Why is it important to understand the statement of financial position?

The point that many people are confused about is the (Balance Sheet) or recently called the “Statement of Financial Position.” How important is it really for business management and investment decision-making?

This financial document not only shows how much wealth the business has but also serves as a strategic operational tool, especially when analyzing resource utilization efficiency and managing expenses to maximize effectiveness.

Basic Structure: The Formulas You Must Know

Assets = Liabilities + Equity

This equation is the core of accounting because it shows that a company’s (assets) come from two sources:

• On the left: Resources owned by the company (assets)
• On the right: The sources of funds used to acquire those resources (borrowed money and owner’s equity)

It is called the “Balance Sheet” because both sides must always be equal. Thailand has officially renamed it to “Statement of Financial Position” to better reflect its purpose.

Main Components of the Balance Sheet

1. Assets (Assets) - Resources that generate income

Assets are items the company owns to operate and generate revenue, divided into two groups based on liquidity:

Current Assets can be converted into cash within 1 year:

• Cash on hand and in banks
• Accounts receivable (from customers)
• Inventory
• Prepaid expenses

Non-current Assets take longer to convert into cash:

• Land and buildings
• Machinery and factory equipment
• Long-term investments
• Patents and copyrights

2. Liabilities (Liabilities) - Obligations to be paid back

Liabilities represent amounts owed by the company to external persons or organizations, divided into:

Current Liabilities payable within 1 year:

• Trade payables (mostly from credit purchases)
• Short-term loans
• Taxes payable

Non-current Liabilities payable over a period longer than 1 year:

• Long-term bank loans
• Long-term bonds
• Long-term contractual obligations

3. Equity (Equity) - The owner’s actual share

This is the “net profit” of the owner after deducting all liabilities, consisting of:

• Capital stock purchased by shareholders
• Retained earnings from past operations (after dividend payments)

Performance Analysis: When SG&A is More Than Just a Number

Monitoring general expenses, selling, and administrative costs (SG&A) through the balance sheet helps management understand how the company uses its money. Analyzing this alongside assets indicates:

• Resource utilization efficiency
• The ratio of administrative costs to revenue
• Profit improvement potential

When is the Balance Sheet Most Useful?

For management:

• To monitor the financial health of the business
• To assess debt repayment ability
• To plan future fundraising
• To improve management strategies and cost reduction

For investors:

• To decide whether to invest
• To compare the potential of different companies in the same industry
• To evaluate financial risks

How to Prepare a Balance Sheet

T-form accounting(:

Assets on the left, liabilities and equity on the right, in an easy-to-read format.

Steps:

1. Write the header with )company name, “Balance Sheet,” date(
2. List assets on the left side
3. List liabilities and equity on the right side
4. Ensure both sides are equal

) Report Form###: Items are listed in order, with assets first, followed by liabilities and equity, a common format for reporting to management and the public.

Steps:

1. Write the header with (company name, “Balance Sheet,” date)
2. Show detailed assets with totals
3. Show detailed liabilities, then equity, with totals
4. Verify that total assets equal total liabilities plus equity

Why is the Name Change Important?

The original name “Balance Sheet” only indicates the balance of figures and does not reflect other purposes. This led to the global financial reporting standard changing the name to “Statement of Financial Position.” This new name emphasizes that the document is a snapshot of the financial status at a specific point in time. Thailand follows suit, calling it “Statement of Financial Position” to clearly show that this document is used to present the true financial condition.

How to Access and Read a Company’s Balance Sheet

For those wanting to study a company’s financial position, it can be found at Datawarehouse.dbd.go.th

Search steps:

1. Visit Datawarehouse.dbd.go.th
2. Select “Legal Entity and Financial Statements”
3. Enter the company name you want to study
4. Click the “Financial Statements” tab
5. You can select the fiscal year, view income statements, analyze financial ratios, and compare data across years and with other companies in the industry

Tips for Analyzing a Balance Sheet

( Step 1: Understand the structure The balance sheet provides an overview of assets, liabilities, and equity at a specific point in time.

) Step 2: Analyze liquidity Assess the company’s ability to pay debts by checking if cash and assets are sufficient for short-term liabilities.

Step 3: Evaluate profitability potential

See whether the company has accumulated increasing profits or rising accumulated losses over the years.

Step 4: Compare over periods

Analyze changes in various items compared to previous years to track financial trends.

Step 5: Assess debt structure

Look at the ratio of short-term to long-term debt to determine if the company has an appropriate debt burden or excessive risk.

Cautions When Making Decisions Based on the Balance Sheet

The balance sheet shows historical data only.

It is not real-time data; significant changes may occur after the statement is prepared.

The reliability of figures

The balance sheet may contain errors or be manipulated to look better. Therefore, verify with independent auditors.

Changing economic conditions

Inflation, interest rates, or currency fluctuations can make figures not directly comparable.

Must be read together with other financial statements

Combine with income statements, cash flow statements, and financial ratios for a complete picture.

Summary

The Statement of Financial Position ###Balance Sheet### is a report showing a company’s assets, liabilities, and equity at a specific point in time. Understanding and analyzing the balance sheet helps management plan better and enables investors to make informed investment decisions.

However, do not rely solely on the balance sheet for decision-making. Study other financial data comprehensively, consider economic conditions, and industry situations to make well-rounded and solid decisions.