Statement of affairs

3 key takeaways

• A statement of affairs outlines the financial status by listing all assets and liabilities.
• It is often used in insolvency proceedings to assess the financial health and determine the ability to pay off debts.
• The document helps stakeholders understand the overall financial position and make informed decisions.

What is a statement of affairs?

A statement of affairs is a comprehensive financial report that details the assets, liabilities, and net worth of a company or individual at a particular point in time. This statement is typically used in insolvency situations, such as bankruptcy or liquidation, to provide a clear picture of the financial status and the extent of any financial difficulties.

Components of a statement of affairs

The statement of affairs includes several key components that collectively provide a complete financial overview:

• Assets: This section lists all the assets owned, including cash, accounts receivable, inventory, property, equipment, and investments. Assets are typically categorized as current (short-term) or fixed (long-term).
• Liabilities: This part details all the liabilities, including accounts payable, loans, mortgages, and other debts. Liabilities are usually divided into current (due within one year) and long-term (due after one year).
• Net worth: Also known as equity, this is calculated by subtracting total liabilities from total assets. It represents the residual interest in the assets after deducting liabilities.

Uses of a statement of affairs

A statement of affairs is used in various financial and legal contexts:

• Insolvency proceedings: In cases of bankruptcy or liquidation, the statement of affairs helps creditors, legal professionals, and courts understand the debtor’s financial position and determine how to proceed with the distribution of assets.
• Business analysis: Companies may prepare a statement of affairs to assess their financial health and identify areas of improvement. This can be particularly useful for internal management and strategic planning.
• Credit assessment: Lenders and financial institutions may use the statement of affairs to evaluate the creditworthiness of a business or individual applying for a loan or credit facility.

Example of a statement of affairs

Consider a company facing financial difficulties. To begin insolvency proceedings, the company prepares a statement of affairs with the following simplified details:

Assets

• Cash: $10,000
• Accounts receivable: $20,000
• Inventory: $30,000
• Equipment: $50,000
• Property: $100,000

Total Assets: $210,000

Liabilities

• Accounts payable: $15,000
• Short-term loans: $25,000
• Long-term loans: $70,000

Total Liabilities: $110,000

Net Worth: $100,000 (Total Assets – Total Liabilities)

This statement shows that the company has $210,000 in assets and $110,000 in liabilities, resulting in a net worth of $100,000. This information is crucial for creditors to understand the company’s ability to repay its debts and for the court to decide on the next steps in the insolvency process.

A statement of affairs provides a vital snapshot of financial health by detailing all assets and liabilities at a specific point in time. Whether used in insolvency proceedings, business analysis, or credit assessments, it offers a clear and comprehensive view of financial standing, enabling stakeholders to make informed decisions.