5.3 How is the Statement of Financial Position analysed? Flashcards
What information does the Statement of Financial Position provide?
The Statement of Financial Position provides useful financial information about the business. Some examples of such information include: 1. Sources and uses of funds 2. Net assets 3. Working Capital 4. Cash at Bank 5. Cash in hand 6. Profit
What does the Statement of Financial Position show?
A snapshot of where a business obtains its funds from and what it uses the funds on. Total Assets = Total Liabilities + Total Equity Total Assets = Resources Total Liabilities + Total Equity = Sources of Funds
Where are the funds of a business sourced from?
- Owner (equity) 2. External parties (liabilities)
How are the funds sourced by a business used?
To obtain resources (assets)
What does the accounting equation show?
The accounting equation / balance sheet equation shows the relationship between assets, liabilities and equity. This is also shown on the Balance Sheet.
What does a business do based on the information about where it obtains funds and how it uses the funds obtained?
It makes conscious decisions.
What are net assets?
Net assets are the excess of total assets over total liabilities. Net assets = Total assets - Total Liabilities = Total Equity Net assets = Total equity Net assets represent the owner’s equity. When a business stops operations, the net assets are the amount that the owner can potentially claim after the business pays off its debts.
What is working capital?
The difference between current assets and current liabilities. Working capital = Current assets - Current liabilities The more working capital a business has, the more able and ready the business is in settling its immediate debts.
What conscious decisions should a business make?
A business should make conscious decisions to ensure that there would be sufficient / enough current assets to settle its current liabilities.
What is a very important figure found in the Statement of Financial Position?
The total amount of cash, whether with the bank or on hand that a business has. Higher profit or higher sales revenue does not necessarily result in more cash. Nor does lower profit mean that the business has less cash.
Does higher profit or higher sales mean that the business has more cash?
No.
Does lower profit mean that the business has less cash?
No.
What does the amount of cash a business has depend on?
It depends on whether the business: 1. buys its goods and services on cash or credit terms. 2. collects money from its credit customers promptly. 3. buys goods and services on cash or credit terms. 4. buys non-current assets on cash or credit terms. 5. delays payments to its credit suppliers.
