Classify assets, liabilities and capital employed
Identify statement-of-financial-position categories and explain capital employed without constructing a statement.
Section 5 · Financial information and decisions
Cambridge IGCSE Business 0264, 2027–2029 syllabus, Topic 5. Use the supplied data and show calculation steps. Candidates are not assessed on constructing cash-flow forecasts or financial statements. Written practice is self-checked and does not certify exam readiness
Before you begin
- No previous finance study is assumed. Identify the time period, whether a figure is a stock or a flow, and the units before calculating or recommending.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Which is normally a current asset?
What you will learn
- Classify current and non-current items
- Distinguish assets from liabilities
- Explain capital employed
Classify by use and timing
Non-current assets, such as property or machinery, are held for longer-term use. Current assets, such as inventory, trade receivables and cash, are expected to be used, sold or received in the operating cycle or near term.
Non-current liabilities include longer-term bank loans. Current liabilities include trade payables and an overdraft due in the short term. Classify the item using the information given and the business's circumstances.
Capital employed represents long-term finance in use
Capital employed is the long-term capital invested in the business. In a statement of financial position, the exact presentation depends on the figures provided; a common calculation from a simplified statement is total assets less current liabilities, equivalent to long-term capital and non-current liabilities under the accounting identity.
The syllabus includes the concept of capital employed and uses it in ROCE. It states candidates are not assessed on constructing statements of financial position, but they may make simple calculations based on one. Follow the supplied layout and stated convention.
Pause and explain
What does capital employed describe?
Worked example
Classify inventory, a five-year bank loan, trade payables due next month and a delivery van used by the business.
Show the worked solution
- Inventory is a current asset.
- The van is a non-current asset; the five-year loan is a non-current liability.
- Trade payables due next month are a current liability.
Answer Inventory: current asset; delivery van: non-current asset; five-year bank loan: non-current liability; trade payables due next month: current liability.
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Classify a cash balance, inventory, a machine used for four years, a supplier invoice due in 30 days and a bank loan due in four years.
Give me a hint
Use current/non-current timing and whether the item is owned or owed.
Compare my reasoning
- Cash and inventory are current assets.
- The machine is a non-current asset; the four-year loan is a non-current liability.
- The supplier invoice is a current liability.
Cash and inventory are current assets; the machine is a non-current asset; the supplier invoice is a current liability; and the four-year bank loan is a non-current liability.
Look for these in your work
- Assets classified
- Liabilities classified
- Timing applied
A simplified statement gives total assets $180,000 and current liabilities $32,000. Using total assets less current liabilities, calculate capital employed and explain what it represents.
Give me a hint
Apply the stated convention, then describe the long-term funds represented.
Compare my reasoning
- 180,000 − 32,000 = 148,000.
- Label the result as capital employed under the stated convention.
- It represents long-term capital invested, not cash alone.
Capital employed is $148,000 under the stated calculation. It represents long-term capital invested in the business, not the amount of cash currently held.
Look for these in your work
- Calculation correct
- Convention stated
- Meaning explained
A manager sees inventory rise sharply and says total assets have increased, so the business must have more cash available. Explain the error.
Give me a hint
Inventory is an asset, but it is not immediately spendable cash.
Compare my reasoning
- More inventory can increase current assets.
- Cash may have been used to buy it or stock may be unsold.
- Check cash, receivables, liabilities and stock turnover separately.
Higher inventory may increase current assets, but it does not mean the business has more cash. Cash may have been used to purchase stock, and the inventory may remain unsold; the manager should review the asset mix and payment obligations.
Look for these in your work
- Asset distinction
- Cash implication corrected
- Further data named
Common mistakes
- Calling trade payables an asset because they relate to inventory
- Classifying every loan as current without checking its term
- Assuming capital employed is cash held in the bank
What can you explain now?
Which is normally a current asset?
Compare with the explanation
Trade receivables
Amounts expected from customers are current assets in the syllabus examples.
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Make it stick
How do current assets and current liabilities differ? Give one example of each.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.