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Cambridge IGCSE0450

Statement of financial position

Business Studies 0450 Chapter Notes

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Statement of financial position - The main elements of a statement of financial positionStatement of financial position - Interpret a simple statement of financial position
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In this chapter

  1. 1Assets and liabilities
  2. 2Non-current assets
  3. 3Current assets
  4. 4Current liabilities
  5. 5Non-current liabilities
  6. 6Sorting items into groups
  7. 7The statement and what the business owns
  8. 8How the business is financing its activities
  9. 9Making deductions from the figures
  10. 10Sale of inventories to raise finance

1. Assets and liabilities

An asset is something the business owns. A liability is a debt the business owes to someone else.

A statement of financial position lists both. It splits each into two groups by time: items kept or repaid within a year, and items kept or repaid over longer. That gives four groups: current assets, non-current assets, current liabilities and non-current liabilities.

Always say which side an item is on. Something the business owns is an asset. Money the business owes is a liability.

Examiner insight

“Other candidates confused assets with liabilities by saying the assets were owed to others.”

Worked example 14 marks

Pita owns Reef Surf Shop. The shop owns a delivery van. It also owes $2 000 to the supplier of its surfboards. Explain the difference between an asset and a liability.

  1. 1

    Knowledge: an asset is something the business owns. [1]

  2. 2

    Application: the delivery van is an asset of Reef Surf Shop. [1]

  3. 3

    Knowledge: a liability is a debt the business owes to someone else. [1]

  4. 4

    Application: the $2 000 owed to the surfboard supplier is a liability. [1]

2. Non-current assets

Non-current assets are items the business owns and keeps for more than one year. Examples are premises, machinery, equipment and vehicles.

A business buys them with long-term finance. An overdraft is short-term finance, so it does not suit buying one.

A definition needs both parts: owned, and lasting more than one year. An example alone is not a definition, and ‘long-term’ alone does not say how long.

Examiner insight

“Others made vague references to long-term but did not specify what the period of time this covered.” “A number of candidates provided examples rather than a definition.”

Worked example 14 marks

Anya runs Loom & Co, a workshop that weaves rugs. She owns the workshop and two large looms. Outline two non-current assets of Loom & Co.

  1. 1

    Knowledge: premises are a non-current asset, as the business owns them and keeps them for more than one year. [1]

  2. 2

    Application: Anya's workshop. [1]

  3. 3

    Knowledge: machinery is a non-current asset, as the business owns it and uses it for more than one year. [1]

  4. 4

    Application: the two looms that weave the rugs. [1]

3. Current assets

Current assets are items the business owns and holds for less than one year. Examples are inventory and trade receivables.

Inventory is the stock the business holds to sell or to use. Trade receivables are the amounts customers still owe the business for goods already sold. They are not money in the bank until the customers pay.

A large inventory is not a source of finance. It is an asset the business owns.

Examiner insight

“Most candidates either understood that a current asset was owned or that it was held in the business for less than one year. The best answers mentioned both elements.” “One common mistake was to refer to ‘a short period of time’ without specifying what this meant.”

Worked example 14 marks

Rhea runs Bean Barn, a coffee shop. It holds sacks of coffee beans. Some office customers have an account and pay at the end of the month. Identify and explain two current assets of Bean Barn.

  1. 1

    Knowledge: inventory is a current asset, as the business owns it and holds it for less than one year. [1]

  2. 2

    Application: the sacks of coffee beans waiting to be used. [1]

  3. 3

    Knowledge: trade receivables are a current asset, as they are owed to the business and paid within the year. [1]

  4. 4

    Application: the money the office customers owe at the end of the month. [1]

4. Current liabilities

Current liabilities are debts the business owes that must be repaid within 12 months. Examples are trade payables and a bank overdraft.

Trade payables are the amounts the business owes its suppliers for goods it has already received. An overdraft is short-term borrowing from the bank.

Do not mix up the two trade terms. Receivables are owed to the business. Payables are owed by the business. Do not write ‘short-term’ alone: give the 12 months.

Examiner insight

“Some confused the concepts of trade payables with trade receivables.” “Some candidates repeated similar points for both answers which could only be awarded once.”

Worked example 14 marks

Kofi owns Quick Print, a print shop. The shop owes its paper supplier for last week's delivery. It is also using a bank overdraft to pay wages. Outline two current liabilities of Quick Print.

  1. 1

    Knowledge: trade payables, the money a business owes to its suppliers. [1]

  2. 2

    Application: Quick Print owes its paper supplier for last week's delivery. [1]

  3. 3

    Knowledge: a bank overdraft, which is short-term borrowing from the bank. [1]

  4. 4

    Application: Quick Print is using its overdraft to pay wages. [1]

5. Non-current liabilities

Non-current liabilities are debts the business does not have to repay within 12 months. A bank loan repaid over several years is the usual example.

The business owes the money, so it is a liability. Repayment is spread over more than 12 months. That is why it sits apart from the current liabilities.

The word ‘long-term’ is not enough. Say it is a debt, and say when it is repaid.

Examiner insight

“Some provided vague responses stating it was long-term but failing to explain that it related to debts.” “Others simply repeated that it was a ‘liability’ or confused the term with non-current assets.”

Worked example 14 marks

Dara owns Green Gate Bakery. To buy a second oven, the bakery took a $20 000 bank loan to be repaid over five years. Explain why the loan is a non-current liability.

  1. 1

    Knowledge: a non-current liability is a debt that does not have to be repaid within 12 months. [1]

  2. 2

    Application: the bakery owes the bank $20 000. [1]

  3. 3

    Application: it repays the loan over five years, not in one year. [1]

  4. 4

    Analysis: so the debt does not have to be cleared within 12 months, which is why it is not a current liability. [1]

6. Sorting items into groups

To place an item, ask two questions. First: does the business own it, or owe it? Owns means asset. Owes means liability.

Second: how long? Under a year, or repaid within 12 months, means current. Longer means non-current.

Keep the groups apart when you add up. A total for current liabilities leaves out every non-current liability.

Examiner insight

“A common mistake was to include non-current liabilities in the total.”

Worked example 16 marks

Tiles & More sells floor tiles. Classify each item as a current asset, a non-current asset, a current liability or a non-current liability.

ItemDetail
WarehouseOwned by the business and used for years
Tiles waiting to be soldHeld for sale this year
Builders who have not yet paidOwed to the business for tiles sold
Tile supplierOwed money for the last delivery
Bank overdraftUsed to pay this month's wages
Bank loanTo be repaid over ten years
  1. 1

    Application: the warehouse is a non-current asset. [1]

  2. 2

    Application: the tiles waiting to be sold are inventory, a current asset. [1]

  3. 3

    Application: the builders who have not paid are trade receivables, a current asset. [1]

  4. 4

    Application: the money owed to the tile supplier is trade payables, a current liability. [1]

  5. 5

    Application: the bank overdraft is a current liability. [1]

  6. 6

    Application: the ten-year bank loan is a non-current liability. [1]

Recap

  • Asset: something the business owns. Liability: a debt the business owes.
  • Non-current asset: owned and kept for more than one year, such as premises, machinery, equipment and vehicles.
  • Current asset: owned and held for less than one year, such as inventory and trade receivables.
  • Current liability: a debt repaid within 12 months, such as trade payables and a bank overdraft.
  • Non-current liability: a debt not repaid within 12 months, such as a long-term bank loan.
  • Receivables are owed to the business. Payables are owed by the business.

7. The statement and what the business owns

A statement of financial position shows the assets and liabilities of a business at a certain point in time. It carries one date, such as 31 December 2025. It is the new name for a balance sheet.

It is not an income statement and it is not a cash-flow forecast.

The assets are what the business owns. Non-current assets are kept for more than one year, such as premises, machinery and vehicles. Current assets are held for less than one year, such as inventories, trade receivables and cash.

To interpret the assets, say what the figures show. Which group is larger? Which single asset is the largest? How much is held as cash?

Examiner insight

“Some responses confused the term with an income statement or cash-flow forecast.” “A small number of candidates did not seem familiar with the new terminology for a balance sheet.”

Worked example 14 marks

Harbour Bikes sells and repairs bicycles. The table gives the assets from its statement of financial position at 31 December 2025.

Outline two things the statement tells the owner about the assets Harbour Bikes owns.

Assets($000)
Non-current assets
Workshop120
Equipment30
Current assets
Inventories40
Trade receivables10
Cash5
  1. 1

    Knowledge: most of what it owns is non-current assets. [1]

  2. 2

    Application: the workshop and equipment are 120 + 30 = 150 of its total assets of 205, so $150 000. [1]

  3. 3

    Knowledge: it holds very little of its current assets as cash. [1]

  4. 4

    Application: current assets are 40 + 10 + 5 = 55, and 40 of that is bicycles in inventories while only 5 is cash. [1]

8. How the business is financing its activities

The statement also shows how the business is financing its activities. Part of the finance belongs to the owners: the capital they put in and the retained profit kept in the business. The rest is liabilities, which are debts the business owes.

Current liabilities are debts that must be repaid within 12 months, such as trade payables and an overdraft. Non-current liabilities are repaid over more than 12 months, such as a long-term bank loan.

Retained profit does not require repayment or interest to be paid. Borrowed money has to be repaid, and interest is paid on it. So compare the two: how much of the finance is the owners' own, and how much is owed?

Examiner insight

“A common mistake was to forget to mention that the debts had to be paid within 12 months.”

Worked example 16 marks

The table gives the rest of Harbour Bikes' statement of financial position at 31 December 2025.

Explain two ways Harbour Bikes is financing its activities.

Financed by($000)
Owner's capital100
Retained profit35
Non-current liabilities
Bank loan50
Current liabilities
Trade payables12
Overdraft8
  1. 1

    Knowledge: retained profit, which is profit kept in the business. [1]

  2. 2

    Application: Harbour Bikes has kept 35 of its past profit, which is $35 000. [1]

  3. 3

    Analysis: this does not have to be repaid and no interest is paid on it, so it adds nothing to the shop's costs. [1]

  4. 4

    Knowledge: a bank loan, which is a non-current liability. [1]

  5. 5

    Application: the loan is 50 of the total finance of 205, which is $50 000. [1]

  6. 6

    Analysis: interest must be paid on it, so costs are higher, and the repayments will take cash out of the shop for more than 12 months. [1]

9. Making deductions from the figures

A deduction is a comment on what the figures show about the business. Copying the figures gains no credit. Compare the years, then say what the change means for this business.

Read the heading first. Figures headed $000 are in thousands of dollars, so 8 means 8 000 dollars. Check whether a year is a forecast. A forecast year has not happened yet, so it is not historical data.

Changes in the non-current assets and in the bank loan are worth a comment. If both rise together, the business has probably borrowed to buy the new assets. Match the rise in assets against the change in each source of finance.

Examiner insight

“Simple copying of the figures without any comparison between the years or comments on what the figures showed did not gain any credit.” “Some candidates did not identify 2026 as a forecast and commented on both years as historical data. Others failed to recognise that each figure in Appendix 3 represented thousands of dollars.”

Worked example 16 marks

Brew & Bean is a coffee shop. The table is an extract from its statements of financial position at 31 December in each year.

Explain two deductions the owner's bank could make from the changes between the two years.

($000)20242025
Non-current assets80110
Cash2010
Bank loan4060
  1. 1

    Knowledge: the shop has bought more non-current assets. [1]

  2. 2

    Application: they rose by 30, from 80 to 110, so $30 000 more of items such as coffee machines. [1]

  3. 3

    Analysis: with more equipment Brew & Bean can serve more customers, so its revenue could rise. [1]

  4. 4

    Knowledge: the new assets were financed mainly by borrowing. [1]

  5. 5

    Application: the bank loan rose by 20 and cash fell by 10, and 20 + 10 = 30, the rise in non-current assets. [1]

  6. 6

    Analysis: the shop now owes 60 and holds half the cash it had, so interest and repayments will be harder to meet. [1]

10. Sale of inventories to raise finance

Inventories are a current asset. The sale of inventories turns them into cash, so it is a way to raise finance. Nothing is borrowed, so there is nothing to repay and no interest to pay.

Inventories on the statement are not finance yet. They raise finance only when they are sold. A large inventory figure with a small cash figure means the money is still sitting in unsold goods.

To sell quickly, a business may have to cut its prices. Then it raises less than the figure on the statement. It also has fewer goods left to sell to its usual customers.

Examiner insight

“A number of candidates incorrectly assumed that a large inventory would act as a good source of finance.”

Worked example 16 marks

Drift Furniture sells sofas. Its statement of financial position ($000) has inventories of 60, cash of 4 and trade payables of 15. The supplier must be paid this month, so the owner decides to sell some of the sofas at reduced prices.

Explain one advantage and one disadvantage to Drift Furniture of selling inventories to raise finance.

  1. 1

    Knowledge: advantage: it raises finance without borrowing. [1]

  2. 2

    Application: Drift has only 4 of cash but 60 of unsold sofas, and it owes its supplier 15. [1]

  3. 3

    Analysis: the cash from the sofas pays the supplier, and there is no loan to repay and no interest to add to costs. [1]

  4. 4

    Knowledge: disadvantage: the inventories may raise less than their value on the statement. [1]

  5. 5

    Application: Drift is reducing the prices of its sofas to sell them this month. [1]

  6. 6

    Analysis: each sofa brings in less cash, so more of them must be sold to raise 15, and fewer are left to sell at full price. [1]

Recap

  • Statement of financial position: the assets and liabilities of a business at a certain point in time.
  • Assets are what the business owns: non-current assets and current assets.
  • Finance comes from the owners (capital and retained profit) or from liabilities, which are repaid.
  • Current liabilities are repaid within 12 months. Non-current liabilities take longer.
  • Compare the years, read the $000 heading and check whether a year is a forecast.
  • Inventories raise finance only when they are sold, and reduced prices raise less.

End-of-chapter exercise

Test yourself on the whole chapter. Work through these before moving on.

  1. Define the term 'current asset'.2 marks
  2. Sara owns Oak Lane Bakery. State two non-current assets the bakery could own.2 marks
  3. Define the term 'current liability'.2 marks
  4. Kemal owns a phone shop. Some customers buy phones now and pay him next month. State whether the money they owe is trade payables or trade receivables. Give a reason for your answer.2 marks
  5. Lina owns Spin City, a laundrette. She owns ten washing machines. She also holds boxes of washing powder to sell to customers. Explain which is a current asset and which is a non-current asset.4 marks
  6. Jo owns Bright Print. Classify each item. | Item | Detail | | --- | --- | | Printing machine | Owned and used for ten years | | Customers who have not yet paid | Owed to the business | | Paper supplier | Owed money for last week's paper | | Bank loan | To be repaid over six years |4 marks
  7. Ife owns Candle Co. It has a ten-year bank loan of $30 000. It also has a bank overdraft that it must clear within three months. Explain why one is a current liability and the other is a non-current liability.4 marks
  8. Jas owns Metro Cycles, which sells bicycles. Customers who buy on credit owe him money and pay within 30 days. He owes the company that makes the bicycles and must pay it within 60 days. Explain why the customers who owe him are an asset but the money he owes the company is a liability.6 marks
  9. Nadia owns Peak Hire, which rents out tents and camping stoves to walking clubs. A trainee has listed the items below for its statement of financial position, but has not yet sorted them into the four groups. The trainee says the current liabilities total 24 000. The trainee also says the current assets total1 500. Explain the mistake in each total and calculate the correct totals. | Item | Amount ($) | | --- | --- | | Tents and stoves for hire, kept for five years | 30 000 | | Delivery van, kept for six years | 9 000 | | Gas canisters to sell to customers | 1 500 | | Walking clubs that have not yet paid for hire | 3 000 | | Gas supplier, to be paid within 30 days | 2 000 | | Bank overdraft | 4 000 | | Bank loan, to be repaid over six years | 18 000 |8 marks
  10. Mira owns Stone & Slate, which sells floor tiles to builders. The table lists four items from its records. Mira says: ‘Our big stock of tiles is a good source of finance, and the bank loan is our only liability.’ Do you agree with Mira? Justify your answer. | Item | Amount ($) | | --- | --- | | Tiles in the warehouse | 60 000 | | Builders who have not yet paid, due within 60 days | 25 000 | | Tile supplier, to be paid within 30 days | 30 000 | | Bank loan, to be repaid over eight years | 40 000 |12 marks
  11. Leo's Laundry has a statement of financial position. Define 'statement of financial position'.2 marks
  12. Pip's Bakery has these items on its statement of financial position: ovens, flour, an overdraft, cash in the till and money owed to its flour supplier. Identify the two current liabilities.2 marks
  13. Zed's Garage has a statement of financial position at 30 June 2026 with figures in $000. It has the line 'Bank loan 30'. State the size of the loan in dollars. State whether the loan is an asset or a liability.2 marks
  14. Nina's Nursery grows plants. Its statement of financial position ($000) has these assets. Non-current assets: greenhouse 40, van 12. Current assets: plants for sale 15, cash 3. Outline two things the statement tells Nina about the assets the nursery owns.4 marks
  15. Reno Print prints leaflets. Its statement of financial position ($000) has owner's capital 60, a bank loan 30 and an overdraft 10. Explain one risk to Reno Print of the way it is financed.4 marks
  16. Delta Tools sells tools to builders. The table is an extract from its statements of financial position ($000) at 31 March in each year. Explain what the changes suggest about Delta Tools. | | 2025 | 2026 | | --- | --- | --- | | Inventories | 20 | 40 | | Cash | 25 | 10 |4 marks
  17. Olu's Outfitters sells coats. Its statement of financial position ($000) has inventories of 24, cash of 1 and an overdraft of 10. Olu says: 'We have 24 of coats, so finance is not a problem.' Do you agree with Olu? Justify your answer.6 marks
  18. Kula Kites makes kites. The table is an extract from its statements of financial position ($000). The 2027 column is a forecast. Explain two deductions a new investor could make from the table. | | 2026 | 2027 (forecast) | | --- | --- | --- | | Non-current assets | 50 | 90 | | Cash | 12 | 7 | | Bank loan | 20 | 55 |6 marks
  19. Saltwind Ferries carries passengers to three islands. It plans to buy a second ferry in 2026. The owner tells a new investor: 'The second ferry will be paid for mostly out of our own profits.' Do the statements of financial position support the owner? Justify your answer. | ($000) | 2025 | 2026 (forecast) | | --- | --- | --- | | Non-current assets | 400 | 640 | | Inventories | 10 | 10 | | Cash | 60 | 15 | | Owner's capital | 250 | 250 | | Retained profit | 70 | 85 | | Bank loan | 120 | 300 | | Trade payables | 30 | 30 |8 marks
  20. Kestrel Marine sells boat engines and spare parts. The table is an extract from its statement of financial position at 30 September 2026. All of its trade payables must be paid this month. Kestrel can sell all of its engines now to a trade buyer at 40% below their value on the statement. Or it can take a new bank loan of 50 for one year at 10% interest. Which should Kestrel choose? Justify your answer. | Kestrel Marine | ($000) | | --- | --- | | Inventories: engines | 90 | | Inventories: spare parts | 30 | | Cash | 5 | | Trade payables | 48 | | Bank loan | 100 |12 marks

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