BTEC Business - F2
- Created by: Kaicee05
- Created on: 14-05-23 19:36
Statement of Financial Position
The statement of financial position calculates the net worth of a business by balancing what it owns against what it owes.
Purpose and use -
It's a snapshot of a businesses net worth at a particular moment in time, normally the end of the financial year. It's a summary of everything they own (assets) and owes (liabilities). It states the value of the business.
Non Current Assets
These are items of value owned by the business and likely to stay for more than a year. Two types: Intangible (Can't be touched) and Tangible (Can be touched).
Tangible assets - Eg. Premesis, vehicles, fixtures and fittings. They have to be realistic when shown on the statement of financial position. They're depreciated on an annual basis. On the statement the historic cost, the amount it has been depreciated by over the year and the current value are shown. The final figure is the net book value, representing what the asset is thought to be worth at the moment.
Intangible assets - Eg. Trademark, brand names and patents. These are things which add value to the business but don't have a physical presence. Their value changes over time. If they decide to decrease value it's called 'amortisation' (a one off charge on the value of an intangible asset). It's shown on the statement.
Current Assets
These are items of value owned by the business where their value is likley to fluctuate and are likley to be in the business for less than a year.
Inventory - This is the value of stock held at that moment of time. Eg. raw materials, work in progress and finished goods. It needs to be given as a realistic value or overvalue them, eg. stock which is likley not to be sold.
Trade receivables - These are people who owe the business money. Eventhough they don't physically have the money yet, they still own it. People who buy on credit need to be monitored to make sure payments are made.
Prepayments - This is where the expense is made in advance to the period of which it relates to. It's classed as an asset.
Current Liabilities
This is something owed by the business which should be paid back in under a year.
Overdrafts - This is the ability to withdraw money from a current account that you don't have and must be paid back.
Accruals - This is an expense paid after the period of which it relates to.
Trade payables - This is when the business owes money to another company because it received a good but has not yet paid for it.
Net Current Assets/ Liabilities
This represents the businesses ability to meet short term debts. A business with insufficient net current assets (working capital) doesn't have enough current assets to meet their current liabilities. It could be bad if the liabilities have to be paid now and they can't meet demands for the current assets. This could lead to them having to sell an asset which they need.
- When current assets are greater that current liabilities = Net Current Assets
- When current assests are less than current liabilities = Net Current Liabilities
Non Current Liabilities
A liability is something that the business owes. Non current liabilities are ones which will be paid back in more than a years time. They're lilkely to be used to buy fixed costs or help set up a business. EG.
- Bank loans
- Mortgages
Net Assets
This is the figure representing the total value minus the value of the liabilities.
Capital
This is the second half of the statement of financial position.
Opening Capital - Capital in the business at the start. It's the money invested from the owners.
Retained profit - This is profit kept from previous years and also net profit from the current year.
Drawings - These are withdrawals made by the owners. For it to be balanced, the net assets need to equal capital employed.
Adjustments for depreciation
Annual depreciation is shown as an expense on the statement of comprehensive income. Each year it is deducted from the net book value of an asset to compare value at the end of the year. This is the value of the asset recorded on the statement of financial position.
Adjustments for Prepayments and Accruals
Prepayments - This is an expense made in advance to the period in which it relates to. It's taken out of expenses on the statement of comprehensive incomeand shown as a current asset on the statement of financial position. Eg. Paying for broadband 12 months early and accounts are produced halfway through the 12 months so half the payment is a prepayment.
Accruals - This is an expense paid after the period in which it relates to. It's an expense on the statement of comprehensive income and a current liability on the statement of fianncial position. Eg. Electricity paid quarterly in arrears.
Interpretation, Analysis and Evaluation
It can be used internally by management to help measure the financial health of the business and inform future decision making. It can also be used by potential investors and creditors. They may use it when deciding to offer the business capital or not.
Analysis - It can be used to make comparisons between figures within the statement of financial position. Eg. Current assets in relation to current liabilities. It can be used to make comparisons between different years. Eg. Current liabilities in one year compared to another. Also, it can be used for intrafirm comparisons to see how one branch of the business is doing in comparison to another. Eg. Debtors for one branch compared to another to identify bad debt concerns. As well as this, it can be used for interfirm comparisons between the business and it's competitors.
Interpretation - It's also useful to consider working capital beacuse this is a measure of the firm's ability to meet day to day expenses. the statement of financial position is a useful indicator of how effectively management are running the business.
Amortisation
This is a process under which the costs of an intangible asset are reduced over a specified period of time. It's also called expected useful life.
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