Statement of Financial Position (Balance Sheet) Flashcards
What does the statement of financial position report? What is this statement most commonly known as?
It reports assets and claims to those assets at a specific point in time.
This statement is commonly known as the balance sheet, especially for those companies following ASPE.
Claims of assets are subdivided into which two categories?
Claims of lenders and other creditors AND claims of shareholders. Claims of lenders and other creditors are called liabilities. Claims of shareholders, the owners of the company, are called shareholder’s equity.
What is the basic accounting equation?
Assets = Liabilities + Shareholder’s Equity
(liabilities = lenders and other creditors)
(shareholder’s equity = owners of company, share capital + retained earnings)
The accounting equation is where the name balance sheet comes from. Assets must be in balance with what?
Assets must be in balance with the claims to the assets.
The right hand side of the equation - the liabilities and equities - also shows how the assets have been financed (through debt by borrowing from lenders or creditors or through equity by investments from shareholders or profits retained in the company)
What is prepaid insurance?
Insurance paid in advance but not yet used.
What is unearned revenue?
Cash received in advance for which the service has not yet been provided and is therefore still owed.
Can the items listed in the statement of financial position be ordered one way or different ways? Explain.
It can be ordered in different ways depending on the company in order to better represent the nature of their business.
Why do lenders and creditors analyze a company’s statement of financial position?
To determine the likelihood that they will be repaid. They carefully evaluate the nature of the company’s assets and liabilities. For ex: does the company have assets that could easily be sold, if required, to repay its debts? Do the company’s assets exceed its liabilities in both the short and long terms?
What do managers use the statement of financial position for?
Managers use it to determine whether inventory is adequate to support future sales and whether cash on hand is sufficient for immediate cash needs. Managers also look at the relationship between total liabilities and shareholder’s equity to determine whether they have the best proportion of debt and equity financing.
Are the statement of financial position, income statement and statement of changes in equity dated in the same period of time?
The statement of financial position is dated at a specific point in time. The income statement, statement of changes in equity, and statement of cash flows cover a period of time.
DECISION TOOLKIT:
Does the company rely mainly on debt or on equity to finance its assets?
Info needed for decision: Statement of financial position
Tools to use for decision: The statement of financial position reports the company’s resources and claims to those resources. There are two types of claims: liabilities and shareholder’s equity.
How to evaluate results: Compare the amount of liabilities as a percentage of total assets to the amount of shareholder’s equity as a percentage of total assets to determine whether the company relies more on lenders and other creditors or on shareholders for its financing.
