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

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

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.