Understanding the Statement of Financial Position.pptx

Understanding the Statement of Financial Position means knowing how a company’s assets, liabilities, and equity are presented at a specific point in time. It shows what the business owns, what it owes, and the remaining value for the owners, helping to measure financial health. By analyzing it, one can assess liquidity, stability, and the company’s ability to meet obligations.

1. Understanding the Statement of Financial Position

2. What is the Statement of Financial Position? Also known as the balance sheet Provides an overview of a company's financial situation at a specific point in time Shows what a company owns (assets) and owes (liabilities) Reflects the company's net worth (equity) Question: Why do you think it's called a "balance" sheet?

3. Key Components of the Statement Assets: What the company owns Liabilities: What the company owes Equity: The difference between assets and liabilities (net worth) Remember: Assets = Liabilities + Equity

4. Types of Assets 1. Current Assets: Can be converted to cash within one year Examples: cash, inventory, accounts receivable 2. Non-current Assets: Long-term assets not easily converted to cash Examples: property, plant, equipment, intangible assets Question: Can you think of other examples of current and non-current assets?

5. Types of Liabilities 1. Current Liabilities: Debts or obligations due within one year Examples: accounts payable, short-term loans 2. Non-current Liabilities: Long-term debts or obligations Examples: long-term loans, bonds payable

6. Understanding Equity Represents the owners' stake in the company Includes: Invested capital (e.g., stock issued) Retained earnings (accumulated profits) Other comprehensive income Question: How might a company's equity change over time?

7. The Importance of the Statement Provides a snapshot of financial health Helps assess liquidity and solvency Used by investors, creditors, and management Basis for important financial ratios Why do you think this statement is important for decision-making?

8. Real-World Example: Airbus Let's look at Airbus's statement as of December 31, 2019: Total assets: €114.4 billion Current assets: €55.7 billion Non-current assets: €58.7 billion Equity: €6.0 billion Current liabilities: €44.1 billion Non-current liabilities: €64.3 billion What observations can you make about Airbus's financial position?

9. Airbus's Current Ratio Current Ratio = Current Assets / Current Liabilities For Airbus: 55.7 / 44.1 = 1.26 Indicates Airbus has €1.26 in current assets for every €1 of current liabilities Generally, a ratio above 1 is considered good Question: What might happen if this ratio was below 1?

10. Key Asset Categories for Airbus 1. Intangible assets: €16.7 billion Includes goodwill and capitalized development costs 2. Property, plant and equipment: €17.0 billion 3. Inventories: €32.0 billion Mostly work-in-progress due to long production cycles Which category surprises you the most? Why?

11. Airbus's Inventory Composition Work-in-progress dominates inventory Reflects long production cycles in aerospace industry Different from other industries (e.g., retail, where finished goods might be higher) How might this inventory structure affect Airbus's cash flow?

12. Airbus's Cash Position Cash and cash equivalents: €9.3 billion Net cash position: €12.5 billion (after considering financing liabilities) Includes cash, securities, and other liquid assets Why do you think it's important for a company like Airbus to maintain a strong cash position?

13. Major Liability Categories for Airbus 1. Contract liabilities: €43.0 billion Mostly pre-delivery payments from customers 2. Provisions: €10.0 billion For warranties, litigation, etc. 3. Trade liabilities: €15.0 billion Similar to accounts payable in other companies How might these liabilities reflect Airbus's business model?

14. Understanding Airbus's Equity Components of Airbus's equity: Capital stock: Nominal value of outstanding shares Share premium: Difference between par value and amount received for shares Retained earnings: Accumulated profits minus dividends paid Other reserves: Changes in other comprehensive income Question: How might these components change over time?

15. Analyzing the Statement When examining a statement of financial position: 1. Compare current vs. non-current assets and liabilities 2. Look at the composition of major categories 3. Calculate key ratios (e.g., current ratio, debt-to-equity ratio) 4. Compare with industry peers and historical data What other aspects would you consider important to analyze?

16. Limitations of the Statement Represents a snapshot at a specific point in time Based on historical cost, which may differ from current market values Doesn't show cash flows or profitability (need other financial statements) Some important assets might not be included (e.g., human capital, brand value) How might these limitations affect decision-making based solely on this statement?

17. Relationship with Other Financial Statements Income Statement: Shows profitability, affects retained earnings Cash Flow Statement: Explains changes in cash position Statement of Changes in Equity: Details movements in equity accounts How do you think these statements work together to provide a complete financial picture?

18. International vs. U.S. Accounting Standards