Statement of Financial Position

1
Statement of Financial Position

• Commonly known as a Balance Sheet
• Most common public document
• Defines assets, liabilities and net (shareholder)
  funds
• Provides information at a particular point in
  time
• 5pm June 30
• Assets should equal liabilities plus net funds

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
2
Statement of Financial Position

• Assets
• Current Assets
• the most liquid of assets
• petty cash
• cash in bank
• (trade) debtors
• stocks (at cost of production)
• loans due for repayment within 12 mths
• dividends receivable

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
3
Statement of Financial Position

• Fixed Non-Current Assets
• fixed in financial sense
• value of plant (may itemise depreciation)
• buildings, land
• vehicles
• Other Non-Current Assets
• investments (usually at cost)
• incl. loans maturing in more than 12 months
• future tax benefits

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
4
Statement of Financial Position

• Intangible Assets
• need to be careful to ensure valued fairly
• goodwill
• establishment costs
• value as a shell company (especially if listed)
• patents
• licences
• trademarks

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
5
Statement of Financial Position

• Liabilities
• Current Liabilities
• creditors
• due for payment within 12 months (usually paid in
  six weeks)
• overdraft, short term borrowings
• incl. hire purchase charges due within 12 mths
• proposed dividend
• (income) tax

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
6
Statement of Financial Position

• Long Term Liabilities
• borrowings
• hire purchase
• (may divide between short and long term)
• future interest should be in both assets and
  liabilities

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
7
Statement of Financial Position

• Net Funds also known as Net Worth
• Assets - Liabilities
• shareholders contributions to shares
• company reserves
• retained earnings, capital gains, share premiums
• LESS dividends and company taxes

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
8
Statement of Financial Position

• Order of Presentation
• Many public companies show net funds first, then
  liabilities and lastly assets
• The reverse is common with private companies

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
9
Analysis of Statement of Financial Position

• Look for notes, especially with respect to
  contingent liabilities
• Current assets/current liabilities gives
  indication of liquidity
• suggested that ratio needs to be around 1.5 to 2
• too large is a waste of investment opportunity

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
10
Analysis of Statement of Financial Position

• Need to very carefully assess amount of stock
  used to increase current assets
• refine liquidity ratio by only using readily
  movable stock
• Another liquidity measure
• immediate current assets
• quick assets ratio -----------------------------
  ------- immediate current liabilities
• gt 1

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
11
Statement of Cash Flows

• Also known as Funds Movement Statement
• Essentially difference between successive
  Statements of Position
• Useful to determine policy in action regarding,
  inter alia
• retirement of long term debt
• where is growth coming from
• dividends
• management of debtors
• depreciation

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
12
Statement of Cash Flows

• Often reorganised to give Sources of Funds and
  Application of Funds
• Depending on how detailed the balance sheets are,
  extra information may be needed

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
13
Statement of Cash Flows

• Sources
• Operations (inflows less outflows)
• Reduction in non-current assets
• Increase in liabilities
• non-current debt
• current debt
• trade creditors
• Share issue

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
14
Statement of Cash Flows

• Application of funds
• Increase in assets
• current
• inventories and work-in-progress
• trade debtors
• cash at bank
• non-current
• fixed assets
• development costs
• advances and loans

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering
15
Statement of Cash Flows

• Application of funds (cont.)
• Reduction in liabilities
• current debt
• non-current debt
• Dividends paid
• Income/company tax paid
• Change in minority interests
• Increase in reserves

Dr Alan J. R. Smith Mechanical and Manufacturing
Engineering