Statement of Financial Position | Purpose and Components

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Statement of Financial Position | Purpose and Components

Statement of Financial Position | Purpose and Components

Definition of Statement of Financial Position

A statement of financial position sometimes referred to as a balance sheet, is a part of a financial statement that presents the position of assets, liabilities, and equity in an organization. It represents an undertaking’s financial position as on a particular day, being the last day of the reporting period. It provides an understanding of the financial health of the business on a particular date.

Explanation

A set of financial statements is presented annually to the investors to provide them with information about the company’s financial results and financial position. One of the components of the financial statements is the statement of financial position. It contains details of the company’s assets, liabilities due by the company, and equity in the company. These items’ position is contained in the statement of financial position as of the end of the reporting period. It is necessarily prepared on an annual basis, but it can also be prepared on a half-yearly or quarterly basis.

This statement helps the stakeholders such as shareholders, government, and analysts understand the company’s financial health, and they can also compare the information with the prior period or with other companies operating in a similar industry.

Purpose of Statement of Financial Position

The purpose of the statement of financial position is to present true information about the company’s assets, liabilities, and equity. It helps to reveal the financial position of the company as at a particular date.

The information contained in the statement helps the investors and the other stakeholders for financial analysis based on which they make investment decisions. Further, investors can also compare the year-end statement of financial position with the past year’s statement to know how much deviation is there. This can give them an understanding of how the company is performing. The statement of the company can also be compared with those of other companies that are working in a similar industry to understand whether the company is better off than the others.

The statement is also useful for the management as it helps them track the company’s financial position and take measures for improvement.

Example of Statement of Financial Position (with Excel Template)

Let’s take an example to understand the Statement of Financial Position’s calculation in a better manner.

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You can download this Statement of Financial Position Excel Template here – Statement of Financial Position Excel Template

Example

Statement of Financial Position as At 31.12.2020

(Amounts expressed in thousands of currency units)

Particulars Notes Year Ended
31.12.2020 31.12.2019
Assets
Non Current Assets
Property, plant and equipment 350,700 360,020
Goodwill  80,800 91,200
Other intangible assets 227,470 227,470
Investments in associate 100,150 110,770
Investments in equity instruments 142,500 156,000
Total Current Assets 901,620 945,460
Current Assets
Inventories 135,230 132,500
Trade receivables 91,600 110,800
Other current assets 25,650 12,540
Cash and cash equivalents 312,400 322,900
Total Non-Current Assets 564,880 578,740
Total Assets 1,466,500 1,524,200
Equity & Liabilities
Equity attributable to owners of the parent:
Share capital 650,000 600,000
Retained earnings 243,500 161,700
Other components of equity 10,200 21,200
Equity attributable to owners of the parent 903,700 782,900
Non-controlling interest 70,050 48,600
Total Equity 973,750 831,500
Non Current Liabilities
Long-term borrowings 120,000 160,000
Deferred tax 28,800 26,040
Long-term provisions 28,850 52,240
Total Non Current Liabilities 177,650 238,280
Current Liabilities
Trade and other payables 115,100 187,620
Short-term borrowings 150,000 200,000
Current portion of long-term borrowings 10,000 20,000
Current tax payable 35,000 42,000
Short-term provisions 5,000 4,800
Total Current Liabilities 315,100 454,420
Total Liabilities 492,750 692,700
Total Equity and Liabilities 1,466,500 1,524,200

The above illustration shows the statement is divided into different components (assets, liabilities, and equity) and line items. Also, the date is presented for the current year as well as the last year.

Components of Statement of Financial Position

There are three main components of a financial position statement, namely assets, liabilities, and equity.

1. Assets

These are the resources that are owned by the company and are acquired or generated with equity fund or outside borrowings. They are further divided into current and non-current assets based on whether they are expected to be realized within a period of twelve months from the reporting period or not. Examples of assets include inventory, property, trade receivables, financial assets, deferred tax asset, and so on.

2. Liabilities

Liabilities refer to the amounts owed by the company towards outside parties (i.e. amounts owned to parties other than shareholders in their capacity as a shareholder). The liabilities are also sub-classified as current and non-current liabilities based on whether they are expected to be settled within a period of twelve months from the reporting period or not. Some most commonly represented line items for liabilities include borrowings, provisions, trade payables, deferred tax liability, etc.

3. Equity

Equity represents the amount belonging to the shareholders of the company. This indicates the amount invested by the company’s shareholders and the amount that company owes to them. There are different components of equity, such as paid-up share capital, revenue reserves, capital reserves, etc.

Importance of Statement of Financial Position

It is a very important statement from the investors’ and management’s perspective. This is because the investors analyze the information in the statement to identify the company’s financial health and soundness. Stakeholders like investors and lending institutions also carry out ratio analysis using the statement of financial position to determine various financial parameters. Management uses the statement to identify and track the company’s financial position over a period of time.

Statement of Financial Position vs Balance Sheet

The term statement of financial position and balance sheet are used interchangeably. Both the statements present the financial position of an entity as at the end of the reporting period by presenting the position of assets, liabilities, and equity. International Financial Reporting Standards use the term Statement of Financial Position while the US GAAP uses the terminology Balance Sheet. There are some differences with respect to the presentation of line items as well in both the statements.

Advantages

It offers the following advantages:

  • It provides information about the financial position of the company.
  • It helps in ratio analysis.
  • The statement of a current period can be compared with the last year’s statement to track the company’s performance.
  • Investors get information about the company’s financial health, and based on this statement, they can make their investment decisions.
  • It also helps determine the company’s liquidity by providing data about the current assets available with the company for settling its current liabilities.

Conclusion

It forms part of an organisation’s financial statements and provides useful insight to the users about the company’s financial health. The statement is to be prepared as per the accounting standards applicable to the company based on their jurisdiction.

Recommended Articles

This is a guide to the Statement of Financial Position. Here we also discuss the definition and components of statement of financial position along with advantages and example. You may also have a look at the following articles to learn more –

  1. Components of Financial Statements
  2. Types of Financial Statements
  3. Users of Financial Statements
  4. Objectives of Financial Statements

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