Statement of Financial Position (Balance Sheet) (HL IB Business Management)

• The Statement of Financial Position shows the financial structure of a business at a specific point in time
   
• It records the business assets and liabilities and specifies the capital (equity) used to fund the business
  
  
• The Statement of Financial Position is also known as the Balance Sheet
  • It is called the balance sheet as the net assets should equal the total equity
     

Diagram: Statement of Financial Position

The Statement of Financial Position for Packer Sports Ltd balances on $14,735

 

Calculating the total assets

• On the stated date Packer Sports Ltd owned non-current assets worth $24,250
  • Property, plant and machinery is valued at $22,700
  • These assets have been depreciated by $1,550
    
    
• The value of its current assets (cash, debtors and stock) was $15,545
  
  
• Total assets were therefore

         

 

Calculating total liabilities

• On the stated date Packer Sports Ltd had current liabilities worth $5,060, comprised of a bank overdraft, trade creditors and other short-term loans
  
  
• The value of its long-term liabilities were $20,000
  
  
• Total liabilities were therefore 

 

Calculating the net assets

• Packer Sports Limited's net assets were therefore

 

Calculating total equity

• Net assets of $14,735 were funded through share capital of $1,500 and retained earnings of $13,235

• Stakeholders will use the Statement of Financial Position alongside the Statement of Profit or Loss to perform ratio analysis and compare performance over time or with other businesses
   

 How Stakeholders use the Statement of Financial Position

Stakeholder	Interest in the Balance Sheet
Shareholders	Used to identify the asset structure of the business and how their investment has been put to use    Used to calculate the working capital of the business and determine its solvency    Used to determine the rough value of a business which helps a judgement on whether their investment is growing
Managers & Directors	Used to identify the financial position of the business at a given point in time    Useful to assess the working capital position of the business and determine if there are enough liquid current assets to pay its bills   Provides information on the capital structure of the business which helps guide decisions on whether to raise further funds through borrowing or via other means (e.g. share issue)
Suppliers & Creditors	Used to judge the solvency of the business to determine the risk when offering firms trade credit   Businesses with low levels of working capital may find it difficult to pay short-term debts and so suppliers may offer trade credit, but with stricter terms
Employees	Used to answer questions such as: Is the business financially stable or are jobs at risk? Has the businesses performance improved or worsened? What is the business spending its money on? How much are senior executives paid? How much tax is the business paying?

• Intangible assets are non-physical and cannot be held
   
• Businesses need to account for intangible assets in their annual reports as it adds to the value of the business

 

Diagram Showing Different Types of Non-physical Assets

Intangible assets include assets such as intellectual property and domain names
  

Intellectual property

• This includes patents, trademarks, patents and copyrights which protect unique ideas, inventions, artistic works, and brand names
   

Brand value

• The reputation and recognition associated with a brand has a value
  • It includes the brand name, logo, slogans, and customer loyalty to the brand
     

Customer relationships

• Long-term relationships with customers including customer lists, contracts, and customer loyalty programs
  • These relationships can provide recurring revenue and a competitive advantage
     

Software and technology

• Proprietary software, computer programs and technology systems that are crucial to a business's operations or provide a competitive advantage
   

Contracts and agreements

• Long-term contracts, lease agreements, licensing agreements and franchise agreements that have value and contribute to future cash flows
• Agreements with employees or business partners that restrict them from competing with the company for a specific period which protect the company's interests and market position (non compete contract)
    

Goodwill

• The value of a company's reputation, customer base and brand
• Goodwill often represents the premium paid when one business takes over or merges with another business
   

Domain names and other online assets

• Valuable domain names, websites, social media accounts and online platforms that drive customer engagement, traffic, and online presence
   

Licenses and permits

• Licenses, permits, and regulatory approvals that grant exclusive rights or access to certain markets or resources, often issued by governments