W2- Statement of financial position

What does the SOFP show and what equation is it based on?

• shows the net assets of business at a point in time

• based on accounting equation

  • net assets of a business = equity (capital + retained earnings + other reserves)

What is the accounting equation?

equity (net assets) = assets - liabilities

What is the profitability equation?

profitability (I/S) = all income - all expenses

What is meant by retained earnings?

• profit/losses from each accounting period are added to retained earnings in the equity section in SOFP

• retained earnings/profits = profit - losses

What does a cash flow statement show

• movement in cash over period of time

what is the formula for liquidity

SOCF (cash flow statement) = cash in - cash out

What does the SOCE show?

movement of equity show for companies only

What are the main features for formatting a SOFP?

• Title- ‘name of business: SOFP as at [date]’

• write assets (NCA & CA) and totals for each & total assets overall

  • current assets, order is from least to most liquid

• then write equity and liabilities (total equity, NCL, CL) & totals for both and total equity & liabilites

  • in equity section, you have either proprietor’s capital or share capital & retained earnings (all profits made until that point in time)

What is the equation for total assets?

total equity + total liabilities

What is net assets equal to?

owner’s equity or investment (assets - liabilities)

What is the equation for owner’s equity?

investment from owner + any profits made to date - money owner has drawn out

What are dividends?

monies drawn out and paid to shareholders

What is proprietor’s capital?

in a sole trader or partnership- the invesment is the capital put in by owners

Write 2 equations for assets?

• Assets = Equity (retained earnings) + liabilities

• Assets = capital + income - expenses + liabilities