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CIE IGCSE Business Your notes

5.4 Statement of Financial Position

Contents
T he Main Features of a Statement of Financial Position
Using the Statement of Financial Position to make Decisions

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The Main Features of a Statement of Financial Position

Your notes
An 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 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

Different Types of Assets

Assets are items that are owned by a business
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, debtors (trade
receivables) and inventory (stock)

Different Types of Liabilities

Liabilities are amounts of money owed by a business (debts)
Non-current liabilities are amounts owed that do not need to be paid back for at least 12
months
E.g. Long-term loans such as mortgages

Current liabilities are amounts owed that must be repaid within 12 months
E.g.Creditors (trade payables) and bank overdrafts

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Using the Statement of Financial Position to make Decisions

Your notes
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

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
This information is useful as it can inform the decision-making process
Financing its activities

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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 Your notes
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

Exam Tip
In your exam, you will not be required to construct a Statement of Financial Position. You do need
to understand how they work and more importantly, how the information contained in them can
be used to make decisions.

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