The statement of financial position and the idea of balancing assets and liabilities is a difficult concept.
However, for IGCSE you don’t need an detailed understanding of how the Statement of Financial Position is constructed. Furthermore, questions on this topic are much less popular than questions on profit or cash flow.
What you do need to know are the contents of a statement of financial position with examples.
| ⭐⭐⭐Top Tip ⭐⭐⭐ Learn definitions for the contents of the statement of financial position with examples. |
5.4.1 Statement of Financial Position
The statement of financial position is a snapshot taken at one moment in time, when we imagine that the business is frozen, and we count up all the business’s assets and liabilities.
The main classifications of assets and liabilities
Assets: items of value owned by the business like buildings, vehicles, equipment, machinery.
Liabilities: debts owed by the business, like bank loans or bills that must be paid.
These are split into two further categories: current and noncurrent.
Current liabilities are debts which must be paid within the next year, for example a bill which must be paid to a supplier within one month, also known as accounts payable.
Accounts payable are debts owed by a business which must be paid.
Non current liabilities are debts which will last longer than one year, like a long term loan for new production machinery.
Non current assets are items of value the business will keep longer than one year. For example, land, buildings, equipment and vehicles.
Current assets are items of value that the business won’t keep for longer than a year, like cash or inventory. Current assets also include sales that have been completed, but the business is still waiting for payment, also known as trade receivables.
Current assets are items of value that the business won’t keep for longer than a year, like cash, inventory or as trade receivables.
Trade receivable are sales that have been completed, but the business is still awaiting payment.
| Key Terms to Learn Assets: items of value owned by the business like buildings, vehicles, equipment, machinery. Liabilities: debts owed by the business like bank loans. Account Payable: debt owed by a business which must be paid (current liability). Non current liabilities are debts which will last longer than one year, like a long term loan for new production machinery. Non current assets are items of value the business will keep longer than one year, for example land, buildings, equipment and vehicles. Current assets are items of value that the business won’t keep for longer than a year, like cash or inventory. Current assets also include sales that have been made but the business is still waiting for payment, also known as trade receivables. Trade receivable: sales made by business, but still awaiting payment (current asset). |
Here is an example of the statement of financial position. Statement of financial position is also known as the balance sheet.
Example Statement of Financial Position for XYZ Inc on 31 Dec 2020
| $ | $ | |
| Non current assets | ||
| Equipment | 25 | |
| Current Assets | ||
| Inventory | 15 | |
| Cash | 1 | |
| Trade Receivable | 3 | |
| Total Assets | 44 | |
| Current Liabilities | ||
| Overdraft | 3 | |
| Accounts Payable | 5 | |
| Non Current Liabilities | ||
| Loan | 20 | |
| Total Liabilities | 28 | |
| Share Capital | 10 | |
| Retained Profit | 6 | |
| Total Equities and Liabilities | 44 |
We can see the different sections for current assets, non current assets, current liabilities and non current liabilities. If you are asked an IGCSE question based on the statement of financial position you will not see this kind of detail and complexity.
Some of the figures will be taken from the statement of financial position to give us a question like the example for Balanced Books, which we will look at in detail in the next section.
5.4.2 Interpret a Simple 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).
