Using the Statement of Financial Position To Make Decisions (Cambridge International IGCSE Business)

Interpreting a statement of financial position

Spec point — 5.4.2 · Interpret a simple statement of financial position and make deductions from it, e.g. how a business is financing its activities and what assets it owns, sale of inventories to raise finance (constructing statements of financial position will not be assessed)

• The statement of financial position is a key document that is part of a business's annual accounts
• It generally follows the structure shown below

Example statement of financial position

The statement of financial position shows assets and liabilities of a business and how the business is funded

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

Exam Hint 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.