Chapter 05 : Statement of Financial Position

Statement of Financial Position, also referred to as the balance sheet:

1. Reports assets, liabilities, and equity at a specific date.
2. Provides information about resources, obligations to creditors, and equity in net
resources.
3. Helps in predicting amounts, timing, and uncertainty of future cash flows.
Usefulness:
Computing rates of return.
Evaluating capital structure.
Assess risk and future cash flows.
Analyze company’s:
 Liquidity
 Solvency
 Financial flexibility
Limitations
Most assets and liabilities are reported at historical cost.
Use of judgments and estimates.
Many items of financial value are omitted.

Classifications

Sub classifications

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Non-Current Assets

Long-term Investments

1. Securities (bonds, ordinary shares, or long-term notes).

Portfolio Type Valuation Classification

Held for Collection Debt (Bonds) Amortized Cost Current or Non-Current
Non-Trading Equity (Shares) Fair Value Current or Non-Current
Trading Debt or Equity Fair Value Current

2. Tangible assets not currently used in operations (land held for speculation).

3. Special funds (sinking fund, pension fund, or plant expansion fund.

4. Non-consolidated subsidiaries or associated companies

Property, Plant, and Equipment

Tangible long-lived assets used in the regular operations of the business.

Physical property such as land, buildings, machinery, furniture, tools, and wasting
resources (minerals).

With the exception of land, a company either depreciates (e.g., buildings) or depletes
(e.g., oil reserves) these assets.

Intangible Assets

Lack physical substance and are not financial instruments.

Patents, copyrights, franchises, goodwill, trademarks, trade names, and customer lists.

Amortize limited-life intangible assets over their useful lives.

Periodically assess indefinite-life intangibles for impairment

Other Assets

Items vary in practice. Can include:

 Long-term prepaid expenses

 Non-current receivables
 Assets in special funds
 Property held for sale
 Restricted cash or securities

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Current Assets

Cash and other assets a company expects to convert into cash, sell, or consume either in one year or in
the operating cycle, whichever is longer

Inventories: We have to disclose the following.

Basis of valuation (e.g., lower-of-cost-or-market).

Cost flow assumption (e.g., FIFO or average cost).

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Receivables

Prepaid Expenses

Payment of cash, that is recorded as an asset because service or benefit will be received in the future.

insurance

supplies

advertising

Short-Term Investments

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Cash and cash equivalents

Generally any monies available “on demand.”

Cash equivalents - short-term highly liquid investments that mature within three months or less.

Restrictions or commitments must be disclosed.

Equity

 Ordinary shares and preference shares - must disclose the par value and the
authorized, issued, and outstanding amounts.

 Share premium - company usually presents one amount for ordinary and preference
shares.

 Retained earnings - amount may be divided between the unappropriated and

restricted amounts.

 Treasury shares - shown as a reduction of equity.

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SCIENTIFIC PRODUCTS INC.

STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2011
Assets
Non-Current assets:
Long term investments
Investments in held to maturity Securities 20,000
Investments in Non-trading Securities 10,000
Long term notes 5,000
Bond sinking funds 15,000
Pension fund 12,000
Plant expansion fund. 8,000
Land held for future development (for sale) 35,000
Non consolidated subsidiaries 60,000
165,000
Property Plant and equipment
Land 125,000
Building 200,000
Equipment 150,000
Furniture 50,000
(-) Accumulated depreciation -40,000
360,000
485,000
Intangible assets
Capitalization development costs 5,000
Goodwill 6,000
Patent 7,000
Franchise, net of amortization 8,000
Trade Mark - Trade names 9,000
35,000
Total Non-Current assets 685,000
Current assets
Inventories, at lower of FIFO Cost or NRV 30,000
Accounts receivable 45,000
(-) Allowance for doubtful accounts -15,000
30,000
Prepaid expenses 20,000
Short term investments (trade securities) 15,000
Cash and cash equivalents 35,000
Total Current assets 130,000
Total assets 815,000

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Equity and Liabilities

Owner's Equity
Controlling interest
Share capital - preference 300,000
Share capital - ordinary 400,000
Share premium - preference 10,000
Share premium - ordinary 25,000
Retained earnings 150,000
Accumulated other comprehensive income 450,000
Less: Treasury shares 100,000
Equity attributable to owners 335,000
Minority interest 125,000
Total Equity 460,000

Non-Current Liabilities
Bond Liabilities due January 31, 2020 125,000
Provision related to pensions 75,000
Long term note payable 50,000
250,000
Current Liabilities
Notes payable 50,000
Accounts payable 20,000
Interest payable 15,000
salary and wages payable 5,000
Provisions related to warranties 12,000
Deposits received from customers 3,000
105,000
Total Equity and Liabilities 815,000

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Statement of Cash Flow:

BIG Screen Corporation

Statement of Cash Flow
For The Period Ending Dec 31, 2009
Cash Flow from Operating Activates:
Net Income XX
Adjustments to reconcile net income:
Change in Current assets (Increase) - XX
(Decrease) + XX

Change in Current Liabilities (Increase) + XX

(Decrease) - XX

Depreciation, Amortization, depletion + XX

Bad Debit Expenses + XX
Loss on sale of (Fixed assets) + XX
= Net cash Provided (Used) by operating activities XX

Cash flow from Investing Activities:

Sale of Assets + XX
Purchase of assets - XX
= Net cash Provided (Used) by Investing activities XX

Cash flow from Financing Activities:

Issuing of Stock + XX
Increase in Liabilities + XX
Dividends - XX
= Net cash Provided (Used) by Financing activities XX

(=) Change in Cash XX

(+) Cash at beginning XX
(=) Cash at the End XX

Non Cash investing and financing activities:

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Pr. 5-133—Statement of cash flows preparation.

Selected financial statement information and additional data for Johnston Enterprises is
presented below. Prepare a statement of cash flows for the year ending December 31, 2012

Johnston Enterprises
Statement of Financial Position and Income Statement Data
December 31, December 31,
2012 2011___
Property, Plant, and Equipment HK$1,241,000 HK$1,122,000
Less: Accumulated Depreciation (476,000) (442,000)
765,000 680,000
Current Assets:
Inventory 391,000 340,000
Accounts Receivable 238,000 306,000
Cash 153,000 119,000
Total Current Assets 782,000 765,000

Total Assets HK$1,547,000 HK$1,445,000

Shareholders' Equity:
Share capital–ordinary HK$ 510,000 HK$ 467,500
Retained Earnings 374,000 340,000
Total Shareholders' Equity 884,000 807,500

Non-Current Liabilities:
Bonds Payable 340,000 391,000

Current Liabilities:
Accounts Payable 187,000 102,000
Notes Payable 51,000 68,000
Income Tax Payable 85,000 76,500
Total Current Liabilities 323,000 246,500

Total Liabilities 663,000 637,500

Total Liabilities & Shareholders' Equity HK$1,547,000 HK$1,445,000

Sales HK$1,615,000 HK$1,513,000

Less Cost of Goods Sold 731,000 731,000
Gross Profit 884,000 782,000
Expenses:
Depreciation Expense 153,000 136,000
Salary Expense 391,000 357,000
Interest Expense 34,000 34,000
Loss on Sale of Equipment 17,000 0
Income Before Taxes 289,000 255,000
Less Income Tax Expense 119,000 102,000
Net Income HK$ 170,000 HK$ 153,000

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Additional Information:
During the year, Johnston sold equipment with an original cost of HK$153,000 and accumulated
depreciation of HK$119,000 and purchased new equipment for HK$272,000.

Solution 5-133
Johnston Enterprises
Statement of Cash Flows
For the Year Ended December 31, 2012

Net Income HK$ 170,000

Cash flow from operating activities

Depreciation expense HK$153,000
Loss on sale of equipment 17,000
Decrease in accounts receivable 68,000
Increase in inventory (51,000)
Increase in accounts payable 85,000
Decrease in notes payable (17,000)
Increase in tax payable 8,500 263,500
Net cash provided by operating activities 433,500

Cash flow from investing activities

Sale of equipment 17,000
Purchase of equipment (272,000)
Net cash used by investing activities (255,000)

Cash flow from financing activities

Retirement of bonds payable (51,000)
Issuance of share capital–ordinary 42,500
Payment of dividends (136,000)**
Net cash used by financing activities (144,500)

Net increase in cash 34,000

Beginning cash 119,000
Cash at end of year HK$153,000

**Beginning R/E  Net income  Dividends  Ending R/E

HK$340,000  HK$170,000  Dividends  HK$374,000
Dividends  HK$136,000

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