IB Business Management SLTopic 3 — Final AccountsPaper 1 & 2Core skill~11 min read
Reading a Statement of Financial Position
The profit statement covers a whole year. This one is a photograph taken on a single day: everything the business owns, everything it owes, and who funded the difference. It is also called the balance sheet, because the two sides must balance.
📚 What you need to know
It shows the financial structure of a business at one point in time.
Non-current assets last more than a year: property, machinery, vehicles. Current assets turn into cash within a year: stock, debtors, cash.
Current liabilities are due within a year: overdraft, trade creditors, short-term loans. Non-current liabilities are due later: long-term loans, mortgages.
Net assets = total assets − total liabilities, and net assets must equal total equity.
Equity is share capital plus retained earnings. It is also called capital employed when you add non-current liabilities.
Depreciation reduces the value of a non-current asset as it wears out.
Intangible assets have value but cannot be touched: brand, patents, goodwill, software, domain names.
Why it always balances
Everything a business owns was paid for somehow — either with borrowed money or with the owners’ money. So the value of what it owns, minus what it owes, has to equal what the owners have put in and left in. That is the whole idea.
Capital employed here is 150 + 160 = 310: the long-term money the business is actually using. You will need that figure for ROCE.
Current or non-current? The 12-month test
Both assets and liabilities are split by time. The question is always the same: will this turn into cash, or have to be paid, within a year?
An overdraft sits in current liabilities even if the firm has used it for years, because the bank can demand it back at any time.
Depreciation
A van bought for $30,000 is not worth $30,000 after three years. Depreciation spreads that loss of value across the years the asset is used, so the balance sheet shows a realistic figure rather than the original price forever.
Intangible assets
Some of the most valuable things a business owns cannot be touched:
Brand value — the name, logo and the loyalty attached to them.
Intellectual property — patents, trademarks and copyrights protecting ideas and designs.
Goodwill — the extra paid above the value of the assets when one firm buys another, reflecting reputation and customer base.
Software, domain names and licences — systems and rights that competitors cannot simply copy.
They are hard to value, which makes them controversial. Two accountants can put very different numbers on the same brand.
Order matters in Paper 2. If asked to construct a balance sheet, use these headings in this sequence: non-current assets, current assets, total assets, current liabilities, non-current liabilities, total liabilities, net assets, equity. And leave out revenue and costs — those belong to the other statement.
Worked examples
WORKED EXAMPLE 1
Building the statement [6 marks]
A company reports (in $000): property 180, machinery 60, stock 40, debtors 25, cash 15, overdraft 20, trade creditors 30, long-term loan 120, share capital 50. Calculate total assets, total liabilities, net assets and the retained earnings figure.
Step 1: assets, sorted by timeNon-current: 180 + 60 = 240Current: 40 + 25 + 15 = 80Total assets = 240 + 80 = 320Step 2: liabilities, sorted by timeCurrent: 20 + 30 = 50Non-current: 120Total liabilities = 50 + 120 = 170Step 3: net assets320 − 170 = 150Step 4: equity must match, so work backwards150 − 50 share capital = 100 retained earningsNet assets $150,000 = equity $150,000the balancing trick works both ways — if equity is given and one asset is missing, subtract to find it
WORKED EXAMPLE 2
What the statement tells a supplier [6 marks]
Using the same figures, a supplier is deciding whether to offer 60 days’ trade credit. Comment on what the statement shows.
Step 1: the number a supplier cares about
Can they pay short-term bills? Compare current assets with current liabilities.
80 against 50, so working capital is 80 − 50 = $30,000 positive.Step 2: look closer at the quality of those assetsHalf of the current assets are stock (40 of 80). Stock has to be sold before it becomes cash.
Step 3: check the borrowing
A $120,000 long-term loan against $150,000 of equity is significant but not extreme.
Offer the credit, but keep the limit modesta supplier reads a balance sheet for safety, not for profit — that framing is what earns the evaluation marks
💡 Exam tip
Sort by time before anything else. Within a year is current; longer is non-current.
Use the balancing rule to find missing figures instead of guessing.
Remember capital employed = equity + non-current liabilities. You will need it for ROCE.
Comment on the mix, not just the totals: too much stock, too little cash, heavy borrowing.
Never put revenue, costs or profit for the year in a balance sheet.
Say which stakeholder you are answering as — a supplier, a bank and a shareholder read it differently.
⚠ Common mix-up
Debtors and creditors swapped. Debtors owe you (an asset). Creditors are owed by you (a liability).
Overdraft put in non-current liabilities. It is repayable on demand, so it is current.
Stock treated as cash. It is a current asset, but it has to be sold first.
Thinking equity is money in the bank. It is the owners’ stake, not a pile of cash.
Confusing the two statements. Profit or loss covers a period; financial position is a single day.
Ignoring intangibles. For a brand-led business they can be the largest asset of all.
Up next: Measuring Profitability — using both statements together to work out how well the business is actually performing.
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