5.3 What is a Statement of Financial Position? Flashcards
What is a Statement of Financial Position?
A Statement of Financial Position is a financial statement that lists the assets, liabilities and equity of a business at a given point in time.
What is the other financial statement that I must know very well?
Statement of Financial Performance.
Why must the Statement of Financial Position balance?
The Statement of Financial Position lists all the assets, liabilities and equity of a business. These three elements of accounting are related through the accounting equation / balance sheet equation, which states that the total assets of a business equals the total liabilities and equity. Hence the Statement of Financial Position must balance. Very Important (To memorize): Total Assets = Total Liabilities + Total Equity
Why is the Statement of Financial Position prepared as at a particular point in time? or The Statement of Financial Position lists the assets, liabilities and equity that the business has on a certain date. Why is it important to know: (1) the exact date the Statement of Financial Position is to be prepared and (2) to check that all the figures on the Statement of Financial Position must be from the same date?
If a Balance Sheet is prepared on 31 December 20X1, then the assets, liabilities and equity are the balances as at the end of 31 December 20X1. According to the objectivity concept, the transactions are based on information that is reliable and verifiable (i.e. supported by source documents or evidence). The interested parties who use the financial information given in the Balance Sheet will then be able good decisions relating to the business.
Is the Statement of Financial Position a formal report?
Yes. It must follow a particular presentation / format.
Why are stakeholders interested in the Statement of Financial Position ?
The Statement of Financial Position shows all the assets and liabilities of the business at a particular point in time. It gives a snapshot (i.e. picture) of the financial position / standing / worth of the business.
Why are stakeholders interested in the Statement of Financial Performance?
The Statement of Financial Performance shows how much income, expenses and profit or loss a business has over a particular period of time. It is like a video recording of the business. Stakeholders will then have a more complete understanding of the business and hence make good decisions relating to the business.
What is the purpose of the Statement of Financial Position?
It is to reflect the financial position / status / standing / worth of the business at a specific point in time.
What is the difference in the Statement of Financial Position for a sole proprietorship and a company?
The only difference is in the equity section. In a sole proprietorship, the owner’s equity comprises capital, profit for the period and drawings. In a company, the shareholders’ equity comprises issued share capital and retained earnings.
Is the Statement of Financial Position for a trading business the same as that of a service business?
No. The Statement of Financial Position for a trading business or a service service business may not have the same items. The Statement of Financial Position for a trading business will have inventory but the service business will not have any inventory. The service business may have supplies, which are materials used to provided services. Unused supplies are classified as assets.
Can the items on the Statement of Financial Position differ?
Yes. It depends on how a business is operated. A business that only allows cash sales will not have any trade receivables on its Statement of Financial Position.
Where is the Statement of Financial Position prepared from?
From the Trial Balance. Tip: It will be more efficient to identify all the asset, liability and equity terms from the Trial Balance first before preparing the Statement of Financial Position.
How is Equity calculated?
To memorise: Formula 1: Equity = Assets - Liabilities Formula 2: Equity = Capital + Profit - Drawings In the equity section of a sole proprietorship, profit for the period is added to beginning capital while drawings for the period are deducted.
