2. C1. D S TATEMENT OF FINANCIAL POSITION ( BALANCE S HEET ) IF I BORROW A MILLION POUNDS AM I A MILLIONAIRE?

3. T OPIC C1. D S TATEMENT OF FINANCIAL POSITION ( BALANCE S HEET ) By the end of this topic you will be able to: Identify the purpose of a statement of financial position (balance sheet) Understand the format of a statement of financial position (balance sheet) Understand the language of a statement of financial position (balance sheet) Complete a statement of financial position (balance sheet) from given figures

4. S TATEMENT OF FINANCIAL POSITION (B ALANCE S HEET ) Also called a balance sheet It balances 2 things: How a business is funded (capital) How a business is using these funds (net assets) These two parts must be the same (net assets = capital employed) Its purpose is to show the financial position of a business at a point in time

5. S TATEMENT OF FINANCIAL POSITION (B ALANCE S HEET ) First some new terminology An asset = something a business owns A liability = something a business owes What are your assets?What are your liabilities? What do you own of value? A bank account A phone A laptop Cash Do you owe anything to anyone? Money borrowed from a friend or family member? This months phone tariff – if you are using your phone now and then paying at end of month this is a liability

6. S TATEMENT OF FINANCIAL POSITION (B ALANCE S HEET ) An asset = something a business owns A liability = something a business owes Look at the items in the table below, write each one under the heading either asset or liability. AssetsLiabilities Delivery van Positive bank balance Machinery Stock Money owed to a supplier Money owed by a customer Overdraft Bank loan

7. S TATEMENT OF FINANCIAL POSITION (B ALANCE S HEET ) More new terminology An asset = something a business owns These can be split into: Fixed assets = will stay in the business for more than one year e.g. premises Short term assets = value will change on a regular basis e.g. stock A liability = something a business owes These can be split into: Current liabilities = need to be paid back in the short term, normally within one year e.g overdraft Long-term liabilities = paid back over a longer period of time, normally over one year e.g. a mortgage may be 25 years

8. S TATEMENT OF FINANCIAL POSITION (B ALANCE S HEET ) Look at the items in the table below, write each one under the headings. Fixed AssetsLong-term liabilities Delivery van Positive bank balance Machinery Stock Money owed to a supplier Money owed by a customer Overdraft Bank loan Short-term assetsCurrent liabilities

9. Q UESTION TIME 2 MARKS Mike wants to complete his statement of financial position (balance sheet). He needs to identify which items are assets. Which two of these are assets? Money owed to suppliers Bank loan Stock Money owed by customers Overdraft

10. S TATEMENT OF FINANCIAL POSITION (B ALANCE S HEET ) Recap – all these terms appear in the first part – how the business uses its funds The components are: (Part 1) Fixed Assets Short-term Assets Current Liabilities Long-term liabilities Working in pairs can you write a brief explanation under each of the components of a statement of financial position?

11. S TATEMENT OF FINANCIAL POSITION (B ALANCE S HEET ) Recap – all these terms appear in the first part – how the business uses its funds The components are: (Part 1) Fixed Assets Items owned by the business that it will keep for more than one year e.g. Premises Short-term Assets Items owned by the business that are to be sold or used within one year e.g. Stock Current Liabilities Items the business owes that are to be paid back within one year e.g. An overdraft Long-term liabilities Items the business owes that are to be paid back in over one year e.g. Bank loan

12. S TATEMENT OF FINANCIAL POSITION (B ALANCE S HEET ) Two more terms So far we have identified that if we owe money to a supplier this is a _________________________ If a customer owes us money this is a _________________________ If we owe money to a supplier this means we have received the goods but not yet paid These are called creditors or trade payables (the money is still to be paid) If we are owed money from a customer this means they have purchased the goods but not yet paid These are called debtors or trade receivables (the money is still to be received)

13. A S AMPLE STATEMENT OF FINANCIAL POSITION FOR N UTS AND B OLTS L TD ( PART 1 – HOW A BUSINESS IS USING ITS FUNDS Fixed Assets £ms£ms Premises15 Equipment130 Machinery200 Vehicles55400 Short-term Assets Stock174 Trade receivables109 Cash17300 Current Liabilities Trade payables145 Overdraft55200 Net Current Assets100 CA – STL Net Assets 500FA + CA - STL Long term liabilities are not shown here because they are a source of the funding not a use.

14. Cash £14 500 Trade payables £10 800 Trade receivables £6 500 Premises £80 000 Q UESTION TIME 12 MARKS The following terms are to be entered into the statement of financial position (balance sheet) for a leisure centre. Using this information, complete the statement by filling in the white boxes. ££ Fixed assets Short-term assets Stock12000 Current liabilities Net current assets Net assets

15. W ORKING CAPITAL Working capital is the money used to run day-to- day activities It is calculated from the top part of the statement of financial position Current (short-term) assets – Current liabilities If the working capital is negative the business may have problems with funding day to day activities

16. S TATEMENT OF FINANCIAL POSITION Part 1 shows where money is tied up in the business in assets, and where it is owed in liabilities The liabilities are deducted from the assets to give the Net Assets This figure indicates the worth of the business But where did the money come from to create this worth? This is shown in part 2 The components are: (Part 2) capital, reserves and long- term liabilities Shares Issued Capital raised by the sale of shares Retained Profit Profit kept by the business Long-term liabilities Bank loan

17. S TATEMENT OF FINANCIAL POSITION Capital = how the business is funded i.e. Money invested in the business allowing it to generate revenue There are two main sources of capital: Internal – from within the business Share capital Retained profit External – from outside the business Bank loan Other investors who need to be repaid

18. A S AMPLE STATEMENT OF FINANCIAL POSITION FOR N UTS AND B OLTS L TD £ms Net Current Assets100 Net Assets 500 ________________________________________________ Long Term Liabilities Bank Loan95 Capital and Reserves Shares Issued125 Retained profit280 500 Must balance

19. B ALANCE S HEET Replace each letter a - g with the correct figure Fixed Assets £ms Fixed Assets6262 Current Assets Stock20 Debtorsa Cash944 Current Liabilities Creditors35 Overdraft5b Net Current Assetsc Net Assets d Long Term Liabilities Bank Loan4 Capital and Reserves Shares Issued26 Retained profitf g

20. 30 S ECOND C HALLENGE End How many items on a balance sheet can you name? Starting NOW

21. T RUE OR F ALSE ? Current assets are always higher than current liabilities Debtors are a current asset Stock is a current liability Current assets can also be called long-term assets Premises are a fixed asset Bank loans are a current liability Retained profit is a source of capital Trade receivables is another term for debtors Trade payables are when a business is owed money from customers

22. 5 M INUTE T EST Name 2 financial statements What is an asset? What is a liability? Name 2 fixed assets What is a debtor? What is the difference between a current liability and a long term liability? What is the purpose of a balance sheet End

23. T OPIC C1. D S TATEMENT OF FINANCIAL POSITION ( BALANCE S HEET ) You have now completed this topic, are you able to? Identify the purpose of a statement of financial position (balance sheet) Understand the format of a statement of financial position (balance sheet) Understand the language of a statement of financial position (balance sheet) Complete a statement of financial position (balance sheet) from given figures Try the test yourself quiz number 7