FUNDAMENTALS OD ACCOUNTANCY BUSINESS AND

MANAGEMENT 2
SELF - LEARNING MODULE

PRELIMINARIES

Module # and Title:

Module 1: Statement of Financial Position

Module Overview:

Hello Learners! In this module you will gain an understanding of

account titles under assets, liabilities, and capital accounts of the Statement of
Financial Position, namely: cash, receivables, inventories, prepaid expenses,
property, plant and equipment, payables, accrued expenses, unearned income,
long-term liabilities, and capital that will equip you in the preparation of the SFP
using the report form and account form.

Learning Competencies :

At the end of the lesson, the students are expected to:

1. Identify the elements of the SFP and describe each of them (ABM_FABM12-
Ia-b-1)
2. Classify the elements of the SFP into current and noncurrent items
(ABM_FABM12-Ia-b-2)
3. Prepare the SFP of a single proprietorship ABM_FABM12-Ia-b-3)
4. Prepare an SFP using the report form and the account form with proper
classification of items as current and noncurrent ABM_FABM12-Ia-b-4)

Instructional Materials

REFERENCE:

Beticon, Josefina, Loria, James Christopher Domingo, and Fermin Antonio

Yabut, Fundamentals of Accountancy Business and Management 2. Quezon
City: Vival Group, Inc., 2016

MATERIALS:

Module

Pre-assessment

Before going any further, you should answer first this pre-assessment section to
gauge your prior knowledge. You can choose the best answer from the options provided.

Direction: Shade the words or concepts that are connected to the study of accounting,
business and management. Use the statements in B as clues to find the correct words
inside the box.
 A W C A P E C A P I T A L S L
B S A N L L F O R C E S V E I
G T S T O O D E S P A R M X A
L K H E W W O R L D K O Z P B
I O N X T P W O N T C S E E I
O X E P E S Q U E N R T E D L
L O T E A G A G I Q U E Q I I
O W S N B I Y A W N T J U T T
S U S S A F E L E C T S I E Y
R E C E I V A B L E S P T B E
E R A S U P E R V I A A Y Q A
S U P E R I O R I T L A N D S
T P R O P E R T Y T E S T X T
I N K M E N O H O M B R E X C
B O S H I N V E N T O R Y E S

Identify the word described by each statement.

___________1. The number or quantity of materials, goods or stock on hand.
___________2. Resources owned by the company.
___________3. Land or real estate owned by a person or company.
___________4. Money
___________5. Amount of profit a company earns over a period of time.
___________6. A company’s legal financial obligations or debts.
___________7. An owner’s residual interest, includes capital contributions, revenues,
and expenses, among others.
___________8. Amount owned to a business or company.
___________9. Costs of operations that is used to generate income.
___________10. The amount of wealth needed to produce goods and services.

INTERACTION

Hi! I provided you some reading materials and examples. Please

take time to read and analyze for you to be ready in your next task.
Enjoy!

Reading material/Concept notes

ELEMENTS OF FINANCIAL POSITION:

1. LIABILITIES
2. ASSETS
3. EQUITY
 The Conceptual Framework for Financial Reporting (IASB
2010) – defines an asset as “a resource controlled by the
entity as result of past events and from which future economic
benefits are expected to flow to the entity”.
One should notice that the Framework uses the word
“control” instead of “ownership”. This is in line with the
doctrine of substance over form. From accounting’s point of
view, control is given priority over ownership for recording
assets.
For example, assuming ABC Co. rents a building to XYZ Co.
The lease term is for 25 years. Furthermore, the lease term is
non-cancellable on the part of both parties. It was noted that
the estimated useful life of the building is also 25 years. In
the case provided, ABC has a building asset despite the fact
that the entity only rents the same property from XYZ Co. this
is due to the fact that ABC Co. will use the asset for the rest
of its estimated useful life hence ABC Co. controls the asset.
It is to be noted that the substance of the transaction
prevailed over its legal form.

Classification of Assets
There are many ways of classifying assets. For the purpose
of this course, the classification is limited to current and
non-current. The decision to rule whether an asset is current
or non-current lies on the expected collectability, realization
or consumption of such assets.

Current
IAS 1,Presentation of Financial Statement, (IASB,
2013:A604) provides the following criteria for an asset to be
classified as current

Expected to be realized, sold or consumed in the entity’s normal

operating cycle
- Normal operating cycle is the period it takes for an
entity to buy its inventories, sell them, and collect the
related receivables. For example, accounts receivables
are classified as current since such are expected to be
realized or collected within the normal operating cycle.
Also, inventories are classified as current since such
will be sold within the normal operating cycle. Finally,
office supplies are current assets since such will be
consumed within the normal operating cycle.

Sell Sell
Inventories Inventories

Collect Cash

Held primarily for trading

Trading pertains to shorts profit taking motives. For
example, ABC Co. purchases shares of DEF Co., a listed entity in
the Philippine Stock Exchange, for P100,000. The intention or
business model of ABC Co. for these instruments is for short-term
profit taking. This means that ABC Co. may sell the shares once
they hit a market price higher than the original costs (e.g.,
P120,000). Hence, such shares are classified as current assets.

Expected to be realized twelve months after the reporting period

For assets not classified in either of the items above,
entities are to consider their realization period. If the
realization period is within twelve months after the reporting
period, then the asset is current.
For example, on January 1, 2015, ABC Co., a clothing retail
company, sells its idle land for P12,000,000. Under the terms of
the contract, the buyer will pay ABC Co. on December 31, 2015.
The receivable from the buyer is not related to the normal
operating cycle since the business of the entity is retail
clothing and not real estate.
Also, the receivable is not for trading but for collection.
Hence, one will look into the realization period of the
receivable in order to correctly classify it. It is to be noted
that collection is on December 11, 2015. Hence, the realization
period is within a year. Therefore, this is classified as
current.

Asset is cash or cash equivalent unless restricted for at least

twelve months after the reporting period.
Generally, cash and cash equivalents are treated as current
assets unless they are restricted for at least twelve months. For
example, a normal checking account in ODM Bank is classified as
a current asset. However, such asset ceases to be current of the
same is earmarked for a plant expansion expected to commence in
five years.
The diagram below summarizes classification of current
assets. If assets do not satisfy any of the criteria above, such
are classified as non-current assets.

Current Classification
Normal
Operating Cycle
NO Current Classification

Trading NO Current
Classification
One Year?

NO Cash or Cash Current Classification

Equivalent

Current Asset Examples

1. Cash and Cash Equivalents

- Cash includes bill and coins on hand, bank accounts and
operating funds. For example, bills and coins inside a
restaurant’s cash register are included in a company’s
cash account. Also, cash deposited in banks under the
company’s name are also classified as cash, unless they
are restricted. Finally, operating and working funds are
also classified as cash. A common example of these
working funds is petty cash.
- Cash equivalents are defined by IAS 7, Statement of Cash
Flows (IASB, 2001:A643) as “short-term, highly liquid
investments that are readily convertible to known amounts
of cash and which are subject to an insignificant risk of
 changes in value”. The term “short-term” is subject to
the entity’s policy. Ordinarily, instruments acquired 90
days before their maturity are classified as cash
equivalents.
- The diagram below summarizes the composition of cash.
Ordinarily, cash and cash equivalents are presented as
one line item in the statement of financial position.

Bills Bills
and Bank and Company’
Coins On Accounts Coins On
Hand
+ + Hand
= s Cash

2. Trade Accounts Receivable

- Are amounts owed by customers to the entity. Ordinarily,
entities sell on credit over cash. The entity records a
trade accounts receivables while waiting for the
collection of cash on due date. Trade accounts
receivables are called “open” accounts since they do not
have documentary support other than the sales contract.
3. Notes Receivables
- Are evidences by a promissory note. There are three key
elements of notes receivables. First is a principal
amount. This is the amount collectible by the entity from
the customer. Second, notes receivables would have
maturity dates. Conventionally, it can be for 30, 60 or
90 days upon the date of issue. Last, it must have a
corresponding interest (e.g., 6%, 7% etc.)
4. Interest Receivables
- Are related to the notes receivables above. Interest
receivables are amounts collectible due to the cost of
borrowing money. Interest is computed as principal
multiplied by interest rate, multiplied by the related
time factor.
5. Financial Assets at Fair Value through Profit of Loss
(FAFVPL)
- These assets are conventionally called trading
securities. FAFVPLs are either debt or equity instruments
of another entity held by the reporting entity. They key
in classifying financial instruments as FAFVPL is the
business model (intention) by7 the reporting entity to
the financial assets.
- For FAVPL, the entity must carry them under the “trading”
business model. This means that the entity must carry
these instruments with short-term profit taking motives
(e.g., due to changes in market price).
6. Inventories
- IAS 2, Inventories (IASB, 2001: A630), includes three
items as part of inventories. First are those goods for
resell in the normal course of business. These are
conventionally called finished goods. For example, a real
estate company selling land will classify their land as
inventories as such are held for sale in the normal
course of business. On the other hand, assume that a
manufacturing entity owns a piece of land where its
manufacturing plant stands. The land will not be
classified as inventories since such is not held for
sale.

Second, IAS 2 (IASB, 2001:A630) includes goods in the

process of production as inventories. These are
conventionally called as work in progress or goods in
process. For example, if a furniture manufacturing
 entity has half-finished furniture as at December 31,
2015 (e.g., unvarnished and unpainted), such are still
classified as inventories.

Last, IAS 2 (IASB, 2001:A630) includes materials and

supplies to be consumed in the production process as
inventories. These are conventionally called raw
materials. For example, a beverage company producing
bottled orange juice will include fresh oranges and
concentrates as their raw materials.

7. Supplies and Other Prepaid Assets

- This includes office supplies to be consumed by the
business. Furthermore, this also includes prepaid assets.
A common example of prepaid assets is prepaid rent.
Assuming that on January 1, 205, ABC Company pays its
annual rent for P120,000. It is to be noted that the
payment is in advance since the rent is good for 2015.
Therefore, as at January 1, 2015, ABC Company has a
prepaid asset of P120,000. After a month, the prepaid
asset is reduced by P10,000, which now becomes an
expense. The schedule below follows the expiration of
prepaid for the year 2015.

ABC COMPANY
Prepaid Rent and Rent Expense Schedule
2015

Date Prepaid Rent Rent Expense

January 1, 2015 120,000 0
January 31, 2015 110,000 10,000
February 28, 2015 100,000 20,000
March 31,2015 90,000 30,000
April 30, 2015 80,000 40,000
May 31, 2015 70,000 50,000
June 30, 2015 60,000 60,000
July 31, 2015 50,000 70,000
August 31, 2015 40,000 80,000
September 30, 2015 30,000 90,000
October 31, 2015 20,000 100,000
November 30, 2015 10,000 110,000
December 31, 2015 0 120,000

Non-current Asset Examples

1. Property, Plant and Equipment

- These include fixed assets used in the normal operating
cycle or production of the business. This includes land
and buildings being used by the Company. Manufacturing
plants are also included in this category.
- Finally, manufacturing equipment, vehicles, furniture and
fixtures and leasehold improvements are also included in
this category. As long-lived assets, property, plant and
equipment are depreciated over their estimated useful
life. However, land is not depreciated since such is
deemed with perpetual benefit. Property, Plant and
Equipment (PPE) are presented in the statement of
financial position after deducting the related
accumulated depreciation.
2. Intangible Assets
- Are those assets meeting the definition of an asset but
without physical substance. Common intangible assets
 include trademarks for brand names, patents for
inventions and copyrights for artistic/literary works.
Intangible assets with definite useful lives are
amortized over their useful lives. Those with indefinites
useful lives, however, are annually tested for
impairment.
3. Investment Properties
- Generally, investment properties are long-lived assets
not used in production. The company’s intention for these
assets is to lease out or for long-term capital
appreciation (IASB,2001:A1204). For example, if ABC
Company purchases a land and erects a building in the
said land for its corporate headquarters, then such is
classified as PPE. This is because the property is to be
used by the entity.
- However, if ABC Company purchases the same and erects a
building to be leased out to renters, such is an
investment property. This is due to the fact that such
are for rental income and not for company use.
4. Biological Assets
- Are living plants or animals held by the business for
resale or for breeding. These include sheep, trees in
plantation, plants, dairy cattle, pigs, bushes, figs and
fruit trees (IASB, 2001:A1226-A1227)

Post assessment

Congratulations, you are now at the final round to complete

your module. Read and analyze the questions in every item and write
the correct answer on the space provided.

Direction: Determine whether each word or group of words indicates Qualitative

Research or Quantitative Research.

___________________1. Naturalistic
___________________2. To validate the already constructed theory
___________________3. Hypothesis
___________________4. Multiple Methods
___________________5. No criteria

GREAT JOB!!!!!!!!