What is statement of financial position
What is Statement of Financial Position?
Dear Sir Hasaan, Will you kindly explain to me what is statement of financial position and what is its function? I will be happy if you answer my question in good detail as I am new to ACCA and will appreciate if the answer actually discuss everything in simple English.
One of the financial statement out of complete set of financial statement is statement of financial position, the function of which, as the name suggest, is to reflect the financial position of the business.
Function of Statement of Financial Position
Term Financial Position of the business encompass the study and analysis of the company's
- economic resources controlled by it
- financial structure
- liquidity and solvency, and
- its capacity to adapt the changing business environment.
Thus company's financial position can be determined if we study the above mentioned characteristics of the entity. And for the same characteristics users of financial statements need information which is presented to them under statement of financial position
As we know complete set of financial statements comprise historical financial information, therefore the information in SoFP will also be past information. However, even the information in the SoFP is historical in nature it can still provide reliable projection about future.
For example information regarding:
Financial structure of the company enable us to understand how risky is the business at the moment (gearing) and how much risky can it be i.e. how much more borrowings can we safely make keeping in view that we will generate enough profits that we will be able to cover the cost of such borrowings (borrowing cost) Liquidity and solvency helps us understand the ability of the entity to meet the liabilities on time. Capacity of the company to adapt changes helps us understand how close we are to risk our going concern. For how long the company can fight back its competitors and challenging business environment which in fact is understood by understanding the above four factors. Some facts about Statement of Financial Position
- Economic resources controlled by the entity can provide us information to depict how and from what sources cash can be generated in future.
- The old name for Statement of financial position was "Balance Sheet" which
actually refers to the fact that Assets of the company are always equal to the summation of capital and liabilities of the business i.e. Assets = Capital + Liability also named as accounting equation .As you can see the assets are balancing the total of capital and liabilities, hence the name "Balance Sheet".
- Statement of Financial Position is not an account but merely a list of assets and liabilities along with the capital balances of the business. Balance sheet is actually prepared out of the post-closing trial balance i.e. the trial balance which contains left over balances after we make closing entries to make trading, profit and loss account or in other words statement of comprehensive income.
[That is why most the time teachers ask you to make income statement before statement of financial position to understand the natural flow of accounting process] The most renowned format of the statement of financial position is "Statement form" or in other words vertical style of presentation, which we also study in F3 and F7 and equivalent exams. But statement of financial position can also be made in "T-account" format which is also named as horizontal style. While other financial statements reflects different aspects of the business for the range of period, statement of financial position provide us with information at a particular calendar day. That is why the statement of comprehensive income, statement of cash flows, statement of changes in equity have ". for the period ended. " with their titles where as statement of financial position always have ". as at. " with its title. On the asset side of SoFP, the least liquid asset is presented first, where as the most liquid asset is presented at the last under the respective heading i.e. Non Current Assets, Current Assets.
If under Non Current Assets we have Building, Land, Plant and machinery and Office equipment then these assets will be presented in the following order:
If under Current Assets we have Cash, Bank, Stock, Trade receivables, Bills receivable then these assets will be presented in the following order under this heading:
- Plant and machinery
- Office equipment
Same goes for liabilities. Liabilities expected to be paid at earliest are presented at the last under each heading.
- Trade receivables
- Bills receivable
Financial Crisis for Beginners
How do Financial Spread Betting Companies make Money?