make decisions based on simple statements of financial position

Cambridge IGCSE Business Studies – Full Topic Sheet

Purpose of this note

This sheet provides a concise, exam‑focused overview of the six IGCSE Business Studies units (0450) and gives detailed guidance for the sub‑topic 5.4.1 – The main elements of a statement of financial position. It is designed to help students achieve the assessment objectives (AO1–AO4) and to make short‑term and long‑term business decisions from simple financial statements.

1. Overview of the Cambridge IGCSE Business Studies syllabus (0450)

5 Financial information & decisions – Detailed focus on 5.4.1

Learning objective

Students will be able to read, construct and analyse a simple statement of financial position, classify each item correctly, calculate key ratios and use the information to recommend appropriate short‑term and long‑term business decisions.

Assessment objectives (AO) mapping

• AO1 – Knowledge: Identify and label the three main sections (Assets, Liabilities, Equity) and the classifications (current / non‑current).
• AO2 – Application: Complete a statement of financial position from given data.
• AO3 – Analysis: Calculate and interpret solvency, liquidity and capital‑structure ratios.
• AO4 – Evaluation: Recommend suitable short‑term and long‑term decisions based on the analysis.

Key terminology

• Statement of financial position (Balance sheet) – a snapshot of what a business owns (assets) and owes (liabilities) on a specific date, together with the owners’ interest (equity).
• Assets – resources with economic value controlled by the business.
• Liabilities – present obligations that will require an outflow of resources.
• Equity (net assets) – residual interest of the owners after deducting liabilities from assets.
• Current – expected to be realised or settled within 12 months.
• Non‑current (long‑term) – expected to be realised or settled after more than 12 months.

Quick reference – Current vs. non‑current classification

Structure of a statement of financial position

• Assets – listed on the left (or top) side.
• Liabilities – listed on the right side, usually above equity.
• Equity – shown below liabilities on the right side.

The statement must always satisfy the accounting equation:

Assets = Liabilities + Equity

This reflects double‑entry bookkeeping – every asset is financed by either a creditor (liability) or an owner (equity).

Standard format (example – figures in £)

Key ratios derived from the statement of financial position

• Current ratio (liquidity) – Current Assets ÷ Current Liabilities
• Working capital (liquidity) – Current Assets – Current Liabilities
• Equity ratio (solvency) – Equity ÷ Total Assets
• Debt‑to‑Equity ratio (capital structure) – Total Liabilities ÷ Equity

Interpretation guide (typical IGCSE expectations)

Using the statement for decision‑making

1. Check solvency: Are total assets greater than total liabilities?
2. Assess liquidity with the current ratio and working capital.
3. Analyse capital structure using the equity ratio and debt‑to‑equity ratio.
4. Identify red flags (e.g., low current ratio, high debt‑to‑equity).
5. Make decisions:
   • Short‑term – arrange an overdraft, accelerate receivables, reduce inventory, negotiate better credit terms.
   • Long‑term – invest in new machinery if equity is strong, raise additional equity, obtain a long‑term loan for expansion, or restructure debt.

Practice activity

Use the data below to complete a statement of financial position and answer the questions that follow.

1. Classify each item as a current asset, non‑current asset, current liability, non‑current liability or equity.
2. Prepare a simple statement of financial position (use the format shown above) and calculate:
   • Total assets
   • Total liabilities
   • Total equity
3. Compute the following ratios (round to two decimal places):
   • Current ratio
   • Working capital
   • Equity ratio
   • Debt‑to‑Equity ratio
4. Based on your calculations, suggest:
   • One short‑term decision (e.g., finance, inventory, cash‑management)
   • One long‑term decision (e.g., investment, borrowing, equity‑raising)

Suggested solution steps (teacher’s guide)

1. Classification
   • Cash – Current asset
   • Trade receivables – Current asset
   • Inventory – Current asset
   • Machinery (net book value) – Non‑current asset
   • Trade payables – Current liability
   • Bank loan (1‑year) – Current liability
   • Long‑term loan – Non‑current liability
   • Owner’s capital – Equity
   • Retained earnings – Equity
2. Statement of financial position

   Assets		Liabilities		Equity
   Current assets	150,000	Current liabilities	75,000	Owner’s capital	120,000
   Non‑current assets	150,000	Non‑current liabilities	80,000	Retained earnings	25,000
   Total assets	300,000	Total liabilities	155,000	Total equity	145,000
   Assets = Liabilities + Equity		300,000 = 155,000 + 145,000

3. Ratio calculations
   • Current ratio = 150,000 ÷ 75,000 = 2.00
   • Working capital = 150,000 – 75,000 = 75,000
   • Equity ratio = 145,000 ÷ 300,000 = 0.48 (48 %)
   • Debt‑to‑Equity = 155,000 ÷ 145,000 = 1.07
4. Decision‑making suggestions
   • Short‑term: The current ratio (2.00) is healthy, but working capital (£75,000) could be improved by reducing inventory levels or negotiating faster payment from customers.
   • Long‑term: The equity ratio (48 %) is slightly below the “strong” benchmark of 50 %. The business could consider a modest equity‑raising (e.g., issuing new shares or retaining more profit) before taking on additional long‑term debt for expansion.

Summary checklist – making decisions from a simple statement of financial position

• Identify and correctly classify every item.
• Ensure the accounting equation balances.
• Calculate the four key ratios and interpret them against typical IGCSE benchmarks.
• Use the analysis to spot strengths (e.g., good liquidity) and weaknesses (e.g., high leverage).
• Formulate one short‑term and one long‑term recommendation that directly addresses the identified issues.

Mastering these steps will equip you to achieve high marks across AO1–AO4 for the financial information & decisions unit.