Statement of Financial Position

Question 1

What is the statement of financial position also known as?

Answer 1

The balance sheet

Question 2

What does the SOFP show?

Answer 2

A snapshot of a companies financial position at a moment in time

What a company owns (assets). What it owes (liabilities). And to what extent shareholders are providing finance (equity).

Question 3

Assets = ?+?

Answer 3

Equity + Liabilities

Question 4

What is the definition of an asset?

Answer 4

An asset is owned / controlled by the company and confers the right to future economic benefit

Future economic benefit can be in the form of income or a reduction in expenses

Question 5

Assets can be categorised into two kinds, what are they?

Answer 5

Current & Non-Current

Question 6

What is a long term asset, and what are the three types?

Answer 6

Generally held for >12 Months

1) Tangible Assets
2) Intangible Assets
3) Investment in financial assets

Question 7

What are examples of tangible non-current assets?

Answer 7

Land, buildings, plant and machinery

All tangible assets with a “limited economic life” must be depreciated.

Must have “physical substance”

Question 8

What are examples of intangible non-current assets?

Answer 8

Goodwill, copyright, trademarks & brands

An asset without physical substance

Question 9

What criteria must be met for an item to be considered as a non-current asset?

Answer 9

Either seperable from the firm or arises from a conrtactual or legal right

and

Must have future economic benefit which will be due to the firm

and

Able to be measured reliably

Measured reliably e.g cost and future changes in cost

Question 10

How is purchased goodwill calculated?

Answer 10

Purchase price of company - Fair value of net assets

Question 11

What is equity?

Answer 11

Equity refers to shareholders’ funds, owners’ equity or capital.

Question 12

What are the three sub-elements of equity?

Answer 12

Share Capital, Revenue Reserves & Capital Reserves

Question 13

What is share capital?

Answer 13

The nominal value of the equity and preference share capital in issue.

This may differ from the amount that the company is “authorised” to issue.

Question 14

What are capital reserves?

Answer 14

Capital reserves arise from capital gains from specific transactions such as premiums from a share sale and revaluations. (Share premium & revaluation reserve)

Not distributable as dividends - but can be used to fund a bonus issue.

Question 15

What are revenue reserves?

Answer 15

Revenue reserves are also known as retained earnings. It is profit that has accumulated but not been issued as dividends, instead it has been retained in the business.

Question 16

Equity = ?+?

Answer 16

Share Capital + Reserves

Question 17

What is a non-controlling interest?

Answer 17

A non-controlling interest is when a parent company owns part, but not all of a subsidiary. The non-controlling interest is attributable to the shares not owned by the parent company.

Also known as a minority interest.

Question 18

What assets are depreciated?

Answer 18

Tangible non-current

Question 19

How is depreciation applied?

Answer 19

Depreciatoin is an annual charge that spreads the cost of an asset across its useful economic life

Not applied to freehold land or non-current asset investments - instead these are periodically revalued.

Question 20

What are the two different methods of depreciation and how do they differ?

Answer 20

1) Straight Line
2) Reducing Balance

Straight line assumes that the asset reduces in value by the same amount each year whereas reducing balance sees a higher charge in the first year and then a more gradual depreciation.