FINANCIAL STATEMENTS - STATEMENT OF FINANCIAL POSITION

CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS

HANDOUT #1

FINANCIAL STATEMENTS
Financial statements are how the informaBon accumulated and processed in financial accounBng is
periodically communicated to the users. The financial statements are the product or main output of the financial
accounBng process.

COMPONENTS OF FINANCIAL STATEMENTS

A complete set of financial statements comprises the following components:
1. Statement of financial posiBon
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 accounBng policies and other explanatory notes.

OBJECTIVE OF FINANCIAL STATEMENTS

The objecBve of financial statements is to provide informaBon about the financial posiBon, financial
performance and cash flows of an enBty that is useful to a wide range of users in making economic decisions.
Financial statements also show the results of the management’s stewardship of the resources entrusted to it.

FREQUENCY OF REPORTING
Financial statements shall be presented at least annually. When an enBty’s end of reporBng period
changes and financial statements are presented for a period longer or shorter than one year, an enBty shall
disclose:
a) The period covered by the financial statements.
b) The reason for using a longer or shorter period.
c) The fact that amounts presented in the financial statements are not enBrely comparable.

STATEMENT OF FINANCIAL POSITION

DEFINITION
A statement of financial posiEon is a formal statement showing the three elements comprising financial
posiBon namely assets, liabiliEes, and equity. Users of financial statements analyze the statement of financial
posiBon to evaluate such factors as liquidity, solvency, and the need of the enEty for addiEonal financing.
InformaBon about liquidity and solvency is useful in predicBng the ability of the enEty to comply with future
financial commitments and to pay dividends to shareholders.

*Liquidity – the ability of the en3ty to meet currently maturing obliga3ons

*Solvency – the availability of cash over the longer term to meet maturing obliga3ons

ASSETS
EssenBal characterisBcs of an asset are:
a) The asset is controlled by the enBty.
b) The asset is the result of a past event.
c) The asset provides future economic benefits.
d) The cost of the asset can be measured reliably.
CLASSIFICATION OF ASSETS
Assets are classified only into two, namely current assets and noncurrent assets.

CURRENT ASSETS
PAS 1, par. 66, provides that an enBty shall classify an asset as current when:
a) The asset is a cash and cash equivalent unless the asset is restricted to se^le a liability for more than
twelve months a_er the reporBng period.
b) The enBty holds the asset primarily for the purpose of trading.
c) The enBty expects to realize the asset within twelve months aRer the reporEng period.
d) The enBty expects to realize the asset or intends to sell or consume it within the enEty’s normal
operaEng cycle.
NOTE: When the enBty’s normal operaBng cycle is not clearly idenBfiable, the duraBon is assumed to be
12 months.

PRESENTATION OF CURRENT ASSETS

Current assets are usually listed in the order of liquidity. PAS 1, par. 54, provides that as a minimum, the
line items under current assets are:
a) Cash and cash equivalents
b) Financial assets at fair value such as trading securiBes and other investments in quoted equity
instruments
c) Trade and other receivables
d) Inventories
e) Prepaid expenses

NONCURRENT ASSETS
The capBon “noncurrent assets” is a residual definiBon. PAS 1 simply states that “an enBty shall classify
all other assets not classified as current as noncurrent”.

PRESENTATION OF NONCURRENT ASSETS

Accordingly, noncurrent assets include the following:
a) Property, plant, and equipment
Ø Land, building, machinery, equipment, furniture, fixtures, pa^erns, molds, dies and tools
b) Long-term investments
c) Intangible assets
Ø Patent, franchise, copyright, lease right, trademark and computer so_ware
d) Deferred tax assets
e) Other noncurrent assets
Ø Long-term advances to officers, directors, shareholders and employees, or abandoned property and
long-term refundable deposit

LIABILITIES
EssenBal characterisBcs of a liability are:
a) The liability is the present obligaEon of a parEcular enEty.
b) The liability arises from past transacEons or event.
c) The seTlement of the liability requires an ouUlow of resources embodying economic benefits.

CURRENT LIABILITIES
An enBty shall classify a liability as current when:
a) The enBty expects to se^le the liability within the enBty’s normal operaBng cycle.
 b) The enBty holds the liability primarily for the purpose of trading.
c) The liability is due to be se^led within twelve months a_er the reporBng period.
d) The enBty does not have an uncondiBonal right to defer se^lement of the liability for at least twelve
months a_er then reporBng period.

PRESENTATION OF CURRENT LIABILITIES

PAS 1, par. 54, provides that as a minimum, the face of the statement of financial posiBon shall include
the following line items for current liabiliBes:
a) Trade and other payables
Ø Accounts payable, notes payable, accrued interest on note payable, dividends payable and accrued
expenses
b) Current provisions
c) Short-term borrowing
d) Current porBon of long-term debt
e) Current tax liability

NONCURRENT LIABILITIES
The term “noncurrent liabiliBes” is also a residual definiBon. PAS 1, par. 69, provides that all liabiliBes not
classified as current as classified as noncurrent.

PRESENTATION OF NONCURRENT LIABILITIES

Examples of noncurrent liabiliBes are:
a) Noncurrent porBon of a long-term debt
b) Finance lease liability
c) Deferred tax liability
d) Long-term obligaBons to company officers
e) Long-term deferred revenue

EQUITY
The term “equity” is the residual interest in the assets of the enBty a_er deducBng all of its liabiliBes.
Simply stated, equity means “net assets” or total assets minus liabiliBes. The terms used in reporBng the equity
of an enBty depending on the form of the business organizaBon are:
a) Owner’s equity in a proprietorship
b) Partners’ equity in a partnership
c) Stockholders’ equity or shareholders’ equity in a corporaBon

FORMS OF STATEMENT OF FINANCIAL POSITION

In pracBce, there are two customary forms in presenBng the statement of financial posiBons, namely:
a) Report Form – this form sets forth the three major secBons in a downward sequence of assets, liabiliBes
and equity
b) Account Form – the presentaBon follows that of an account, meaning, the assets are shown on the le_
side and the liabiliBes and equity on the right side of the statement of financial posiBon.
EXAMPLE ON REPORT FORM
Pinagpala Proprietorship
Statement of Financial PosiBon
As of December 31, 2022

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

Noncurrent assets:
Property, plant, and equipment 5,000,000
Investment in associate, at equity 1,000,000
Long-term investment 5,100,000
Intangible assets 2,000,000
Other noncurrent assets 100,000
Total noncurrent assets 13,200,000
Total assets 15,550,000

LIABILITIES AND OWNER’S EQUITY

Current liabiliBes:
Trade and other payables 750,000
Note payable – short-term debt 400,000
Current porBon of bonds payable 200,000
Warranty liability 50,000
Total current liabiliBes 1,400,000

Noncurrent liabiliBes:
Bonds payable – remaining porBon 1,800,000
Note payable – due July 1, 2024 600,000
Deferred tax liability 100,000
Total noncurrent liabiliBes 2,500,000
Total liabiliBes 3,900,000

Owner’s Capital 11,650,000

Total liabiliBes and owner’s capital 15,550,000
EXAMPLE ON ACCOUNT FORM
Pinagpala Proprietorship
Statement of Financial PosiBon
As of December 31, 2022

ASSETS LIABILITIES AND EQUITY

Current assets: Current liabiliBes:
Cash and cash equivalents 500,000 Trade and other payables 750,000
Financial assets at fair value 200,000 Note payable – short-term
Trade and other receivables 700,000 debt 400,000
Inventories 900,000 Current porBon of bonds
Prepaid expenses 50,000 payable 200,000
Total current assets 2,350,000 Warranty liability 50,000
Total current liabiliBes 1,400,000

Noncurrent assets: Noncurrent liabiliBes

Property, plant, and Bond payable – remaining
Equipment 5,000,000 porBon 1,800,000
Investment in associate 1,000,000 Note payable – due July 1
Long-term investment 5,100,000 2024 600,000
Intangible assets 2,000,000 Deferred tax liability 100,000
Other noncurrent assets 100,000 Total noncurrent liabiliBes 2,500,000
Total noncurrent assets 13,200,000

Equity
Owner’s Capital 11,650,000
Total equity 11,650,000
Total assets 15,550,000 Total liabiliBes and equity 15,550,000

Source:
Valix, C., Peralta, J., & Valix, C.A., (2015). Financial AccounBng Volume 1.

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