TOPIC 2: STATEMENT OF FINANCIAL POSITION

LEARNING OUTCOMES:
For the students:
1. To identify components of financial statements
2. To understand the objective of financial statements.
3. To understand the objective and use of the Statement of Financial Position
4. To know the classification of assets and liabilities
5. To know the forms of presenting the Statement of Financial Position
6. To be able to know how to prepare the Statement of Financial Position

INTRODUCTION:
Financial statements are the means by which the information accumulated and processed
in financial accounting is periodically communicated to the users. They are the end
product or main output of the financial accounting process.

General Purpose Financial Statements- are those intended to meet the needs of users who
are not in a position to require an entity to prepare reports tailored to their particular
information needs. In other words, they are directed to all common users and not to
specific users.

COURSE WORK (ACTIVITY AND DISCUSSION):

Components of financial statements:

1. Statement of financial position
2. Income Statement
3. Statement of Comprehensive Income
4. Statement of Changes in equity
5. Statement of cash flows
6. Notes, comprising a summary of significant accounting policies and other
explanatory notes.

Objective of financial statements

-To provide information about the financial position, financial performance and cash
flows of an entity that is useful to a wide range of users in making economic decisions.

The 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.

Statement of Financial Position helps users of financial statements to assess the financial
soundness of an entity in terms of liquidity risk, financial risk, credit risk and business
risk.

Example
Classification of Components

Statement of financial position consists of the following key elements:

Assets

An asset is something that an entity owns or controls in order to derive economic benefits
from its use. Assets must be classified in the balance sheet as current or non-current
depending on the duration over which the reporting entity expects to derive economic
benefit from its use. An asset which will deliver economic benefits to the entity over the
long term is classified as non-current whereas those assets that are expected to be realized
within one year from the reporting date are classified as current assets.

Assets are also classified in the statement of financial position on the basis of their
nature:

 Tangible & intangible: Non-current assets with physical substance are classified
as property, plant and equipment whereas assets without any physical substance
are classified as intangible assets. Goodwill is a type of an intangible asset.

 Inventories balance includes goods that are held for sale in the ordinary course of
the business. Inventories may include raw materials, finished goods and works in
progress.

 Trade receivables include the amounts that are recoverable from customers upon
credit sales. Trade receivables are presented in the statement of financial position
after the deduction of allowance for bad debts.

 Cash and cash equivalents include cash in hand along with any short term
investments that are readily convertible into known amounts of cash.

Liabilities

A liability is an obligation that a business owes to someone and its settlement involves
the transfer of cash or other resources. Liabilities must be classified in the statement of
financial position as current or non-current depending on the duration over which the
entity intends to settle the liability. A liability which will be settled over the long term is
classified as non-current whereas those liabilities that are expected to be settled within
one year from the reporting date are classified as current liabilities.

Liabilities are also classified in the statement of financial position on the basis of their
nature:

 Trade and other payables primarily include liabilities due to suppliers and
contractors for credit purchases. Sundry payables which are too insignificant to be
presented separately on the face of the balance sheet are also classified in this
category.
  Short term borrowings typically include bank overdrafts and short term bank
loans with a repayment schedule of less than 12 months.

 Long-term borrowings comprise of loans which are to be repaid over a period that
exceeds one year. Current portion of long-term borrowings include the
installments of long term borrowings that are due within one year of the reporting
date.

 Current Tax Payable is usually presented as a separate line item in the statement
of financial position due to the materiality of the amount.

Equity

Equity is what the business owes to its owners. Equity is derived by deducting total
liabilities from the total assets. It therefore represents the residual interest in the business
that belongs to the owners.

Equity is usually presented in the statement of financial position under the following
categories:

 Share capital represents the amount invested by the owners in the entity

 Retained Earnings comprises the total net profit or loss retained in the business
after distribution to the owners in the form of dividends.

 Revaluation Reserve contains the net surplus of any upward revaluation of

property, plant and equipment recognized directly in equity.

Rationale - Why the balance sheet always balances?

The balance sheet is structured in a manner that the total assets of an entity equal to the
sum of liabilities and equity. This may lead you to wonder as to why the balance sheet
must always be in equilibrium.

Assets of an entity may be financed from internal sources (i.e. share capital and profits)
or from external credit (e.g. bank loan, trade creditors, etc.). Since the total assets of a
business must be equal to the amount of capital invested by the owners (i.e. in the form of
share capital and profits not withdrawn) and any borrowings, the total assets of a business
must equal to the sum of equity and liabilities.

This leads us to the Accounting Equation: Assets = Liabilities + Equity

Purpose & Importance

Statement of financial position helps users of financial statements to assess the financial
health of an entity. When analyzed over several accounting periods, balance sheets may
assist in identifying underlying trends in the financial position of the entity. It is
particularly helpful in determining the state of the entity's liquidity risk, financial risk,
credit risk and business risk. When used in conjunction with other financial statements of
the entity and the financial statements of its competitors, balance sheet may help to
identify relationships and trends which are indicative of potential problems or areas for
further improvement. Analysis of the statement of financial position could therefore assist
the users of financial statements to predict the amount, timing and volatility of entity's
future earnings.

Forms of Statement of financial position

a. Report Form

X COMPANY
Statement of Financial Position
December 31, 2017

ASSETS
Note
Current Assets

Cash and cash equivalents 1 500,000.00

Financial Assets 200,000.00

Trade and other receivables 2 700,000.00

Inventories 3 900,000.00

Prepaid expenses 4 50,000.00

Total Current Assets 2,350,000.00

Non-current Assets
Property, plant and
equipment 5 5,000,000.00

Investment in Associate 1,000,000.00

Long-term investments 6 5,100,000.00

Intangible assets 7 2,000,000.00

Other Non-current assets 8 100,000.00

Total non-current assets 13,200,000.00

Total Assets 15,550,000.00

 LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities

Trade and other payables 9 750,000.00

Note payable-short term debt 400,000.00

Current portion of bonds payable 200,000.00

Warranty liability 50,000.00

Total Current liabilities 1,400,000.00

Non-current liabilities

Bonds payable-remaining portion 1,800,000.00

Note payable due- July 1,
2019 600,000.00

Deferred tax liability 100,000.00

Total non-current liabilities 2,500,000.00

Shareholders' Equity

Share capital P100 par 5,000,000.00

Reserves 10 3,000,000.00

Retained Earnings 3,650,000.00

Total Shareholders' Equity 11,650,000.00

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 15,550,000.00

Note 1- Cash and Cash Equivalents

Cash on hand 40,000.00

Cash in bank 300,000.00

Petty cash fund 10,000.00

BSP Treasury bill purchased on Dec. 1, 12017

and due march 1, 2018 150,000.00

Total 500,000.00
Note 2- Trade and Other Receivables

Accounts Receivable 580,000.00

Allowance for doubtful accounts (20,000.00)

Notes Receivable 100,000.00

Accrued interest on notes receivable 10,000.00

advances to employees- current 30,000.00

Total 700,000.00

Note 3- Inventories

Finished Goods 300,000.00

Goods in Process 400,000.00

Raw materials 150,000.00

Manufacturing supplies 50,000.00

Total 900,000.00

Note 4 Prepaid Expenses

Office supplies unused 30,000.00

Prepaid insurance 20,000.00

Total 50,000.00

Note 5-Property, plant and equipment

Land 1,500,000.00

Building 4,500,000.00

Machinery and Equipment 1,000,000.00

Furnitures and Fixtuires 300,000.00

Patterns, molds, dies and tools, net 100,000.00

Total
 7,400,000.00

Accumulated depreciation (2,400,000.00)

Carrying Amount 5,000,000.00

Accumulated Depreciation

Building 1,900,000.00

Machinery and Equipment 350,000.00

Furnitures and Fixtuires 150,000.00

Total 2,400,000.00

Note 6-Long Term Investments

Plant expansion fund 2,000,000.00

Investments in bonds 3,000,000.00

Cash surrender value 100,000.00

Total 5,100,000.00

Note 7-Intangible Assets

Patent 500,000.00

Franchise 1,500,000.00

Total 2,000,000.00

Note 8 -Other Non-current assets

Long term refundable deposit 20,000.00

Long-term advances to officers 80,000.00

Total 100,000.00

Note 9- Trade and other payables

Accounts Payable 350,000.00

Notes payable
 150,000.00

Accrued interest on note payable 15,000.00

Income tax payable 50,000.00

Dividend Payable 100,000.00

Accrued expenses 85,000.00

Total 750,000.00

Note 10- Reserves

Share premium 2,000,000.00

Retained earnings appropriated 1,000,000.00

for contingencies 3,000,000.00

b. Account Form

Please click the link below

Statement of Financial Position- Report form and Account form.pdf

ACTIVITY: Please perform Activity posted in Assignment in the LMS

VALUE FOCUS: Diligence