Statement of
Financial Position
What a business owns, owes and is worth — how to read, interpret and make deductions from a Balance Sheet, including working capital, financing and the sale of inventories.
📖 Click any section to open it and start revising.
Statement of Financial Position (SFP) — also known as the Balance Sheet — is a financial statement showing what a business OWNS (assets), what it OWES (liabilities) and how much it is WORTH to its owners (equity) at a specific point in time.
Unlike the Income Statement — which covers a period of time — the SFP is a snapshot on one specific date (e.g. 31 December). The two sides of the SFP always balance.
Important Exam Note: Constructing a Statement of Financial Position will NOT be assessed. You must be able to READ, INTERPRET and make DEDUCTIONS from a given SFP.
SFP vs Income Statement: The Income Statement shows profit over a period. The SFP is a snapshot on a single date. Never confuse the two — the examiner will penalise this.
Assets are everything the business owns. They are split into two categories based on how long they are held and how quickly they can be converted to cash.
- Land & buildings
- Machinery & equipment
- Vehicles
- Computers / technology
- Long-term investments
- Furniture & fittings
- Inventories (stock)
- Trade receivables (debtors)
- Cash and bank balances
- Short-term investments
- Prepaid expenses
Current assets are listed least → most liquid:
- 1st → Inventories (stock)
- 2nd → Trade receivables
- 3rd → Cash & bank
Non-current assets lose value over time through use and wear. This reduction in value is called depreciation. It explains why assets like machinery appear at a lower value in subsequent years on the SFP.
Quick Check — Classify the Asset
Click each card to reveal whether it is a non-current or current asset.
Assets are listed in order of permanence: non-current first, then current assets in order of liquidity (stock → debtors → cash). This order is fixed — do not rearrange them in the exam.
🗂 Activity — Sort Items into the Right SFP Category
Drag each item from the bank into the correct category. Then click Check.
Liabilities are everything the business owes to others. Like assets, they are split by time horizon — whether repayable within 12 months or after.
- Trade payables (creditors)
- Bank overdraft
- Short-term bank loans
- Tax payable
- Accrued expenses
- Long-term bank loans
- Mortgages on property
- Debentures / bonds
- Finance leases
Equity (Capital / Net Worth)
The owners’ interest in the business. Also called Net Assets, Capital or Shareholders’ Funds. Total Equity must always equal Net Assets.
| Component | What It Means |
|---|---|
| Share Capital | Money originally invested by shareholders when the business was set up or when new shares were issued. Does not need to be repaid. |
| Retained Profit (Reserves) | Accumulated profit kept in the business after tax and dividends. The most important internal source of finance. |
| Total Equity | Share Capital + Retained Profit. This must equal Net Assets. If they don’t match — there is an error. |
For “how is the business financed?” — always look at the Financed By section. The balance between share capital, retained profit and long-term loans reveals the financing strategy.
The SFP follows a standard layout. Knowing the structure helps you quickly locate figures for interpretation questions. The two sides always balance.
Click a Line to Understand It
Click any row in the SFP below to see an explanation — great for exam interpretation practice.
The funds available for day-to-day operations. It measures the business’s short-term liquidity — its ability to pay debts due within the next 12 months.
- Current assets exceed current liabilities
- Can pay short-term debts comfortably
- Good liquidity position
- Reassures suppliers and banks
- Current liabilities exceed current assets
- May struggle to pay short-term debts
- Risk of insolvency
- Urgent action: raise cash, sell stock, reduce creditors
- Excess cash sitting idle
- Money not used productively
- May indicate slow stock turnover
- Surplus should be invested in the business
Current Ratio & Acid Test
| Ratio | Formula | Ideal Range | What It Tests |
|---|---|---|---|
| Current Ratio | Current Assets ÷ Current Liabilities | 1.5 : 1 to 2 : 1 | Overall short-term liquidity including stock |
| Acid Test Ratio | (Current Assets − Inventories) ÷ Current Liabilities | At least 1 : 1 | Liquidity without relying on selling stock — stricter test |
The acid test is more stringent because inventories may take time to sell. An acid test below 1:1 means the business cannot pay short-term debts without selling stock — a serious liquidity risk. The ideal current ratio is 1.5 : 1 to 2 : 1.
🧮 Live Working Capital Calculator
Enter any values to instantly calculate working capital, current ratio and acid test — and see what zone the business is in.
Deduction 2 — How is the Business Financed?
The Financed By section reveals where long-term money has come from — share capital, retained profit or loans. This allows deductions about the business’s financial strategy.
| Source | High Value Suggests | Low Value Suggests |
|---|---|---|
| Share Capital | Significant funds raised from shareholders. Good for growth but dilutes existing owners’ control. | Less reliance on shareholders — may be owner-funded or use debt instead. |
| Retained Profit | Consistently profitable; reinvests earnings. Strong financial health — less need for external borrowing. | Profits paid as dividends or history of losses. Less financial resilience. |
| Long-term Loans | High gearing — interest burden, but leveraged for growth. Higher financial risk. | Little long-term borrowing — lower risk but may limit investment capacity. |
🎯 Activity — Read the SFP and Deduce the Financing Strategy
Look at the data for each business and select the best deduction about how it is financed.
Deduction 3 — Sale of Inventories to Raise Finance
Selling stock to raise cash. This converts a current asset (stock) into another current asset (cash) — improving liquidity without increasing liabilities.
- Immediately improves cash position and liquidity
- Does not create new debt — no interest to pay
- Reduces storage and holding costs
- Useful when business urgently needs to pay creditors
- If sold below cost price → reduces profit margins
- Stock may be needed to fulfil future orders
- Customers may expect permanently lower prices
- Does not solve the underlying cause of cash shortage
- Only a short-term solution — not sustainable
When you see high inventories on an SFP, tell the examiner this means “cash is tied up in stock” — and that selling stock through discounting would improve working capital and liquidity without creating new debt.
NCA: Land & Buildings $400,000 · Equipment $100,000 → Total NCA $500,000
CA: Inventories $120,000 · Trade Receivables $40,000 · Cash $10,000 → Total CA $170,000
CL: Trade Payables ($90,000) · Overdraft ($30,000) → Total CL ($120,000)
NCL: Long-term Loan ($200,000) · Share Capital $200,000 · Retained Profit $150,000 → Total Equity $350,000
Key Deductions — Step by Step
- CA ($170,000) − CL ($120,000) = $50,000 — positive but tight
- Current liabilities are very high relative to current assets
- Current ratio = 170,000 ÷ 120,000 = 1.42 : 1 — below ideal 1.5 : 1
- Acid test = (170,000 − 120,000) ÷ 120,000 = 0.42 : 1 — well below 1 : 1
- Heavy reliance on stock — a significant liquidity risk
- $120,000 of the $170,000 CA are inventories — 71% of current assets
- Much working capital is tied up in unsold stock
- Solution: sell inventory at a discount → cash improves → acid test improves
- $200,000 share capital + $150,000 retained profit → history of profitability, partly owner-funded
- $200,000 long-term loan adds financial risk (gearing)
Exam conclusion style: “Riverside Furniture is profitable and growing (strong non-current assets) but faces short-term liquidity pressure due to high inventories and current liabilities. Reducing stock levels is the priority recommendation.”
| Topic | Key Point |
|---|---|
| Statement of Financial Position | Snapshot of what a business OWNS, OWES and is WORTH on a specific date |
| Non-Current Assets | Owned 12+ months, used in business, not for resale — e.g. machinery, buildings. Lose value = depreciation |
| Current Assets | Converted to cash within 12 months — listed by liquidity: stock → debtors → cash |
| Current Liabilities | Debts due within 12 months: trade payables, overdraft, short-term loans |
| Non-Current Liabilities | Long-term debts repayable in 12+ months: mortgages, long-term loans |
| Equity | Total Assets − Total Liabilities = what business is worth to owners |
| Share Capital | Owner/shareholder investment — does not need to be repaid |
| Retained Profit | Accumulated profits kept in business — most important internal source of finance |
| Working Capital | Current Assets − Current Liabilities — ideal current ratio 1.5 : 1 to 2 : 1 |
| Accounting Equation | Assets = Liabilities + Equity — both sides ALWAYS balance |
| Sale of Inventories | Converts stock to cash — improves liquidity without creating new debt |
| How financed? | Look at share capital vs retained profit vs long-term loans in the SFP |
SFP = snapshot on one date. Income Statement = covers a full period. Never confuse them.
Liquidity risk — can’t pay short-term debts without selling stock. Red flag for the examiner.
Cash tied up in stock. Selling at a discount converts stock to cash — improves WC with no new debt.
Strong past performance. Business reinvests earnings — less reliance on external borrowing.
High gearing — significant interest burden. Financial risk rises. Check if profits can service the debt.
Figure → identify → judge (good/bad) → explain WHY using numbers → recommend action.
Top 5 Exam Tips: (1) SFP is a SNAPSHOT — Income Statement is a PERIOD. (2) WC = CA − CL. Ideal current ratio 1.5–2:1. (3) High inventories = cash tied up in stock. (4) Growing equity year-on-year → retaining profit → more valuable. (5) Constructing a SFP is NOT assessed — reading and interpreting IS.
🎯 Self-Test Questions
Fill in the Blanks — Drag & Drop
Drag the correct term into each gap in the paragraph below.
Multiple Choice Questions
Quiz Complete!
Here’s how you did:
Extended Response Practice
- Working capital = $240,000 − $120,000 = $120,000 — positive ✓
- Current ratio = 240,000 ÷ 120,000 = 2.0 : 1 — within ideal range ✓
- Acid test = (240,000 − 180,000) ÷ 120,000 = 0.5 : 1 — well below 1:1 ✓
- Business is heavily reliant on stock — inventories are 75% of CA. If stock cannot be quickly sold, the business will struggle to meet short-term debts → significant liquidity risk ✓
- Selling inventories converts stock (a current asset) into cash (another current asset) ✓
- This increases cash balance → improves ability to pay short-term debts ✓
- Working capital improves as cash replaces unsold stock ✓
- No new debt is created — unlike a loan — so liabilities do not increase ✓
- However, selling below cost reduces profit margins — a short-term trade-off ✓ (additional)
Continue Learning
🚀 Keep Revising
More resources — always freeEverything is always free.
No sign-up. No paywall. Just past papers, notes and resources — organised by topic.
We’re proud to provide valuable educational resources at no cost to you. By allowing ads on our site, you help us keep this platform free and accessible for everyone.
Thank you for your support—it truly makes a difference!