One of the basics of financial statements is the'Statement of Financial Position'Let's find out what it is, why it is important, and how to read it.

What is the Statement of Financial Position?

The Statement of Financial Position is a statement that shows a company's financial position at a certain point in time. In English, it is called the Balance Sheet, and is also called B/S for short.

It consists of three elements: assets, liabilities, and equity. Assets represent the tangible and intangible property owned by the company, liabilities represent the debts that the company must repay, and equity represents the remainder after subtracting liabilities from assets, which means the company's net assets. In other words, the Statement of Financial Position is an important document that allows you to see a company's financial status at a glance.

The Statement of Financial Position shows the total amount of each item, and it is a principle to arrange assets and liabilities in order of liquidity. Through this, you can evaluate a company's short-term repayment ability and its ability to secure funds.

Understanding the Components of the Statement of Financial Position

As explained earlier, the Statement of Financial Position is made up of three main components: assets, liabilities, and equity. Each element plays an important role in understanding a company's financial situation.

• Assets: Represents the tangible and intangible property owned by the company, including cash, inventory, equipment, and real estate. Assets are resources that are expected to contribute to the company's future revenue generation.
• Liabilities: Represents the company's obligation to repay creditors. This includes bank loans, accrued expenses, and accounts payable. Liabilities represent the financial burden of a company and include the maturity date and interest rate.
• Equity: The remaining portion after deducting liabilities from assets, representing the company's net assets. In the case of a corporation, it represents the shareholders' equity and is also called shareholders' equity. Equity is an important indicator for evaluating the company's financial stability and long-term growth potential.

These components are closely related, and through the Statement of Financial Position, a company's financial status can be comprehensively understood.

Assets: Definition and Types

Assets refer to the valuable resources owned by a company, tangible or intangible, and are generally classified into the following types.

• Current Assets: Assets that can be converted to cash within one year, including cash and cash equivalents, short-term investments, accounts receivable, and inventory. Current assets play an important role in evaluating a company's short-term funding ability and the performance of its business operations.
• Non-current Assets: Assets that can be converted to cash after one year, including investment assets, tangible assets, intangible assets, and other non-current assets. Non-current assets are resources that contribute to the company's long-term revenue generation and growth, and play an important role in evaluating the company's financial stability and long-term outlook.

For example, tangible assets such as buildings and machinery owned by a company are used in the company's production activities and contribute to generating revenue, and investment assets such as financial products and stocks are assets invested in anticipation of future profits.

Liabilities:

Liabilities refer to the debts that a company must repay. Liabilities are one of the ways for a company to secure funds, and a company incurs burdens such as interest expenses while securing the funds it needs.

It affects the company's financial status and business performance, so it needs to be actively managed. To maintain an appropriate level of debt, it is necessary to plan the amount of debt and the repayment schedule, and to secure sufficient funds for debt repayment.

Efforts are needed to manage credit ratings and negotiate loan terms to reduce burdens such as interest expenses. Excessive debt can worsen the company's financial status and lead to risks such as bankruptcy, so be careful.

Equity

Equity refers to a company's net assets and is calculated by subtracting liabilities from assets. It represents the stake held by the company's owners (shareholders) and is one of the key factors determining the company's financial stability and profitability.

It is largely composed of capital, capital surplus, and retained earnings. Capital is the amount initially invested by the company, capital surplus is the amount of funds raised through stock issuance or capital increase that is not classified as capital, and retained earnings are the amount of profits earned by the company through business activities that are retained internally instead of being distributed externally through dividends.

Based on this, it is possible to analyze and evaluate the company's financial status and business performance, and it can also be used to predict future cash flows and make investment decisions.

How to Create and Principles of the Statement of Financial Position

The Statement of Financial Position is a statement that shows a company's financial position at a certain point in time, and assets are listed on the debit side and liabilities and equity are listed on the credit side. The following principles apply to the creation method.

• Principle of Separation: Assets, liabilities, and equity are displayed separately.
• Principle of Total Amount: Assets, liabilities, and equity are listed in their total amounts, and assets and liabilities are not offset.
• Principle of 1 Year Standard: Assets and liabilities are divided into current assets and non-current assets, current liabilities and non-current liabilities based on the standard of one year.
• Principle of Liquidity Arrangement: Assets are arranged in order of highest liquidity.
• Principle of Surplus Separation: Equity is displayed separately as capital, capital surplus, and retained earnings.

Through this, a company's financial status can be clearly understood, and the reliability and usefulness of accounting information can be improved.

Basis of Statement of Financial Position Analysis: Evaluating Financial Health Through Ratio Analysis

Ratio analysis is one of the most common methods of analyzing the Statement of Financial Position. Through this, you can evaluate the company's financial health and stability. The following are some of the key ratios.

• Current Ratio: A ratio of current assets to current liabilities that measures a company's ability to repay short-term debts. Generally, it is considered good if it is 100% or higher.
• Debt Ratio: A ratio of total liabilities to shareholders' equity that measures a company's long-term debt repayment capacity. The appropriate debt ratio varies depending on the company's industry and size, but usually 100% or less is considered an appropriate level.
• Times Interest Earned Ratio: The value obtained by dividing operating income by interest expense, which is an indicator of whether a company can sufficiently cover interest expense. A value of 1 or higher means that the company can generate a profit even after paying interest expense, and a value of less than 1 means that it is difficult to pay interest expense.
• Quick Ratio: A ratio of quick assets to current liabilities, which measures a company's ability to repay short-term debts using a stricter standard than the current ratio.

By analyzing these ratios, you can more objectively evaluate a company's financial status.

Examples of Using the Statement of Financial Position

The Statement of Financial Position provides useful information for both investors and managers. Let's take a look at each example of use.

First, investors can use the Statement of Financial Position to understand a company's financial status and cash flow. Based on this, they receive help in evaluating the investment value of the company and determining whether to invest.

For example, you can evaluate the financial health of a company by checking the company's asset and liability size on the Statement of Financial Position and analyzing their ratios. In addition, you can also consider profitability indicators such as revenue and operating income to predict the company's future growth potential. In addition, you can use the Statement of Cash Flows to understand a company's cash inflows and outflows, and refer to it in setting up a funding plan.

From the manager's perspective, the Statement of Financial Position can be used to understand the company's financial status and establish management strategies based on it. It is also used to create budgets and evaluate performance. It allows you to reduce unnecessary spending and promote efficient fund management. In addition, you can comprehensively understand the company's financial situation by reviewing the Statement of Changes in Equity and notes together.

Concluding Remarks

Today, we have learned about the Statement of Financial Position, which can be considered the most important part of financial statements. Next time, we will take a closer look at the other items, such as the Income Statement and the Statement of Cash Flows.