Statement of Financial Position/ Balance Sheet - Lecture 4b

Question 1

Definition of SFP

Answer 1

A statement of the financial position of the business at a specific point in time, usually at the end of the financial period

Question 2

What does a SFP do?

Answer 2

Shows the financial assets, liabilities and equity of a business at a specify point in time ( and not over a period )

Question 3

The accounting equation

Answer 3

Total Assets = Total Liabilities (including capital)

Question 4

Why does the SFP always balance?

Answer 4

Every £1 worth of resources (assets) has been paid for by someone. This could be the owners (capital, aka. equity) or third parties (liabilities)

Question 5

What is a short term asset called

Answer 5

Current asset

Question 6

What is a short term liability called

Answer 6

current Liabilities

Question 7

What is a long term asset called

Answer 7

non current asset

Question 8

What is a long term liability called

Answer 8

non current liabilities

Question 9

3 formulas for the accounting formula:

Answer 9

F1:
NCA + CA = C + NCL + CL

F2:
NCA + (CA - CL) = C + NCL

F3:
NCA + (CA - CL) - NCL = C

Question 10

Net current assets

Answer 10

AKA working capital
Measure of solvency
CA-CL

Question 11

Recievables meaning

Answer 11

Amounts owed by customers who paid on credit.

Question 12

Trade payables meaning

Answer 12

Amount the business owes to credit suppliers

Question 13

Cost concept:

Answer 13

Assets are recorded in the books at their historical cost (i.e. original purchase price) and are then subject to depreciation. Sometimes assets appreciate (increase in value) but generally it is regarded as imprudent (see prudence convention in last weeks notes) for any increase in value to be recorded in the books. There are exceptions to this.

Question 14

Going concern concept

Answer 14

This ‘concept’ is an assumption. We assume that the business is going to continue to survive and prosper (i.e. it is a ‘going concern’) unless the contrary is known to be true. The significance of this is as follows:

Whist the going concern assumption is correct:

The entity is not about to be liquidated; therefore:

Historic cost values can continue to be used

Otherwise the net realisable value (best estimate of current market value minus any extra cost incurred in achieving the sale) would have to be used

Question 15

Limitations of the statement of financial position

Answer 15

• unrecognised intangibles
• historic costs
• lack of ‘timeliness’

because of this, post balance sheets events are sometimes noted in the final drafts

Question 16

Post balance sheet events

Answer 16

There can be a period of up a few months in between the SFP date and the ‘signing –off’ of the accounts by the directors.

Until the signing –off, any final accounts drawn up are provisional. If significant events come to light during this period that ought to be drawn to the shareholders attention, there should be disclosure by way of a ‘note to the accounts’.

This note is included in the final draft; the signed-off version.

Question 17

Role of the auditors

Answer 17

*Auditors = firm of accountants independent of the entity
*They check a sample of transactions, examine the accounting policies
*They issue a report (represents their opinion)
*Report states whether the final accounts represent a true and fair view of the Company finances
*Report is to assure (or warn) shareholders
* Unqualified opinion - auditor is satisfied
* Qualified opinion - auditor is not satisfied.