Understanding the Statement of Financial Position: A Key Tool for Investors

No matter if you are an investor or a business executive, reading and analyzing financial statements is an essential skill. One of the most important documents is the (Statement of Financial Position), also known as the balance sheet, which helps you clearly understand the company’s financial status and trends. This article will guide you through everything you need to know about this document, from the basics to how to use it for investment decisions.

What is the Statement of Financial Position?

Statement of Financial Position is a snapshot of a company’s overall financial health at a specific point in time, showing how much assets the company owns, how much liabilities it has, and the owners’ equity.

This document follows the fundamental equation: Assets = Liabilities + Equity

Originally called the “Balance Sheet” because both sides of the equation must always be equal, international standards later renamed it the “Statement of Financial Position” to better reflect its purpose. Thailand has adopted this change and refers to it as the “Statement of Financial Position.”

The Three Main Components of Financial Statements

1. Assets (Assets): Resources owned by the company

Assets are resources used by the company to generate income and operate. They are divided into two categories:

Current Assets – assets that can be converted into cash within 1 year, such as:

• Cash and cash equivalents
• Trade receivables (Money owed by customers)
• Inventory
• Prepaid expenses

Non-current Assets – assets that are difficult to convert into cash, such as:

• Land, buildings, and machinery
• Real estate
• Long-term investments
• Patents, copyrights, and franchises

2. Liabilities (Liabilities): Obligations to be paid

Liabilities represent amounts the company must repay to lenders. They are divided into two types:

Current Liabilities – payable within 1 year, such as:

• Trade payables
• Tax liabilities

Non-current Liabilities – payable over the long term, such as:

• Long-term bank loans
• Long-term bonds payable

3. Owners’ Equity (Equity): Owners’ interest

This is the residual interest remaining for the owners, calculated as: Assets minus Liabilities.

It consists of two components:

• Share Capital – initial funds invested to start the business
• Retained Earnings / Accumulated Losses – profits accumulated over the years or losses if the business has been operating at a loss

Two Formats of Balance Sheets: Which One Is Suitable?

Companies use two presentation formats for preparing balance sheets:

Accounting Format (Balance Sheet (T-Account Style))

The accounting balance sheet lists items in a T-shape:

• Left side: Total assets
• Right side: Liabilities and owners’ equity

Steps to prepare:

1. Write a header with 3 lines: (Company Name, “Balance Sheet”, Date of preparation)
2. List all assets on the left
3. List liabilities and owners’ equity on the right
4. The totals of both sides must match

The accounting format is popular because it is easy to read and compare.

Report Format (Balance Sheet (List Format))

The report format presents items in a sequential list:

• First section: Total assets
• Second section: Liabilities and owners’ equity

Steps to prepare:

1. Write a header with 3 lines
2. List assets and total them
3. List liabilities first, then owners’ equity, and total to match assets

Why Is This Knowledge Important?

The statement of financial position is an indispensable tool for analyzing a company because it helps to:

Analyze liquidity – see if the company can meet short-term obligations by comparing current assets with current liabilities.

Assess profitability potential – verify if the company efficiently generates income from its assets.

Evaluate debt-paying ability – analyze whether the company has enough assets to cover both short-term and long-term liabilities.

Compare with competitors – this document allows managers and investors to compare the financial status with other companies in the same industry.

How to Access a Company’s Financial Statements

Executives and investors can view the statement of financial position at:

Website Datawarehouse.dbd.go.th

Steps to find:

1. Visit datawarehouse.dbd.go.th
2. Select the category “Legal Entity Data and Financial Statements”
3. Enter the company name
4. Click on the “Financial Data” tab
5. Choose the fiscal year and view data comparisons across years

How to Read a Balance Sheet Effectively

Step 1: Familiarize Yourself with the Document

Start by understanding what the statement of financial position is and its purpose. Remember, it shows the company’s financial status at a specific point in time.

Step 2: Study the Structure

Understand that:

• Assets are what the company owns (Cash, land, inventory, etc.)
• Liabilities are what the company owes (Loans, creditors, etc.)
• Owners’ Equity is what remains for the owners

Step 3: Analyze Items in Depth

Use the data in the balance sheet to examine:

• The company’s liquidity
• Profitability efficiency
• Debt-paying capacity
• Key ratios

Step 4: Track Changes Over Time

Don’t look at the balance sheet only once. Compare the company’s balance sheets over different periods to monitor trends and financial changes.

Important Cautions When Using the Statement of Financial Position

Although the statement of financial position is highly valuable, it has limitations to be aware of:

Historical Data – The balance sheet shows past financial status, not real-time data. If significant changes occur after the date of the balance sheet, the information may not reflect the current situation.

Reliability Concerns – Financial statements may contain errors or manipulations to present a better picture, which can lead to incorrect analysis.

Economic Conditions – Changes in the economy, such as inflation, interest rate fluctuations, or currency adjustments, can distort comparisons over time.

Therefore, it is advisable to consider the statement of financial position alongside other financial documents and the economic context of that period.

Summary

The balance sheet and its presentation formats are crucial documents that tell the financial story of a company through three main components: assets, liabilities, and owners’ equity.

For managers, the balance sheet helps assess financial health and strategic planning. For investors, it provides a foundation for investment decisions.

Despite its limitations, learning how to read and analyze the statement of financial position correctly will help you make smarter financial decisions with confidence. The key is not to rely solely on this document but to study other financial statements and the overall company context.