3.4.2 - Statements of financial position
Read a business's assets, liabilities and capital employed at a particular date. Use a statement of financial position to interpret its funding and ability to meet obligations, while recognising the limits of a snapshot.
Assets at a date
A statement of financial position records a business's assets, liabilities and owners' equity at a stated date.
Unlike an income statement covering a period, it is a snapshot: “at 31 December” describes balances on that date, not sales during the year. It helps managers, owners and lenders examine what resources the business controls and how those resources are financed. You need to interpret a supplied statement, not construct one. The older term balance sheet refers to this document.
Assets
Resources controlled by a business that are expected to provide economic benefits. Non-current assets are held for longer-term use; current assets are normally used, sold or converted into cash within the operating cycle or next twelve months.
| IAS item | Meaning and example |
|---|---|
| Non-current assets | Longer-term resources such as premises, machinery or delivery vehicles used by the business. A retailer's delivery van is different from vehicles held for sale by a vehicle dealer. |
| Inventory | Goods held for sale, raw materials or work in progress. Inventory is a current asset; it is not automatically cash. Older sources may call it stock. |
| Trade receivables | Money owed by customers who have bought on credit; a current asset. Older sources may call these debtors. |
| Cash and bank balances | Cash available to the business; normally current assets when the balances are positive. |
Illustrative extract for a manufacturer at 31 December, amounts in dollars:
| Asset item | Amount ($) |
|---|---|
| Non-current assets | 160,000 |
| Inventory | 28,000 |
| Trade receivables | 12,000 |
| Cash | 8,000 |
| Total current assets | 48,000 |
| Total assets | 208,000 |
Inventory, receivables and cash add to $48,000; that subtotal is already included in the $208,000 total assets. Do not add it a second time. Receivables can turn into cash when customers pay; inventory normally has to be sold first. Having $208,000 total assets therefore does not mean having $208,000 cash available to pay a bill.
Liabilities and capital employed
Liabilities show obligations owed to others, while capital employed measures the longer-term funds invested in the business.
Liabilities
Amounts the business owes. Current liabilities are normally due within the operating cycle or next twelve months; non-current liabilities are obligations due after the next twelve months.
Trade payables are amounts owed to suppliers for credit purchases and are normally current liabilities; older sources may call them creditors. An overdraft or the part of a loan due within the next year can also be current liabilities. The remaining long-term loan is non-current. A loan is classified by repayment timing, not simply by its original label.
Owners' equity represents the owners' financial interest in the business. It differs from borrowing: lenders are owed debt, while owners provide risk capital. Capital employed combines owners' equity and non-current liabilities: longer-term funding used by the business.
Equivalently, capital employed = total assets − current liabilities = owners' equity + non-current liabilities. All amounts must refer to the same date.
Complete illustrative funding extract for the manufacturer at the same 31 December date:
| Item | Amount ($) |
|---|---|
| Total assets | 208,000 |
| Current liabilities | 30,000 |
| Non-current liabilities | 70,000 |
| Owners' equity | 108,000 |
Working capital is . Capital employed is , or . The funding check is . Deducting all liabilities from total assets instead would give equity of $108,000, not capital employed.
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