<5.4 STATEMENT of FINANCIAL POSITION> 

--HOW WORTHLESS ARE YOU🤔?--

• Would you agree that your parents have more '$-worth' than you do? Of course you would, I mean who is paying for you to go to this school? Clearly, your age and net worth are positively related, however fear not as while your asset value may be low, your liabilities are also likely to be non-existant. Now try to work out your own net worth by listing all your assets.

Now copy the table above into your workbook and fill in the blanks the copy and complte the paragraph below: "Adviser told Robert: 'The total value of what Bobby owns is $_____, whilst he owes $_____, meaning you own more/less than the value of what you owe. This difference, $_____ is called 'equity' or 'Net-worth'  and means that you could, theoretically, invest this much of your own capital into your new business. Unfortunately, it is not all in a cash form!"

• In exactly the same we define the wealth of an individual, we define the wealth of an individual firm, by SUBTRACTING ALL DEBTS OWED FROM THE VALUE OF ALL ITEMS OWNED to get NET ASSETS.

• The official document which details this information is called a BALANCE SHEET, which is also called...

'THE STATEMENT OF FINANCIAL POSITION'

• It is typically produced ANNUALLY, QUARTERLY or MONTHLY

• 'A STATEMENT OF FINANCIAL POSITION' is also called 'A BALANCE SHEET' and consists of three main sections: assets, liabilities and equity.

  • • • What your business owns (It's ASSETS)

      • What your business owes (It's LIABILITES)

      • How much shareholders have invested (It's SHAREHOLDER FUNDS)

• • SHAREHOLDER FUNDS refer to ITEMS OF VALUE NOT-OWED BY THE FIRM. These items ARE USED TO FUND THE PURCHASE OF ASSETS and fall into two categories:

    • • • 1) 'SHARE CAPITAL' which refers to the amount of MONEY INVESTED BY SHAREHLDERS when they BUY NEWLY ISSUED SHARES (This is the money the SHARKS on 'Shark tank' give to the entreprenuer in exchange for the % share), which are recored as assets BUT NOT as liabilities.

        • 2) RETAINED PROFITS refers to profits SAVED ('RETAINED') by the firm from previous years that was not given to shareholders. (as dividends).

        • So, SHARE CAPITAL + RETAINED PROFITS = SHARHOLDER FUNDS

--Did you see it?--

ASSETS = LIABILITIES + SHAREHOLDER FUNDS

• This formula is intuitive. That's because a company has to pay for all the things it owns (ASSETS) by either borrowing money (taking on LIABILITIES) or taking it from investors (ISSUING SHARES) or using its savings (RETAINED PROFITS).

• Below are some examples of how changes will impact both sides equally and they will ALWAYS BALANCE EACH SIDE OUT:

  • ...If a biz takes out a 10-year, $5,000 loan from a bank, 2 things happen

    • • • 1)...its ASSETS will INCREASE BY +$5,000 (Cash account, inititally).

        • 2)...its LIABILITIES (specifically, the long-term debt account) will also INCREASE BY +$5,000, balancing the two sides of the equation. 

  • ...If the company takes +$10,000 from investors via the issue of shares,...

    • • • 1)...its ASSETS will INCREASE BY +$10000 (Again, cash account, initially), 

        • 2)...at the same time its SHAREHOLDER EQUITY will INCREASE BY +$10,000. 

  • ...If a firm generates +$20,000 profits and 'DOESN'T GIVE DIVIDENDS'

    • • • 1)...its ASSETS will INCREASE BY +$20,000 (Cash account initially) 

        • 2)...and as this is RETAINED PROFIT then SHAREHOLDER EQUITY will also INCREASE BY +$20,000.

• Therefore we can conclude that...

• ASSETS = LIABILITIES + SHAREHOLDER FUNDS /or/

• SHAREHOLDER FUNDS = ASSETS - LIABILITIES

• As we can appreciate from UNIT 5.2, a firm needs to have LIQUID ASSETS that can be EASILY CONVERTED INTO CASH available to pay for day-to-day expenses such as paying suppliers, wages, raw materials, utility bills etc... and these assets include CASH, ACCOUTS RECEIVABLE and INVENTORY, which as we know from above are called 'CURRENT ASSETS'.

• Of course these current assets are FIRSTLY needed to pay the CURRENT LIABILITIES listed above, and once this is done THE REMAINING $ VALUE is used to pay for day-to-day expenses, and this remainder is called 'WORKING CAPITAL' 

• Therefore we can say that:

• WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

• A business has the following financial data:

  • • • • Current Assets (Items you can turn into cash soon): $50,000

        • Current Liabilities (Items that you owe soon): $20,000

• Working Capital = Current Assets − Current Liabilities

• $30,000 = $50,000 − $20,000

• NOTE: If your current assets < current liabilitoes you will be in trouble

• CAPITAL EMPLOYED  refers to "How much long-term (Non-current) finance/capital is being used/employed by the firm to generate growth and profits?" Long term finance includes...

• ...finance from ISSUING SHARES = SHARE CAPITAL

• ...finance from RETAINED PROFITS, and...

• ...finance from NON-CURRENT LIABILITIES = LOANS

• CAPITAL EMPLOYED  = SHAREHOLDERS FUNDS + NON-CURRENT LIABILITIES

• A business has the following financial data:

  • • • • Total Assets (Everything the firm owns): $166,000

        • Non-Current Assets (e.g land, machinery...): $130,000

        • Working capital: $26,000

        • Current Assets (Items you can turn into cash soon): $50,000

        • Current Liabilities (Items that you owe soon): $20,000

• Working Capital = Current Assets − Current Liabilities

• $30,000 = $50,000 − $20,000

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