Lecture 2 statment of financial position(1)

Lecture 2
The Statement of Financial Position
‘A snap-shot of the company’s wealth at one moment in time’


Learning outcomes

 Understand the different terminology used
 Explain the nature and purpose of the three main financial statements
 For “The Statement of Financial Position”
 Be able to classify individual items on the statement of financial position.
 Be able to prepare a statement of financial position.


Terminology

This module is taught using the terminology used under IFRS, however it is important to be aware of the old terminology, often used by
small UK companies as this is often used interchangeably…

International Standards

UK GAAP

Statement of financial position

Balance Sheet

Income Statement

Profit & Loss statement

Inventory

Stock

Trade receivables

Debtors

Trade payables

Creditors

Non Current Assets

Fixed Assets


The major financial statements – an overview

Income Statement (…for period ended…)

Statement of Financial Position (…as at…)

Cashflow Statement (…for period ended…)


The relationship between the statement of financial position, the income statement and the cash flow
statement

Statement of financial position

Statement of financial position

Statement of financial position

Income statement

Income statement

Statement of cash flows

Statement of cash flows

Period 1

Period 2

Time


The Statement of Financial Position

Assets

 what the company owns
 have value
Claims

 what the company owes.
Equity, claims by the owners

Liabilities, claims by other individuals & organisations (except the owners )


Classifying Assets

 Current
 Non-current


Current assets

Held for sale or consumption during the business’s operating
cycle

Expected to be sold within the next year

Held principally for trading

They are cash or near equivalents to cash


The circulating nature of current assets

Inventories
(stock)

Sell stock to customers
Buy stock

Trade receivables

Cash

(trade debtors)

Invest cash!

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a


Non-current Assets

A non-current asset is acquired by the business to generate income over a
considerable period of time.


Which of the following assets are current or non-current assets?
Current

Non Current

Non Current

Non Current

Non Current













Cash at bank

Non Current

Chairs, desks and office equipment
Cars for the sales team

Non Current

A manufacturing production line
Delivery Vans
Half completed inventory.
Factory and surrounding land

Current

Goodwill purchased from a business take-over
Computer equipment

Non Current

Inventories of raw materials
Debts owed to the company by customers

Current
Current


Classifying Claims

 Current liabilities
 Non-current liabilities

 Equity


Current Liabilities

In general, amounts payable within one year

For Example:

•

Debts owed to suppliers for goods (‘Trade Payables’)

•

Bank Overdraft

•

Accrued expenses


Working Capital

Working Capital is the capital used to finance the day to day running of
the business.

 It can be defined as current assets – current liabilities.
 Or
… how much short term cash the company has access to.

Non-current liabilities
In general, amounts payable in more (not current liabilities) than
one year

•

A long term loan

•

Mortgage

•

Lease


Equity and Reserves

Generally Claims belonging to the owners of the enterprise

For Example

Owners capital or share capital
Profits for this year
Retained Profits from previous years

The statement of financial position equation:

plus

equals

Assets

Equity

Liabilities


The effect of trading operations on the statement of financial position

plus (minus)

equals

Assets

Equity

plus

Profit

(Loss)

Liabilities

Exercise on the Accounting Equation.

 Bethan Willow put £15,000 into a bank account on 1st January 2010 in order to
commence a business, Willow Developments . The business borrowed a further
£5,000 from the bank, purchased a van for £7,000 and other equipment for £2,500.
Inventory costing £9,000 is purchased out of the bank.

 During the first month they made a profit of £1,000 which was put in the bank and
they repaid £500 of the loan.


Example of the Accounting Equation.

Remember: Assets = Claims (ie equity and liabilities)
This must always hold true

Transaction 1: Initial Capital Deposit
Transaction 2: Bank Loan
Transaction 3: Van Purchase

Transaction 4: Other equipment purchase

Transaction 5: Inventory Purchase

Transaction 6: Profit

Transaction 7: Loan repayment

Example of the Accounting Equation – Further Practice

Accounting & Finance An introduction McLaney & Atrill
th
(7 Edition)

Example 2.2, page 49, Jerry & Co


The Statement of Financial Position-structure:

ASSETS
Non-current assets
Current Assets
Total Assets

EQUITY & LIABILITIES
Equity
Non-current liabilities
Current liabilities
Total Equity & Liabilities

Format - see example 2.3, page 54


Brie Manufacturing
Statement of financial position as at 31 December 2011

£000

ASSETS
Non-current assets
Property

45

Plant and equipment

30

Motor vans

19
94

Current assets
Inventories

23

Trade receivables

18

Cash at bank

12
53

Total assets

147


Brie Manufacturing
Statement of financial position as at 31 December 2011 (continued)

£000

EQUITY AND LIABILITIES
Equity

60

Non-current liabilities
Long-term borrowings

50

Current liabilities
Trade payables
Total equity and liabilities

37
147


Example: Magnum Engineering