A statement of financial position is another name for the balance sheet. It displays the assets of a company and their sources of financing, debt and equity.
The statement of financial position displays the financial health of a company at a specific point in time. Whereas, the income statement reports the financial performance of a company over the course of a period, usually a year. Investors and creditors will use the statement of financial position to determine how efficiently a company is using its resources and how efficiently is it being financed.
Statement of Financial Position Template
Throughout this series on financial statements, you can download the Excel template below for free to see how Bob’s Donut Shoppe uses financial statements to evaluate the performance of his business.
Format
The statement of financial position can be reported in either of the following formats:
Account Format
This format divides the statement into two columns. The left side would include the assets of a company consisting of both current assets and fixed assets. The right side of the statement of financial position displays the liabilities and equity of a company. Think of this as a debit and a credit type format as the debit accounts come on the left side and the credit accounts come on the right-hand side.
Report Format
This will have only one column and it is the more traditional way of presenting the statement of financial position. In this format, the assets appear first, followed by liabilities and equity of a company.
In both formats, the assets and liabilities are bifurcated into current and long term. They will also be listed generally by how liquid they are.
Components of a Statement of Financial Position
There are primarily 3 main components as listed below:
- Assets
- Liabilities
- Equity
Assets
The assets side of the statement of financial position helps the investors or the creditors who are reviewing the financial statements to determine what resources have the company invested in and how efficient are they in utilizing them. It helps with financial analysis by studying ratios like the current ratio, which shows whether the short-term assets are enough to cover the short-term obligations.
The assets can be subdivided into three sub-categories:
- Current assets: These are cash or cash equivalents that are expected to be converted to cash within a year. These include cash, accounts receivable, inventory, prepaid expenses and dues from affiliates.
- Non-current assets: These are the long-term assets of a company and represent a longer-term investment as they cannot be converted to cash quickly. They are usually held by a company for more than one year. Examples include equipment, land, property, investments in other companies, long-term notes receivables, etc.
- Intangible assets: These include those types of assets that lack a physical presence and substance, therefore making them very hard to be evaluated. Examples of some common types of intangible assets include patents, copyrights, goodwill, franchises, trademarks, trade names, mineral rights, etc.
Liabilities
These are defined as the financial debt and obligations that a company undertakes during the course of its business operations. These can be subdivided into the following categories:
- Current liabilities: These are amounts that are due and need to be paid with one year. Examples include accounts payable, accrued expenses, current portion of longer-term debt, unearned revenue, etc.
- Non-current liabilities: These are usually the longer-term obligations of a company that are expected to be paid after one year. These include notes payable, loan payable, mortgage payable, long-term lease obligations, deferred revenue, etc.
- Owner’s debt: A lot of times, a situation might arise where long term credit facilities are required by the company but are no longer available as banks might not be lending at attractive rates. Therefore, the company can borrow money from the owners at agreed-upon interest rates.
Equity
This simple equation does a lot in demonstrating that shareholder’s equity is the residual value of assets minus liabilities. Alternatively, equity can also be directly calculated as the combination of contributed capital (commons stock + preferred stock – treasury stock) and retained earnings (net income + other comprehensive income – dividends paid).
Analysis of the Statement of Financial Position
The balance sheet can be used by the investor, creditors or any other stakeholders in any of the following ways:
- It reveals the financial position of a business at a specific point in time. When previous periods are grouped and compared together, various trends and insights can be generated that could be used for forecasting purposes.
- A balance sheet can reveal how leveraged a company really is. If the total amount of debt exceeds the equity, we can say that the company is now operating at dangerously high levels of borrowing. Financial leverage can exponentially amplify the losses for a company in hard and difficult economic times.
- Investors might want to know how much cash the company has and whether it is sufficient for the company to pay them dividends.
- Various financial ratio analysis can be undertaken to identify problems a company might be facing. For example, an investor might calculate the inventory turnover, which might indicate that there is a lot of excess inventory. Another useful ratio is the fixed asset turnover, which determines how efficiently is a company utilizing its fixed assets.
Statement of Financial Position Example
Continuing with Bob and his donut shop example, we can see how his statement of financial position would look at the end of his financial period, i.e. month-end.
The statement of financial position in the two different formats are shown below:
Account Format
Report Format
FAQs
1. What is the statement of financial position?
The statement of financial position (also called the balance sheet) is an accounting report that contains information about a company's assets, liabilities and equity.
2. How is a statement of financial position used?
A statement of financial position can be used for several purposes, including: Calculating financial ratios. For example, current and quick ratios can help you determine whether a company is able to meet its short-term obligations on time.
3. How is statement of financial position formatted?
A statement of financial position is often formatted as a table with three columns. The first column lists the asset accounts, the second column lists liability or equity accounts and the final column contains totals for each section that are used to calculate net worth.
4. What is the main purpose of the statement of financial position?
The main purpose of a statement of financial position is to provide information on the assets, liabilities and net worth of an entity.
5. What are the elements of statement of financial position?
The main elements of a statement of financial position are assets, liabilities and equity.
