IB Business Management HLTopic 3 — Final AccountsPaper 1, 2 & 3Core skill~11 min read
Reading a Statement of Financial Position
If the statement of profit or loss is a film of the whole year, this one is a photograph taken on a single day. It lists what the business owns, what it owes, and where the money to buy everything came from. And it has to balance — that is not a coincidence, it is the whole point.
📚 What you need to know
The statement of financial position shows the financial structure of a business at one point in time. It is also called the balance sheet.
Non-current assets are owned for more than a year. Current assets turn into cash within a year.
Current liabilities are due within a year. Non-current liabilities are due after more than a year.
Total assets = non-current assets + current assets.
Net assets = total assets − total liabilities.
Net assets always equal total equity (share capital plus retained earnings). That is why it is called a balance sheet.
Working capital = current assets − current liabilities — the cash cushion for paying short-term bills.
Why it always balances
Everything a business owns had to be paid for somehow. The money either came from people the firm owes (liabilities) or from the owners (equity). So the value of what it owns must equal the value of where that money came from. There is no way around it.
The two bars are the same height because they describe the same money twice: once as things owned, once as where the funding came from.
The four groups of items
ASSETS — WHAT IT OWNS
Non-current: property, plant and equipment, vehicles, machinery
Shown after taking off accumulated depreciation
Current: cash, debtors (money owed to the firm), stock
Current assets turn into cash within twelve months
LIABILITIES & EQUITY — WHAT FUNDS IT
Current liabilities: overdraft, trade creditors, short-term loans
Equity is the owners’ stake, not something owed to outsiders
Debtors and creditors are easy to swap by mistake. Debtors owe money to you, so they are an asset. Creditors are owed money by you, so they are a liability. Say it out loud once and it sticks.
Working through the figures
Riverside Cycles Ltd owns property, plant and equipment valued at $68,000, which has been depreciated by $12,400. Its current assets are cash $6,200, debtors $4,900 and stock $9,300. It owes a bank overdraft of $1,800, trade creditors of $5,600 and short-term loans of $2,600, plus long-term borrowing of $26,000. Its share capital is $15,000.
WORKED EXAMPLE
Total assets, total liabilities and net assets
Using the figures above, calculate the value of non-current assets, total assets, total liabilities and net assets. Then state the retained earnings needed for the statement to balance.
Step 1: Non-current assets after depreciation$68,000 − $12,400 = $55,600Step 2: Current assets$6,200 + $4,900 + $9,300 = $20,400Step 3: Total assets$55,600 + $20,400 = $76,000Step 4: Current liabilities, then total liabilities$1,800 + $5,600 + $2,600 = $10,000$10,000 + $26,000 = $36,000Step 5: Net assets$76,000 − $36,000 = $40,000Step 6: Equity must match net assets$40,000 − $15,000 share capital = $25,000Net assets $40,000 · Retained earnings $25,000if your equity does not match net assets, something has been classified in the wrong place
WORKED EXAMPLE
Working capital
Calculate Riverside Cycles’ working capital and explain what the answer tells you.
Step 1: Use the formulaWorking capital = current assets − current liabilitiesStep 2: Substitute$20,400 − $10,000 = $10,400Working capital = $10,400short-term assets are about twice short-term debts, so the firm should be able to pay its bills comfortably
Working capital is the number a supplier looks at before deciding whether to give you trade credit. A firm with almost no working capital may still get credit, but on tighter terms — that is a great evaluation point in a Paper 2 answer.
Equity (share capital + retained earnings), which must equal net assets
Intangible assets
Some valuable things a business owns cannot be touched. These are intangible assets, and they still have to be accounted for because they add real value.
Intellectual property: patents, trademarks and copyrights protecting inventions, artistic works and brand names.
Brand value: the reputation and recognition attached to a name, logo and slogan.
Goodwill: the extra amount paid above the value of the assets when one business buys another, reflecting its reputation and customer base.
Customer relationships, contracts and licences: agreements that will bring in future cash.
Software, domain names and online assets that give the firm an edge.
Careful with valuations. Land and property can rise in value, and that increase can be recorded. But businesses are expected to be cautious, and deliberately overstating asset values to obtain finance can count as fraud.
Who uses it, and why
Stakeholder
What they use it for
Shareholders
Judging the rough value of the business and whether their investment is growing
Managers and directors
Checking working capital and deciding whether to raise more funds
Suppliers and creditors
Judging solvency before offering trade credit
Employees
Seeing whether the business is financially stable and jobs are safe
Lenders
Checking what assets could be used as collateral, and how much debt already exists
💡 Exam tip
In construction questions, marks go for the headings in the right order as well as the numbers. Write them out before filling anything in.
Check your two sides match before moving on. Net assets must equal total equity.
Always include the words “as at” and the date. This statement is a snapshot, not a period.
Leave out revenues and costs. Those belong in the statement of profit or loss.
If asked to comment, use working capital and the split between debt and equity. Those two ideas carry most of the analysis marks.
⚠ Common mix-up
Putting stock in non-current assets. Stock is bought to be sold quickly, so it is current.
Treating a bank overdraft as long-term. It is repayable on demand, so it is a current liability.
Swapping debtors and creditors. Debtors are an asset, creditors are a liability.
Forgetting to take off accumulated depreciation before adding non-current assets to the total.
Calling equity a liability. It is the owners’ stake, which is why it sits on its own.
Saying the statement covers a year. It covers one single day.
Up next: Working Out Depreciation — the HL topic that explains why the non-current assets on this statement get smaller every year.
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