Statement of Financial Position Flashcards
(23 cards)
What is the statement of financial position?
Shows the financial position of the business at a particular point in time.
What does it list?
The assets, liabilities and owners equity of the business. Or the assets and the claims against those assets (liabilities and owners equity)
What is an asset?
- business RESOURCE
- Has EXPECTED FUTURE ECONOMIC BENEFIT
- the business has EXCLUSIVE RIGHT TO CONTROL the benefit
- Arise from some past transaction or event (already occurred)
- must be capable of MEASUREMENT IN MONETARY TERMS
How should current assets be listed
In order of liquidity or nearness to cash first
What is a current asset?
an asset that is
- consumed or converted to cash within 12mths or within one operating cycle
- not held on a continuing basis
- held as part of the day to day trading activities of the business
What is a non current asset?
- Held for generating wealth
- held on a continual basis
How are non-current assets shown on the statement of financial position?
Shown at cost less accumulated depreciation (called the written down value)
What are the claims against assets
Internal - owners equity
External - liabilities
What is a liability?
- External claim against business assets
- a present obligation of the entity
- settlement is expected to result in an outflow from the entity
What is a current liability?
- Amounts due and payable to external parties within 12 months or one operating cycle
Examples of current liabilities
- Accounts Payable
- Bank loan (short term)
- bank overdraft
- revenue received in advance
- accrued expenses
Example of current asset (listed in terms of liquidity)
- Cash at bank
- Accounts Receivable
- Inventory
- Prepayments
What is a non-current liability
Amounts due to external parties that are not due for repayment within 12 months or within the next operating cycle after the SOFP
Examples of non current liabilities
Mortgage Loan
Debentures
Long Term Loan
Provisions
What is owners equity?
The claim of the owners against the business
- The owners interest in the assets of the business after deducting liabilities
What is the accounting equation
Assets = Liabilities + Owners Equity
This equation must hold at all times
Owners Equity will increase when a …. is realised
Profit
What are the limitations to a Statement of Financial Postion
- drawn up at a point in time and is relevant only at that point
- does not give a figure for assets in terms of realisaton value
- does not consider other factors of the business such as customer relations, market position, staff loyalty, quality of products etc when determining the financial wealth of the business
What other factors would show how much the business is worth
- reputation
- product quality
- skills of employees
- market position
These all do not appear on the statement of financial postilion but can add value to a business.
What is the historic cost convention and how does it relate to non current assets
States that assets are recorded at their original cost rather than their current value
- assets may have a higher value that what they are represented on the SOFP as they may have appreciated in value eg land
Why must the accounting equation allways hold
Business acquires assets
must do so with funds equal to the cost of the assets.
Funds are provided through external parties (liabilities) or owners (owners equity)
What is depreciaiton?
- Process of ALLOCATING THE USE of the non current asset used in the production of income for the period.
- the cost of the economic benefit of the tangible asset used up during the period.
FORMAT OF THE SOFP
Current Assets - Cash - Accounts Receivable - Inventory - Prepayments - Commissions owing Non Current Assets - Furniture and Fittings - Land - Buildings
TOTAL ASSETS
Current Liabilities - Accounts Payable - Short Term bank loan - overdraft - accrual expenses Non Current Liabilities - Bank Loans - Debentures TOTAL LIABILITIES
Owners Equity - Opening Capital - PLUS Realized profit or LESS loss - Plus Retained Profit or Reserves - Less Drawings TOTAL OWNERS EQUITY
TOTAL OWNERS EQUITY AND LIABILITES
