Legal Definitions - statement of financial condition

A statement of financial condition is a formal financial report that presents an entity's financial health at a specific point in time. It provides a snapshot of what an entity owns (its assets), what it owes to others (its liabilities), and the residual value or ownership interest (its equity). This statement is crucial for understanding an entity's financial position, solvency, and liquidity, and is often used by investors, creditors, and management for decision-making.

• Example 1: Small Business Loan Application

  Imagine "The Daily Grind," a local coffee shop, wants to purchase a new, high-capacity espresso machine and applies for a bank loan. The bank will require a statement of financial condition from The Daily Grind. This document would itemize the coffee shop's assets, such as its cash on hand, existing equipment, inventory of coffee beans, and any money owed by customers. It would also list its liabilities, including outstanding loans for previous equipment, unpaid supplier invoices, and rent payable. The difference between these assets and liabilities would represent the owner's equity in the business. The bank uses this statement to assess the coffee shop's current financial standing and its ability to repay the new loan.

• Example 2: Personal Financial Planning

  Consider Maria, who is working with a financial advisor to plan for her retirement and assess her overall financial well-being. While not always formally called a "statement of financial condition" in a personal context, the comprehensive document her advisor helps her create serves the same purpose. It would list all her assets, such as her savings accounts, investment portfolio, real estate, and the value of her car. Alongside these, it would detail her liabilities, including her mortgage, student loan debt, and credit card balances. This personal financial snapshot allows Maria and her advisor to understand her net worth, track her progress toward financial goals, and make informed decisions about future investments or debt management.

• Example 3: Non-Profit Grant Reporting

  "Hopeful Horizons," a non-profit organization dedicated to providing educational resources to underprivileged children, receives significant grants from foundations and individual donors. At the end of its fiscal year, Hopeful Horizons must prepare a statement of financial condition to report to its board of directors and grant providers. This statement would outline its assets, which might include cash from donations, grants receivable (pledged but not yet received funds), office equipment, and any restricted endowment funds. Its liabilities would encompass unpaid program expenses, deferred revenue (grants received for programs in the next fiscal year), and any short-term operational loans. The net assets (equity) section would reflect the cumulative impact of its operations and donor contributions over time, demonstrating the organization's stewardship of resources and its financial capacity to continue its mission.