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4 – Statement of Financial Position – IGCSE AID

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5.4 – Statement of Financial Position

The balance sheet, along with the income statement is prepared at the end of the financial year. It
shows the value of a business’ assets and liabilities at a particular time. It is also known as
‘statement of financial position’.

Assets are those items of value owned by the business.

Fixed/non-current assets (buildings, vehicles, equipment etc.) are assets that remain in the
business for more than a year – their values fall over time in a process called depreciation every
year.
Short-term/current assets (inventory, trade receivables (debts from customers), cash etc) are
owned only for a very short time.
There can also intangible (cannot be touched or felt) non-current assets like copyrights and
patents that add value to the business.

Liabilities are the debts owed by the business to its creditors.

Long-term/non-current liabilities (loans, debentures etc.)- they do not have to be repaid within a
year.
Short-term/current liabilities (trade payables (to suppliers), overdraft etc.)- these need to be
repaid within a year.

CURRENT ASSETS – CURRENT LIABILITIES = WORKING CAPITAL

This is because the liquid cash a company has with them will be the liquid (short-term) assets they
own less the short-term debts they have to pay.

Shareholder’s Equity is the total amount of money invested in the company by shareholders. This
will include both the share capital (invested directly by shareholders) and reserves (retained earnings
reserve, general reserve etc.).
Shareholders can see if their stake in the business has risen or fallen by looking at the total equity
figure on the balance sheet.

Check whether the equations on the right are satisfied in this balance sheet!

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5/17/24, 6:01 AM 5.4 – Statement of Financial Position – IGCSE AID

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SHAREHOLDERS
EQUITY = TOTAL
ASSETS – TOTAL
LIABILITIES

TOTAL ASSETS = TOTAL

LIABILITIES +
SHAREHOLDERS
EQUITY

CAPITAL EMPLOYED =
SHAREHOLDERS
EQUITY + NON-
CURRENT LIABILITIES
This is because non-current
liabilities like loans are also
used for permanent
investment in the company.

Uses of a statement of financial position

When the current assets subtotal is compared to the current liabilities subtotal, investors can
estimate whether a firm has access to sufficient funds in the short term to pay off its short-term
obligations i.e., whether it is liquid
One can also compare the total amount of debt (liabilities) to the total amount of equity listed on
the balance sheet, to see if the resulting debt-equity ratio indicates a dangerously high level of
borrowing. This information is especially useful for lenders and creditors, (especially banks) who
want to know if the firm will be able to pay back its debt
Investors like to examine the amount of cash on the balance sheet to see if there is enough
available to pay them a dividend
Managers can examine its balance sheet to see if there are any assets that could potentially be
sold off without harming the underlying business. For example, they can compare the reported
inventory assets to the sales to derive an inventory turnover level, which can indicate the presence
of excess inventory, so they will sell off the excess inventory to raise finance

Notes submitted by Lintha

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6 thoughts on “5.4 – Statement of Financial Position”

1.
loshne says:
May 22, 2022 at 8:12 am
i only wish y’all did this for bio, physics and chem cause i really fricked those up, the other notes
are so confusing>> (i didn’t take coordinated science that’s why)

REPLY
1.
Devin says:
October 10, 2023 at 9:55 pm
you can use savemyexams.com to revise for STEM subjects, I think this site is strongly focused
on Business/Economics.

REPLY
2.
loshne says:
May 22, 2022 at 8:12 am
the only reason i did somewhat okay on my business paper 1 (actual igcse, m/j 2022) is because i
read these notes on the way to school (it’s a 2 hour long bus ride)

REPLY
1.
Bakaweeb says:
October 13, 2023 at 6:07 am
Any tips ( i suck at bs including paper 1 and 2)

REPLY
1.
saranaik04 says:
January 20, 2024 at 8:30 am
Hey, coming from someone who gets an A star , I strongly recommend that you use mind
maps, don’t try reading every chapter individually try connecting all the chapters and
forming a bigger picture, ensure that you know all the key terms very well and that your
analysis and application game is mad strong, evaluation too but its only 15 percent of ur
grade, anyways good luck, I hope you do well!

REPLY

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5/17/24, 6:01 AM 5.4 – Statement of Financial Position – IGCSE AID

2.
saranaik04 says:
January 20, 2024 at 8:32 am
Really focus on connecting all the chapters and forming a bigger picture of the subject
busines studies as a whole, don’t read them individually, and apply your answers to the
case study wherever possible, best of luck, I hope you do well!

REPLY

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