LESSON 1

STATEMENT OF FINANCIAL POSITION

Financial Statements
The basic purpose of accounting is to provide information that is useful in making economic decisions. Accounting information is most commonly communicated to users
through the Financial Statements.

Financial Statements – are the structured representation of an entity’s financial position and results of its operations. They are the end product of the accounting process.

The Financial Statements provide information on:

1. How much resources are controlled by an entity and how these resources were generated – financial position
2. How well the entity performed during a certain period – results of operations

Complete set of Financial Statements

1. Statement of Financial Position – also called as “Balance Sheet” or “Statement of condition”; provides information on Assets, Liabilities and Equity
2. Statement of Profit or Loss and other comprehensive income – provides information on income and expenses
3. Statement of Changes in Equity – provides information on the movements in the components of equity during the period
4. Statement of Cash Flows – provides information on how cash and cash equivalents were generated and used during the period
5. Notes – provides narrative disclosures and other information required by the standards but were not presented in the other financial statements
 Information on financial position is primarily provided by the Statement of Financial Position
 Information on results of operation is provided by the other components of a complete set of financial statements as follows
o Information on financial performance is provided by the Statement of Profit or Loss and other comprehensive income
o Information on changes in financial position (e.g., changes in equity and changes in cash flows) is provided by the statement of changes in equity and statement of
cash flows
 The “Notes” is used in conjunction with the other financial statements

Elements of the financial statements

1. Assets
2. Liabilities
3. Equity (also called Capital, Net assets or Net worth)
4. Income
5. Expenses

The elements directly related to the measurement of financial position in the balance sheet are Assets, Liabilities and Equity.
The elements directly related to the measurement of financial performance in the statement of profit or loss and other comprehensive income are income and expenses
The other financial statements usually reflect income and expenses and changes in balance sheet elements.

Elements of the Statement of Financial Position

The Statement of Financial Position (Balance Sheet) provides information on an entity’s financial position. Financial position simply refers to the condition of an entity’s assets, liabilities and
equity and their interrelationships.
1. ASSETS – are the economic resources you control that have resulted from past events and can provide you with economic benefits
Control - You don’t necessarily need to own the economic resource for it to be considered your asset. What is important is that you control the right over the
economic benefits that the resource may produce. “Control” means you have the exclusive right to enjoy those benefits and the ability to prevent others from
enjoying those benefits
Past events - The control over an economic resource have resulted from a past event or transaction. Therefore, resources for which control is yet to be obtained in
the future do not qualify as assets in the present
Physical possession is not always necessary for control to exist. Example, the money that you have deposited to a bank remains your asset despite the
transfer of physical possession. This is because you still control the right over the money by withdrawing it or spending it through electronic means.
Economic benefits - To be an asset, the economic resource must have the potential to provide you with economic benefits in at least one circumstance. For
example, the economic resource can be
a. Sold, leased, transferred or exchanged for other assets
b. Used singly or in combination with other assets to produce goods or provide services
c. Used to enhance the value of other assets
d. Used to promote efficiency and cost savings or
e. Used to settle a liability
2. LIABILITIES – are your present obligations that have resulted from past events and can require you to give up economic resources when settling them
Obligation – means a duty or responsibility. An obligation is either
a. Legal obligation – an obligation that results from a contract, legislation or other operation or law or
b. Constructive obligation – an obligation that results from your past actions (e.g., past practice or published policies) that have created a valid expectation on
others that you will accept and discharge certain responsibilities
Giving up of economic resources
Settling the obligation necessarily would require you to pay cash, to transfer other non-cash assets, or to render a service
Present obligation as a result of past events
A present obligation exists as a result of past events if:
a. You have already obtained economic benefits or taken an action; and
b. As a consequence, you are required to transfer an economic resource

3. EQUITY – is simply asset minus liabilities. Other terms for equity are “capital”, “net assets” and “net worth”

PRESENTATION OF STATEMENT OF FINANCIAL POSITION

A statement of financial position (balance sheet) is presented as either:
a. Classified (current/non-current distinction) – a classified balance sheet shows information on current and non-current assets and liabilities; or
b. Unclassified (based on liquidity) – an unclassified balance sheet does not show distinction between current and non-current assets and liabilities

Balance sheets are more commonly presented using the classified presentation. However, there are some entities that use the unclassified presentation, such as banks and other
financial institutions.
Current and Noncurrent Assets
Assets are classified as current when they are expected to be realized within 12 months from the end of the reporting period. All other assets are classified as noncurrent. “Realized” means
converted into cash or claim for cash.
Examples of accounts and their normal classification:
Current Assets Noncurrent Assets
1. Cash 1. Land
2. Accounts receivable (net of Allowance for doubtful accounts 2. Building (net of Accumulated depreciation
3. Inventory 3. Equipment (net of Accumulated depreciation)
 4. Prepaid assets
Current and Noncurrent Liabilities
Liabilities are classified as current when they are expected to be settled within 12 months from the end of reporting period. All other liabilities are classified as noncurrent.
Current Liabilities Noncurrent Assets
1. Accounts Payable 1. Long-term Notes payable (e.g., nontrade note payable that matures
2. Salaries Payable beyond 1 year from the end of the reporting period)
3. Utilities Payable
4. Unearned income
Trade and Nontrade receivables and payables
Some receivables and payables are presented as current even if they are collectible or payable beyond 12 months. These are called trade receivables and trade payables.
Trade and Nontrade receivables
Trade receivables are receivables arising from the sale of goods or services in the ordinary course of business. These include trade accounts receivable and trade notes receivable.
Receivables arising from other sources are nontrade receivables.

In a classified statement of financial position:

a. Trade receivables are presented as current assets if they are collectible within the normal operating cycle, even if the normal operating cycle is longer than 12 months.
b. Nontrade receivables are presented as current assets only if they are collectible within 12 months from the end of the reporting period
The normal operating cycle of an entity is the time between the acquisition of assets for processing and their realization in cash. For a manufacturing entity, the normal
operating cycle covers the time of acquisition of raw materials for processing, production of finished goods sale of finished goods on account, and eventual collection of receivables
from the sale. When the entity’s normal operating cycle is not clearly identifiable, is it assumed to be 12 months.
“Accounts receivable” is usually assumed as trade receivable unless there is evidence to the contrary. As such, “Accounts receivable” is normally classified as current asset.
On the other hand, “Notes receivable” is treated as trade receivable only if there is evidence that the note receivable was received in exchange for the sale of goods or services
in the ordinary course of business. For nontrade note receivable, only the portion that is collectible within 12 months is presented as current asset, the remainder is presented as
noncurrent asset.

Trade and Nontrade payables

Trade payables are obligations arising from purchases of inventory that are sold in the ordinary course of business. These include trade accounts payable and trade notes payable. Payables
arising from other sources are classified as nontrade payables.
In a classified statement of financial position:
a. Trade payables are presented as current liabilities if they are payable within the normal operating cycle, even if the normal operating cycle is longer than 12 months
b. Nontrade payables are presented as current liabilities only if they are payable within 12 months from the end of the reporting period
“Accounts payable” is usually assumed as trade payable unless there is evidence to the contrary. As such, “Accounts payable” is normally classified as current liability.
On the other hand, “Note payable” is treated as trade payable only if there is evidence that the note payable was issued in exchange for the purchase of inventory. For a
nontrade note payable, only the portion that is payable within 12 months is presented as current liability, the remainder is presented as noncurrent liability.
Only assets and liabilities are classified as current and noncurrent. There are no current or noncurrent classifications for equity.

LINE ITEMS IN THE STATEMENT OF FINANCIAL POSITION

Accounts are presented in the financial statements using the “line items”. A line item is a caption used to describe a group of accounts with similar nature.

The following are the common line items together with their composition:
ASSETS

Cash and cash equivalents

This line item consists of the following:
Cash (a) P xx
Cash equivalents (b) xx
Cash and cash equivalents P xx

(a) Cash includes cash on hand and cash in bank

(b) Cash equivalents are some short-term debt securities that are acquired 3 months prior to their maturity date. This is discussed in higher accounting studies, so right now we
don’t actually need to worry about this.

Trade and other receivables

This line item consists of the following:
Accounts receivable P xx
Allowance for bad debts xx
Notes receivable (c) xx
Advances to suppliers (d) xx
Trade and nontrade receivables P xx

(c ) only the current portion of the notes receivable is included in the “trade and other receivables” line item. The noncurrent portion is presented separately.
(d) Advances to suppliers – Is an account used to record advance payments made to suppliers for purchases of inventories that have not yet been delivered by the supplier

Inventory
This line item consists of goods held for sale in the ordinary course of business.

Prepaid assets
This line item consists of the following:
Prepaid supplies P xx
Prepaid rent xx
Prepaid insurance xx
Prepaid assets P xx
The term “prepaid assets” is also referred to in traditional accounting as “prepaid expenses”

Property, plant and equipment

This line item consists of the following:
Land P xx
Building xx
Accumulated depreciation – Bldg (xx)
Equipment xx
Accumulated depreciation – Equipment (xx)
Property, plant & equipment P xx
“Property, plant and equipment”, commonly abbreviated as PPE, is also known as fixed assets.
LIABILITIES
Trade and other payables
This line item consists of the following:
Accounts payable P xx
Notes payable (trade) (e) xx
Interest payable (f) xx
Salaries payable (g) xx
Utilities payable (h) xx
Unearned income xx
Trade and other payables P xx
(e) Nontrade notes payable that represent bank loans are most commonly excluded from the “trade and other payables” line item and presented separately. Furthermore, short-term bank
loans are presented separately from the current portion of long-term loans. These loans are presented under the following line items:

Short-term borrowings
This line item consists of loans with original term of 1 year or less
Current portion of long-term borrowings
This line item consists of the portion of a long-term loan that is maturing within 12 months from the end of the reporting period.
Long-term borrowings
This line item consists of loans with original term of more than 1 year.
(f) The accounts “interest payable”, “salaries payable”, and “utilities payable” are also referred to as “accrued liabilities” or in traditional accounting as “accrued expenses”
Income tax payable (current tax payable)
This line item consists of unpaid income taxes due to the national government
Line items are used in order to promote comparability of financial statements between different entities. An entity shall use its judgment when determining the need to present additional
line items

Illustration: Statement of Financial Position

ABC Co.’s post-closing trial balance on December 31, 20x1 shows the following account balances:

Accounts Dr. Cr.

Cash 20,000.00
Accounts Receivable 122,000.00
Allowance for bad debts 30,000.00
Notes receivable (Trade) 8,000.00
Inventory 200,000.00
Prepaid Supplies 15,000.00
Prepaid Rent 25,000.00
Prepaid Insurance 10,000.00
Land 1,000,000.00
Building 2,000,000.00
Accumulated depreciation - Bldg. 1,600,000.00
Equipment 800,000.00
Accumulated depreciation - Equipment 250,000.00
Accounts Payable 100,000.00
Notes Payable - short term loan 200,000.00
Notes Payable - long term loan
(P50,000 due within 1 year) 1,450,000.00
Interest Payable 65,000.00
Salaries Payable 105,000.00
Utilities Payable 8,000.00
Unearned Income 35,000.00
Owner's Capital 357,000.00
Totals 4,200,000.00 4,200,000.00

Requirement: Prepare the statement of financial position.

Report Form
ABC Co.
Statement of Financial Position
As of December 31, 20x1
ASSETS Notes
Cash and Cash Equivalents 1 ₱20,000.00
Trade and other receivable 2 100,000.00
Inventory 200,000.00
Prepaid Assets 3 50,000.00
Total Current Assets ₱370,000.00
Property, plant and equipment 4 1,950,000.00
Total Noncurrents Assets 1,950,000.00
TOTAL ASSETS ₱2,320,000.00
LIABILITIES
Trade and other payables 5 ₱313,000.00
Short-term borrowings 200,000.00
Current portion of long-term borrowings 6 50,000.00
Total Current Liabilities ₱563,000.00
Long-term borrowings 6 1,400,000.00
Total Noncurrent Liabilities 1,400,000.00
TOTAL LIABILITIES 1,963,000.00
EQUITY
Owner's Capital 357,000.00
TOTAL LIABILITIES AND EQUITY ₱2,320,000.00

The breakdowns of the line items are shown in the “Notes” (e.g., the 5th component of a complete set of financial statements) as follows:

Note 1: Cash and cash equivalents

 This line item consists of the following:
Cash ₱ 20,000.00
Cash Equivalents -
Cash and cash equivalents ₱ 20,000.00
Note 2: Trade and other receivables
This line item consists of the following:
Accounts Receivable ₱ 122,000.00
Allowance for bad debts - 30,000.00
Notes Receivable 8,000.00
Trade and other receivables ₱ 100,000.00

Note 3: Prepaid Assets

This line item consists of the following:
Prepaid supplies ₱ 15,000.00
Prepaid rent 25,000.00
Prepaid insurance 10,000.00
Cash and cash equivalents ₱ 50,000.00
Note 4: Property, plant and equipment
This line item consists of the following:
Land ₱ 1,000,000.00
Building 2,000,000.00
Accumulated depreciation - Bldg - 1,600,000.00
Equipment 800,000.00
Accumulated depreciation -
Equipment - 250,000.00
Trade and other receivables ₱ 1,950,000.00

Note 5: Trade and other payables

This line item consists of the following:
Accounts Payable ₱ 100,000.00
Interest Payable 65,000.00
Salaries Payable 105,000.00
Utilities Payable 8,000.00
Unearned income 35,000.00
Cash and cash equivalents ₱ 313,000.00
Note 6: Current and Noncurrent portions of Long-term borrowings
This line item consists of the following:
Current portion ₱ 50,000.00
Noncurrent potion 1,400,000.00
Trade and other receivables ₱ 1,450,000.00

The format of the balance sheet shown above is called the Report Form, wherein assets, liabilities and equity are presented in a Vertical manner.
Another format of a balance sheet is the Account Form. Under the account form, assets, liabilities and equity are presented in a Horizontal manner, somewhat similar to the basic
accounting equation. This is illustrated below:

ABC Co.
Statement of Financial Position
As of December 31, 20x1
ASSETS LIABILITIES
Cash and Cash Equivalents 20,000 Trade and other payables 313,000
Trade and other receivable 100,000 Short-term borrowings 200,000
Inventory 200,000 Current portion of long-term borrowings 50,000
Prepaid Assets 50,000 Total Current Liabilities 563,000
Total Current Assets 370,000
Long-term borrowings 1,400,000
Property, plant and equipment 1,950,000 Total Noncurrent Liabilities 1,400,000
Total Noncurrents Assets 1,950,000
TOTAL LIABILITIES 1,963,000
EQUITY
Owner's Capital 357,000
TOTAL ASSETS 2,320,000 TOTAL LIABILITIES AND EQUITY 2,320,000

Forms of balance sheet

REPORT FORM ACCOUNT FORM

ASSETS ASSETS LIABILITIES
VERTICAL

LIABILITIES EQUITY
EQUITY

HORIZONTAL

The standards do not prescribe a specific format for presenting financial statements. This is at the discretion of the reporting entity, having in mind the concept of comparability. However,
the more commonly used format in external reporting is the report form.