A statement of financial position tells shareholders more about the continuity of the entity. A strong balance sheet position means that the business will not only survive but will remain for a long time despite making losses in the current year. In this article, we explain what the statement is about as well as its importance to stakeholders.
1. What is a statement of financial position?
A statement of financial position is the part of a company's financial statement that explains the company's position in money terms. The value in the balance sheet is what the entity will use to trade in the next accounting period. The stronger the financial position the stronger the going concern of the entity.
The statement of financial position contains the business assets, liability and capital. A strong balance sheet means there are more assets in the entity to trade. And a weak one means there are more payment obligations to meet with the available assets. This is mostly true for non-financial service entities such as manufacturing and trading businesses.
However, the opposite is true for a financial service firm such as a bank or an investment house. In this case, they need liabilities (that is, customers’ deposits) to make money unlike in trading business where inventory, a part of asset, is required to carry out trade.
2. Typical statement of financial position
Statement of financial position can be prepared either in order of permanent or liquidity. Where it is prepared in the order of permanent, the non-current assets (that is property, plants, and equipment) are first listed before current counterparts. On the order hand, where it is prepared in order of liquidity, current assets, in most cases, cash and cash equivalent is stated as the first line item.
3. Some IFRS applicable to the Balance sheet
We have fished out some International Financial Reporting Standards that are applicable in the preparation of a balance sheet. The IAS 1 explains the format of the statement of financial position as well as its line items. IAS 2 talks on measuring and recognizing inventory in this statement as well as the profit or loss account.
IAS 16 examines the property, plants, and equipment of an entity, their measurement, computation of depreciation value and so on. IFRS 9 looks at financial assets such as cash and trade receivables and payables and their impairments.
4. Importance of statement of financial position to businesses
Balance sheets are significant to every business and its stakeholders. It tells them if the business is a going concern. As long as there is enough cash in the statement, it implies that the business can carry out operations in the next periods. The statement of financial position explains why the amount of capital a business owns and used to finance the business. As well as, the value of the liabilities it is using for the entity.
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