Understanding the Statement of Financial Position (Cambridge International IGCSE Business)

Introduction to the statement of financial position

Spec point — Note: candidates will not be assessed on constructing statements of financial position.

What is 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 business's 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 net assets are equal to the total equity – the net assets and equity balance

A statement of financial position

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

Assets

Spec point — "non-current assets, e.g. property (land and buildings), machinery current assets, e.g. inventory, trade receivables, cash"

Assets

• Assets are items owned by a business

  • There two type, namely, non-current assets and current assets

Non-current assets

• Non-current assets are owned by a business in the long-term, usually a period more than 12 months

  • 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

• Current assets include cash and items that can be turned into cash relatively quickly, usually within 12 months

  • The three main types of current assets are cash, trade receivables and inventory

Cash is the most liquid current asset, while inventory is the least liquid

• Cash is the most liquid form of current asset, as it can be used immediately as a method of payment
• Inventory is the least liquid form of current asset, as, before it can be used for payment, it must be sold

Liabilities

Spec point — "non-current liabilities, e.g. bank loans current liabilities, e.g. trade payables, overdraft"

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

    • For example, long-term loans such as mortgages

  • Current liabilities are amounts owed that must be repaid within 12 months

    • For example, creditors (trade payables) and bank overdrafts

Capital employed

• Capital employed is the total amount of money that a business uses to operate and grow

• It usually includes:

  • Equity

    • Money invested by the owners or shareholders.

  • Non-current liabilities

    • Long-term loans or borrowings

• In the statement of financial position, capital employed is equal to net assets

• Capital employed is equal to net assets*

Calculations based on the statement of financial position

Spec point — "make simple calculations based on statements of financial position: total assets, total liabilities, working capital"

Calculations based on the statement of financial position

Statement of financial position

Chagny Rentals Ltd at 31st December 2024

Chagny Rentals Ltd's statement of financial position at 31st December 2024

1. Calculating total assets

• Total assets are the sum of non-current assets and current assets
• This figure represents everything a business owns at a specific point in time

Worked Example In this case, Chagny Rentals Ltd has total assets of

equals space $490 comma 000 space plus space$ 64 comma 000

equals space $ 554 comma 000

2. Calculating total liabilities

• Total liabilities are the sum of current liabilities and non-current liabilities
• This figure represents everything a business owes at a specific point in time

Worked Example In this case, Chagny Rentals Ltd has total liabilities of

equals space $22 comma 700 plus space$ 146 comma 000

equals space $ 168 comma 700

3. Calculating working capital

• Working capital is the money a business has available for day-to-day activities, such as paying bills, buying stock and covering wages
• It is calculated using the formula

$\mathrm{Working} \mathrm{capital}-\mathrm{Current} \mathrm{assets}-\mathrm{Current} \mathrm{liabilities}$

Worked Example In this case, Chagny Rentals Ltd has working capital of

equals space $64 comma 000 space minus space$ 22 comma 700

equals space $ 41 comma 300

It is likely to be able to meet its financial obligations because it has more current assets than current liabilities

Decisions based on the statement of financial position

• The statement of financial position can be used to answer important questions that may support business decisions

Exam Hint Remember, a statement of financial position is a snapshot of assets and liabilities at one point in time, unlike a profit and loss statement which shows performance over a period of time, usually a year