5.4.2 Interpreting a Statement of Financial Position
Although it’s not as popular as cash flow or income questions, you may be asked to calculate values based on an extract from a statement of financial position.
| Extract from Balanced Books Statement of Financial Position on 31 Dec 2020 ($000) | ||
| Current Assets | 110 | |
| Trade Receivables | 80 | |
| Cash | X | |
| Current Liabilities | Y | |
| Net current assets | 60 | |
| Calculate values for: [2] X: Y: |
First we need to calculate the current liabilities to find value Y.
| Current assets – current liabilities = net current assets |
We know that net current assets are calculated by taking current liabilities away from current liabilities.
So if we calculate the difference between net current assets and current assets we will find out the value for current liabilities.
60 + Y = 110
Y = 110 – 60 = 50
Y = $50,000
So we take 60 from 110 and we get 50 or $50,000 for current liabilities.
For calculating the value of X for cash, we know that total current assets are 110, and as there are only two current assets listed, cash and trade receivables, the value for cash must be the difference between 110 and 80, 30 or $30,000.
Trade Receivables + Cash = (Total) Current Assets:
80 + cash = 110
80 + 30 = 110
X = $30,000
You may also be asked basic questions interpreting a statement of financial position.
Statement of Financial Position for Timeless Clocks on 31 Dec 2020
| $ | $ | |
| Non current assets | ||
| Equipment | 25 000 | |
| Current Assets | ||
| Inventory | 15 000 | |
| Cash | 1000 | |
| Trade Receivable | 3000 | |
| Total Assets | 44000 | |
| Current Liabilities | ||
| Overdraft | 3000 | |
| Accounts Payable | 5000 | |
| Non Current Liabilities | ||
| Loan | 20000 | |
| Total Liabilities | 28000 | |
| Share Capital | 10000 | |
| Retained Profit | 6000 | |
| Total Equities and Liabilities | 44000 |
You will not be given this kind of detailed financial information in the IGCSE exam. It’s so we can get an overview of the statement of financial position and see how we interpret the information.
What assets does the business own? Look at the non current assets. Here we see the business owns $25,000 of equipment.
We can also see the business has $15,000 of inventory, which could be sold to improve the cash flow position of the business.
We can also see how the business is financed by looking at the non current liabilities, in this case a $20,000 loan and share capital of $10,000. This gives us a total of $30,000 which is the capital employed for Timeless Clocks.
Capital Employed: value of all long term finance invested in the business (shareholders funds and non current liabilities).
