0264 · 5.4.1The main elements of a statement of financial position

Statement categories and assets

0:00A business can own valuable machinery while struggling to pay its suppliers. Its equipment helps it operate, but bills require money at the right time. Understanding its financial position means examining both its resources and its debts. By the end of this video, you will understand how to read these figures, calculate important totals, and use them to make decisions. Assets are resources owned by the business, while liabilities are debts the business owes.

0:25Owners’ capital is the finance provided by the owners of the business. These three ideas connect the resources available to the business with the finance supporting them. A statement of financial position is a financial statement showing the value of a business’s assets and liabilities, and the owners’ capital, on a particular date. Think of it as a financial photograph taken at that moment. The figures describe the position when the photograph was taken.

0:49Transactions after that date change what the next photograph will show. The main categories are non-current assets, current assets, non-current liabilities and current liabilities. Their classification depends on time and their role in the business. Resources used over several years belong in a different category from goods awaiting sale. Likewise, a debt payable soon has a different effect from borrowing repayable several years later. Non-current assets are resources owned and used by the business for more than one year.

1:18Property includes land and buildings, such as a workshop where products are made. Machinery belongs here because the business uses it repeatedly. Vehicles also fit this category when they support operations over several years. Current assets are resources expected to be turned into cash within a year, together with money already available. These include inventory, trade receivables and cash. Their purpose is closely connected to everyday trading. Materials become products, customers make purchases, and money becomes available to meet business payments.

1:49Inventory is the goods and materials a business holds, for use in production or for sale. A furniture manufacturer might hold timber, partly finished tables and completed chairs. These resources belong to the business even before customers buy the finished products. Their value appears among current assets because they are expected to move through trading within a year. Trade receivables are money owed to the business by customers who bought on credit.

2:13Buying on credit allows the customer to receive the product before paying. Once the manufacturer delivers a table under this arrangement, the customer owes money. That amount remains a resource because the business expects to collect it. Cash is the money a business holds as notes and coins and in its bank account. It is already available for payments. Inventory must be sold, and trade receivables must be collected, before those resources produce cash.

2:36The different forms of current assets therefore matter when a supplier requests payment.

Classifying liabilities

2:40Non-current liabilities are debts repayable after more than one year. A bank loan used to purchase machinery belongs here when repayment falls beyond that period. The machinery appears among resources, while the borrowing appears among debts. Showing both gives a fuller picture of the business’s financial position. Debts repayable within a year are called current liabilities. Trade payables are money the business owes to suppliers. A manufacturer receiving timber on credit records the unpaid amount here.

3:10The supplier has delivered the materials, and the manufacturer must pay according to the agreed terms. An overdraft is borrowing that allows a business to spend more than the balance in its bank account. It appears among current liabilities because repayment can be required at short notice. This helps explain why an overdraft receives different treatment from a longer-term loan. For any borrowing, check when the amount shown must be repaid.

3:33The direction of the debt helps you classify credit transactions correctly. Trade receivables are money coming in from customers, while trade payables are money going out to suppliers. Linking each term to who must pay whom makes the categories easier to understand and remember.

Calculating total assets

3:49Alder Furnishings makes wooden tables and chairs. Its statement shows property worth sixty thousand dollars and machinery worth twenty thousand dollars. Inventory is nine thousand dollars, while trade receivables are seven thousand dollars. The business also holds four thousand dollars in cash. We first group the resources used for more than a year. Total non-current assets equal property plus machinery in this example. Sixty thousand dollars plus twenty thousand dollars gives eighty thousand dollars.

4:18This subtotal represents the value of the longer-term resources supporting production. Total current assets equal inventory plus trade receivables plus cash. Nine thousand dollars plus seven thousand dollars gives sixteen thousand dollars. Adding four thousand dollars of cash brings the total to twenty thousand dollars. We include all three categories because each is part of the resources connected to everyday trading. Total assets equal non-current assets plus current assets. Eighty thousand dollars plus twenty thousand dollars gives one hundred thousand dollars.

4:50This brings together both groups of resources. The result describes their combined value on the statement’s date, while the separate categories show how those resources are used.

Calculating liabilities and capital

4:59The same statement shows trade payables of six thousand dollars and an overdraft of two thousand dollars. Its non-current liabilities consist of a bank loan of thirty thousand dollars. Owners’ capital is sixty-two thousand dollars. These figures show the finance supporting the resources we have just examined. Total current liabilities equal trade payables plus the overdraft in this example. Six thousand dollars plus two thousand dollars gives eight thousand dollars.

5:25These are the debts classified as repayable within a year. Grouping them helps us compare near-term obligations with the resources available through everyday trading. Total liabilities equal non-current liabilities plus current liabilities. Thirty thousand dollars plus eight thousand dollars gives thirty-eight thousand dollars. This total includes both repayment periods. Owners’ capital is shown separately because it represents the owners’ finance, while the liability categories record debts owed by the business.

5:53The figures also fit together as a complete financial picture. Total liabilities of thirty-eight thousand dollars plus owners’ capital of sixty-two thousand dollars gives one hundred thousand dollars. That equals the total value of assets. The business’s resources are supported by a combination of borrowing, unpaid obligations and owners’ finance.

Working capital and capital employed

6:13Working capital is current assets minus current liabilities. It measures the amount remaining in the shorter-term resource group after allowing for debts repayable within a year. A positive result gives a margin between those two categories. Its usefulness depends partly on how quickly inventory sells and customers pay. For Alder Furnishings, working capital equals twenty thousand dollars minus eight thousand dollars. The result is twelve thousand dollars. Its current assets therefore exceed its current liabilities by that amount.

6:43This gives the business a positive margin, although payment dates and the speed of collecting money still matter. Capital employed is the total long-term finance used in the business. It equals owners’ capital plus non-current liabilities. Both sources can support operations over an extended period. This helps explain how a business finances its property, machinery and the working capital needed for everyday activity. Alder Furnishings has owners’ capital of sixty-two thousand dollars and non-current liabilities of thirty thousand dollars.

7:12Adding those amounts gives capital employed of ninety-two thousand dollars. You can also find it through total assets minus current liabilities. One hundred thousand dollars minus eight thousand dollars gives the same ninety-two thousand dollars. The two routes describe the same long-term financing position. One starts with the sources of finance and adds them together. The other starts with the resources and removes the amount financed by current liabilities. Understanding this connection helps you read a statement even when its layout presents the information differently.

Using financial position for decisions

7:43Yarrow Nurseries grows and sells garden plants and shrubs, and has twelve employees. It wants an eight thousand dollar bank loan for greenhouse equipment to increase growing capacity. Its statement shows inventory of fifteen thousand dollars, trade receivables of twenty-five hundred dollars and cash of fifteen hundred dollars. Current assets total nineteen thousand dollars. The business has current liabilities of twenty-five thousand dollars and an existing non-current bank loan of thirty-five thousand dollars.

8:10Most of its current assets are inventory, mainly young trees and shrubs that take months to sell. A bank must consider how the business will meet existing obligations alongside repayments on the proposed borrowing. The statement provides useful evidence for that decision. Working capital equals nineteen thousand dollars minus twenty-five thousand dollars. The answer is negative six thousand dollars. Current liabilities exceed current assets by six thousand dollars. This signals pressure on short-term payments, so the business should examine payment dates and expected cash receipts before adding another repayment commitment.

8:43I recommend that the bank delays approving the loan until Yarrow Nurseries provides evidence of how repayments will be funded. Negative working capital shows that existing short-term debts already exceed current assets by six thousand dollars. Inventory forms fifteen thousand dollars of its nineteen thousand dollars of current assets, so turning those resources into cash takes time. The business also repays an existing thirty-five thousand dollar loan. Approving now would add capacity, but a new repayment could leave it unable to pay its suppliers on time.

9:14For the owners, this statement supports a decision to address short-term payments before taking on further borrowing for equipment. They should examine when customers will pay and when suppliers require settlement. The bank would also need information about future cash receipts and repayment terms. A statement gives a dated position, so a lending decision requires evidence about what happens next. Several distinctions help you avoid common classification mistakes. Classify a vehicle by its purpose: one used for deliveries is a non-current asset, while one held for sale is inventory.

9:46Follow the repayment date when classifying a loan. Treat working capital as a comparison of resource and debt categories, and examine cash separately when judging immediate payments. In Paper One Short Answer and Data Response and Paper Two Case Study, questions use business stimulus material. To calculate is to work out from given facts, figures or information. Explain means set out purposes or reasons, say why and how, supported with relevant evidence.

10:13Use the figures from the named business to support the outcome in your answer. Alder Furnishings has current assets of twenty thousand dollars and current liabilities of eight thousand dollars. Its working capital is twelve thousand dollars. Current assets exceed debts repayable within a year, so there is a margin available to support those payments. Selling inventory and collecting trade receivables releases cash that the business can use to pay suppliers.

10:37A statement of financial position connects resources, debts and owners’ finance on a particular date. Longer-term resources support operations, while current assets move through everyday trading. Total assets and total liabilities each combine their two categories. Working capital is current assets minus current liabilities, and capital employed is the total long-term finance used in the business. Use these relationships to make decisions about payment capacity and further borrowing. Look at what the resources consist of, when debts fall due, and how quickly money becomes available.

11:10The totals give you a starting point. Understanding the categories reveals why a business can own substantial resources and still need careful management of its payments.