Statement Of Financial Position

Running head: STATEMENT OF FINANCIAL POSITION 1

STATEMENT OF FINANCIAL POSITION

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STATEMENT OF FINANCIAL POSITION 2

STATEMENT OF FINANCIAL POSITION

The balance sheet is one of the most important financial statements of any

organization. It outlines all the assets of the organization at that particular time and details on

how they are financed, by equity or by debt. The balance sheet also called the statement of

financial position as by looking at it one can quickly tell how much the business is worth and

what investments to venture. The balance sheet contains information on the fixed assets of

the company which are the long-term properties that the firm owns such as buildings, land,

and machines. The statement of financial position also gives information on current assets

which are short-term assets such as stock and cash (Pennsylvania Bar Institute, 2014). Also,

the statement of financial position outlines both the short-term liabilities, the debts the

organization is required to clear within one year, and long-term liabilities which also includes

the owner’s equity. Investors seek to find out the ratio of the current assets to current

liabilities which shows how liquid the organization’s capital is. They also try to find out the

cost and size of debt which determines the ability of the organization to manage its

obligations. Any investor would also like to discover whether the organization focuses on

tangible or the intangible assets from the balance sheet.

Assets in the balance sheet are often financed either by debt or the shareholder’s

equity. Debt is either in long term or short term and represents the rights of the outsiders to

the organization resources. Short-term debt is the debt that the company is required to pay

within one year such as accounts payables, bank overdraft, and accrued liabilities. Long-term

obligations are supposed to be paid for a period exceeding one year such as bank loans and

pension funds liability (Pennsylvania Bar Institute, 2014). Debt is significant to the business

as it helps the owners expand the company even though their capital is not enough.

Shareholder’s equity, on the other hand, represents the owner’s contribution to the business.

Ownership is what the owner(s) contributed to starting the business. In addition to the capital

STATEMENT OF FINANCIAL POSITION 3

contribution, shareholder’s equity includes reserves and retained profits. Shareholder’s equity

represents what the company is worth after all commitments have been fulfilled hence very

important.

Gross working capital measures the organization’s resources. It is the sum of all the

organization’s current assets without putting into consideration the value of the liabilities.

The net working capital is an improvement of the gross working capital as it considers the

current liabilities. It is arrived at by summing up the company’s current assets and subtracting

the total current liabilities (Marfu'ah & Marfu'ah, 2012). Net working capital, therefore,

gives a clearer picture of the organization’s financial position.

The debt ratio is the total accrued debts of a given company expressed as a percentage

of total assets at that particular financial reporting period. The ratio is the proportion of the

organization’s assets that are financed by debt and shows the measure of the organization’s

leverage. A high debt ratio is an indication of an organization that is deep in debt and is not

able to pay all its debts using its assets. Organization’s working capital ratio results from

current assets / current liabilities (Robinson, 2009). The working capital ratio shows whether

the company’s current assets are enough to cover its operating expenses and short-term

liabilities. The debt and working capital ratios of an organization, therefore, can be used as an

indication of the organization’s financial strength by its ability to cover its outstanding debts.

In the balance sheet equity is represented by the owner’s contribution to the business.

For public and private companies’ equity may be obtained through the sale of shares which

may be common or preferred stock. Retained earnings, treasury stock, and reserves also form

part of the owner’s equity. When reporting the common stock on the balance sheet, the par

value, authorized, issued and outstanding shares should be revealed.

The earnings before taxes for the income statement result from taking all the revenues

and subtracting all the expenses including depreciation. In case of a loan, deduct the interest.

STATEMENT OF FINANCIAL POSITION 4

Net income, on the other hand, is arrived at by subtracting corporate tax from the earnings

before taxes. Earnings per share are the net income divided by the number of outstanding

shares. Net income is the balance after subtracting the dividends paid to preference

shareholders from the total earnings after tax and interest (Subramanyam, 2014). Dividends

per share is a ratio of the total dividends paid to the number of ordinary shares outstanding.

The two ratios are essential to both the firm and the investors as they reveal how much the

owners of the company are earning thus necessary for investment decisions.

Debt and equity financing are both critical to any business organization as they help

keep the business moving by funding the assets. Although debt financing is a liability to the

organization, interest on the debt is tax deductible, and thus high leverage increases the value

of the firm. It is important to note that despite its benefit, a firm should not rely entirely on

debt as the creditors may affect the decision making of the owners. Thus there should be a

balance between debt and equity financing (Robinson, 2009). The essay assignment enables

one to understand the importance of financial statements and especially the balance sheet to

both the organization and potential investors.

STATEMENT OF FINANCIAL POSITION 5

References

Pennsylvania Bar Institute. (2014). Off to a good start (up): Representing the start-up, from

formation to financing.

Robinson, T. R. (2009). International financial statement analysis. Hoboken, NJ: John Wiley

& Sons.

Subramanyam, K. R. (2014). Financial statement analysis. New York: McGraw-Hill

Education.

Marfu'ah, & Marfu'ah. (2012). Analisis Tingkat Kesehatan Bank pada Bank Pembangunan

Daerah Kalimantan Timur.

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