INTACCT5

Statement of Financial Position

SELF-TEST ACTIVITY

1. Do you agree that the statement of financial position does not portray the market
value of the entity? Explain your answer.
o Yes, because according to what I have read, most of the assets are not reported at
fair value but measured according to the historical cost. And the market value of
an entity does not always come from its recorded assets, it also come from the
employees, good management team and the reputation of the company itself.

2. What are the elements of an entity’s financial position? Describe each briefly.
o Asset – it is something that an entity owns that gives benefit to the entity. It is
classified as current assets, if this asset will benefit the entity within one year, and
non-current assets, if this asset will benefit the entity after a year. Assets are also
classified as Cash and Cash Equivalents, Inventories, Trade Receivables and
Tangible and Intangible assets.
o Liabilities – it is an obligation that an entity owes to someone. It can be settled
through cash or other resources. Just like the assets, liabilities is also classified as
current and non-current liabilities. Liabilities are also classified as Payables.
o Equity – this is what the entity owns. It is derived by deducting the total liabilities
from the total assets.

3. How does the concept of operating cycle affect the classification of certain assets and
liabilities into current and non-current?
o The Operating Cycle is the time required for a company’s cash to be put into its
operations and then return to the company’s cash account. And it affects the
classification of assets and liabilities into current and non-current because most of
the manufacturers have more than seven months of operating cycle and some of
the industries require a very long processing time resulting to having an operating
cycle that is longer than one year. It is said that to accommodate those industries,
the accountant’s definition of current and non-current assets or liabilities include
the following phrases, “within one year or within the operating cycle, whichever
is longer.” (AccountingCoach.com)

4. Explain how debt refinancing can affect the classification of a liability.

o According to Jack Du (2019), “Debt refinancing, it is when a borrower applies for
a new loan or debt instrument that has better terms than a previous contract and
can be used to pay down the previous obligation.” It is when a borrower borrows
again to pay his loan before. Paying debt through another debt. And because of
that, it affects the classification of a liability.

5. Describe the major components of shareholder’s equity.

According to Horton from Investopedia (2020), there are four components that are
included in the shareholder’s equity, and those are:
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Statement of Financial Position
o Outstanding Shares - It is the amount of company stock that has
been sold to investors and not repurchased by the company. It
represents the total amount of stock the company has issued to
public investors, company officers, and company insiders
o Retained Earnings - When a company retains income instead of
paying it out as a dividend to stockholders, a positive balance in
the company’s retained earnings account is created. A company
often uses retained earnings to pay off debt or reinvest in the
business. It is also typically the largest line item in the
computation.
o Additional Paid-In Capital -it is derived from the difference
between the par value of common and preferred stock and the price
each has sold for, as well as shares that were newly sold.
o Treasury Stock – it is the number of shares that have been
repurchased from investors by the company. A company will hold
its own stock in its treasury for later use. It reduces the total
shareholders' equity on a company's balance sheet. This figure is
subtracted from a company's total equity, as it represents a smaller
number of available shares for investors once it is repurchased.
6. Compare the different forms of presenting the statement of financial position.
o Statement of Financial Position – also known as Balance Sheet, it presents
the financial position of an entity. It has three (3) elements, which are
Assets, Liabilities and Equity.
o Income Statement – it reports the company’s financial performance in
terms of profit or loss. It has two (2) elements, and those are Income and
Expense. If you deduct the expenses from the income, you will get the net
profit or loss.
o Cash Flow Statement – it presents the movement of cash. It has three (3)
segments, and those are Operating Activities, Investing Activities and
Financing Activities.
o Statement of Changes in Equity – this is where you can see the detailed
movement in owner’s equity.

LEARNING ACTIVITY

Classify the following items. Use the letter of the following classifications:

A Current Assets D Non-current Liabilities

B Non-current Assets E Equity
C Current Liabilities F Notes to Financial Statements

1. A.
2. C.
3. B.
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Statement of Financial Position
4. A.
5. F.
6. E.
7. B.
8. E.
9. D.
10. F.