STATEMENT OF

FINANCIAL
POSITION
(SFP)
Part 1

LESSON OBJECTIVES

1. Define the Statement of Financial Position (SFP).

2. Enumerate and explain the accounting elements found in the SFP
3. Discuss the concept of recognition of assets and liabilities.
4. Prepare SFP.

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 MOTIVATION

Picture looks familiar right? Of course,

Robert Kiyosaki is among the greatest
financial guru. We have learned a lot from
him. We are already in our last FS, and this
is Statement of Financial Position (SFP). So
far, I know that you have learned and read
a lot in your modules. There are many terms
that you have not encountered in your
Accounting 1. SFP is a broad topic and the
basis of basic accounting equation (A = L +
C), but no matter how complicated this
topic is, it only tells us one thing, building
wealth starts with knowing what is the real
distinction between Assets and Liabilities.

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 DISCUSSION:
STATEMENT OF FINANCIAL
POSITION (SFP): NATURE AND
CONCEPT

The STATEMENT OF FINANCIAL POSITION shows what the business is worth in terms of the
properties it owns (assets), the debts it owes (liabilities), and the investment of owners (capital
or owner’s equity). The Assets, Liabilities, and Capital are the three accounting elements that
are found in the SFP. It is the claim of both the creditors and the owner of the business.
ASSETS are resources controlled by the entity as result of past events and from which future
economic benefits are expected to flow to the entity. (A = L + C). It is also the claim of the
creditors.
LIABILITIES are present obligations of the entity arising from past events, the settlement of
which are expected to result in an outflow from the entity’s resources embodying economic
benefits. (L = A - C)
EQUITY / CAPITAL is the residual interest in the assets of the entity after deducting all its
liabilities.
(C = A - L). It is also the claim of the owner.

The three elements, Assets, Liabilities, and Equity should be properly recognized to be included
in the SFP.

RECOGNITION is the process of incorporating in the SFP an item that meets the definition of an
element and satisfies the criteria for recognition set out in the framework. The process of
recognition starts with the identification of transactions and events that are financial in
character and have effects on the accounting elements. Once the events are properly identified,
they are recorded chronologically in the book of accounts.

CRITERIA FOR RECOGNITION OF ASSETS AND LIABILITIES

1. It is probable that nay future economic benefit associated with the item will flow to or
from the entity.
2. The item has a cost or value that can be measured with reliability.

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 THE ASSETS ACCOUNT

PAS classified assets into (1) current, and (2) noncurrent assets. These are presented separately
in the face of SFP
You can classify an asset as current if it satisfies the following criteria:
1. It is expected to be realized in or is intended for sale or consumed in a normal operating
cycle, usually not more than a year. Operating cycle means the time between the
acquisition of assets for processing and their realization in cash or cash equivalents.
2. It is primarily for the purpose of being traded.
3. It is cash or cash equivalent unless it is restricted from being exchanged or used to settle
a liability for at least 12 months after the date of the SFP.

COMPOSITION OF CURRENT ASSETS

1. CASH comprises cash on hand and demand deposit. The following are included as cash:
a. Money includes undeposited cash collection in the form of bills and coins. It can be (1)
Cash on hand or (2) Cash on Bank.
b. Money substitutes are cash items in the form of customer’s checks, bank drafts, money
orders, manager’s checks, cashier checks, or traveler’s checks.
c. Current working funds these are funds set aside to meet current needs like petty cash
fund, interest fund, dividend fund, and payroll fund.

2. CASH EQUIVALENTS are short-term liquid investments that are readily convertible to known
amounts of cash and are subject to an insignificant risk of changes in value. An investment
qualifies as a cash equivalent only when it has a short maturity of 3 months or less from the date
of acquisition.
Example: 3-month BSP treasury bill, time deposit, money market placement.

MISCELLANEOUS TOPICS ON CASH AND CASH EQUIVALENTS

A. FOREIGN CURRENCY the amount of cash in foreign currencies is valued at the current
exchanges rate and shown either as current asset or noncurrent asset.
• If the amount of the foreign currency is not restricted for use. Example you can
use Euro in the Philippines as payment of purchases made, then is classified as
current assets under Cash and Cash Equivalent account.
• If the amount of deposit in foreign currency is material and there is restriction as
to its use, then it is shown as a separate item in the noncurrent asset section.
B. BANK OVERDRAFT is the result of over issuance of checks against the amount of deposit
in the bank, bringing a credit balance in the Cash in Bank account. (I will discuss this further
in Bank Reconciliation Statement)

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 MISCELLANEOUS TOPICS ON CASH AND CASH EQUIVALENTS

C. POSTDATED CHECKS these are checks received by the company as payment by the
customer for goods or services shall be treated as Trade and Other Receivables.

D. COMPENSATING BALANCE represents the required balance to be maintained by the

borrower with the bank connection with the loan.
• If there is no restriction as to the use or withdrawal, the compensating balance is shown
as part of the Cash and Cash Equivalent.
• If there is a restriction as to use, the amount is shown as part of the investment in the
noncurrent assets section.

3. FINANCIAL ASSETS
Financial Assets includes the following:
1. Cash
2. Equity instrument of another entity
3. Contractual right (this was already discussed in your past modules under the topic
“Derivatives”)
A. To receive cash or another financial asset from another entity or
B. To exchange financial assets or liabilities with other entity under conditions that are
potentially favorable to the entity.
4. Contract that will be settled in the entity’s own equity instrument and is:
A. A nonderivative for which the entity is obliged to receive a variable number of the
entity’s own equity instrument
B. A derivative that will or may be settled other than by the exchange of fixed amount of
cash or another financial asset for a fixed number of the entity’s own equity
instrument.
Equity instrument is any contract that evidences a residual interest in the assets of an
entity after deducting all liabilities.
Financial instrument is any contract that gives rise to a financial asset of one entity
and a financial liability or equity instrument of another entity.

4. TRADE AND OTHER RECEIVABLES

Loans and receivables are non-derivatives financial assets. It is broadly classified as Trade
Receivable. Trade Receivables came from ordinary course of business operations and can be
found in the current asset section. It is collectible in one year of normal operating cycle. Its
common examples are (1) Accounts Receivables and (2) Notes Receivables

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 NON-TRADE RECEIVABLES
Non-trade receivables are claims of the business that does not come from ordinary course of
business operations. It is shown in current asset section if collectible within one year. This
includes the following:
A. Advances to officers, employees, directors, or shareholders.
B. Advances to affiliates.
C. Claims against common carriers for damages (Example of carriers are FedEx, UPS).
D. Advances to supplier for merchandise.
5. INVENTORIES
Inventories are assets of the business that are held for sale in the ordinary course of business.
It is held for the purpose of production, sale, or for rendering of service.
MEASUREMENT OF INVENTORIES - Inventories should be measured at the lower range
of cost and the net realizable value.

COST OF INVENTORIES - The cost of inventories comprises all (1) Cost of Purchase, (2)
Cost of conversion, and (3) Other cost incurred bringing the inventories to
present location.
(1) The Cost of Purchase of inventories comprises the following:
A. Purchase price
B. Import duties and other taxes
C. Transport and handling
D. Other costs directly attributable to the acquisition of finished goods, materials, and
services.
E. Trade discounts, rebates, and other similar items are deducted in determining the cost
of purchases.

The Cost of Purchase is computed as follows:

Purchase price P xxx
Add: Import duties xxx
Freight in xxx
Other business taxes xxx
Other incidental cost to acquisition xxx P xxx
Total P xxx
Less: Trade discounts P xxx
Trade allowance xxx
Purchase rebates xxx P xxx
Cost of acquisition Pxxx

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 (2) Cost of Conversion – includes the cost directly related to the units of production,
such as (a) direct materials, (2) direct labor, and (3) manufacturing overhead.
These are usually called “the three elements of cost”. The Cost of Goods that are
processed from raw materials to finished product is computed as follows:
Direct materials + direct labor + manufacturing overhead = Manufacturing Cost

NET REALIZABE VALUE OF INVENTORIES

Net realizable value is computed as follows:

Estimated selling price P xxx
Less: Estimated cost of completion xxx
Estimated cost to sell xxx
Net Realizable Value Pxxx

6. PREPAID EXPENSES
Prepaid expenses include all prepayments made that are expected to be consumed within
one yar from the date of SFP.
Examples of prepaid expenses are:
1. Prepaid Rent
2. Prepaid Advertising
3. Prepaid Insurance
4. Unused Office and Store Supplies

PRO FORMA OF CURRENT

ASSET SECTION USING LINE
ITEM PRESENTATION

CURRENT ASSETS
Cash and Cash Equivalents 1 P 2,500,000
Trading Securities 1,000,000
Trade and Other Receivables 2 3,000,000
Inventories 3 2,600,000
Prepaid Expenses (Note 4) 4 50,000
Total Current Assets P9,150,000

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 SUMMARY

The STATEMENT OF FINANCIAL POSITION (SFP) shows what the business is worth in terms
of the properties it owns (assets), the debts it owes (liabilities), and the investment of
owners (capital or owner’s equity). SFP is the basis of basic accounting equation A = L+C.

Assets is classified into Current and Noncurrent Assets. It is expected to be realized in or is

intended for sale or consumed in a normal operating cycle, usually not more than a year.

The current assets accounts are composed of: (1) Cash, (2) Cash Equivalents, (3) Financial
Assets, (4) Trade and Other Receivables, (5) Inventories, (6) Prepaid Expenses.

LINKS AND REFERRENCES FOR

ADDITIONAL LEARNING

Textbook: Aduana, N. (2017). Fundamentals of Accountancy, Business, and Management 2. Quezon City.
C & E Publishing Inc.
Reference: Rabo, J., Tugas, F., Salendrez, S. (2016). Fundamentals of Accountancy, Business and
Management 2, Quezon City, Philippines. Vibal Publishing
Robles and Empleo (2016). The Intermediate Accounting Vol. 2. Mandaluyong, Philippines
Millennium Books Inc.
Manalo, M. Learning to Succeed with Accounting 2. Quezon City. Phoenix Publishing House Inc.

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 ASSESSMENT: FORMATIVE

The following information are the disclosed items from the given example above
“Proforma entry of Current Asset section using line item presentation.
Required:
Prepare a computational note to SFP. Take note that all disclosed accounts are given in
random order. Classify them according to the given line item in the Current Assets section.

Cash in Bank P 2,400,000

Accounts Receivable 2,260,000
Factory Supplies 50,000
Unused Office Supplies 30,000
Petty Cash Fund 20,000
Prepaid Rent 20,000
Finished Goods 1,780,000
Notes Receivable 800,000
Allowance for Doubtful Accounts (100,000)
Raw Materials 320,000
Cash on Hand 80,000
Accrued Interest in Notes Receivable 40,000
Goods in Process 450,000

OTHER LINKS FOR PICTURE USED:

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MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT