What is a Statement of Financial Position?
Statement of Financial Position also known as the Balance sheet gives the understanding to its users about the financial status of the business at the particular point of time by showing the details of the assets of the company along with its liabilities and owner’s capital.
It is one of the most important financial statements which reports the firm’s financial position at a point in time. In other words, it summaries’ business financial position and acts as a snapshot of events at one point in time. It comprises of three important elements (explained in detail later) namely:
- Assets are the resources owned and controlled by the business. Assets are further classified into Current AssetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc. and Non-Current AssetsNon-Current AssetsNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company's investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark..
- Liabilities are the amount of business owed to its Lenders and Other Creditors. Liabilities are further classified into Current LiabilitiesClassified Into Current LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc. and Long Term LiabilitiesLong Term LiabilitiesLong Term Liabilities, also known as Non-Current Liabilities, refer to a Company’s financial obligations that are due for over a year (from its operating cycle or the Balance Sheet Date). .
- Shareholder’s Equity which is the residual interest in the Net Assets of a businessNet Assets Of A BusinessThe net asset on the balance sheet is the amount by which your total assets exceed your total liabilities and is calculated by simply adding what you own (assets) and subtract it from whatever you owe (liabilities). It is commonly known as net worth (NW). that remains after deducting its liabilities
The Fundamental Accounting EquationAccounting EquationAccounting Equation is the primary accounting principle stating that a business's total assets are equivalent to the sum of its liabilities & owner’s capital. This is also known as the Balance Sheet Equation & it forms the basis of the double-entry accounting system. (also known as the Balance Sheet EquationThe Balance Sheet EquationBalance Sheet Formula is a fundamental accounting equation which mentions that, for a business, the sum of its owner’s equity & the total liabilities equal to its total assets, i.e., Assets = Equity + Liabilities) through which transactions are measured equates:
Financial Position Statement Example
Let’s take a look at an example of Starbucks as on September 30, 2018
source: Starbucks SEC Filings
Effectively the above example consists of two lists:
- A list of everything owned by the Business collectively called Assets
- A list of the various sources of finance used to fund these acquisitions which can be either in the form of Liabilities or Shareholders’ Equity.
Thus, it is a statement showing the nature and amount of a business’s assets on one side and liabilities and Share CapitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side. on the other side. In other words, the Balance SheetOther Words, The Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. shows the financial position on a particular date, which is usually at the end of a year period.
The Statement of Financial Position shows how the money has been made available to the business of the company and how the money is employed in the business.
The format of the Financial Position Statement
Let’s understand the format of the Statement of Financial Position in more detail
#1 – Current Asset
Current Assets are those cash and items which will be converted into cash in the normal course of business within one year and includes Inventory, Trade ReceivablesTrade ReceivablesTrade receivable is the amount owed to the business or company by its customers. It is also known as account receivables and is represented as current liabilities in balance sheet., Bill receivable, etc. The Total Current Assets are referred to as the Gross Working CapitalGross Working CapitalGross working capital refers to the total current assets of the company that can be converted into cash within a year, such as accounts receivables, inventory of raw material, WIP inventory, finished goods inventory, cash, and bank balance, marketable securities such as T-bills, commercial paper and short term investments. and also known as the qualitative or circulating capital.
#2 – Current Liabilities
Current includes all liabilities which are due within one year and includes Trade Payables, Creditors, short term borrowings such as Bills Payable, Deferred Tax Liabilities, Current Portion of Long termCurrent Portion Of Long TermCurrent Portion of Long-Term Debt (CPLTD) is payable within the next year from the date of the balance sheet, and are separated from the long-term debt as they are to be paid within next year using the company’s cash flows or by utilizing its current assets. Borrowings, which are payable within the year, etc.
#2 – Long Term Asset
Non-Current Assets, also known as Fixed Assets are those assets which are bought to use them in the business and usually have long lives. They may include tangible assetsInclude Tangible AssetsAny physical assets owned by a firm that can be quantified with reasonable ease and are used to carry out its business activities are defined as tangible assets. For example, a company's land, as well as any structures erected on it, furniture, machinery, and equipment. such as Land, Property, Machines, and Vehicles, etc. Tangible Non-Current Assets are generally valued at Cost less Accumulated DepreciationAccumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset's purchase price and its carrying value on the balance sheet.. However, it is pertinent to note that not all Tangible Assets depreciate, such as Land, etc.
- Intangible Non-Current Assets are noncurrent assets that cannot be touched. The most common type of Intangible AssetsCommon Type Of Intangible AssetsSome of the most common intangible assets are logos, self-developed software, customer data, franchise agreements, Newspaper Mastheads, license, royalty, Marketing Rights, Import Quotas, Servicing Rights etc. is Goodwill, Patents, and Trademarks. Goodwill is subject to an Annual Impairment TestGoodwill Is Subject To An Annual Impairment TestGoodwill impairment is the process of writing off the accounting charge amounting to the excess of the acquired asset's book value as recorded in the financial statements over its fair value. A higher impairment charge reflects the company's irrational investment decisions. .
- Non-Current Assets include investment in other companies in the form of Shares, Debentures, and loans, etc. and the business intends to hold the same for a reasonable period, say more than a year.
#4 – Long Term Liabilities
Non-Current LiabilitiesNon-Current LiabilitiesThe most common examples of Non-Current Liabilities are debentures, bond payables, deferred tax liabilities etc. Non-Current Liabilities are the payables or obligations of an entity which might not be settled within twelve months of accounting such transactions. include Long term borrowings that are not due within one year. It includes finance leases, medium-term bank loans, Bonds and Debentures and also includes contingent liabilities such as Guarantees, etc.
#5 – Shareholders Equity
Shareholders EquityShareholders EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders' Equity Statement on the balance sheet details the change in the value of shareholder's equity from the beginning to the end of an accounting period. is the amount contributed by the shareholders/owners of the business in the form of shares. Alternatively, Shareholders Equity is the Net value of the business, which is derived by subtracting Assets from Liabilities.
Briefly Equity comprises of:
- Common Stock
- Retained EarningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company. which includes the number of profits retained by the business;
We saw how a Statement of Financial Position depicts the position of the business on a particular date. However, despite so many benefits that it offers to various stakeholders of the business, it suffers from certain limitations which are as enumerated below:
- This statement is prepared based on going concern assumption and, as such, represents neither the realizable ValueRealizable ValueRealizable value is the net consideration from sales proceeds of any assets in the normal course of business after deduction of incidental expenses. It is common for the valuation of inventories under International Financial Reporting Standards and other accepted accounting policies. nor replacement value of Assets.
- Valuation of Assets is substantially impacted by the judgment of Management and various accounting policiesAccounting PoliciesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level. adopted by them.
- It takes into consideration only financial factors and fails to quantity non-financial factors that have considerable bearing on the operating results and financial condition of an Enterprise.
- It shows the historical costs and does not disclose the current worth of the business.
This article has been a guide to What is Statement of Financial Position. Here we discuss the format of Financial Position Statement along with practical examples and limitations. You may also have a look at the related articles: