The Statement of Financial

Position
Learning Objectives:
By the end of the chapter, the students should be able to:

1. Understand the purpose of the Statement of Financial Position (SFP).

2. Enumerate the basic elements of the Statement of Financial Position.
3. Describe the nature of the accounts reported on the SFP.
4. Prepare the SFP using report format and account format.
5. Prepare a classified SFP, and
6. Determine the normal balances of the SFP accounts.
Definition of Financial Statements
Financial Statements are the means by which the information accumulated and
processed in financial accounting is periodically communicated to the users.

The financial statements are the end product or main output of the financial
accounting process.

Financial statements are a structural financial representation of the financial position

and financial performance.
Components of Financial Statements
A complete set of financial statements comprises the following components.
1. Statement of Financial Position
2. Statement of Comprehensive Income
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes, compromising a summary of significant accounting policies
6. A statement of financial position as the beginning of the earliest comparative
period when a entity applies an accounting policy retrospectively or makes a
retrospective restatement of items in its financial statements, or when it
reclassifies items in its financial statements.
Objective of Financial Statements
The objective of the Financial statements is 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.
Review on Balance Sheet Elements
Asset- is defined as “resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the entity.”
Liability- defined as “present obligation of an entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits.
Equity- residual interest in the assets of the entity after deducting all of its
liabilities.
The Accounting Equation
Accounting Equation and Balance Sheet
Current Asset
PAS 1, paragraph 66 provides that an entity shall classify an asset as current when:

A. The asset is cash or cash equivalent unless the asset is restricted from being
exchanged or used to settle a liability for at least 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
entity’s normal operating cycle.
Noncurrent Asset
The caption “non-current assets” is a residual definition. PAS 1, paragraph 66,
simply states that “an entity shall classify all other assets not classified as current as
noncurrent.”
Assets
1. Cash
2. Receivables
3. Inventory
4. Prepaid Expenses
5. Property, Plant and Equipment
6. Intangible Assets
Cash and Cash Equivalents
Cash is money owned by the company.
The following cash items are included in “cash.”
A. Cash on hand- cash kept in company’s premises.
B. Cash in bank- refers to money in the bank which can be kept in a savings or
checking account.
C. Cash fund- set aside for current purposes such as petty cash fund, payroll fund,
and dividend fund.
To be reported as “cash” an item must be unrestricted in use.
Cash Equivalents- PAS 7, paragraph 6, defines “cash equivalents” as short-term and
highly liquid investments that are readily convertible into cash and so near their
maturity that they represent insignificant risk of changes in interest rates.

The standard further states that “only highly liquid investments that are acquired
three months before maturity can qualify as cash equivalents.”

a. If the term is three months or less, such instruments are classified as cash
equivalents and therefore included in the caption “cash and cash equivalents”.
B. if the term is more than three months but within one year, such investments are
classified as short-term financial assets and presented separately as current assets.

C. If the term is more than one year, such investments are classified as non-current
or long term investments.
Sample Problem
Receivables
● Refers to the company’s right to collect or claim payment.
● Account receivable normally has a term of 30 days which means a customer
should pay 30 days from the date of delivery. Some sellers are more lenient and
give terms of 60, 90, 180 days.
● Notes receivables is another kind of receivable. It is evident by promissory note
● Promissory note is a legal document that says the borrower promises to pay, on
scheduled payment with principal and interest on stated rate.
Sample Problem
Inventory
● Reports the cost of unsold merchandise.
● On trading business, it contains merchandise held for resale.
● On manufacturing company, it is composed of raw materials, unfinished
inventories (work in process) and unsold finished goods.
● Consignment occurs when goods are sent by their owner (the consignor) to an
agent (the consignee), who undertakes to sell the goods. The consignor
continues to own the goods until they are sold, so the goods appear as inventory
in the accounting records of the consignor, not the consignee.
Sample Problem
Prepaid Expenses
● Refer to future expenses that the company had paid for in advance. It is place
on expense account until the service or items are used.
Sample Problem
Property, Plant and Equipment
● Long-term assets that are used in the operations of the company.(non-current
asset)
● Land, building, warehouse, automobiles, delivery vehicle, computer equipment
and manufacturing equipment are examples of PPE.
● Cost of PPE is not immediately reported as expense, rather, it is recognized as
asset.
● The process of recognizing the asset is called capitalization while depreciation
refers to transferring of cost of asset to expense.
Take note, not all PPE are subject to depreciation. Land is not depreciated because
this asset does not have a useful life. More so, the land increases in value.
Sample Problem
Intangible Asset
● Long-term assets.
● The allocation of the cost of intangible assets to the year it was used is called
amortization.
● It is amortized over the useful life.
● Examples are patent, trademark, brand name.