A snapshot at a single moment
The statement of financial position, also known as the balance sheet, shows what the business owns and what it owes at a specific date, such as 31 December. It is a still picture, not a film, so it is read together with the income statement and the statement of cash flows to understand the movement during the year.
The statement is built on the accounting equation: Assets = Liabilities + Equity. Assets and liabilities are split into current (within one year or one operating cycle) and non-current.
The statement we will read
A trading company selling building materials, amounts in SAR:
| Item | 2025 | 2024 |
|---|---|---|
| Cash and cash equivalents | 150,000 | 260,000 |
| Accounts receivable (net) | 400,000 | 340,000 |
| Inventory | 600,000 | 450,000 |
| Prepaid expenses | 50,000 | 40,000 |
| Current assets | 1,200,000 | 1,090,000 |
| Property and equipment (net) | 800,000 | 720,000 |
| Total assets | 2,000,000 | 1,810,000 |
| Accounts payable | 450,000 | 380,000 |
| Accrued expenses | 100,000 | 90,000 |
| Short-term loan | 150,000 | 100,000 |
| Zakat and VAT payable | 100,000 | 95,000 |
| Current liabilities | 800,000 | 665,000 |
| Long-term loan | 300,000 | 350,000 |
| End-of-service benefit provision | 100,000 | 90,000 |
| Total liabilities | 1,200,000 | 1,105,000 |
| Capital | 500,000 | 500,000 |
| Retained earnings | 300,000 | 205,000 |
| Equity | 800,000 | 705,000 |
| Liabilities and equity | 2,000,000 | 1,810,000 |
The ten minutes: five stops
Minutes 1-2: size and direction
Total assets grew from 1,810,000 to 2,000,000 SAR, about 10%. The next question: who financed this growth? Liabilities rose by 95,000 and equity rose by 95,000, so the financing was roughly balanced.
Minutes 3-4: liquidity
Current assets of 1,200,000 against current liabilities of 800,000 give a current ratio of 1.5 times. But half of current assets is inventory; if we exclude it together with prepayments, only 550,000 remains against 800,000. This means the business depends on selling inventory to pay its near-term liabilities.
Minutes 5-6: where did the cash go?
Cash fell by 110,000 SAR, while inventory rose by 150,000 and accounts receivable by 60,000. The story is clear: the business tied up its cash in goods and in amounts owed by customers. This is not necessarily bad if sales grew by the same proportion, which is what the income statement reveals.
Minutes 7-8: debt
Total liabilities of 1,200,000 against equity of 800,000, or 1.5 SAR of liabilities for every 1 SAR of equity. The short-term loan increased and the long-term loan decreased, so check the repayment schedule in the notes to the financial statements to see what falls due within the next year.
Minutes 9-10: equity
Retained earnings rose by 95,000. If net profit for the year was larger than that, the difference is usually dividends or drawings, which the statement of changes in equity confirms.
Signals worth stopping for
- Receivables growing faster than sales: this may mean loose credit or doubtful debts.
- Inventory swelling without corresponding growth in sales: slow-moving goods or excess purchases.
- Long-term assets financed with short-term loans: liquidity pressure is to be expected.
- Balances due to related parties (partners or sister companies) without clear terms.
- Negative equity, or equity declining year after year.
The quick-read table
To apply the method to any statement, keep this simple table and fill it in each time. The values below are for the building materials company in our example:
| Question | Indicator | Result in the example |
|---|---|---|
| Is the business growing? | Growth in total assets | About 10% |
| Can it pay in the near term? | Current ratio | 1.5 times |
| Does liquidity depend on inventory? | Quick ratio | About 0.69 times |
| Where did the cash go? | Change in inventory and receivables | 210,000 SAR increase |
| Who finances the business? | Liabilities to equity | 1.5 |
| Is it retaining profits? | Change in retained earnings | 95,000 SAR increase |
The conclusion a reader draws from this statement in ten minutes: a business growing with balanced financing, but tying up a large part of its cash in inventory and receivables, with quick liquidity below its near-term liabilities. The logical decision is to monitor inventory turnover and the collection period before expanding further. And if you read the statement through the eyes of a lending bank, its first question would be about the quality of the inventory and the ageing of customer debts.
Remember that the statement of financial position is affected by its date. A business selling school supplies may look loaded with inventory in July and rich in cash in October. So always compare with the same date in the previous year, and ask about any large transaction made a few days before the statement date, such as repaying a loan or buying a large batch of goods, because it may temporarily flatter or distort the picture.