilities are the debts owed by the business to its creditors.
    • Long-term/non-current liabilities (loans, debentures etc.)- they do not have to be
    repaid within a year.
    • Short-term/current liabilities (trade payables (to suppliers), overdraft etc.)- these
    need to be repaid within a year.

    CURRENT ASSETS – CURRENT LIABILITIES = WORKING CAPITAL

    This is because the liquid cash a company has with them will be the liquid (short
    term) assets they own less the short-term debts they have to pay.

    Shareholder’s Equity

     This is the total amount of money invested in the company by shareholders.


     This will include both the share capital (invested directly by shareholders) and
    reserves (retained earnings reserve, general reserve etc.).
     Shareholders can see if their stake in the business has risen or fallen by looking
    at the total equity figure on the balance sheet.

    2
    SHAREHOLDERS EQUITY = TOTAL ASSETS – TOTAL LIABILITIES

    TOTAL ASSETS = TOTAL LIABILITIES + SHAREHOLDERS EQUITY


    CAPITAL EMPLOYED = SHAREHOLDERS EQUITY + NON-CURRENT LIABILITIES

    This is because non-current liabilities like loans are also used for permanent
    investment in the company.

    Uses of a statement of financial position

     When the current assets subtotal is compared to the current liabilities subtotal,
    investors can estimate whether a firm has access to sufficient funds in the short
    term to pay off its short-term obligations i.e., whether it is liquid
     One can also compare the total amount of debt (liabilities) to the total amount
    of equity listed on the balance sheet, to see if the resulting debt-equity ratio
    indicates a dangerously high level of borrowing. This information is especially
    3
    useful for lenders and creditors, (especially banks) who want to know if the firm
    will be able to pay back its debt
     Investors like to examine the amount of cash on the balance sheet to see if there
    is enough available to pay them a dividend
     Managers can examine its balance sheet to see if there are any assets that could
    potentially be sold off without harming the underlying business. For example,
    they can compare the reported inventory assets to the sales to derive an
    inventory turnover level, which can indicate the presence of excess inventory,
    so they will sell off the excess inventory to raise finance

    Who uses financial information?

    Many groups of people are interested in the published accounts of a company. The
    information they provide may influence future decisions. For example:
    • lenders will be looking at the solvency of a business
    • rivals are interested in monitoring the profits earned by competitors
    • banks can use them to make lending decisions
    • government uses financial information to calculate tax payments
    • owners will look at financial statements to help them make decisions
    • employees will use them to ensure their jobs are secure

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