Interpreting a Statement of Financial Position
- The statement of financial position is a key document that is part of a businesses annual accounts
- It generally follows the structure shown below
Diagram: Statement of Financial Position
The statement of financial position is sometimes called the balance sheet
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
- The business has long-term liabilities of $20,000
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 Tip
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.