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Interpreting a Statement of Financial Position

  • The statement of financial position is a critical element within a business's annual accounts.
  • It typically adheres to a structured format.

 Diagram: Statement of Financial Position

Using the Statement of Financial Position to make Decisions | Business Studies for GCSE/IGCSE - Year 11Using the Statement of Financial Position to make Decisions | Business Studies for GCSE/IGCSE - Year 11

Interpreting the statement of financial position

  • The Statement of Financial Position provides valuable insights into how a business finances its operations, its asset holdings, and its liabilities.
  • These deductions are instrumental in guiding decision-making processes within the business.

Financing its activities

  • Packer Sports Limited's funding comprises $1,500 from share capital and $13,235 from retained earnings. 
  • Additionally, the business holds long-term liabilities totaling $20,000, which are presumed to be in the form of a long-term loan. 
  • Given that the long-term liabilities significantly exceed the share capital, the company's gearing is deemed high. 
  • Consequently, future loan applications may encounter challenges, as the business is likely perceived as a lending risk.

What the business owns

  • As of the specified date, Packer Sports Ltd possessed total assets valued at $39,795. 
  • This comprised non-current assets valued at $24,250, including property, machinery (plant), and other equipment. 
  • The company's current assets, amounting to $15,545, consisted of cash, debtors, and stock. 
  • It's anticipated that the stock will be sold and converted into cash or debtors, with debtors' payments subsequently contributing to cash inflows.

What the business owes

  • The business's total liabilities as of the stated date amounted to $25,060.
  • Its current liabilities, totaling $5,060, included a bank overdraft, trade creditors, and other short-term loans.
  • Long-term liabilities were valued at $20,000.

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FAQs on Using the Statement of Financial Position to make Decisions - Business Studies for GCSE/IGCSE - Year 11

1. What is a Statement of Financial Position?
Ans. A Statement of Financial Position, also known as a balance sheet, is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It shows the company's assets, liabilities, and shareholders' equity.
2. How can a Statement of Financial Position be used to make decisions?
Ans. The Statement of Financial Position can be used by investors, creditors, and management to assess the financial health of a company. It helps in evaluating the company's liquidity, solvency, and overall financial stability, which can aid in decision-making.
3. What are some key components of a Statement of Financial Position?
Ans. Some key components of a Statement of Financial Position include assets (such as cash, inventory, and property), liabilities (such as loans and accounts payable), and shareholders' equity (such as retained earnings and common stock).
4. How often should a company prepare a Statement of Financial Position?
Ans. Companies typically prepare a Statement of Financial Position at the end of each accounting period, such as quarterly or annually. It provides a snapshot of the company's financial position at that specific point in time.
5. What are some limitations of using a Statement of Financial Position for decision-making?
Ans. Some limitations of using a Statement of Financial Position include the fact that it only provides a snapshot of the company's financial position at a specific point in time, and may not reflect all relevant information about the company's performance or future prospects.
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