5.4: Statement of Financial Position Notes:

Purpose

• Shows assets, liabilities, and business worth at a specific moment.

• Helps owners understand financial strength, liquidity, and how the business is financed.

Key Definitions

• Assets: items owned by the business.

• Liabilities: debts owed by the business.

• Net worth = Assets − Liabilities.

• Non‑current assets: long‑term (buildings, machinery).

• Current assets: short‑term (inventory, debtors, cash).

• Current liabilities: debts due within 1 year (creditors, overdraft).

• Non‑current liabilities: long‑term debts (loans, debentures).

• Working Capital = Current Assets − Current Liabilities

• Capital Employed = Shareholders’ Equity + Non‑Current Liabilities

Structure of a Statement of Financial Position

What It Shows

• How the business is financed (loans vs shareholders).

• Liquidity (ability to pay short‑term debts).

• Asset structure (how much is tied in inventory, machinery, etc.).

• Whether the business is financially stable.

Using the Statement in Decision‑Making

• Managers can:

  1. Identify if inventory is too high.

  2. Check if working capital is sufficient.

  3. Assess gearing (risk level).

  4. Decide whether to borrow more or raise share capital.

NOTES DONE BY FARIDA SABET

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