Chapter 2: The statement of financial position Flashcards
What is a statement of financial position?
The business’s statement of financial position shows its liabilities, capital and assets at a point of time. It is a financial snapshot of the position of the business at the end of the reporting period to which the financial statements relate.
How is the statement of financial position presented? (2)
The statement of financial position is divided into two halves, and is presented in either of the following ways:
1. Capital and liabilities in one half and assets in the other (the IAS 1 format that we adopt in this Workbook)
2. Capital in one half and net assets in the other (the UK GAAP format for the balance sheet)
Define net assets.
Assets less liabilities.
What is the distinction between current and non-current assets.
Non-current assets are assets acquired for continuing use within the business, with a view to earning income or making profits from their use, either directly or indirectly, over more than one reporting period.
Current assets are expected to be converted into cash within one year.
What usually comprises non-current assets in the statement of financial position? (3)
Give a couple of examples.
- Property, plant and equipment (i.e. tangible assets)
- Intangible assets such as patents and licenses
- Long term investments
A non-current assets is not acquired for sale to a customer.
In a manufacturing industry, a production machine is a non-current assets, because it makes goods which are then sold.
In a service industry, equipment used by employees giving serve to customer is a non-current asset (e.g., the equipment used in a garage, or furniture in a hotel).
What two further conditions must an item satisfy to be classed as a non-current asset?
- It must be used by the business. For example, the owners own house would not normally appear on the business statement of financial position.
- The asset must have a ‘life’ in use of more than one reporting period or year.
What is depreciation?
The financial statements of a business reflect that the cost of a non-current assets is gradually consumed as the asset is used over its useful life. This is done by gradually ‘writing off’ the asset’s cost in the statement of profit or loss over several reporting periods. This process is known as depreciation.
What two forms do current assets take?
- Items owned by the business with the intention of turning them into cash in a short time, usually within one year
- Cash, including money in the bank, owned by the business
These assets are ‘current’ in the sense that they are continually flowing through the business; they are always realisable in the near future.
Define a current asset.
An asset is current when it is expected to be realised in, or intended for sale or consumption in, the entity’s normal operating cycle, or is held for being traded, or it is expected to be realised within 12 months of the date of the statement of financial position, it it is cash or cash equivalent.
Give three types of current asset.
- Inventory
- Trade and other receivables
- Cash
What are short-term investments and prepayments?
Short-term investments are stocks and shares of other businesses, owned with the intention of selling them in the near future.
Prepayments are amounts of money paid by the business in one reporting period for benefits which have not yet been enjoyed, but will be enjoyed within the next accounting period. For example paying for annual insurance premium in advance.
What is the distinction between trade receivables and other receivables?
Trade receivables represent customers who owe money for goods or services bought on credit in the course of the trading activities of the business.
Other receivables are due from anyone else owing money to the business, such as an insurance company, HMRC for VAT, or employees for season ticket loans.
