CHAPTER 5

STATEMENT OF FINANCIAL
POSITION
ASSETS:DEFINITION
 The conceptual framework for financial
reporting defines an asset as “ a resource
controlled by the entity as a 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”.
ASSETS:CLASSIFICATION
 There are many ways of classifying assets. But the
classification is limited to current and non-current.
CURRENT ASSETS
-an asset can be classified as current if it is:
Expected to be realized, sold or consume 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. 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.
 Held Primarily for Trading
-trading pertains to short profit taking motives. This means
that a company may sell it shares once they hit a market price
higher than the original costs. Hence, such shares are classified
as current assets.
Expected to be realized 12 months after the reporting period
-for assets not classified in either of the items above,
entities are to considered their realization period. If the
realization period is within 12 months after the reporting period,
then the assets is current.
Asset is cash or cash equivalent unless restricted for at least
12 months after the reporting period
-generally, cash and cash equivalents are treated as
current assets unless they are restricted for at least 12 months.
Classification of Current Assets

Normal Operating Current Classification

cycle?

Trading? Current Classification

No

One Year? Current Classification

No

Cash or
Cash Current Classification
No Equivalent?
CURRENT ASSETS: EXAMPLE
1. Cash and Cash Equivalents
Cash includes bill and coins on hand, bank accounts and operating
funds. Also, cash deposited in banks under the company’s name are also
classified as cash, unless they are restricted.
Cash equivalents are defined as “short-term, highly liquid investments
that are readily convertible to known amounts cash and which are subject
to an insignificant risk of changes in value”.
The diagram below summarizes the composition of cash.

Bills and Bank Operating Company’s

Coins On Accounts Funds Cash
Hand
2. Trade Accounts Receivable
-these are amounts owed by customers to the entity. Ordinarily, entities sell
on credit over cash. Trade accounts receivable are called “open” accounts
since they do not have documentary support other than the sale contract.
3. Notes Receivable
-notes receivable are evidence by a promissory note. There are 3 key
elements of notes receivable: principal amount, maturity dates, and
corresponding interests.
4. Interest Receivables
- these 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. FAFVPL’s are
either debt or equity instruments of another entity held by the reporting entity.
This means that the entity must carry these instruments with short term profit
taking motives.
6. Inventories
-these are composed of 3 items. First are those good for
resell in the normal course of business. These are conventionally
called finish goods. Second, includes goods in the process of
production as inventories. These are conventionally called as
work in progress or goods in process. Lastly, it includes materials
and supplies to be consume in the production process as
inventories. These are conventionally called raw materials.
7. Supplies and other Prepaid assets
-these includes office supplies to be consumed by the
business. Furthermore, this also includes prepaid assets.
 NON CURRENT ASSETS: EXAMPLE
1. Property, plant and Equipment
- these include fixed assets use in the normal operating
cycle or production of the business. These 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.
2. Intangible Assets
-these are assets meeting the definition of an assets but
without physical substance. This include trademarks for brand
names, patents for inventions and copyrights for artistic/literary
works.
3. Investment Properties
- generally, investment properties are
long-lived assets not use in production. The
company’s intention for this assets is to lease out
or for long-term capital appreciation.
4. Biological Assets
- biological assets are living plants or
animals held by the business for resale or for
breeding. These includes sheep, trees in
plantation, plants, dairy cattle, pigs, bushes, figs,
and fruit trees.
 LIABILITIES: DEFINITIONS
 The conceptual framework defines a liability
as a “present obligation… arising from past
events the settlement of which is expected to
result in an outflow from the entity of
resources embodying economic benefits
(assets)”. There are varied sources of liabilities
but the most common sources are
regulations, contracts and constructive
practices.
LIABILITIES: CLASSIFICATION

 The rule for classifying liabilities as current

and non current are similar for that of
assets, except for the last one. Liabilities
are classified as current if the “entity has
no unconditional right to defer
settlement for at least 12 months”.
CLASSIFICATION OF LIABILITIES

Normal
Operating Current Classification
Cycle?

Trading? Current Classification

No

One Year? Current Classification

No

No right to
defer Current Classification
settlement?
No
 CURRENT LIABILITIES: EXAMPLES
1. Trade Accounts Payable
Trade accounts payable are open accounts relating to purchase of
goods and/or raw materials. If the seller has accounts receivables for
uncollected accounts, the buyer will have accounts payables for unpaid
amounts.
2. Notes Payable
Unlike Trade Accounts Payables, Notes Payable are evidenced by a
promissory note. If a seller receives a note receivable, the buyer then issues a
note payable. As in the notes receivable, notes payables would have a
principal amount, maturity date and interest rate.
3. Interest Payable
These are considered as cost for borrowing money. Interest are
computed as principal amount, multiplied by time factor and interest rate.
4. Other accrued expenses
These accounts pertain to expenses incurred but not yet
paid. Common examples of these accrued expenses are
salaries, rent and utilities.
5. Income Tax Payable
Income tax is computed at 30% of the corporate taxable
income. For sole proprietors, however, their taxable income is
subjected to the graduated tax rates. These are normally paid
on the 15th of April of the succeeding year. Hence, they
remain unpaid (payable) as at December 31 of the current
year.
NON-CURRENT LIABLITIES: EXAMPLE
1. Long-term Debt
Long-term debt can be span from 5 years to almost 25
years. It means that principal repayment is due every year.
Based on the definition, a portion of the serial loans will be
current while most of it is non-current. Long-term debt may also
include mortgage payable if certain properties are held as
collateral for such loans.’
2. Bonds Payable
These bonds are contracts of indebtedness sold to certain
individuals. As in the case of long-term debt, such indebtedness
will bear interest. A bond is sometimes evidence with a bond
certificate unless, it is a script bond.
OWNER’S EQUITY: A RECALL
 Below is a summary of the definitions and classification for each type of
business organization.

Sole Proprietorship Partnership Corporation

Owner classification Sole Proprietor Partners Shareholder
(Stockholder)
Account for Capital Account Capital Account Ordinary Share,
Contributions Preference Share,
Share Premium
Account Where Net Capital Account Capital Account Retained Earnings
Income is Closed
Account Where Capital Account Capital Account Retained Earnings
Dividend/ Distribution
is Recorded
STATEMENT OF FINANCIAL POSITION
 The statement of financial position shows the assets, liabilities and owner’s
equity of the reporting entity. The following section discusses the key parts of
the statement of financial position and how to prepare them.

1. Prepare the Statement Heading

The statement heading includes the name of the Company, name of the statement
and the date covered.

UY LAW OFFICE
Statement of Financial Position
December 31, 2015
2. Prepare the Asset Section
From the given trial balance, the bookkeeper or accountant is now to
determine the asset and contra-asset accounts. After which, the assets are
categorized as current or non-current. Finally, the current assets and non-
current assets are arranged by liquidity which means the ease of converting
such assets into cash. A common arrangement of current assets can be
found below.

Cash
FAFVPL
Notes Receivables
Trade Accounts Receivables
Inventories
Supplies and Other Prepayments
Below is the asset section of the illustrative case’s SFP:

ASSETS
Current Assets
Cash 588,500
Accounts Receivables 75,000
Prepaid Rent 110,000
Office Supplies 2,000
Total Current Assets 775,500
Non-current Assets
Property, plant and Equipment – net 35,000
Total Assets 810,500
3. Prepare the Liability Section
The bookkeeper or accountant is now to determine the liability
accounts from the given trial balance. The liabilities are categorized as
current or non-current. The current and non-current liabilities are arranged
by liquidity. Liquidity, for this purpose, means the ease of converting such
liabilities into cash. A common arrangement of current liabilities can be
found below.

Accounts Payable and Other

Accrued expenses

Notes Payable

Income Tax Payable

Below is the liability section of the illustrative case’s SFP:

Current Liabilities

Accounts Payable 25,000

Current portion of notes payable 50,000

Unearned revenues 35,000

Interest payable 500

Total Current Liabilities 110,500

Non-current Liabilities

Notes payable 50,000

4. Prepare the Owner’s Equity Section
This section is basically lifted from the ending
balances of accounts the statement of changes in equity.
Below is the owner’s equity section of the illustrative case’s
SFP:
Owner’s Equity
Jan Uy 650,000

5. Ensure that the Accounting Equation is balanced

The bookkeeper ensure that total assets will equate
to total liabilities and equities. Furthermore, the statement is
footed and rested for mathematical accuracy.
 UY LAW OFFICE
Statement of Financial Position
December 31, 2015

ASSETS

Cash 588,500

Accounts receivable 75,000

Prepaid Rent 110,000

Office Supply 2,000

Total Current Assets 775,500

Non-current Assets

Property, plant and equipment-net 35,000 Completed Statement of Financial

Total Assets 810,500 Position with Supporting Notes
LIABILITIES AND EQUITY

CURRENT LIABILITIES

Accounts payable 25,000

Currents position of notes payable 50,000

Unearned Revenue 35,000

Interest payable 500

Total Current Assets 110,500

Non-current Liabilities

Notes payable 50,000

Owner’s Equity

Jan Uy 650,000

Total liabilities and Equity 810,500

 Statement of Financial Position with Supporting Notes
Cash in Blanco de Plata 880,000
Cash in Metro Pacific Bank 220,000
Petty Cash Fund 5,500
Change Cash Fund 2,750
Cash Equivalent 11,000
Accounts Receivables 220,000
Notes Receivables 22,000
Raw Materials
Work in Progress
66,000
44,000 TRIAL
BALANCED
Finished Goods 110,000
Land Used as Plant site 110,000
Building and Plant 220,000
Accumulated Depreciation-Building and plant
Fixtures
(22,000)
110,000 OF
DOMINIC
Accumulated Depreciation-Fixtures (11,000)
Patents 110,000
Accumulated Amortization-Patents (11,000)
Trademarks
Accumulated Amortization-trademarks
110,000
(11,000) TRADING
Land Held for Fair Value Appreciation 1,100,000
Accounts Payable 220,000
Notes Payable 110,000
Interest Payable 11,000
Income Tax Payable 99,000
Long-term debt 550,000
Capital 2,296,250
 DOMINIC TRADING
Statement of Financial Position
December 31, 2015
ASSETS
Current Assets
Cash and Cash Equivalent (Note 1) 1,119,250
Notes Receivables 22,000
Accounts Receivables 220,000
Inventories (Note 2) 220,000
Total Current Assets 1,581,250
Non-current Assets
Property, plant and equipment (Note 3) 407,000
Investment property 1,100,000
Intangible assets (Note 4) 198,000
Total Noncurrent Assets 1,705,000
TOTAL ASSETS 3,286,250
 LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable 220,000
Notes Payable 110,000
Current portion of long-term debt (Note 5) 55,000
Income tax payable 99,000
Interest payable 11,000
Total Current Liabilities 495,000
Non-current Liabilities
Long-term debt (Note 5) 55,000
Owner’s Equity
Dominic Capital 2,296,250
Total Liabilities and Equity 2,846,250
Note 1 Composition of Cash and Cash Equivalents
Cash in Banco de Plata 880,000
Cash in Metro Pacific Bank 220,000
Pretty Cash Fund 5,500
Change Cash Fund 2,750
Cash Equivalents 11,000
Total Cash and Cash Equivalents 1,119,250

Note 2 Composition of Inventories

Raw Materials 66,000
Work in Progress 44,000
Finished Goods 110,000
Total Inventories 220,000
Note 3 Composition of PPE
Land Building and Fixtures Total
Plant
Cost 110,000 220,000 110,000 440,000
Accumulated - (22,000) (11,000) (33,000)
Depreciation
Carrying value 110,000 198,000 99,000 407,000

Note 4 Intangible Assets

Patents Trademarks Total
Cost 110,000 110,000 220,000
Accumulated (11,000) (11,000) (22,000)
Depreciation
Carrying Value 99,000 99,000 198,000

Note 5 Long-term Debt Schedule

Long-term Debt
Current Portion 55,000
Non-current Portion 495,000
Total 550,000