LESSON 2: STATEMENT OF FINANCIAL POSITION (PAS1)

A statement of financial position is a formal statement showing the three elements comprising the
financial position, namely assets, liabilities, and equity.
Investors, Creditors, and other statement users analyze the financial position to evaluate such
factors as liquidity, solvency, and the need for additional financing.

CLASSSIFICATION OF ASSETS
Assets are classified only into two, namely current assets and noncurrent assets.
The operating cycle of an entity is the time between the acquisition of assets for processing and their
realization in cash or cash equivalents. When an entity’s operating cycle is not clearly identifiable, the
duration is assumed to be twelve months.

Current Assets
PAS 1, par 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 to settle a liability for more than
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 assets within twelve months after the reporting period.
d. The entity expects to realize the assets or intends to sell or consume it within the entity’s normal
operating cycle.
PAS 1, par 54, provides that as a minimum, the line items under current assets are:
a. Cash and cash equivalents
b. Financial assets at fair value such as trading securities and other investments in quoted equity
instruments
c. Trade and other receivables
d. Inventories
e. Prepaid Expenses

 Cash and Cash Equivalents (PAS 7)

- Cash is money either in paper or coins plus money substitutes (checks, postal money
orders, bank drafts, and treasury warrants)
- Two types: Cash on hand and Cash in Bank
- Cash equivalents are any short-term investment securities with maturity periods of 90
days or less. They include bank certificates of deposit, banker’s acceptances, Treasury
bills, commercial paper, and other money market instruments.
- Measured at face amount
-
 Financial assets at fair value such as trading securities and other investments in quoted equity
instruments (PFRS 9)
 - Under PFRS 9, a financial asset is initially measured at fair value plus transaction costs,
unless it is carried at fair value through profit or loss, in which case transaction costs are
immediately expensed
- Where a financial asset is an equity instrument, the default measurement category is fair
value through profit or loss; measurement at fair value through other comprehensive
income only occurs if specified criteria are met.
 Trade and other Receivables
- Current receivables: expected to be collected within a year
- Trade receivables: amounts owed by customers for goods sold and services rendered
- Nontrade receivables: arise from a variety of transactions (e.g. interest, royalties,
dividends, compensation for damages)
- Most relevant standards: • PFRS 9 Financial Instruments / PAS 39 and PFRS 15 Revenue
from contracts with customers
 Inventories (PAS 2)
- Inventories include assets held for sale in the ordinary course of business (finished
goods), assets in the production process for sale in the ordinary course of business (work
in process), and materials and supplies that are consumed in production (raw materials)
- The standard requires inventories to be measured at the lower of cost and net realizable
value (NRV)
 Prepaid Expenses
- Represents expenses that are paid in advance but not yet incurred or remain unexpired at
the end of the period.
Noncurrent Assets
PAS 1, par 66, simply states that “an entity shall classify all other assets not classified as current as
noncurrent”.
Noncurrent assets include the following:
a) Property, Plant and Equipment
b) Long Term Investments
c) Intangible Assets
d) Deferred Tax Assets
e) Other Noncurrent Asset

 Property, Plant and Equipment

-PAS 16 applies to property, plant and equipment (PPE). The standard itself defines PPE as
"tangible items that are held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes; and are expected to be used during more than one
[accounting] period

 Long Term Investments

- LT investments are assets that are held for more than one year or accounting period and
are used to create other income outside of the normal operations of the company.
 - Covered by PFRS 9- Financial Instruments and PAS 28- Investment in Associates and
Joint Ventures
 Intangible Assets
- IAS 38 sets out the criteria for recognizing and measuring intangible assets and requires
disclosures about them.
- An intangible asset is an identifiable non-monetary asset without physical substance. 

 Deferred Tax Asset

- IAS 12 prescribes the accounting treatment for income taxes. Income taxes include all
domestic and foreign taxes that are based on taxable profits.
- Current tax for current and prior periods is, to the extent that it is unpaid, recognized as a
liability. Overpayment of current tax is recognized as an asset.
 Other Noncurrent Assets
- Noncurrent assets that cannot be properly classified (either as property, plant, or
equipment; long-term investments; or intangibles are presented as other noncurrent assets.
- Examples are: 1. Long-term advances to officers and employees 2. Long-term refundable
deposits. 3. Abandoned Property, Plant, and Equipment
-
IFRS 9 Financial Instruments and IAS 28 Investments in Associates and Joint Ventures — Measurement
of long-term interests - Measurement of interests in associates and joint ventures
CLASSSIFICATION OF LIABILITIES
Liabilities are classified only into two, namely current liabilities and noncurrent liabilities.
Current Liabilities
PAS 1, par 69, provides that an entity shall classify a liability as current when:
a. The entity expects to settle the liability within the entity’s normal operating cycle.
b. The entity holds the liability primarily for the purpose of trading.
c. The liability is due to be settled within twelve months after the reporting period.
d. The entity does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting period.
PAS 1, par 54, provides that as a minimum, the line items under current liabilities are:
a. Trade and other payables
b. Current Provisions
c. Short-term Borrowings
d. Current Portion of Long Term Debt
e. Current Tax Liability
Noncurrent Liabilities
The term “noncurrent liabilities” is also a residual definition.
PAS 1, par 69, provides that all liabilities not classified as current are classified as noncurrent.
a. Noncurrent portion of long-term debt.
b. Finance lease liability
c. Deferred Tax Liability
d. Long Term Obligations to Company Officers
 e. Long Term Deferred Revenue

Accounting Issues on Current and Noncurrent Liability

 Currently Maturing Long-Term Debt

 With Discretion to Refinance
 Covenants and Effects of Breach of Covenants
Currently Maturing Long-Term Debt
- A liability which is due to be settled within twelve months after the reporting period is
classified as current, even if:
a. The original term was for a period longer than twelve months
b. An agreement to refinance or to reschedule payment on a long-term basis is completed
after the reporting period nd before the financial statements are authorized for issue.
However, if the refinancing on a long-term basis is completed on or bwfore the end of
the reporting period, the refinancing is adjusting event and therefore the obligation is
classified as noncurrent.
With Discretion to Refinance
If the entity has the discretion to refinance or roll over an obligation for at least twelve months after the
reporting period under an existing loan facility, the obligation is classified as noncurrent even if it would
otherwise be due within a shorter period.
Otherwise, if the refinancing or rolling over is not at the discretion of the entity, the obligation is
classified as a current liability.
Covenants and Effect of Breach of Covenants
Covenants are often attached to borrowing and agreements which represent undertakings by the borrower.
Covenants are actually restrictions on the borrower as to undertaking further borrowings, paying
dividends, maintaining specified level of working capital and so forth.
Under these covenants, if certain conditions relating to the borrower’s financial situation are breached, the
liability becomes payable on demand.

PAS 1, par 74 provides that the liability is classified as current even if the lender has agreed, after the
reporting period and before the statements are authorized for issue, not to demand payment as a
consequence of a breach.
However, par 75 provides that the liability is classified as noncurrent if the lender has agreed on or before
the end of reporting period to provide a grace period ending at least twelve months after the end of
reporting period.
EQUITY
The term used in reporting the equity of an entity depends on the form of the business organization.
PAS 1, par 7, the holders of instruments classified as equity are simply known as owners.

BELERICK Merchandising
Statement of Financial Position
As of December 31, 2021

ASSETS

Current Assets
Cash and cash equivalents (Note 1) 2,500,000
Trading Securities 1,000,000
Trade and other receivables (Note 2) 3,000,000
Inventories 2,600,000
Prepaid Expenses (Note 3) 50,000
Total Current Assets 9,150,000

Non-current Assets
Property, Plant, and Equipment (Note 4) 12,000,000
Long-term Investment (Note 5) 6,000,000
Intangible Assets (Note 6) 3,000,000
Other Non-current Assets (Note 7) 500,000
Total Non-current Assets 21,500,000
Total Assets 30,650,000

LIABILITIES AND OWNERS EQUITY

Current Liabilities
Trade and other Payables (Note 8) 2,300,000
Short Term Bank Loan 1,000,000
Warranty Payable 100,000
Total Current Liabilities 3,400,000
Noncurrent Liabilities
Bonds Payable 5,000,000
Deferred Tax Liability 150,000
Total Noncurrent Liabilities 5,150,000
Total Liabilities 8,550,000
Owners’ Equity
Belerick, Capital 22,100,000
Total Liabilities and Equity 30,650,000

Note 1-Cash and Cash Equivalents

Cash on hand 80,000
Cash in bank 2,400,000
Petty cash fund 20,000
Total cash and cash equivalent 2,500,000
Note 2-Trade and other receivables
Account Receivable 2,260,000
Allowance for Doubtful Accounts (100,000)
Notes Receivable 800,000
Accrued Interest on Notes Receivables 40,000
Total trade and other Receivables 3,000,000

Note 3- Prepaid Expenses

Unused office supplies 30,000
Prepaid rent 20,000
Total Prepaid Expenses 50,000

Note 4- Property, Plant, and Equipment

Acquisition Cost Accumulated Depreciation Book Value

Land 9,500,000 - 9,500,000
Building 8,000,000 3,200,000 4,800,000
Office Equipment 1,000,000 500,000 500,000

Note 5- Long Term Investments

Sinking Fund 2,000,000
Building Expansion Fund 2,500,000
Investments in Bonds 1,500,000
Total Long Term Investments 6,000,000

Note 6- Intangibles
Computer software 1,300,000
Goodwill 1,700,000
Total Intangibles 3,000,000

Note 7- Other Non-current Assets

Long Term Advances to Officers 400,000
Long Term Refundable Deposits 100,000
Total other Non-Current Assets 500,000

Note -Trade and other Payables

Accounts Payable 1,200,000
Notes Payable 1,000,000
Income Tax Payable 60,000
Accrued Expenses 40,000
Total Trade and other Payables 2,300,000
NOTES TO FINANCIAL STATEMENTS
Provide narrative description or disaggregation of items presented in the financial statements and
information about items that do not qualify for recognition.
Notes contain information in addition to that presented in the statement of financial position, income
statement, statement of comprehensive income, statement of changes in equity and the statement of cash
flows. qawsz
Provide necessary disclosures required by Philippine Financial Reporting Standards.
FORMS OF THE FINANCIAL POSITION
a. Report Form
 This form sets forth the three major sections in a downward sequence of assets, liabilities,
and equity.
b. Account Form
 The presentation follows that of an account, meaning, the assets are shown on the left
side and the liabilities and equity on the right side of the statement of financial position.

Report Form

Account Form:
In the Philippines, the common practice is to present current assets before noncurrent assets, current
liabilities before noncurrent liabilities, and equity after liabilities. Other formats may be equally
appropriate provided the distinction is clear. This is in accordance with par 7 of the preface to PAS 1.
PAS 1, par 57, provides that the standard does not prescribe the order or format in which items are to be
presented in the Statement of Financial Position.

Activity 1: Identify the correct answer.

1. In presenting a statement a statement of financial position, an entity
 a. Must make the current and noncurrent presentation.
b. Must present assets and liabilities in order of liquidity
c. Must choose either the current and noncurrent or the liquidity presentation, meaning free
choice of presentation.
d. Must make the current and noncurrent presentation, except when a presentation based on
liquidity provides information that is reliable and more relevant
2. Assets to be sold, consumed or realized as part of the normal operating cycle are
a. Current assets
b. Noncurrent assets
c. Classified as current or noncurrent in accordance with other criteria
d. Noncurrent investments
3. Liabilities that an entity expects to settle within the normal operating cycle are classified as
a. Noncurrent liabilities
b. Current or noncurrent liabilities in accordance with other criteria
c. Current liabilities
d. Equity
4. In which section of the statement of financial position should cash that is restricted for the
settlement of a liability due 18 months after the reporting period be presented?
a. Current assets
b. Equity
c. Noncurrent liabilities
d. Noncurrent assets
5. In which section of the statement of financial position should employment taxes that are due for
settlement in 15 months’ time be presented.
a. Current liabilities
b. Current assets
c. Noncurrent liabilities
d. Noncurrent assets
6. An entity has a loan due for repayment in six months’ time but the entity has the option to
refinance for repayment two years later. The entity plans to refinance this loan. In which section
of the statement of financial position should this loan be presented?
a. Current liabilities
b. Current assets
c. Noncurrent liabilities
d. Noncurrent assets
7. Which must be included on the face of the statement of financial position?
a. Investment property
b. Number of shares authorized
c. Contingent asset
d. Shares in an entity owned by that entity
8. Which is not required to be presented as minimum information on the face of the statement of
financial position?
a. Investment property
b. Investment accounted under the equity method
c. Biological assets
d. Contingent liability
9. Which must be include as a line item in the statement of financial position?
 a. Contingent assets
b. Property, plant, and equipment analyzed by class
c. Share capital and reserves analyzed by class
d. Deferred tax liability
10. Which statement about the statement of financial position is not true?
a. Biological assets should be reported in the statement of financial position
b. The number of shares authorized for issue should be reported in the statement of financial
position or the statement of changes in equity or in the notes.
c. Provisions should be recognized in the statement of financial position
d. A revaluation surplus on a no current asset in the current year should be recognized in the
income statement.

Activity 2: Write if the asset is current and NCA if the asset is non-current.
____1. Cash on hand ____6. Furniture and Fixture
____2. Prepaid Insurance ____7. Secret Formulas
____3. Inventory ____8. Cash on BDO
____4. Transportation Equipment ____9. Accrued Interest Receivable
____5. Marketable Securities ____10. Investment Property

Activity 3: True or False.

1. All cash items are classified as current assets.
2. In the line item financial statements, the different cash items like cash on hand and cash in bank
are individually presented on the face of the financial statements.
3. “Cash equivalents” is an account title that can be used interchangeably with “Cash”.
4. There is a need to make a distinction in financial statement presentation between “Trade Notes
Receivable” and “Nontrade Noted Receivable” that are collectible beyond one year.
5. Trade accounts receivable are always presented as current assets in the balance sheet.
6. The “Prepaid Insurance” represents the expired portion of the advance payment to an insurance
company.
7. Sinking fund, plant expansion fund, petty cash fund, and preferred stock redemption fund are
examples of long-term investments.
8. Liability is usually values based on the face value of the obligation, and not the discounted
amount.
9. Securities that are issued for trading and issued to maturity are classified as current liabilities.
 10. When liability is expected to be settled within the normal operating cycle of the business,
notwithstanding the one year period, the liability is classified as current liability.

Activity 4: Prepare a Statement of Financial position in (a) Report Form and (b) Account form

Amaterasu Enterprises
Post-Closing Trial Balance
As of December 31, 2021

TITLE Dr. Cr.

Petty Cash Fund 5,000

Cash in Bank 146,400
Accounts Receivable 175,000
Allowance for Bad Debts 12,000
Unused Supplies 135,000
Prepaid Insurance 2,000
Office Equipment 70,000
Accumulated Depreciation-Office Equipment 4,500
Laboratory Equipment 550,000
Accumulated Depreciation-Laboratory Equipment 5,000
Expenses payable 2,000
Accounts payable 65,000
Loans payable 100,000
Withholding Taxes payable 14,500
SSS Premiums payable 4,900
HDMF Premiums payable 2,000
Philhealth Premiums Payable 3,500
Emma Roar, Capital 1,120,000
Emma Roar, Drawings 250,000  
Totals 1,333,400 1,333,400

Activity 5: Identify the correct answer.

1. For a liability to exist
a. There must be a past event
b. The exact amount must be known
c. The identity of the party to whom the liability is owned must be known
d. There must be an obligation to pay cash in the future.
2. Which statement best describes the term liability?
a. An excess of equity over current assets
b. Resources to meet financial commitments when due
c. The residual interest in the asset of the entity after deduction all of the liabilities
d. A present obligation arising from past event
3. Which item is not a current liability?
a. Unearned revenue
b. Share dividend payable
c. The currently maturing portions of long-term debt
d. Trade accounts payable
4. Noncurrent liabilities include
a. Bonds payable
b. Short-term obligation refinanced on a long-term basis at the end of reporting period
c. Deferred tax liability
d. All of these are non-current liabilities
5. Which is not within the definition of a liability?
a. The signing of a three-year employment contract at a fixed annual salary
b. An obligation to provide goods in the future
c. A note payable with no specified maturity date
d. A present obligation that is estimated in amount
6. The statement of financial position is useful for analyzing all, except
a. Liquidity
b. Solvency
c. Profitability
d. Financial flexibility
7. The statement of financial position is useful for all, except
a. To compute rate of return
b. To analyze cash inflows and outflows for the period
c. To evaluate capital structures
d. To assess future cash flows
8. What is one criticism not normally aimed at a statement of financial position?
a. Failure to reflect current value information
b. The extensive use of separate classifications
c. An extensive use of estimates
d. Failure to include items of financial value that cannot be recorded objectively
9. The statement of financial position
a. Omits many items that are of financial value
b. Makes very limited use of judgement and estimate
c. Use fair value for most assets and liabilities
d. All of the choices are correct
10. Which is a limitation of the statement of financial position?
a. Many items that are of financial value are omitted
 b. Judgement and estimate are used
c. Current fair value is not reported
d. All of these are a limitation of the statement of financial position
11. The amount of time that is expected to elapse until an asset is realized or otherwise converted into
cash is referred to as
a. Solvency
b. Financial flexibility
c. Liquidity
d. Exchangeability
12. Which of the following is not an acceptable major asset classification?
a. Current assets
b. Investments
c. Property, plant, and equipment
d. Deferred charges
13. What is an example of an item which is not an element of working capital?
a. Accrued interest on notes receivable
b. Goodwill
c. Goods in process
d. Temporary investments
14. Accrued revenue would normally appear in the statement of financial position under
a. Noncurrent assets
b. Current liabilities
c. Noncurrent liabilities
d. Current assets
15. Which is usually classified as a noncurrent asset?
a. Plant expansion fund
b. Prepaid rent
c. Supplies
d. Goods in process

Activity 6: Identify the correct answer. Show your solution.

1. Lunox Company provide the following information at year-end:

Cash 1,500,000
Accounts Receivable 1,200,000
Inventory, including inventory expected in the 1,000,000
ordinary course of operations to be sold beyond
12 months amounting to 700,000.
Financial Asset Held for Trading 300,000
Equity Investment at fair value through other 800,000
Comprehensive income
Equipment held for Sale 2,000,000
 Deferred Tax Asset 150,000

What amount should be reported as total current assets?

2. Vexana Company was incorporated on January 01, 2021 with 5,000,000 from the issuance of
share capital and borrowed funds of 1,500,000. During the first year, net income was 2,500,000.
On December 20, the entity paid a 500,000 cash dividend. On December 31, 2021, the liabilities
had increased to 1,800,000.
On December 3,2021, what amount should be reported as total assets?

3. Gatotkaca Company reported the following liability account balances on December 31, 2021:

Accounts Payable 1,900,000

Bonds Payable, due December 31, 2022 3,400,000
Discount on Bonds Payable 200,000
Deferred Tax Liability 400,000
Dividends Payable 500,000
Income Tax Payable 900,000
Note Payable, due January 31, 2023 600,000

On December 31, 2021, what total amount should be reported as current liabilities?

4. Estes Company reported the following liability balances on December 31, 2021:

10 % note payable issued on October 1, 2020, 2,000,000

maturing October 1, 2022
12% note payable issued on March 1, 2020, 4,000,000
maturing on March 1, 2022

The 2021 financial statements were issued on March 31, 2022.

Under the loan agreement for the 10% note payable, the entity has the discretion to refinance the
obligation for at least twelve months after December 31, 2021.

On March 1, 2022, the netire 4,000,000 balance of the 12% note payable was refinanced through
issuance of a long-term obligation payable lump sum.

What amount of the note payable should be classified as current on December 31, 2021?

5. Kadita Company reported the following current assets on December 31, 2021:

Cash 5,000,000
Accounts Receivable 2,000,000
Inventory, including goods received on 800,000
consignment P200,000
Bond Investment at fair value through 1,000,000
other comprehensive income
Prepaid Expenses, including a deposit of 150,000
P50,000 made on inventory to be
delivered in 18 months _________
Total current assets 8,950,000

Cash in general checking account 3,500,000

Cash fund to be used to retire bonds payable in 2020 1,000,000
Cash held to pay value added taxes 500,000
Total Cash 5,000,000

What total amount of current assets should be reported on December 31, 2021?