CHAPTER 8: STATEMENT OF FINANCIAL POSITION

Statement of Financial Position

A statement of financial position is a formal statement showing the three elements comprising financial
position, namely assets, liabilities and equity.

Liquidity is the ability of the entity to meet currently maturing obligations. Solvency is the availability of
cash over the longer term to meet maturing obligations.

Current and Noncurrent Distinction

PAS 1, paragraph 60, provides that an entity shall present current and noncurrent assets, and current
and noncurrent liabilities, as separate classifications in the statement of financial position.

Assets

The Revised Conceptual Framework defines an asset as a present economic resource controlled by the
entity as a result of past events.

Current Assets

PAS 1, paragraph 66, provides that an entity shall classify an asset as current when:

a. The asset is cash or a cash equivalent unless the asset is restricted to settle a liability for more
than twelve months after the reporting period.
b. The entity holds the asset primarily for the purpose of trading.
c. The entity expects to realize the asset within twelve months after the reporting period.
d. The entity expects to realize the asset or intends to sell or consume it within the entity’s normal
operating cycle.

Operating Cycle

The operating cycle of an entity is the time between the acquisition of assets for processing and their
realization in cash or cash equivalents.

When the normal operating cycle is not clearly identifiable, the duration is assumed to be twelve
months.

Presentation of Current Assets

Current assets are usually listed in the statement of financial position in the order of liquidity.

PAS 1, paragraph 54, provides that as a minimum the line items under current assets are:

Order in Financial Statement;

a. Cash and cash equivalents

b. Financial assets at fair value through profit or loss, such as trading securities and other
investments in quoted equity instruments.
c. Trade and other receivables
 d. Inventories
e. Prepaid expenses

Noncurrent Assets

The caption noncurrent asset is a residual definition.

PAS 1, paragraph 66, simply states that “an entity shall classify other assets not classified as current as
noncurrent assets”.

Accordingly, noncurrent assets include the following:

a. Property, plant and equipment

b. Long-term investments
c. Intangible assets
d. Other noncurrent assets

Liabilities

Under the Revised Conceptual Framework, a liability is defined as a present obligation of an entity to
transfer an economic resource as a result of a past events.

Current Liabilities

PAS 1, paragraph 69, provides that an entity shall classify a liability as current when:

a. The entity expects to settle the liability within the entity’s normal operating cycle.
b. The entity holds the liability primarily for the purpose of trading.
c. The liability is due to be settled within twelve months after the reporting period.
d. The entity does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting period.

Presentation of Current Liabilities

PAS 1, paragraph 64, provides that as a minimum, the face of the statement of financial position shall
include the following line items for current liabilities:

a. Trade and other receivables

b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability

Noncurrent Liabilities

The term noncurrent liability is a residual definition

Example of Noncurrent Liabilities

a. Noncurrent portion of a long-term debt

 b. Lease liability – rent to own
c. Deferred tax liability – BIR allow you to differ your tax
d. Long-term obligations to entity officers – employee benefits
e. Long-term deferred revenue

Working Capital

Working Capital is the excess of current assets over current liabilities and the working capital ratio is
current assets divided by current liabilities.

Equity

The term equity is the residual interest in the assets of the entity after deducting all of the liabilities

The term is used in reporting the equity of an entity depending on the form of the entity are:

a. Owner’s equity in a proprietorship

b. Partners’ equity in a partnership
c. Shareholders’ equity in a corporation

Shareholders’ Equity

Shareholders’ equity or stockholders’ equity is the residual interest of owners in the net assets of a
corporation measured by the excess of assets over liabilities.

Generally, the elements constituting shareholders’ equity with their equivalent IAS term are:

Philippine term IAS term (international setting)

Capital stock Share capital

Subscribed capital stock Subscribed share capital
Common stock Ordinary share capital
Preferred stock Preferred share capital
Additional paid capital Share premium
Retained earnings (deficit) Accumulated profits (losses)
Retained earnings appropriated Appropriation reserve
Revaluation surplus Revaluation reserve
Treasury stock Treasury share

Forms of Statement of Financial Position

The format of a statement of financial position is not specified in PAS 1.

In practice, there are two customary forms in presenting the statement of financial position, namely:

a. Report form
This form sets forth the three major sections in a downward sequence of assets, liabilities and
equity.
b. Account form
 As the title suggests, the presentation follows that of an account, meaning, the assets are shown
on the left side and the liabilities and equity on the right side of the statement of financial
position.

Illustration – report form

 SAMPLAR COMPANY
Statement of Financial Position
December 31, 2019

ASSETS

Note
Current assets:
Cash and cash equivalents (1) 500,000
Financial assets at fair value 200,000
Trade and other receivables (2) 700,000
Inventories (3) 900,000
Prepaid expenses (4) 50,000
Total current assets

Noncurrent assets:
Property, plant and equipment (5) 5,000,000
Investment in associates, at equity 1,000,000
Long-term investments (6) 5,100,000
Intangible assets (7) 2,000,000
Other noncurrent assets (8) 100,000
Total noncurrent assets

Total assets

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Trade and other payables (9) 750,000
Note payable - short-term debt 400,000
Current portion of bonds payable 200,000
Warranty liability 50,000
Total current liabilities

Noncurrent liabilities:
Bonds payable - remaining portion 1,800,000
Notes payable - due July 1, 2021 600,000
Deferred tax liability 100,000
Total noncurrent liabilities

Shareholders' equity
Share capital, P100 par 5,000,000
Reserves (10) 3,000,000
Retained earnings 3,650,000
Total shareholders' equity

Total liabilities and shareholders' equity

 SAMPLAR COMPANY
Statement of Financial Position
December 31, 2019

ASSETS

Note
Current assets:
Cash and cash equivalents (1) 500,000
Financial assets at fair value 200,000
Trade and other receivables (2) 700,000
Inventories (3) 900,000
Prepaid expenses (4) 50,000
Total current assets

Noncurrent assets:
Property, plant and equipment (5) 5,000,000
Investment in associates, at equity 1,000,000
Long-term investments (6) 5,100,000
Intangible assets (7) 2,000,000
Other noncurrent assets (8) 100,000
Total noncurrent assets

Total assets

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Trade and other payables (9) 750,000
Note payable - short-term debt 400,000
Current portion of bonds payable 200,000
Warranty liability 50,000
Total current liabilities

Noncurrent liabilities:
Bonds payable - remaining portion 1,800,000
Notes payable - due July 1, 2021 600,000
Deferred tax liability 100,000
Total noncurrent liabilities

Shareholders' equity
Share capital, P100 par 5,000,000
Reserves (10) 3,000,000
Retained earnings 3,650,000
Total shareholders' equity

Total liabilities and shareholders' equity

 SAMPLAR COMPANY
Statement of Financial Position
December 31, 2019

ASSETS

Note
Current assets:
Cash and cash equivalents (1) 500,000
Financial assets at fair value 200,000
Trade and other receivables (2) 700,000
Inventories (3) 900,000
Prepaid expenses (4) 50,000
Total current assets

Noncurrent assets:
Property, plant and equipment (5) 5,000,000
Investment in associates, at equity 1,000,000
Long-term investments (6) 5,100,000
Intangible assets (7) 2,000,000
Other noncurrent assets (8) 100,000
Total noncurrent assets

Total assets

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Trade and other payables (9) 750,000
Note payable - short-term debt 400,000
Current portion of bonds payable 200,000
Warranty liability 50,000
Total current liabilities

Noncurrent liabilities:
Bonds payable - remaining portion 1,800,000
Illustration – account form
SAMPLAR COMPANY
Statement of Financial Position
December 31, 2019

ASSETS

Note
Current assets:
Cash and cash equivalents (1) 500,000
Financial assets at fair value 200,000
Trade and other receivables (2) 700,000
Inventories (3) 900,000
Prepaid expenses (4) 50,000
Total current assets 2,350,000

Noncurrent assets:
Property, plant and equipment (5) 5,000,000
Investment in associates, at equity 1,000,000
Long-term investments (6) 5,100,000
Intangible assets (7) 2,000,000
Other noncurrent assets (8) 100,000
Total noncurrent assets 13,200,000

Total assets 15,550,000

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Trade and other payables (9) 750,000
Note payable - short-term debt 400,000
Current portion of bonds payable 200,000
Warranty liability 50,000
Illustration – United Kingdom Style
 SAMPLAR COMPANY
Statement of Financial Position
December 31, 2019

ASSETS

Note
Current assets:
Cash and cash equivalents (1) 500,000
Financial assets at fair value 200,000
Trade and other receivables (2) 700,000
Inventories (3) 900,000
Prepaid expenses (4) 50,000
Total current assets

Noncurrent assets:
Property, plant and equipment (5) 5,000,000
Investment in associates, at equity 1,000,000
Long-term investments (6) 5,100,000
Intangible assets (7) 2,000,000
Other noncurrent assets (8) 100,000
Total noncurrent assets

Total assets

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Trade and other payables (9) 750,000
Note payable - short-term debt 400,000
Current portion of bonds payable 200,000
Warranty liability 50,000
Total current liabilities

Noncurrent liabilities:
Bonds payable - remaining portion 1,800,000
Notes payable - due July 1, 2021 600,000
Deferred tax liability 100,000
Total noncurrent liabilities

Shareholders' equity
Share capital, P100 par 5,000,000
Reserves (10) 3,000,000
Retained earnings 3,650,000
Total shareholders' equity

Total liabilities and shareholders' equity

CHAPTER 2: STATEMENT OF FINANCIAL POSITION

PROBLEMS

Problem 1

Darwin Company provided the following information at year-end:

Cash 1,500,000
Accounts receivable 1,200,000
Inventory, including inventory expected in the ordinary course of
operations to be sold beyond 12 months amounting to P700,000 1,000,000
Financial asset held for trading 300,000
Equity investment at fair value through other comprehensive income 800,000
Equipment held for sale 2,000,000
Deferred tax asset 150,000

What amount should be reported as total current assets at year-end?

a. 6,000,000 b. 4,000,000 c. 6,800,000 d. 4,800,000

Problem 2

Mirr Company was incorporated on January 1, 2018 with proceeds from the issuance of P7,500,000 in
share capital and borrowed funds of P1,100,000.

During the first year, revenue from sales and consulting amounted to P8,200,000, and operating costs
and expenses totaled P6,400,000.

On December 15, 2018, the entity declared a P300,000 dividends, payable to shareholders on January
15, 2019. The liabilities increased to P2,000,000 by December 31, 2018.

On December 31, 2018, what amount should be reported as total assets?

a. 11,000,000 b. 11,300,000 c. 10,100,000 d. 12,100,000

Problem 3

Gar Company reported the following liability account balances on December 31, 2018:

Accounts payable 1,900,000

Bonds payable, due December 31, 2019 3,400,000
Discount on bonds payable 200,000
Deferred tax liability 400,000
Dividends payable 500,000
Income tax payable 900,000
Note payable, due January 31, 2020 600,000

On December 31, 2019, what total amount should be reported as current liabilities?

a. 7,100,000 b. 6,700,000 c. 6,500,000 d. 6,900,000

Problem 4

Mazda Company reported the following liability balances on December 31, 2018:

10% note payable issued on October 1, 2017, maturing October 1, 2019 2,000,000

12% note payable issued on March 1, 2017, maturing on March 1, 2019 4,000,000

The 2018 financial statements were issued on March 31, 2019.

Under the loan agreement for the 10% note payable, the entity has the discretion to refinance the
obligation for at least twelve months after December 31, 2018.

On March 1, 2019, the entire P4,000,000 balance of the 12% note payable was refinanced through
issuance of a long-term obligation payable lump sum.

What amount of the notes payable should be classified as current on December 31, 2018?

a. 6,000,000 b. 4,000,000 c. 2,000,000 d. -0-

Problem 5

Silver Company provided the following information at year-end:

Share premium 1,000,000

Accounts payable 1,100,000
Preference share capital, at par 2,000,000
Ordinary share capital, at par 3,000,000
Sales 10,000,000
Total expenses 7,800,000
Treasury shares at cost – ordinary 500,000
Dividends 700,000
Retained earnings – beginning 1,000,000

What total shareholders’ equity should be reported at year-end?

a. 8,000,000 b. 8,500,000 c. 5,800,000 d. 8,700,000

Problem 6

Puzzle Company provided the following information at year-end:

Cash and cash equivalents 500,000

Accounts receivable, net of allowance P100,000 2,000,000
Inventory 6,000,000
Property, plant and equipment at carrying amount 12,000,000
Accounts payable 4,400,000
Wages payable 1,500,000
Share capital 6,000,000
Share premium 4,000,000

The only asset not listed is short-term investment.

The only liabilities not listed are a P3,000,000 note payable due in two years and related accrued
interest of P100,000 due in four months.

The current ratio at year-end is 1.5 to 1.00.

1. What is the amount of current liabilities?

a. 5,900,000 b. 6,000,000 c. 9,000,000 d. 8,900,000

2. What is the amount of short-term investment?

a. 700,000 b. 400,000 c. 500,000 d. -0-

3. What is the balance of retained earnings at year-end?

a. 2,000,000 b. 6,000,000 c. 5,000,000 d. 1,500,000

Problem 7

Daet Company provided the following account balances and related information at year-end:

Cash 3,700,000
Accounts receivable 1,500,000
Allowance for doubtful accounts 200,000
Inventory 2,000,000
Prepaid insurance 300,000

Total current assets 7,700,000

Analysis of cash

Cash in bank 1,300,000

Bank overdraft in another bank (300,000)
Cash set aside for plant addition 2,000,000
Petty cash fund 10,000
Cash withheld from wages 190,000
General cash 500,000

Total cash 3,700,000

The accounts receivable included past due account in the amount of P100,000. The account is deemed
uncollectible and should be written off.

The inventory included goods held on consignment amounting to P150,000 and goods of P200,000
purchased and received at year-end.

Neither of these items have been recorded as a purchase.

The prepaid insurance included cash surrender value of life insurance of P50,000.

1. What is the adjusted cash balance?

a. 2,000,000 b. 1,700,000 c. 4,000,000 d. 2,300,000

2. What is the adjusted balance of accounts receivable?

a. 1,200,000 b. 1,400,000 c. 1,300,000 d. 1,500,000

3. What is the adjusted inventory?

a. 2,200,000 b. 2,000,000 c. 1,850,000 d. 1,600,000

4. What total amount should be reported as current assets at year-end?

a. 5,500,000 b. 5,100,000 c. 5,300,000 d. 5,200,000