Statement of Financial Position

Question 1

What is the statement of financial position?

Answer 1

The SOFP, also known as the balance sheet, shows the assets, liabilities, and capital of a business at a specific point in time.

Question 2

SOFP shows how a business has raised capital and how it has used it.
What are the key relationships shown by the SOFP?

Answer 2

1. Assets are equal to liabilities.
2. Total assets are equal to fixed and current assets.
3. Liabilities equal share capital, borrowings, other creditors, and reserves.

Question 3

Why is the SOFP important?

Answer 3

1. Shows the actual value of a business.
   Helps track progress over time.
2. Indicates vulnerability to interest rate changes due to borrowing.
3. Highlights the use of short-term (e.g., overdrafts) or long-term loans.

Question 4

Other information of SOFP?

Answer 4

1. It shows the state of the business at a particular moment in time: before or after could be very different.
2. It only shows financial dealings, it does not show how well the business is being managed.

Question 5

What are fixed assets and capital, and their significance?

Answer 5

Fixed assets are used to generate income.
Acquiring fixed assets means that the business is intending to improve its performance and output.
Using reserves or share capital to acquire them is safer than borrowing because if the business is borrowing to buy assets then it is vulnerable to interest rate changes.

Question 6

Define reserves in a business context.

Answer 6

Reserves are funds set aside for spending on assets or shareholder payments.

Question 7

What are non-current assets?

Answer 7

Non-current assets are assets not intended to be converted into cash in the short term. They can:

1. Be tangible or intangible.
2. Depreciate in value (tangible assets).
3. Be depreciated (intangible assets through amortization).

Non-current assets are valued at their net book value, which is the cost of the asset before depreciation.

Question 8

What are current assets?

Answer 8

Current assets are those intended to be converted into cash in the short term.
1. Inventories
2. Trade receivables
3. Prepayments
4. Money as cash or in the bank

Question 9

What are current liabilities?

Answer 9

Current liabilities are short-term debts. Examples include:

1. Bank overdraft
2. Trade payables
3. Accruals

Question 10

What is the formula for calculating net current assets and liabilities, and what do the results mean?

Answer 10

A: Formula: NetCurrentAssets(orLiabilities) = CurrentAssets − CurrentLiabilities

Results:
1. Positive result: Surplus working capital (business can cover liabilities).
2. Negative result: No working capital (business may struggle to cover liabilities).

Question 11

What are non-cuurent liabilities?

Answer 11

Non-current liabilities are debts due after more than a year.
Examples include:
1. Long-term bank loans
2. Mortgages
3. Only instalments are due within the next 12 months, while the full balance is payable later.

Question 12

What are net assets and how are they calculated?

Answer 12

Net assets (or net worth) represent the total value of a business.
Formula:
Current assets + Fixed assets - Current liabilities = Net assets

Question 13

What is capital, and what are its key components?

Answer 13

Capital refers to cash or other assets introduced to or removed from a business. Key components include:

• Opening capital: Value of investment by the owners.
• Transfer of profit or loss: Profit or loss from the statement of comprehensive income.
• Drawings: Funds taken by the owners (e.g., salary or wages).
• Closing capital: Opening capital (+ for profit/- for loss) (+/-) drawings.

Question 14

What is straight-line depreciation?

Answer 14

AnnualDepreciation= asset purchase price - estimates salvage value/estimated useful life of asset

Question 15

What is reducing balance depreciation and how does it work?

Answer 15

Reducing-balance depreciation decreases an asset’s value by a fixed percentage each year, based on its current value (net book value), not its original cost.

Calculation: If an asset’s value is £10 000 and the reducing-balance percentage is 10 per cent then the depreciation at the end of the first year is £1000. This brings the net book value of the asset down to £9000. At the end of the second year applying a 10% depreciation reduces the value of the asset by £900. This means the net book value is now £8100.

Example:
1. Initial asset value: £10,000
Depreciation rate: 10%
Year 1:
- Depreciation = £10,000 × 10% = £1,000
- Net book value = £10,000 - £1,000 = £9,000

Year 2:
Depreciation = £9,000 × 10% = £900
Net book value = £9,000 - £900 = £8,100

This continues yearly, with depreciation amounts getting smaller as the asset’s value decreases.

Question 16

What is straight-line depreciation, and how is it calculated?

Answer 16

Straight-line depreciation spreads the cost of an asset evenly over its useful life.

Calculation:
A business buys a computer network for £5000.
It estimates that the computer system will be worth around £200 scrap value. The business has always replaced its computer network every three years to keep up to date. Therefore:

Asset cost: £5,000
Scrap value (value after use): £200
Useful life: 3 years

Example: Depreciationperyear = Assetcost − Scrapvalue/Usefullife
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Depreciationperyear = £5,000 − £200/3 =£1,600

The computer network depreciates by £1,600 each year.