Question

The statement of financial position is one of the major financial statements published by companies. It reports the company's assets, liabilities and equity at a specific point in time.

(a) Describe the terms assets, liabilities and equity. Are these terms related? If so, how?

(b) For each of the terms (i.e. assets, liabilities and equity) provide one (1) example. Justify your choice.

Answer 1

The statement of financial position is also referred as the company's balance sheet or as the statement of financial condition. This statement represents the current financial position of the company.

a) Assets : Assets are resources which are present as a result of the company's past events and which are meant to provide future benefits. Assets are again classified as current assets and long term assets. Current assets are the resources which are meant to be with the company for a period of one year or less. On the other hand, long term or non-current assets are meant to provide economic benefits for a longer period.

Liabilities: Liabilities are the obligations which the company owes. These again could be short term or current liabilities and ,long term liabilities. Current liabilities are obligation which needs to be repaid in a period of one year or less whereas long term liabilities have longer duration.

Equity : The difference between assets and liabilities is the owner's equity. This is the amount which is attributable to the shareholder's of the company.

Yes, these three terms are related through an accounting equation

Assets = Liabilities + Equity

b) Asset :Property,Plant & equipment (PPE).. This is an asset and as described it is purchased by the company and is an investment to reap future economic benefit. It is an example of long term asset which is suppose to earn revenue for the company

Liabilities: Long term note is an example of an obligation which needs to be repaid in a period greater than one year. A company might borrow to fund its project or investment.

Equity: Contribution by the company's owner's also known as shareholder's equity is an example of the company's equity on the balance sheet. Another example could be the retained earnings which are the extra earnings after repaying dividend from net income.