Chapter 25

Statement of
financial
position
PG 785 - 799
Statement of financial position (i.e., balance
sheet)
• The income statement alone can't be used to
tell us how much the business is worth,
therefore the information from the income
statement (as well as other details), is given on
the statement of financial position.

• BUT what is the difference between the

income statement & statement of financial
position?
1. Income statement: records income &
expenses + profit and loss over a period of
time – i.e., 1 year.
2. Statement of financial position: records CASE STUDY EXAMPLE ON NEXT SLIDE
the worth of the business at ONE moment,
i.e., the end of the financial year
Case Study
Example:
TERMS/PRINCIPLES IN
THIS CASE STUDY
EXPLAINED ON NEXT
SLIDE
 Terms of the statement of financial position
(before layout of the statement is explained)
∙ Assets: items of value that are owned by the business.
Non-current (fixed) assets: e.g., land, buildings, equipment and vehicles.
 Likely to be kept by the business for more than a year.
 MOST non-current assets depreciate over time (except for land) THEREFORE their
value will fall on the statement of financial position from one year to the next.
 Other examples of non-current assets: intangible assets (do not exist physically but
have value)
 Brand names
 Patents
 Copyrights
 Current assets: e.g., cash, inventories (stocks) and accounts receivables (debtor
customers owing $ to the business)
These are held for short periods of time.
 Terms of the statement of financial position
(before layout of the statement is explained)
∙ Liabilities: items of value that are owed by the business.
Non-current liabilities (long-term):
 Long-term borrowings that DO NOT need to be paid back within one year.
 Current liabilities (short-term):
 MUST BE paid back within one year.
 e.g., bank overdraft accounts payable (suppliers / creditors who are owed money by the business
 Explanation of the statement of position terms
(before layout of the statement is explained)
∙ Always remember the following formula:
Total assets – Total liabilities = Owners' equity or (shareholders' funds in a limited company)

• But what does this mean?

1. Total assets – total liabilities is ALWAYS = to total shareholders' funds or equity.
∙ If not, then the statement of financial position won't balance.
2. Shareholders' equity is the total sum of money invested into the business by the owners of the
company, i.e., the shareholders and is invested in 2 ways:
a) Share capital: the money put into the business when the shareholders bought newly issued
shares.
b) Reserves: i.e., profit and loss reserves which are retained profits from the current /
previous years.
∙ Profit: = owned by the shareholders BUT has not been paid out in the form of dividends – it is
kept in the business as part of the shareholders' funds
 Case Study Example:
LAYOUT OF THE STATEMENT OF FINANCIAL POSITION
 Activity 25.1: Mark with an 'x' the correct box for each term
Current Non-current Current Non-current
Share capital Reserves
assets Assets liabilities liabilities
Company vehicles

Cash in the till

Ten-year bank loan

Ordinary share capital

Money owed by
customers
Unsold goods (inventory)
Factory building
Retained profit
Amounts owed to
suppliers
Tax owed to government
 Activity 25.1: Answers
Current Non-current Current Non-current
Share capital Reserves
assets Assets liabilities liabilities
Company vehicles
x

Cash in the till x

Ten-year bank loan
x

Ordinary share capital

x

Money owed by
customers x

Unsold goods (inventory) x

Factory building x
Retained profit x
Amounts owed to
suppliers x

Tax owed to government

x
 Interpreting the statement of financial position data
1. Shareholders can see if their "stake" in the business has increased or fallen over the last 12
months by looking at the TOTAL EQUITY FIGURES for two years (2018 & 2017 in
previous slide).
2. Shareholders can analyze how expansion by the business has been paid for.
• e.g., increasing non-current liabilities (like long-term loans)
• From retained profits (using these to expand the company or pay dividends)
• Or increasing share capital (selling shares)
3. Can calculate working capital (i.e., net current assets):
• Formula: Working capital = Current assets – Current liabilities
4. NO business can survive without working capital.
• It is used to pay short-term debts. They will be forced to stop trading if they cannot pay these debts,
i.e., have no working capital.
5. Captial employed is also calculated from the statement (i.e., the long-term & permanent
capital used to pay for the assets of the business.
• Formula: Capital employed = Shareholders' funds + Non-current liabilities