Statement of Financial Position

Fundamental of Accountancy, Business, and

Management 2
ABM12
Statement of Financial Position
(Balance Sheet)
 An accounting report that summarizes the financial status of
a business at a particular point in time.
 Three main sections of a statement of financial position:
 Assets
 Liabilities
 Owner’s equity
 The accounting equation is the basis of the statement of
financial position.
Assets = Liabilities + Owner’s equity
 T-form statement of financial position
 Narrative form statement of financial position
 PERMANENT ACCOUNTS – As the name suggests, these accounts are
permanent in a sense that their balances remain intact from one accounting
period to another. (Haddock, Price, & Farina, 2012) Examples of permanent
account include Cash, Accounts Receivable, Accounts Payable, Loans Payable
and Capital among others. Basically, assets, liabilities and equity accounts are
permanent accounts. They are called permanent accounts because the accounts
are retained permanently in the SFP until their balances become zero. This is in
contrast with temporary accounts which are found in the Statement of
Comprehensive Income (SCI). Temporary accounts unlike permanent accounts
will have zero balances at the end of the accounting period
 CONTRA ASSETS – Contra assets are those accounts that are presented
under the assets portion of the SFP but are reductions to the company’s assets.
These include Allowance for Doubtful Accounts and Accumulated Depreciation.
Allowance for Doubtful Accounts is a contra asset to Accounts Receivable. This
represents the estimated amount that the company may not be able to collect
from delinquent customers. Accumulated Depreciation is a contra asset to the
company’s Property, Plant and Equipment. This account represents the total
amount of depreciation booked against the fixed assets of the company.
Assets
 Asset is defined as “resource controlled by the entity as a
result of past event and which future economic benefits are
expected to flow to the entity”
 Essential characteristic of asset:
 The asset is controlled by the entity
 The asset is the result of a past transaction or event
 The asset provides future economic benefits
 The cost of the asset can be measured raliably
Liabilities
 Liability is defined as “ present obligation of an entity arising
from past events, the settlement of which is expected to
result in an outflow from the entity of resources embodying
economic benefits”.
 Essential characteristic of Liabilities:
 The liability is the present obligation of a particular entity
 The liability arises from past transaction or event.
 The settlement of the liability requires an outflow of resources
embodying economic benefits.
Equity
 Equity is the residual interest in the assets of the entity after
deducting all of its liabilities.
 Simply stated, equity means “ net assets” or total assets
minus liabilities.
 The terms used in reporting the equity of an entity
depending on the form of the business organization are:
 Owner’s Equity in a Proprietorship
 Partner’s Equity in a Partnership
 Stockholder’s Equity in a Corporation
 T-form statement of financial position
City Traders Co.
Statement of financial position
As of June 30, 2005

Assets Liabilities
Cash at bank 3 000 Creditors 5 000
Debtors 5 000 Loan 10 000
Stock 20 000 15 000
Office equipment 4 000
Vehicle 18 000 Owner’s equity
Capital – K. Wilson 35 000
Total assets $50 000 Total equities & $50 000
_______ liabilities _______
Narrative form statement of financial position
City Traders Co.
Statement of financial position
As of June 30, 2005

Assets
Cash at bank 3,000
Debtors 5,000
Stock 20,000
Office equipment 4,000
Vehicles 18,000
Total assets $50,000
Liabilities
Creditors 5,000
Loan (due 30/6/07) 10,000 15,000
Owner’s equity Capital – K. Wilson 35,000
Total equities $50,000
Classification in the Statement of
Financial Position
 A classified statement of financial position separate both
assets and liabilities into those that are current and those that
are non-current.
 The assets are usually classified according to their liquidity,
which is how quickly they are expected to be turned into
cash or used up.
 Liabilities are classified on the basis of the urgency of
repayment.
Assets
 Current assets: Assets that are expected to be realised in
cash or used up within the next 12 months. Current assets
include cash on hand, cash at bank, short-term investments,
inventory, debtors.
 Line items under current assets:
 Cash or Cash Equivalent
 Financial assets at fair value such as trading securities and other
investments in a quoted equity instruments
 Trade and other receivables
 Inventories
 Prepaid Expense
 Non-current assets: Assets that are acquired with the
intention of controlling them for a period of time greater
than 12 months. Non-current assets include property,
equipment, machinery, furniture, vehicles, long-term
investments
 Line items under non-current assets
 Property, plant and equipment
 Long-term investments
 Intangible assets
 Other non-current assets
Liabilities
 Current liabilities: obligations that will be satisfied within
the next 12 months. Current liabilities include bank
overdrafts, short-term loans, creditors.
 Line items under current liabilities:
 Trade and other payables
 Current provisions
 Short term borrowing
 Current portion of long term debt
 Current tax liability
 Non-current liabilities: obligations that are deferred over
a period greater than 12 months. Non-current liabilities:
include long-term loans.
 Line items under non-current liability
 Non-current portion of a long term debt
 Finance lease liability
 Deferred tax liability
 Long term obligations to company officers
 Long term deferred revenue
Equity
Philippine Term
 Capital stock
 Subscribed capital stock
 Common stock
 Additional paid capital
 Retained earning (deficit)
 Retained earning appropriated
 Revaluation surplus
 Treasury stock
IAS Term
 Share capital
 Subscribe share capital
 Preference share capital
 Ordinary share capital
 Share premium
 Accumulated profits (Losses)
 Appropriation reserve
 Treasury share
 T-form statement of financial position
City Traders Co.
Statement of financial position
As of June 30, 2005

Current assets Current liabilities

Cash at bank 3 000 Creditors 5 000
Debtors 5 000 Loan 5 000 10 000
Stock 20 000 28 000 Current liabilities
Non-current assets Loan (due 30/6/07) 5 000
Office equipment 4 000 Owner’s equity
Vehicle 18 000 22 000 Capital – K. Wilson 35 000
Total assets $50 000 Total equities & $50 000
_______ liabilities _______
Narrative form statement of financial position
City Traders Co.
Statement of financial position
As of June 30, 2005
Current assets
Cash at bank 3,000
Debtors 5,000
Stock 20,000 20,000
Non-current assets
Office equipment 4,000
Vehicles 18,000 22,000
Total assets $50,000
Current liabilities
Creditors 5,000
Loan 5,000 10,000
Non-current liabilities
Loan (due 30/6/07) 5,000
Owner’s equity Capital – K. Wilson 35,000
Total equities $50,000
 Income Statement

Fundamental of Accountancy, Business, and

Management 2
ABM12
The Income Statement
 Income Statement
 The financial performance of the company over a period of time
(the accounting period)
 Changes in Revenue accounts and Expense accounts (profit or loss
over the period)
 The format is Revenues - Expenses = Profit (Loss)
 Shows the results of a company’s operations over a period of
time.
 What goods were sold or services performed that provided
revenue for the company?
 What costs were incurred in normal operations to generate
these revenues?
 What are the earnings or company profit?
Source of Income
 Sales of Merchandise to customers
 Rendering of Services
 Use of entity resources
 Disposal of resources other than products
Component of Expense
 Cost of sales or cost of good sold
 Distribution costs or selling expenses
 Administrative expenses
 Other expenses
 income tax expense
 Single-step/Natural
 All operating revenues and gains are reported first, followed by all operating
expenses and other losses.
 No separate section is prepared for COGS and gross profit.
 Also known as Nature of Expense

 Multiple-step/ Functional
 Divided into separate sections, various subtotals are reported.
 Involves separate sections for gross profit, operating income, other
income/losses, income before income taxes, and net income
 Also known as Cost of Sales Method
Gross Sales 9,300,000 Interest expense on bank loan 50,000

Sales Return Allowance 100,000 Interest expense on bonds payable 150,000

Sales Discount 200,000 Inventory Dec.31 2,000,000

Interest Revenue 180,000 Sales and salaries 600,000

Dividend revenue 120,000 SSS& Phil health - sales 20,000

Gain from expropriation 500,000 Advertising 100,000

Rent Revenue 100,000 Sales Commission 180,000

Store supplies expense 50,000

Shares in net income of Associate (25%) 500,000
Loss on sale of Investment 30,000 Delivery Expense 250,000

Depreciation – store equipment 150,000

Loss on sale of Property 120,000
Office Salaries 650,000
Casualty loss from earthquake 170,000
SSS& Phil health – office 30,000
Inventory, Jan.1 1,500,000
Bonuses 100,000
Freight in 300,000
Office Supplies Expense 70,000
Purchase return and allowance 150,000
Taxes and Licenses 20,000
Purchase 6,000,000
Doubtful accounts 40,000
Purchase discount 250,000
Depreciation – Office Equipment 90,000
Income tax expense 580,000
Inventory Beg. 500,000
Gross Purchase 1,900,000
Ending Inventory 300,000
Freight in 150,000
Purchase Allowances and discount 50,000
Beginning raw materials 500,000
Gross Purchase 1,900,000
Ending raw material 300,000
Freight in 150,000
Purchase Allowances and discount 50,000
Direct Labor 3,000,000
Factory Overhead 1,300,000
Beginning goods in process 900,000
Ending goods in process 1,000,000
Beginning finished goods 1,600,000
Ending finished goods 1,500,000
Seatwork

c. Statement of Cost of Sales of Merchandising

Statement of Change in Equity

Fundamental of Accountancy, Business, and

Management 2
ABM12
Statement of change in equity

 The Statement of change in equity is a basic statement that

shows the movements in the elements or components of the
equity.
Additional investment 500,000
Capital January 1 4,000,000
Withdrawals 1,000,000
Profit 2,000,000
 Sample Company
Statement of change in equity
December 31,20XX
Sample Capital Jan. 1 4,000,000
Additional Investment 500,000
Add: Profit _2,000,000_
Total 6,500,000
Less: Withdrawals _(1,000,000)_
Sample Capital Dec. 31 5,500,000
 Triple Strike Company revealed the following information
for the purpose of presenting the statement of financial
position on Decemeber 31, 2014
Triple Strike Capital Jan 1, 2014 100,000
Withdrawals 5,000
Profit 20,000
Financial Statement Analysis
Financial Statement Analysis
 is the process of evaluating risks, performance, financial
health, and future prospects of a business by subjecting
financial statement data to computational and analytical
techniques with the objective of making economic decisions
(White et.al 1998).’
 Will help the business owners and other interested people to
analyze the data in financial statements to provide them with
better information about such key factors for decision
making and ultimate business survival
3 Financial Statement Analysis
Technique
 Horizontal Analysis
 also called trend analysis, is a technique for evaluating a series of
financial statement data over a period of time with the purpose of
determining the increase or decrease that has taken place (Weygandt
et.al. 2013)
 Vertical Analysis
 also called common-size analysis, is a technique that expresses each
financial statement item as a percentage of a base amount (Weygandt
et.al. 2013)
 Financial Ratio Analysis
 is the process of evaluating risks, performance, financial health, and
future prospects of a business by subjecting financial statement data to
computational and analytical techniques with the objective of making
economic decisions(White et.al 1998)
Horizontal Analysis
 Horizontal analysis uses financial statements of two or more
periods.
 All line items on the FS may be subjected to horizontal analysis.
 Only the simple year-on-year (Y-o-Y)grow this covered in this
lesson.
 Changes can be expressed in monetary value (peso) and
percentages computed by using the
 following formulas:
 Peso change=Balance of Current Year-Balance of Prior Year
 Percentage change= (Balance of Current Year-Balance of Prior
Year)/(Balance of Prior Year)
Vertical Analysis
 also called common-size analysis, is a technique that
expresses each financial statement item as a percentage of a
base amount (Weygandt et.al. 2013).
 For the Statement of Financial Position, the base amount is
Total Assets or Total liabilities and Equity.
 Balance of Account / Total Assets.
 Balance of Account/ Total Liabilities and Equity
 For the SCI, the base amount is Net Sales.
 Balance of Account / Total Sales
 C&F Store
Statement of Financial Position
As of December 31
2014 2013
Cash 110,000 87,400
Accounts Receivable 90,000 69,920
Inventory 129,000 218,500
Prepaid Rent 12,000 4,370
Delivery Van 550,000 493,810
Total Assets 891,000 874,000

Accounts Payable 75,000 67,298

Loan Payable 400,000 393,300
Anistle Cruz, Capital 416,000 413,402
Total Liabilities and 891,000 874,000
Equity
 C&F Store
Statement of Comprehensive Income
As of December 31
2014 2015
Sales 810,000.00 686,000.00
Cost of Goods Sold (348,300.00) (301,750.00)
Gross Profit 461,700.00 384,250.00
Operating Expenses (234,900.00) (205,800.00)
Interest Expense (40,500.00) (17,150.00)
Net Income 186,300.00 161,300.00
Financial Ratio Analysis
 It expresses the relationship among selected items of financial
statement data. The relationship is expressed in terms of a
percentage, a rate, or a simple proportion (Weygandtet.al.
2013)
 Ratios are generally grouped into three categories:
 Profitability
 Efficiency
 Financial health
Profitability Ratios
 measure the ability of the company to generate income from
the use of its assets and invested capital as well as control its
cost.
 Gross Profit Ratio (Gross Profit Margin)
 Operating Income Ratio (Operating Income Margin)
 Net profit ratio (Net Profit Margin)
 Return on asset(ROA)
 Return on equity(ROE)
 Name Ratio Formula
Gross Profit Margin _Gross Profit_
Net Sales
Operating income margin _Operating Income_
Net Sales
Net profit margin _Net Income_
Net Sales
Return on assets _Net Income_
Total Assets
Return on assets _Net Income_
Average Assets
Return on assets Income Before Interest and tax_
Total Assets
Return on assets Income Before Interest and tax_
Average Assets
Return on equity _Net Income_
Total Equity
Return on equity _Net Income_
Average Equity
Return on equity Income Before Interest and tax_
Total Equity
Return on equity Income Before Interest and tax_
Average Equity
Operational Efficiency Ratio
 Measures the ability of the company to utilize its assets.
Operational efficiency is measured based on the company’s
ability to generate sales from the utilization of its assets, as a
whole or individually.
 Asset Turnover
 Fixed Asset Turnover
 Inventory Turnover
 Days in Inventory
 Accounts Receivable Turnover
 Days in Account Receivable
 Name Ratio
Asset Turnover
Fixed Asset Turnover
Inventory Turnover
Days in Inventory
Accounts Receivables Turnover
Days in Accounts Receivables
Accounts Receivables Turnover
Formula
_Net Sales_
Average Asset
_Net Sales_
Average Fixed Asset
_Cost of Goods Sold _
Average Inventory
_______365_______
Inventory Turnover
_Net Income_
Average Equity
_______365_______
Financial Health Ratios
 look into the company’s solvency and liquidity ratios.
Solvency refers to the company’s capacity to pay their long
term liabilities.
 Solvency
 Debt ratio
 Equity ratio
 Debt to equity ratio
 Interest coverage ratio
 Liquidity
 Current ratio
 Quick Ratio
 Name Ratio Formula
Solvency
Debt to Equity ratio _Total Debt_
Equity
Debt ratio _Total Debt_
Total Assets
Equity ratio _Total Equity_
Total Assets
Interest coverage ratio Operating Income .
Interest Expense
Liquidity
Current Ratio _Current Assets_
Current Liabilities

Quick Ratio _______Quick Assets_______

Current Liabilities