C1.D STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

IF I BORROW A MILLION POUNDS

AM I A MILLIONAIRE?

TOPIC C1.D STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

By the end of this topic you will be able to: Identify the purpose of a statement of financial

position (balance sheet) Understand the format of a statement of

financial position (balance sheet) Understand the language of a statement of

financial position (balance sheet) Complete a statement of financial position

(balance sheet) from given figures

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

Also called a balance sheet It balances 2 things:

How a business is funded (capital) How a business is using these funds (net assets) These two parts must be the same (net assets = capital

employed)

Its purpose is to show the financial position of a business at a point in time

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

First some new terminology

An asset = something a business owns A liability = something a business owes

What are your assets? What are your liabilities?

What do you own of value?A bank accountA phoneA laptopCash

Do you owe anything to anyone?Money borrowed from a friend or family member?This months phone tariff – if you are using your phone now and then paying at end of month this is a liability

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) An asset = something a business owns A liability = something a business owes

Look at the items in the table below, write each one under the heading either asset or liability.

Assets Liabilities

Delivery van

Positive bank balance

Machinery

Stock

Money owed to a supplier

Money owed by a customer

Overdraft

Bank loan

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

More new terminology An asset = something a business owns

These can be split into: Fixed assets = will stay in the business for more

than one year e.g. premises Short term assets = value will change on a

regular basis e.g. stock

A liability = something a business owesThese can be split into:

Current liabilities = need to be paid back in the short term, normally within one year e.g overdraft

Long-term liabilities = paid back over a longer period of time, normally over one year e.g. a mortgage may be 25 years

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

Look at the items in the table below, write each one under the headings.

Fixed Assets Long-term liabilities

Delivery vanPositive bank

balanceMachinery

StockMoney owed to a

supplierMoney owed by a

customerOverdraftBank loan

Short-term assets

Current liabilities

QUESTION TIME 2 MARKSMike wants to complete his statement of financial position (balance sheet).He needs to identify which items are assets.Which two of these are assets?

Money owed to suppliers

Bank loan

Stock

Money owed by customers

Overdraft

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

Recap – all these terms appear in the first part – how the business uses its funds

The components are: (Part 1) Fixed Assets

Short-term Assets

Current Liabilities

Long-term liabilities

Working in pairs can you write a brief explanation under each of the components of a statement of financial position?

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

Recap – all these terms appear in the first part – how the business uses its funds

The components are: (Part 1) Fixed Assets

Items owned by the business that it will keep for more than one year e.g. Premises

Short-term Assets Items owned by the business that are to be sold or used within

one year e.g. Stock Current Liabilities

Items the business owes that are to be paid back within one year e.g. An overdraft

Long-term liabilities Items the business owes that are to be paid back in over one

year e.g. Bank loan

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

Two more terms

So far we have identified that if we owe money to a supplier this is a

_________________________ If a customer owes us money this is a

_________________________

If we owe money to a supplier this means we have received the goods but not yet paid These are called creditors or trade payables (the money is still

to be paid)

If we are owed money from a customer this means they have purchased the goods but not yet paid These are called debtors or trade receivables (the money is still

to be received)

A SAMPLE STATEMENT OF FINANCIAL POSITION FOR NUTS AND BOLTS LTD (PART 1 – HOW A BUSINESS IS USING ITS FUNDS

Fixed Assets £ms £msPremises 15Equipment 130Machinery 200Vehicles 55 400 Short-term AssetsStock 174Trade receivables 109Cash 17 300Current LiabilitiesTrade payables 145Overdraft 55 200Net Current Assets 100 CA – STL

Net Assets 500 FA + CA - STL

Long term liabilities are not shown here because they are a source of the funding not a use.

Cash£14 500

Trade payables£10 800

Trade receivable

s£6 500

Premises £80 000

QUESTION TIME 12 MARKS

The following terms are to be entered into the statement of financial position (balance sheet) for a leisure centre.

Using this information, complete the statement by filling in the white boxes.

£ £

Fixed assets

Short-term assets

Stock 12000

Current liabilities

Net current assets

Net assets

WORKING CAPITAL

Working capital is the money used to run day-to-day activities

It is calculated from the top part of the statement of financial position Current (short-term) assets – Current liabilities

If the working capital is negative the business may have problems with funding day to day activities

STATEMENT OF FINANCIAL POSITION

Part 1 shows where money is tied up in the business in assets, and where it is owed in liabilities

The liabilities are deducted from the assets to give the Net Assets This figure indicates the worth of the business

But where did the money come from to create this worth? This is shown in part 2

The components are: (Part 2) capital, reserves and long-term liabilities Shares Issued

Capital raised by the sale of shares Retained Profit

Profit kept by the business Long-term liabilities

Bank loan

STATEMENT OF FINANCIAL POSITION

Capital = how the business is funded i.e. Money invested in the business allowing it to generate revenue

There are two main sources of capital: Internal – from within the business

Share capital Retained profit

External – from outside the business Bank loan Other investors who need to be repaid

A SAMPLE STATEMENT OF FINANCIAL POSITION FOR NUTS AND BOLTS LTD

£ms

Net Current Assets 100Net Assets 500________________________________________________

Long Term LiabilitiesBank Loan 95Capital and ReservesShares Issued 125Retained profit 280 500

Must balance

BALANCE SHEET Replace each letter a - g with the correct figure

Fixed Assets £msFixed Assets 62 62Current AssetsStock 20Debtors aCash 9 44Current LiabilitiesCreditors 35Overdraft 5 bNet Current Assets cNet Assets d Long Term LiabilitiesBank Loan 4Capital and ReservesShares Issued 26Retained profit f g

30 SECOND CHALLENGE

End

How many items on a balance sheet can you

name?Starting NOW

TRUE OR FALSE?

Current assets are always higher than current liabilities

Debtors are a current asset Stock is a current liability Current assets can also be called long-term assets Premises are a fixed asset Bank loans are a current liability Retained profit is a source of capital Trade receivables is another term for debtors Trade payables are when a business is owed

money from customers

5 MINUTE TEST Name 2 financial statements What is an asset? What is a liability? Name 2 fixed assets What is a debtor? What is the difference between a current liability

and a long term liability? What is the purpose of a balance sheet

End

TOPIC C1.D STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

You have now completed this topic, are you able to? Identify the purpose of a statement of financial

position (balance sheet) Understand the format of a statement of

financial position (balance sheet) Understand the language of a statement of

financial position (balance sheet) Complete a statement of financial position

(balance sheet) from given figures

Try the test yourself

quiz number 7