Section A: Key terms and recall
Define the term 'assets' and give two examples. [2 marks]
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Assets are resources owned by a business that have economic value. Examples include cash, inventory, and equipment. [2 marks]
Define the term 'liabilities' and give two examples. [2 marks]
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Liabilities are obligations or debts that a business owes to others. Examples include loans and accounts payable. [2 marks]
What is the difference between current assets and non-current assets? [2 marks]
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Current assets are assets that can be converted into cash within one year, such as inventory and accounts receivable. Non-current assets are long-term assets like property, plant, and equipment. [2 marks]
What is the difference between current liabilities and non-current liabilities? [2 marks]
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Current liabilities are debts that are due to be paid within one year, such as accounts payable and short-term loans. Non-current liabilities are long-term debts, such as mortgages and long-term loans. [2 marks]
What is the purpose of a statement of financial position? [2 marks]
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The purpose of a statement of financial position is to provide a snapshot of a business's financial health at a specific point in time, showing what the business owns (assets) and what it owes (liabilities). [2 marks]
Section B: Applying your knowledge
A small retail business has the following assets: cash $5,000, inventory $10,000, and equipment $15,000. It also has liabilities: accounts payable $3,000 and a long-term loan $8,000. Calculate the total assets and total liabilities. [4 marks]
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Total assets = $5,000 (cash) + $10,000 (inventory) + $15,000 (equipment) = $30,000. Total liabilities = $3,000 (accounts payable) + $8,000 (long-term loan) = $11,000. [4 marks]
A manufacturing company has the following assets: cash $20,000, inventory $30,000, and machinery $50,000. It also has liabilities: accounts payable $5,000, short-term loan $10,000, and a long-term loan $20,000. Calculate the total current assets, total non-current assets, total current liabilities, and total non-current liabilities. [4 marks]
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Total current assets = $20,000 (cash) + $30,000 (inventory) = $50,000. Total non-current assets = $50,000 (machinery). Total current liabilities = $5,000 (accounts payable) + $10,000 (short-term loan) = $15,000. Total non-current liabilities = $20,000 (long-term loan). [4 marks]
A service business has the following assets: cash $10,000, accounts receivable $15,000, and office equipment $20,000. It also has liabilities: accounts payable $4,000 and a long-term loan $12,000. Calculate the total assets and total liabilities. [4 marks]
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Total assets = $10,000 (cash) + $15,000 (accounts receivable) + $20,000 (office equipment) = $45,000. Total liabilities = $4,000 (accounts payable) + $12,000 (long-term loan) = $16,000. [4 marks]
A retail business has the following assets: cash $8,000, inventory $12,000, and store equipment $25,000. It also has liabilities: accounts payable $3,000, short-term loan $7,000, and a long-term loan $15,000. Calculate the total current assets, total non-current assets, total current liabilities, and total non-current liabilities. [4 marks]
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Total current assets = $8,000 (cash) + $12,000 (inventory) = $20,000. Total non-current assets = $25,000 (store equipment). Total current liabilities = $3,000 (accounts payable) + $7,000 (short-term loan) = $10,000. Total non-current liabilities = $15,000 (long-term loan). [4 marks]
Section C: Explain and analyse
Explain how a statement of financial position can help a business make decisions about financing its activities. [4 marks]
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A statement of financial position provides information on the assets and liabilities of a business. This helps in understanding the financial health and liquidity of the business. By analysing the statement, a business can decide whether it needs to raise additional finance, whether it can afford to take on more debt, and how it can best use its assets to generate more revenue. It also helps in assessing the ability to meet short-term and long-term obligations. [4 marks]
Analyse how a statement of financial position can indicate the liquidity of a business. [4 marks]
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Liquidity refers to the ability of a business to meet its short-term obligations. A statement of financial position shows the current assets and current liabilities of a business. By comparing current assets to current liabilities, a business can assess its liquidity position. A higher ratio of current assets to current liabilities indicates better liquidity, meaning the business is more likely to be able to pay its short-term debts. [4 marks]
Explain how a statement of financial position can help a business make decisions about selling inventory to raise finance. [4 marks]
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A statement of financial position lists the inventory as a current asset. By analysing the value of inventory, a business can decide whether selling some of its inventory would provide the necessary finance. This decision would depend on the value of the inventory, the urgency of the need for finance, and the potential impact on the business's operations. Selling inventory can provide quick cash but may also affect the business's ability to meet customer demand. [4 marks]
Section D: Challenge
A manufacturing company is considering expanding its operations. It has the following assets: cash $50,000, inventory $75,000, and machinery $100,000. It also has liabilities: accounts payable $10,000, short-term loan $20,000, and a long-term loan $40,000. The company is thinking about taking on an additional long-term loan of $30,000 to finance the expansion. Using the information provided, analyse whether taking on the additional loan would be a good decision for the company. [6 marks]
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First, calculate the total assets and total liabilities before taking on the additional loan: Total assets = $50,000 (cash) + $75,000 (inventory) + $100,000 (machinery) = $225,000. Total liabilities = $10,000 (accounts payable) + $20,000 (short-term loan) + $40,000 (long-term loan) = $70,000. Net assets = Total assets - Total liabilities = $225,000 - $70,000 = $155,000. After taking on the additional long-term loan of $30,000, the total liabilities would be $100,000. The net assets would then be $125,000. The company's liquidity position should also be considered. Current assets are $125,000 (cash + inventory) and current liabilities are $30,000 (accounts payable + short-term loan). The current ratio is 4.17:1, which is healthy. Taking on the additional loan would increase the company's debt but also provide the necessary finance for expansion. The decision should also consider the potential return on investment from the expansion and the company's ability to repay the additional loan. [6 marks]