Statement of financial position

Question 1

What is statement of financial position?

Answer 1

is a snapshot of a business’s net worth at a particular moment in tine, normally end of the financial year. It is a summary of everything the business owns(its assets) and owes(its liabilities)

Question 2

non - current assets

Answer 2

owned by business and stay there for over a year, either tangible or intangible.
tangible assets are depreciated on a annual basis.
intangible - value can be decreased by a principial similar to depreciation - called ‘amortisation’ where a one off charge is made to the value of intangible assets.

Question 3

current assets

Answer 3

items owned by a business whose value is likely to fluctuate on a regular basis.
such as inventories, trade receivables(people who owe business money), prepayments, cash in the bank and cash in hand.
current assets are listed in order of how easy it is to turn them into cash quickly.

Question 4

current liabilities

Answer 4

something owed by the business that should be paid back in under a year.
e.g. overdrafts, accruals and trade payables(people or businesses the business owes money to)

Question 5

net current assets/liabilities

Answer 5

represents business’s ability to meet short term debts.
a business with insufficient net current assets, does not have enough current assets to meet its current liabilities - may have to sell a fixed asset which without the business cannot operate.

Question 6

calculation for net currents assets

Answer 6

current assets - current liabilities.
current assets > current liabilities = net current assets.
current assets < current liabilities = net current liabilities.

Question 7

non - current liabilities

Answer 7

a business will pay it back in more than one year e.g. bank loans and mortgages, used to buy fixed assets or to set up the business initially.

Question 8

net assets

Answer 8

are the figures that represent the total value of all the assets minus the value of the liabilities.
calculated as:
(non current assets + net current assets) - non current liabilities

Question 9

capital emplyoed

Answer 9

is the total amount of capital tied up in a business at a point in time.
calculated as - owners or shareholders capital + retained profit - drawings

Question 10

What are adjustments

Answer 10

adjustments are made to ensure that both records(SOCI and SOFP) are showing a true and fair picture of the business’s activity.

Question 11

Types of adjustments

Answer 11

• depreciation, straight line or reducing balance
• prepayments
• accruals

Question 12

How SOFP can be used by management

Answer 12

can be used internally to help measure the financial health of the business and inform future decision making.
can be used externally by potential investors and creditors. An investor might look at a business’s SOFP when deciding whether or not to offer capital

Question 13

How SOFP can be analysed

Answer 13

• comparisons between figures within SOFP.
• comparisons between year i.e.. value of fixed assets or current liabilities in one year compared with previous years.
• intrafirm comparison to see how different aspects of the business are performing.
• interfirm comparisons to see how the business is performing in relation to its competitors.