Week 2 - Statement of Financial Position Flashcards
What does the statement of financial position show?
- The resources the business controls: ASSETS
- How the assets were financed
From Owners: EQUITY
From Lenders: LIABILITIES
The statement of financial position also shows the financial strengths and weaknesses of a company
State the balance sheet equation
Assets = Equity + Liabilities
Non-current Assets + Current Assets = Equity + Non-current Liabilities + Current Liabilities
What is an asset?
- Resources controlled by business
- Capable of providing future economic benefits
- Obtained from a past event
What is the difference between a current and non-current asset?
•Short term benefits = Current Assets - Benefits occur within one year - Current assets are cash, or cash equivalents, or things that are expected to become cash within a year •Long term benefits = Non-Current Assets - Benefits occur over several years
State some examples of current assets?
Inventories (or stocks) Trade receivables (or debtors) Investments Prepayments Cash
What are inventories (or stocks)?
Merchandise, production supplies, materials etc.
What are trade receivables (or debtors)?
Money owed by customers for goods or services supplied on credit
What are investments?
Short term financial investments
What are prepayments?
Expenses/items paid for in advance of receiving their benefits
Give an example of a prepayment
• I open a business and pay two years’ rental charges
– that is £80,000 ( 2 x £40,000)
• However, only one year’s rental charge will appear
on my income statement (expense incurred in
generating that year’s sales)
• So my profit (liability) is down by £40,000 but my
cash (asset) is down by £80,000
• To balance this out, I have a prepayment (next
year’s rental charge) of £40,000 in my current assets
What are the three types/stages of inventories (or stocks)?
Raw materials
Work in progress
Finished goods
What is the future economic benefit of a current asset in the form of raw materials?
Used to manufacture goods for sale
What is the future economic benefit of a current asset in the form of goods that are a work in progress?
Expectation of completion and sale
What is the future economic benefit of a current asset in the form of finished goods?
Expectation of sale
What is the future economic benefit of a current asset in the form of trade receivables?
Expectation that the customer will pay cash
What is the future economic benefit of a current asset in the form of investments in shares of other companies?
Expectation of dividend income and growth in value of investment, for future sale
What is the future economic benefit of a current asset in the form of cash held in a bank account?
Expectation of using the cash to buy resources which will create further cash
Comment on the circulating nature of current assets
Cash —> Inventories (stock) —> Trade receivables
(trade debtors)
Full cycle on page 20 of Week 2
State some examples of non-current assets?
Tangible fixed assets
Intangible assets
Financial assets or investments
Name some tangible fixed assets
Land and buildings
Plant and equipment
Vehicles
What are tangible fixed assets?
Property, plant and equipment; motor vehicles; furniture