ACCOUNTING SEMINAR

STATEMENT OF FINANCIAL POSITION

Prepared by : Shafira Alifiana Elmira

SIN : C1I017048
Date of Submission : March 18th 2020

INTERNATIONAL ACCOUNTING
FACULTY OF ECONOMIC AND BUSINESS
UNIVERSITAS JENDERAL SOEDIRMAN
INTRODUCTION
Obviously, every business produce a financial statement to give information
about their financial situation and also as a form of accountability as well as benchmark
whether the company’s can last for a long term or not. Public companies in the US are
called SEC (Securities and Exchange Commission)-registered companies or listed
companies have to make quarterly reports and they report on sales revenue or turnover,
gross profit, and net profit. All companies with shareholders or stockholders have to
send them an Annual Report each financial year. This contains a review of the year’s
activity, and an examination and explanation of the company’s financial position and
results. There are also financial statements and notes, and the auditor’s report on
financial statement.
Investors in companies want to know how much the companies worth, so
companies regularly have to publish the value of their assets and liabilities. Companies
also have to calculate their profit or losses: their managers need this information, and so
do the shareholders, bondholders, and the tax authorities. Company law in Britain and
the Securities and Exchange Commission in the US, require companies to publish
annual balance sheets: statements for shareholders and creditors.
In the US the term for balance sheet (UK) is mostly spell as Statement of
Financial Position. The balance sheet or statement of financial position is a financial
statement that reports a company’s assets, liabilities and shareholder’s equity at a
specific point in time. Since financial statements are prepared for external users such as
creditor, investors, government, suppliers, external auditor, the tax authorities, and so
on there is always more than a way of presenting accounts. It called creative
accounting. Overall, creative accounting can come in many different forms. It can also
occur in many different ways. For example, companies that try to boost their balance
sheet and it has purpose to increase their net income earnings power in order to create
the appearance of a stronger financial condition or stronger management performance .
Companies may also be looking to overstate their overall asset position to potential
creditors.  
Public companies are considered to be held to a higher standard because of their
mandate to follow Generally Accepted Accounting Principles (GAAP) but that hasn’t
stopped several companies throughout history from cooking their books to post much
better than actual results in many categories. Enron, WorldCom, and Lehman Brothers
are some of the top known cases of fraud but there are others. We’ll explore more about
the statement of financial position or balance sheet in further more.
TOPIC
1. Statement of Financial Position or Balance Sheet
First, we will discuss more about Statement of Financial Position or Balance
Sheet. Statement of Financial Position or Balance Sheet is a financial statement
that reports a company's assets, liabilities and shareholders' equity at a specific
point in time, and provides a basis for computing rates of return and evaluating
its capital structure. It is a financial statement that provides a snapshot of what a
company owns and owes, as well as the amount invested by shareholders . The
balance sheet is one of the three (income statement and statement of cash flows
being the other two) core financial statements used to evaluate a business.
The balance sheet is a document which has two halves. The total of both
halves are always the same, so they balance. One half shows a business’s assets,
which are things owned by the company, such as factories and machines, that will
bring future economic benefits. The other half shows the company’s liabilities and
its capital or shareholder’s equity. Liabilities are obligations to pay other
organizations or people: money that owes, or will owe at a future date. These often
include loans, taxes that will soon have to paid, future pension payments to
employees, and bills from suppliers: companies which provide raw materials or
parts.
Since assets are shown as debits (As the cash or capital account was
debited to purchase them) and the total must correspond with the total sum of the
credits- that is the liabilities and capital- assets equal liabilities plus capital.

Assets = Libilities + Shareholder’s Equity

This formula is intuitive: a company has to pay for all the things it owns
(assets) by either borrowing money (taking on liabilities) or taking it from investors
(issuing shareholders' equity).
American and continental European companies usually put assets on the
left and capital and liabilities on the right. In Britain, this was traditionally the other
way round, but now most British companies use a vertical format, with assets at
the top and liabilities and equity below.
Statement of financial position is a historical report. It only shows the items
that were present on the day of the report. This is in contrast with other financial
reports like the income statement that presents company activities over a period of
time. The statement of financial position only records the company account
information on the last day of an accounting period. In this sense, investors and
creditors can go back in time to see what the financial position of a company was
on a given date by looking at the balance sheet. Fundamental analysts use
 balance sheets, in conjunction with other financial statements, to calculate
financial ratios.
2. Purpose and Importance of Statement of Financial Position
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.
3. Example
Following is an illustrative example of Statement of Financial Position:
 As we can see from the example template, each balance sheet account is listed in
the accounting equation order. This organization gives investors and creditors a
clean and easy view of the company’s resources, debts, and economic position
that can be used for financial analysis purposes. Investors use this information to
compare the company’s current performance with past performance to gauge the
growth and health of the business. They also compare this information with other
companies’ reports to decide where the opportune place is to invest their money.
Creditors, on the other hand, are not typically concerned with comparing
companies in the sense of investment decision-making. They are more concerned
with the health of a business and the company’s ability to pay its loan payments.
Analyzing the leverage ratios, debt levels, and overall risk of the company gives
creditors a good understanding of the risk involving in loaning a company money.
Obviously, internal management also uses the financial position statement to track
and improve operations over time.
4. Classification of Components
a. Assets
In accounting, assets are generally divided into fixed assets and current
assets. Fixed assets (or non-current assets) and investments, such as buildings
and equipment, will continue to be used by the business for a long time. Current
assets are things that will probably be used by the business in the near future.
They include cash-money available to spend immediately, debtors- companies or
people who owe money they will have to pay in the near future, and inventory.
These resources are typically consumed in the current period or within the next 12
months.
Manufacturing companies generally have inventory of raw material, work in
progress - partially manufactured products – and products ready for sale. There
are various ways of valuing inventory, but generally they are valued at the lower of
cost or market which means whichever figure is lower: their cost – the purchase
price plus the value of any work done on the items – or the current market price.
This is another example of conservatism: even if the inventory is expected to be
sold at a profit, you should not anticipate profits.
Assets also can be classified as tangible and intangible assets. Tangible
assets are assets with a physical existence – things you can touch – such as PPE
(property, plant and equipment). It generally recorded at their historical cost less
accumulated depreciation charges. This gives their net book value. Intangible
assets include brand names – legally protected names for a company’s products.
Patents – exclusive rights to produce a particular new product for a fixed period,
and trademarks – names or symbols that are put on products and cannot be used
by other companies. Networks of contracts, loyal customers, reputation, trained
staff or human capital, and skilled management can be considered as intangible
assets. If company buys another one at above its net worth – because of its
intangible assets – the difference in price is recorded under assets in the balance
sheet as goodwill.
b. Liabilities
 Amounts of money that a company owes and are generally divided into two
types – long term and current. Long-term liabilities or non-current liabilities include
bonds. Current liabilities are expected to be paid within a year of the date of the
balance sheet. They include: creditors, planned dividends, deferred taxes – money
that will have to be paid as taxes in the future, although the payment does not
have to be made now.
Accrued expenses because of the matching principle, under which transactions
and other events are reported in the periods to which they relate and not when
cash is received or paid, balance sheet usually include accrued expenses. These
are expenses that have accumulated or built up during the accounting year but will
not paid until the following year, after the date of the balance sheet. So accrued
expenses are charged against income – that is deducted from profits – even
though the bills have not yet been received or the cash paid. Accrued expenses
could include taxes, and utility bills, for example electricity and water.
c. Shareholder’s Equity
Consist of all the money belonging to the shareholders. Part of this is share
capital – the money the company raised by selling its shares. But shareholder’s
equity also includes retained earnings: profits from previous years that have not
been distributed – paid out to shareholders – as dividends. Share premium: money
made if the company sells shares at above their face value – the value written on
the shares. Reserves is funds set aside from share capital and earnings, retained
for emergencies or other future needs. Shareholder’s equity is the same as the
company’s net assets or assets minus liabilities. This section is displayed slightly
different depending on the type of entity. For example a corporation would list the
common stock, preferred stock, additional paid-in capital, treasury stock, and
retained earnings. Meanwhile, a partnership would simply list the member’s capital
account balances including the current earnings, contributions, and distributions.
In the world of nonprofit accounting, this section of the statement of financial
position is called the net assets section because it shows the assets that the
organization actually owns after all the debts have been paid off. It’s easier to
understand this concept by going back to an accounting equation example. If we
rearrange the accounting equation to state equity = assets – liabilities, we can see
that the equity of a non-profit is equal to the assets less any outstanding liabilities.
5. Why Balance Sheet Always Balance?
Notice that the balance sheet is always in balance. Just like the
accounting equation, the assets must always equal the sum of the liabilities and
owner’s equity. This makes sense when you think about it because the company
has only three ways of acquiring new assets. It can use an asset to purchase and
a new one (spend cash for something else). It can also take out a loan for a new
purchase (take out a mortgage to purchase a building). Lastly, it can take money
from the owners for a purchase (sell stock to raise cash for an expansion). All
three of these business events follow the accounting equation and the double
entry accounting system where both sides of the equation are always in balance.
6. Spotting Creative Accounting in the Balance Sheet
Overall, creative accounting can come in many different forms. It can
also occur in many different ways. Keep in mind that certain loopholes do
exist that may help a company positively spin financial reporting in their
favor legally. On the balance sheet, spotting creative accounting practices
can be broken down into three categories for analysis: assets, liabilities,
and equity. The balance sheet is closely tied to the income statement
which is often where issues with asset revenue and/or liability expenses
can help to create inflated revenues or understated expenses that result in
a higher bottom line net income and furthermore a higher level of retained
earnings tied back to the balance sheet. Here we’ll explore some of the
ways each of the three categories of the balance sheet can be
manipulated. However, keep in mind that any scenario involving the illegal
overstatement of assets, understatement of liabilities, or overall under or
overstatement of shareholders’ equity can reap short term benefits but
when spotted will have negative consequences.
- Overvaluing Assets
Assets top out balance sheet construction. Like liabilities, assets are
divided into current (12 months or less) and long-term (more than 12
months). Items commonly found in the asset category include: cash and
equivalents, accounts receivable, inventory, and intellectual intangibles.
a. Provision for Doubtful Accounts
Account Receivable have a direct link to revenues on the
income statement. Companies that use accrual accounting can book
revenue in accounts receivable as soon as a sale is made. Thus, the
processing of accounts receivable can be one high risk area for
premature or fabricated revenues. One reason accounts receivables
may be overstated can be inappropriate planning for doubtful
accounts. Prudent companies typically take proactive measures for
account receivable defaults. By not doing so, this can inflate
earnings. It is up to each company to analyze and estimate the
percentage of accounts receivables that goes uncollected on a
regular basis. If there is no allowance for doubtful accounts,
accounts receivable will receive a temporary boost in the short term.
Investors can possibly detect when the reserves for doubtful
accounts are inadequate. Accounts receivable will not be fully turned
into cash, which can show up in liquidity ratios like the quick ratio.
Write-downs will also need to be made to revenues. If accounts
receivable makes up a substantial portion of assets and inadequate
default procedures are in place this can be a problem. Without
 doubtful account planning, revenue growth will be overstated in the
short-term but potentially retracted over the longer term.
b. Revenue Acceleration
In the asset category, companies can also overstate revenues
through acceleration. This could come from booking multiple years
of revenue at once. Companies may also manipulate revenues by
comprehensively booking a recurring revenue stream upfront rather
than spreading it out as it is expected to be received. Revenue
acceleration is not necessarily illegal but it is not usually a best
practice.
c. Inventory Manipulation
Inventory represents the value of goods that were manufactured
but not yet sold. Inventory is usually valued at wholesale but sold with a
markup. When inventory is sold, the wholesale value is transferred over to
the income statement as cost of good sold and the total value is
recognized as revenue. As a result, overstating any inventory values could
lead to an overstated cost of goods sold, which can reduce the revenue
earned per unit. Some companies may look to overstate inventory to
inflate their balance sheet assets for the potential use of collateral if they
are in need of debt financing. Typically, it is a best practice to buy
inventory at the lowest possible cost in order to reap the greatest profit
from a sale.
One example of manipulated inventory includes Laribee Wire
Manufacturing Co., which recorded phantom inventory and carried other
inventory at bloated values. This helped the company borrow some $130
million from six banks by using the inventory as collateral. Meanwhile, the
company reported $3 million in net income for the period, when it really
lost $6.5 million.
Investors can detect overvalued inventory by looking for telling
trends like large spikes in inventory values. The gross profit ratio can also
be helpful if it is seen to fall unexpectedly or to be far below industry
expectations. This means net revenues may be falling or extremely low
because of excessive inventory expensing. Other red flags can include
inventory increasing faster than sales, decreases in inventory turnover,
inventory rising faster than total assets, and rising cost of sales as a
percentage of sales. Any unusual variations in these figures can be
indicative of potential inventory accounting fraud.

d. Subsidiaries and Joint Ventures

When public companies make large investments in a separate
business or entity, they can either account for the investment under
 the consolidation method or the equity method depending on their
ability to control the subsidiary. Regardless, these investments are
booked as assets. This can leave the door open for companies to
potentially use subsidiaries, ownership investments, and joint
venture structuring for concealment or fraudulent purposes-
oftentimes, off-balance sheet items are not transparent.
Under the equity method, the investment is recorded at cost
and is subsequently adjusted to reflect the share of net profit or loss
and dividends received. Gains on these investments inflate assets
and also lead to higher net income which carries over to the retained
earnings portion of shareholders’ equity. While these investments
are reported on the balance sheet and income statement, the
methodologies can be complex and may create opportunities for
fraudulent reporting.
Investors should be cautious—and perhaps take a look at
the auditor’s reliability—when companies utilize the equity method
for accounting in situations where they appear to control the
subsidiary. For example, a U.S.-based company operating in China
through various subsidiaries in which it appears to exert control
could create an environment ripe for manipulation.
- Undervalueing Liabilities
Undervaluing liabilities is a second way to manipulate financial
statement reporting from the balance sheet. Any understatement of a
company’s expenses can be beneficial in boosting bottom line profits.
a. Contingent Liabilities
Contingent liabilities are obligations that are dependent on future
events to confirm the existence of an obligation,the amount owed,
the payee, or the date payable. For example, warranty obligations or
anticipated litigation losses may be considered contingent liabilities.
Companies can creatively account for these liabilities by
underestimating them or downplaying their materiality. Companies
that fail to record a contingent liability that is likely to be incurred and
subject to reasonable estimation are understating their liabilities and
overstating their net income and shareholder’s equity. Investors can
watch for these liabilities by understanding the business and
carefully reading a company's foot notes, which contain information
about these obligations. Lenders for example, regularly account for
uncollected debts incurred through defaults and often discuss this
area when earnings reports are released.
b. Other Expenses
 Some other ways companies may manipulate expenses can include:
delaying them inappropriately, adjusting expenses around the time
of an acquisition or merger, or potentially overstating contingent
liabilities for the purpose of adjusting them in the future as an
increase to assets. Moreover, in the realm of expenses, subsidiary
entities as mentioned above, can also be a haven for off-balance
sheet reporting of some expenses that are not transparently
realized.
c. Pension Obligation
Pention obligation are ripe for manipulation by public
companies, since the liabilities occur in the future and company-
generated estimates need to be used to account for them.
Companies can make aggressive estimates in order to improve both
short-term earnings as well as to create the illusion of a stronger
financial position. There are two key assumptions that companies
may adjust.
In general, pension obligations are a result of the present value
of future payments paid to employees. One way to potentially
manipulate this is through the discount rate used. Increasing the
discount rate can significantly reduce the pension obligation.
Companies may also overstate the expected return on plan assets.
Overstating expected return creates more assets from which to pay
pension liabilities, effectively reducing the overall obligation. Since
pension obligations can be ongoing for a company, accountants could
potentially make various adjustments over the full length of the
obligations in order favorably manipulate net income in the short-term
or at some time in the future.
CONCLUSION
The purpose of the statement of financial position is to present the financial
position of the company on a particular date. Unlike the income statement, which
is a change statement that report events occurring during a period of time, the
statement of financial position is a statement that presents an organized array of
assets, liabilities, and shareholders’ equity at a point in time. It is a freeze frame or
snapshot picture of financial position at the end of a particular day marking the end
of an accounting period.
The statement of financial position does not portray the market value of the
entity (number of ordinary shares outstanding multiplied by price per share) for a
number of reasons. Most assets are not reported at fair value, but are instead
measured according to historical cost. Also, there are certain resources, such as
 trained employees, an experienced management team, and a good reputation,
that are not recorded as assets at all. Therefore, the assets of a company
minus its liabilities, as shown in the statement of financial position, will not be
representative of the company’s market value.
On the balance sheet spotting creative accounting practices can be
broken down into three categories for analysis: assets, liabilities, and equity.
Overstating assets and/or understating liabilities leads to increased net
income on the income statement. Fraudulently increasing net income can
create the illusion of better performance, both by the company and
management. Inflating assets and understating liabilities on the balance
sheet can also improve key performance ratios that creditors may be
interested in when assessing or following lines of credit. Overall, a
company’s balance sheet ratios are an important factor in performance
assessment by all types of stakeholders and creatively improving them
through balance sheet manipulation can have many advantages.

REFERENCES
MacKenzie, Ian. Professional English in Use Finance. Cambridge University Press.
https://www.investopedia.com/terms/b/balancesheet.asp
https://www.investopedia.com/articles/fundamental-analysis/10/creative-accounting-
balance-sheet.asp
https://www.myaccountingcourse.com/financial-statements/statement-of-financial-
position
https://accounting-simplified.com/financial/statements/statement-of-financial-
position.html
https://www.academia.edu/34707033/Chapter_03_-The_Statement_of_Financial_Position_and_Financial_Disclosures_Question_3-1_Question_3-
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