What is a Statement of Financial Position?
Statement of Financial Position, popularly known as Balance Sheet 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 basically comprises of three important elements (explained in detail later) namely:
- Assets which are the resources owned and controlled by the business. Assets are further classified into Current Assets and Non-Current Assets.
- Liabilities which are the amount business owed to its Lenders and Other Creditors. Liabilities are further classified into Current Liabilities and Long Term Liabilities.
- Shareholder’s Equity which is the residual Interest in the Net Assets of a business that remains after deducting its liabilities
The Fundamental Accounting Equation (also known as the Balance Sheet Equation) through which transactions are measured equates:
Financial Position Statement Example
Let’s take a look at an example of Statement of Financial Position or Balance Sheet of Starbucks as on September 30, 2018
source: Starbucks SEC Filings
Effectively the above statement of financial position 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, Statement of Financial Position or Balance Sheet is a statement showing the nature and amount of a business’s assets on one side and liabilities and Share Capital on the other side. In other words, the Balance Sheet shows the financial position on a particular date which is usually at the end of one 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 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 a period of one year and basically includes Inventory, Trade Receivables, Bill receivable etc. The Total Current Assets are referred to as the Gross Working Capital 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 term 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 with the intention of using them in the business and usually have long lives. They may include tangible assets such as Land, Property, Machines, and Vehicles etc. Tangible Non-Current Assets are generally valued at Cost less Accumulated Depreciation. However, it is pertinent to note that not all Tangible Assets depreciate in value such as Land etc.
- Intangible Non-Current Assets are noncurrent assets which cannot be touched. The most common type of Intangible Assets is Goodwill, Patents, and Trademarks. Goodwill is subject to an Annual Impairment Test.
- Non-Current Assets includes investment in other companies in the form of Shares, Debentures and Loan etc and the business intends to hold the same for a reasonable period of time, say more than a year.
#4 – Long Term Liabilities
Non-Current Liabilities include Long term borrowings which are not due within one year. This includes finance leases, medium-term bank loans, Bonds and Debentures and also includes contingent liabilities such as Guarantees etc.
#5 – Shareholders Equity
Shareholders Equity 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 Earnings which includes the number of profits retained by the business.
Limitations of the Statement of Financial Position
We saw how a Statement of Financial Position depicts the position of the business on a particular date. However, despite so many benefits that Statement of Financial Position offers to various stakeholders of the business it suffers from certain limitations which are as enumerated below:
- Statement of Financial Position is prepared on the basis of going concern assumption and as such represents neither the realizable Value nor replacement value of Assets.
- Valuation of Assets is substantially impacted by the judgment of Management and various accounting policies adopted by them.
- Statement of Financial Position takes into consideration only financial factors and fails to quantity non-financial factors which have considerable bearing on the operating results and financial condition of an Enterprise.
- It shows the historical costs and does not disclose current worth of the business.
This 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: