A statement of financial position is a snapshot of a business on one date. It lists what the business owns (assets), what it owes (liabilities) and what belongs to the owners (equity). Questions use it to ask you to classify items, calculate totals and comment on the business’s financial position.
It sits beside the income statement from the previous lesson. The income statement covers a period of time, and this statement covers one moment.
How is the statement organised?
There are four blocks to learn.
- Non-current assets: items kept for use over more than a year, such as machinery, vehicles and premises.
- Current assets: inventory, trade receivables (customers who owe money) and cash.
- Current liabilities: amounts due within a year, such as trade payables (money owed to suppliers) and a bank overdraft.
- Non-current liabilities: amounts due after more than a year, such as a five-year bank loan.
Then comes the funding side: equity, made up of share capital or owner’s capital plus retained profit.
What can you calculate from it?
Three totals appear again and again.
- Working capital = current assets − current liabilities. It shows the short-term room the business has to pay its bills.
- Net assets = non-current assets + current assets − current liabilities − non-current liabilities. This equals equity.
- Capital employed = equity + non-current liabilities. It is the long-term money the business has used.
Worked example
Kedai Roti Sri Murni (from the previous lesson) ends its first year with these items.
| Item | RM |
|---|---|
| Equipment | 80,000 |
| Delivery van | 40,000 |
| Inventory | 12,000 |
| Trade receivables | 18,000 |
| Cash | 10,000 |
| Trade payables | 16,000 |
| Bank overdraft | 4,000 |
| Bank loan (repayable in 5 years) | 50,000 |
| Share capital | 60,000 |
Step 1, non-current assets: 80,000 + 40,000 = RM120,000.
Step 2, current assets: 12,000 + 18,000 + 10,000 = RM40,000.
Step 3, current liabilities: 16,000 + 4,000 = RM20,000. Working capital is 40,000 − 20,000 = RM20,000.
Step 4, net assets: 120,000 + 40,000 − 20,000 − 50,000 = RM90,000.
Step 5, equity check: share capital 60,000 plus retained profit 30,000 (the year’s profit, with no dividends paid) = RM90,000. It balances.
Step 6, capital employed: equity 90,000 + non-current liabilities 50,000 = RM140,000. Check: total assets 160,000 − current liabilities 20,000 = 140,000.
The mistake to watch for
A common slip is to place a bank overdraft with cash in the current assets.
Mistaken answer: current assets = 12,000 + 18,000 + 10,000 + 4,000 = RM44,000.
The student read “bank” and assumed it was money the business has.
An overdraft is borrowing from the bank, so it is a current liability. The correction is to ask two questions about every line: does the business own it or owe it, and will it be settled within a year or after? Those two answers choose the block.
Check yourself
1. Classify each as non-current asset, current asset, current liability or non-current liability: a factory oven; unsold stock; money owed to a flour supplier; a seven-year bank loan.
Show answer
Factory oven: non-current asset. Unsold stock: current asset. Money owed to the supplier: current liability. Seven-year loan: non-current liability.
2. A business has non-current assets of RM95,000, current assets of RM30,000, current liabilities of RM25,000 and non-current liabilities of RM40,000. Find net assets.
Show answer
95,000 + 30,000 − 25,000 − 40,000 = RM60,000. Equity must also be RM60,000.
3. For the same business, find working capital and capital employed.
Show answer
Working capital = 30,000 − 25,000 = RM5,000. Capital employed = equity 60,000 + non-current liabilities 40,000 = RM100,000.
Where this leads next
Once you can find these totals, calculating a ratio from supplied figures turns them into measures you can compare. The cash versus profit bridge shows why a healthy-looking statement can still hide a cash shortage.
Check on the Cambridge subject page how your exam year words this statement, since 0450 and 0264 may differ in layout and terms. A teacher can build a fresh statement with you and test each block, which is the focus of our online one-to-one Business tuition.