FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2

LESSON 1

LEARNING COMPETENCY: Identify the elements of the SFP and

describe each of them.
SHORT REVIEW
A Snapshot of the Financial Position
We begin our study of financial statements with the Statement of Financial Position
(SFP). It was previously referred to as Balance Sheet. What is the origin of the name Balance
Sheet? The Balance Sheet is divided into two parts (Figure 1). The assets are on one side
and the claims are on the other side. Claims of creditors are called liabilities while claims of
owners are referred to as equity. The total of the assets should equal the total of the claims.
Hence, the statement was endearingly referred to as Balance Sheet because it is a statement
where the two parts must balance.

LIABILITIES
ASSETS

EQUITY

FIGURE 1: THE ACCOUNTING EQUATION

At the topmost part of the SFP is the title. The first line of the title shows the name of

the company. It allows easy identification of the reporting entity. The second line identifies

the FS which is the SFP. The third line is the date of the SFP. It states “as of the year ended.

This differentiates the SFP from the other financial statements with the third line of the

title that reads "for the year ended." How important is the third line? It tells the reader that

the balances reported on the SFP is the net effect of all transactions related to the specific

account from the date of the establishment of the company up to the date of the SFP.
As an example, look at the SFP in Figure 2.
 How is the balance of cash of P120,000 computed? it

is simply the sum of cash receipts less all the cash payments from the establishment date to

the SFP cut-off date. What is the meaning of the P120,000 cash balance? This is the amount

of cash available to be used for the company's operations "as of" December 31, 20X1. In

contrast, look again at Figure 2, but this time direct your attention to the Statement of Comprehensive Income
which has for its third line "for the year ended" December 31, 20X1.

Reported revenue amounts toP1,29 Million. This is the peso value of the revenue generated

by the company from January 1 to December 31, 20X1. This amount does not include the

revenue generated before and after this twelve month period.

Financial statements are interconnected reports. To appreciate the relationship of the

Financial Statements to each other, refer to the arrows at Figure 2 on page 5. The first report

prepared is the Statement of Comprehensive Income (SC). This report computes for the

net income. he net income is transferred to the Statement of Changes in Equity (SoCE).

SoCE is a report that presents the computation of the year end balance of equity accounts

that are reported in the Equity section of the SFP. The last statement is the Statement of

Cash Flows (SCF). This statement explains the cash balance that is reported on the SFP. The

interconnected reports eventually end on the SFP.

Discussion Questions: Before moving on to the next part, answer the

following review questions:

1. What is the other name for SFP?

2. Differentiate an 'as-of" and for the period" report.

Discuss how the other financial statements are linked to the SFP.

Elements of the Statement of Financial Position

The SFP is a report based on the accounting equation: Assets = Liabilities + (Owners)

Equity (Figure 1). Most students endearingly refer to the accounting equation as ALOE. It

was once called a Balance Sheet because the sum of the assets should be "balanced" to the

Sum of the liabilities and equity. The SFP s "balanced" as a consequence of double-entry

accounting.
 On one Side of the SFP are assets. Assets are resources with future benefits that are

within the control of the company. The asset should be useful to the company in the future.

Control means that the company can prevent others from benefiting from the asset. To

appreciate this, we will analyze how cash, a known asset, met this definition.

Our analysis of cash begins with the future benefits criterion. What are the uses of cash?

It can be used to settle obligations, pay for purchases of assets or be distributed to owners.

The second criterion is control? Can control be exerted over cash? Physical safeguards and

processes are established in order to prevent others from using the company's cash for

themselves. Example of control is depositing cash in reputable banks. Moreover, there are

legal actions that the company can use against someone who steal or misuse its cash. Given

our analysis, cash is a resource that met the definition of an asset. Other examples of assets

are receivables, inventory and equipment.

On the other side of the SFP are the claims. Liabilities and equity are sources of financing.

Liabilities are claims of creditors while equity represents claims of owners. Creditors require

payments of principal and interest. Owners, on the other hand, are not required to be repaid

for their investment in the company. In the event of the company's closure, the owners are

entitled to the assets of the company only after all the creditors had been paid.

Discussion Questions: Before moving on to the next part, answer the following review
questions:

4. What are the elements of the SFP?

5. What is an asset

6 What is a liability? Differentiate liability from equity.

Assets

Recall that assets are resources with future benefits that are within the control of

the company. Resources are classified into asset accounts based on its future use to the

company. There are many kinds or assets. This book will focus only on the following assets:

1. Cash
2. Receivables
3. Inventory

4. Prepaid Expenses
 5. Property, Plant, and Equipment

6. Intangible Assets

Cash

We will discuss the most well-known asset class first - Cash. Cash is money owned

by the company. Cash kept in the company’s premises is called cash on hand. Cash in bank

reefers to money in the bank which can be kept in a savings or checking account. Generally,

time deposit is not categorized as cash, this will be further explained in detail below.

Strictly speaking, cash refers only to funds readily available to be spent for the company’s operations. It is
used for buying assets, paying suppliers, utilities, employee salaries

and others. It is also used tor settlement of obligations. On the other hand, cash are sourced

from contribution of owners, proceeds from borrowings, sale of assets or collections from customers.

Cash on hand includes bills, coins and bank checks kept in the premises of the company.

Bank checks, or checks, are bank documents used by the issuer to instruct the bank to pay

the assigned payee from funds in the issuer's bank account. Checks maybe reported as

part of cash because these documents are accepted as payments and deposits. A check is

classified as cash if the date of the check is on or before the SFP date. A check dated after the

SFP date is a post-dated check and is classified as receivable rather than cash.

Not all bank deposits are classified as cash. Some accounts are not readily available

for use such as a time deposit account. A time deposit account is a deposit in the bank that

earns higher interest because the depositor commits not to withdraw the funds over the

agreed upon time. Penalties are imposed if the depositor withdraws before the maturity of

the deposit. Given the withdrawal restrictions, time deposits are not classified as cash. Those

with a term of up to 90 days are reported as cash equivalents while those that will mature

longer than 90 days are reported as investments.

Cash equivalents are technically not cash because it is not immediately available for

use. It is almost cash in the sense that it will become cash within the next 90 days. Time

deposits with term maturities of ninety days or less are examples of cash equivalents.
 It is generally reported on the SFP together with cash. The line account is cash and cash

equivalents. However, the components of cash and cash equivalents (cash on hand, cash n

bank, cash equivalents) are required to be disclosed in the accompanying notes to financial

statements.

Friendly convenience store: Cash

Friendly Convenience Store is managed by Juana Dela Cruz. Juana asked you to deter

mine the balance of her cash account as of December 31, 20X1. You determined the following:

1. She kept some cash in the store as change fund (suki),. The cash count revealed3 pieces

of 100 peso bills, 5 pieces of 50 peso bills, 5 pieces of 20 peso bills, 5 pieces of 10 peso

coins, 10 pieces of 5 peso coins, 10 pieces of 1 peso coins and 25 pieces of 25 centavo

coins.

2. Two of her regular customers gave Juana the following checks in payment of debts:

a. P1,540 check dated December 31, 20X1

b. P2432 check dated January 3, 20X2.

3. There are two bank accounts in the name of the store with the following balances:

a. Balance of the savings account on December 31, 20X1 according to the passbook

is P26,780.

b. A time deposit certificate for P100,000 for 90-days.

Report to Juana Dela Cruz the balance of the cash and cash equivalents account or

Friendly Convenience Store.