9609 · 10.1.2
Statement of financial position — FAQ
Frequently asked questions for 9609 Statement of financial position. Direct answers first, then deeper explanation — then practise with marking.
Is a profitable company always financially healthy?
Not necessarily. A company can be profitable (as shown on the Statement of Comprehensive Income) but have poor liquidity. For example, if it makes many credit sales that customers are slow to pay (high trade receivables) and has large short-term debts, it could face a cash flow crisis despite being profitable. The SoFP reveals this liquidity position.
Why is it called a 'Balance Sheet'?
It is called a Balance Sheet because it is based on the accounting equation (Assets = Liabilities + Equity), which must always balance. The total value of all assets must equal the total value of all claims on those assets from both creditors (liabilities) and owners (equity).
Can a business have negative equity?
Yes. This occurs when total liabilities are greater than total assets. This is a very serious financial situation, sometimes referred to as insolvency. It means that even if the business sold all its assets, it could not pay off all its debts, leaving nothing for the owners. Such a business is at a very high risk of failure.