IBBusinessDPBusiness ManagementHLRevision Notes3. Finance & Accounts3.4 Final AccountsStatement of Financial Position (Balance Sheet)

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

Revision Note

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Lisa Eades

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The Statement of Financial Position

  • The Statement of Financial Position shows the financial structure of a business at a specific point in time

  • It identifies a businesses 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 net assets should equal the total equity

Diagram: the statement of financial position

An example of a Statement of Financial Position for Packer Sports Ltd 
An example of a Statement of Financial Position for Packer Sports Ltd 

Calculating the total assets

  • On the stated date Packer Sports Ltd owned non-current assets worth $24,250

    • It owns property, plant and machinery that is valued at $22,700

    • These assets have been depreciated by $1,550

  • The value of its current assets was $15,545, comprised of cash, debtors and stock

  • Total assets were therefore

         $ 24 comma 250 plus $ 15 comma 545 space equals space $ 39 comma 795

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 

$ 5 comma 060 space plus space $ 20 comma 000 space equals space $ 25 comma 060 

Calculating the net assets

  • Packer Sports Limited's net assets were therefore

$ 39 comma 795 space minus space $ 25 comma 060 space equals space $ 14 comma 735 

Calculating total equity

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

Exam Tip

In Paper 2 you may be asked to construct a balance sheet from given data.

To achieve full marks you must follow the format illustrated above and you should check that you have

  1. Included all of the relevant headings in the correct order

    • Non-current assets

    • Current assets

    • Total assets

    • Current liabilities

    • Non-current liabilities

    • Total liabilities

    • Net assets

    • Equity

  2. Correctly classified items under each heading

    • For example, you need to ensure that you have correctly allocated cash, stock and debtors as current assets, and creditors and bank overdrafts as current liabilities

  3. Omitted irrelevant figures that belong to the profit and loss account

    • For example, costs and revenues are not included in the balance sheet

How Stakeholders use the Statement of Financial Position

  • 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 and 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?

Exam Tip

Information found in the Statement of Profit or Loss and Statement of Financial Position can be used in a range of answers.

For example, if you are answering a question about sources of finance you might be able to use the capital structure of the business to recommend whether a business should borrow or look at an alternative source.

If a business already relies heavily on borrowing, it may be more sensible to recommend seeking to raise more share capital.

Different types of Intangible Assets

  • Intangible assets are non-physical assets that cannot physically be held but hold value for a business

  • Businesses need to account for intangible assets in their annual reports as it adds to the value of the business

Diagram: intangible assets

Intangible assets include domain names, patents and copyrights, customer relationships, IT systems, goodwill, contracts
Examples of intangible assets 

  • 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

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Lisa Eades

Author: Lisa Eades

Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.