Statement of Financial Position Flashcards
statement of financial position can also be called
balance sheet
sofp is a summary of what
assets an organisation controls
liabilities an organisation owes to outside parties
equiites
at a certain point in time, snapshot, would be different had it been taken another time
define an asset
a present economic resource controlled by the entity as a result of past events
4 requirements to be an asset
control
a result of past events
present
economic benefits
what does the ‘control’ condition mean for an asset
the resource must be owned or leased by and entity
what does the ‘result of past events’ condition mean for an asset
the company signed a contract or paid money to acquire the right to an asset
what does the ‘present’ condition mean for an asset
the resource must be under the entity’s control at the statement of financial position date
ie no future agreements can be included
what does the ‘economic benefits’ condition mean for an asset
resources will be used to generate profits and cash
future monetary value
example of intangible assets
patents and trade marks
is a new marketing director who is expected to increase profits by 30% an asset? why or why not?
no
do not have control over him/her
define a non current asset
not purchase to be resold in the normal course of business
retained within the business for more than one year
held for the lonf term for the business to use in produce of goods or services
example of non current assets
property, pant and equipment, buildings, vehicles, computer, fixtures and fittings
define current assets
short term assets which are constantly changing
examples of current assets
inventory
trade receivables
cash and cash equivalents
how to distinguish between non current and current assets
time (< or > 1 year)
depends on busines in which an entity is engaged
example of how current and non current assets can differ between businesses
DPD vehicles are a non current asset as they are used to carry out work
BMW vehicles are a current asset as they will be reols within the year
define liability
a present obligation of the entity to transfer an economic resource as a result of past events
what does ‘present obligation’ mean in the definition of liability
must exist at date of SOFP
what does ‘economic resource’ mean in the definition of liability
transfer of cash to an outside party
what does ‘as a result of a past event’ mean in the definition of liability
eg as a result of borrowing money which now has to be repaid
what is a non current liabilty
due for settlement in more than 12 months
examples of non current liabilties
loans >1 year
retirement benefits
long term provisions
what is a current liabilty
due for settlement within the next 12 months
examples of current liabilities
bank overdrafts
installments in long term loans
trade payables
tax payables
what are trade payables
amounts due to supplier for good bought on credit
what is a claim
an obligation of the business to provide cash to some outside party
what is the accounting equation
total assets = total liabilities + equity
or
total assets - total liabilities equity
these two should balance on sofp
define equity
the residual assets of the entity after deducting all its liabilities
ie all the cash that would be left after the assets were sold and liabilities settled (paid off)
who does equity belong to
owners of business
what is equity made up of
share capital
share premium
retained earnings
what is share capital
number of shares in the issue x par value of each share
what is the par value
face or normal value
what is share premium
amount received on shares issues over and above the par value
what are retained earnings
profits of the business not yet issued to shareholders as dividends
what are dividends
paymnets to shareholders out of the earnings made
4 steps to drawing up the sofp
- decide what is an asset, liability and equity
- categorize assets and liabilities as current or non current
- add together balances
- enter balances under relevant headings
how are assets and liabilities usually valued
historic cost ie original cost
what are the two ways of valuing assets and liabilites
historic cost
fair value
what is the fair value
the price that the asset/liabiility would be sold on the market today
when is fair value ofetn used
for land and buildings
problems with using historic cost
get more and more out of date meaning it becomes less relevant for decision making
mixing historic and fair values can lead to confusion for users
what does sofp not show
unmeasurable assets eg employee knowledge and skills, brands and traditions
unmeasurable liabilities eg environmental damage, claims not known bu year end
market value of the organisation
what is the market value of the organisation
what a third party woulf pay to acquire the organisation
how is sofp useful to users
- info on how business is financed and how funds are deployed
- asses value of the bueiness
- asses relationships between asset and claims
- performance of business can be assesed
what does dual aspect mean
2 account balances will be effected by the same transaction
