Introduction
The information accumulated and processed in financial accounting is periodically communicated to the users by means of Financial Statements. In this Chapter, one of the financial statements, which is the Statement of Financial Position will be discussed.
Task
At the end of this module, you will be able to:
1. To be able to describe the Statement of Financial Position or SFP.
2. To identify the elements of the SFP and describe each of them.
3. To classify the elements of the SFP into current and non-current items.
The SFP is the primary financial statement of any business. It shows the assets, liabilities, and capital of any company
Process
Statement of Financial Position
A Statement of Financial Position, also known as a balance sheet, is a formal statement presenting the three accounting elements which are assets, liabilities, and equity. A statement of financial position is one of four business documents a public company must file every year in order to retain its status. The other three are an income statement, a statement of retained earnings, and a cash flow statement. Most often statements of financial positions are called ‘balance sheets.’ However, when a company is a government or non-profit organization, the original term ‘statement of financial position is used.
Most often this statement is prepared and released as one of the last events for the specific accounting period. This means that all the transactions in the three sections listed above are given on a single document and posted to a general ledger. More simply, a statement of financial position is a single picture of a company’s entire financial position for a given period of time. Its goal is to summarize the changes in financial activity.
Components of a Balance sheet (A = L + C)
The Heading
The heading - is the first component of the balance sheet. It is extremely important since it tells the readers of the balance sheet three important pieces of information:
1. The company name;
2. The type of statement to follow (Balance Sheet);
3. The date at which account value applies
Ex:
THE TOY COMPANY
Balance Sheet
As of December 31, 2017
Assets
Assets are a company's resources—things the company owns. These are the economic resources of the business. Some characteristics of assets are:
a. Assets are resources owned and/or controlled by the enterprise.
b. Assets are acquired by an enterprise as a result of a past transaction or event.
c. The enterprise should have the capacity to restrict or prevent other entities from enjoying the economic benefits arising from the use of the resource or item.
Liabilities
Liabilities are a company's obligations—amounts the company owes to other businesses, governments, shareholders, employees, and others.
Some characteristics of liabilities are:
a. A liability is a present obligation arising out of a past event. Examples of events are a purchase transaction or a borrowing transaction.
b. A liability is required to be settled in the future.
Liabilities can be viewed in two ways:
1. as claims by creditors against the company's assets, and
2. a source—along with owner or stockholder equity—of the company's assets.
Capital
Capital or Owner’s Equity is the amount left over after liabilities are deducted from assets:
Assets - Liabilities = Owner's (or Stockholders') Equity.
Equity –the original and additional investments of the owner of the business is recorded in entity or Capital. Net income earned during the year increases capital and is decreased by net loss.
Withdrawals – Any amount of money or other assets withdrawn by the owner of the business for personal use are reflected in the “withdrawals” account. Other accounting references use the term “drawings” or “personal” instead of “withdrawals”.
Current and Noncurrent Assets and Liabilities
Assets are classified in the balance sheet as current and noncurrent. It is considered current if it is expected to be used for the next 12 months.
Those assets which will not fall under the above criteria are considered noncurrent. Examples of noncurrent assets are:
1. Property, plant, and equipment
2. Long-term investments
3. Intangible assets
4. Others
Intangible Assets
Intangible assets are recognized at fair value when they are acquired and amortized over their useful lives except for goodwill which has an unlimited useful life. They are periodically tested for impairment. These are fixed assets that have no physical existence such as copyright, patents, goodwill, etc.
Property, Plant, and Equipment
Property, plant, and equipment (also called tangible fixed assets) are those fixed assets that have some physical existence. They are grouped into different classes such as land, land improvements, buildings, vehicles, etc. based on their function and depreciated over their useful lives except for land which has unlimited useful life (unless it is land obtained on lease). Property, plant, and equipment are presented on the balance sheet net of accumulated depreciation and accumulated impairment losses.
Long-term Investments
Long-term investments are investments that are not expected to be realized (sold or otherwise converted to cash) within the next 12 months. These include investments in the common stock of companies, purchases of bonds issued by companies, etc.
Liabilities are also classified in the balance sheet as current and noncurrent. It is considered as current if it shall be paid or due within the next 12 months.
The settlement comes either from the use of current assets such as cash on hand or from the current sale of inventory. Settlement can also come from swapping out one current liability for another. At present, most liabilities show up on the balance sheet at historic cost rather than fair value. And there’s no GAAP requirement for the order in which they show up on the balance sheet, as long as they are properly classified as current. The big-dog current liabilities, which you’re more than likely familiar with from previous accounting classes, are accounts payable, notes payable, and unearned income. Keep in mind that any money a company owes its employees (wages payable) or the government for payroll taxes (taxes payable) is a current liability, too.
Here’s a brief description of each:
Short-term notes payable: Notes due in full less than 12 months after the balance sheet date are short-term. For example, a business may need a brief influx of cash to pay mandatory expenses such as payroll. A good example of this situation is a working capital loan, which a bank makes with the expectation that the loan will be paid back from the collection of accounts receivable or the sale of inventory.
Accounts payable: This account shows the amount of money the company owes to its vendors.
Dividends payable: Payments due to shareholders of record after the date declaring the dividend
Payroll liabilities: Most companies accrue payroll and related payroll taxes, which means the company owes them but has not yet paid them.
Current portion of long-term notes payable: If a short-term note has to be paid back within 12 months of the balance sheet date, you’ve probably guessed that a long-term note is paid back after that 12- month period. However, you have to show the current portion (that which will be paid back in the current operating period) as a current liability.
Unearned revenue: This category includes money the company collects from customers that it hasn’t yet earned by doing the complete job for the customers but that it anticipates earning within 12 months of the date of the balance sheet.
Those liabilities which will not fall in the above criteria are considered noncurrent Examples of noncurrent liabilities are:
1. Noncurrent portion of long-term debt
2. Capital or finance lease liability
3. Deferred tax liability
4. Long-term obligations to company officers
5. Long-term deferred revenue
Bonds payable: Long-term lending agreements between borrowers and lenders. For a business, it’s another way to raise money besides selling stock.
Long-term leases: Capital leases (you record the rental arrangement on the balance sheet as an asset rather than the income statement as an expense) that extend past 12 months of the date of the balance sheet. Because the rental arrangement is recorded as an asset, the related lease obligation must be recorded as a liability.
Product warranties: Report as noncurrent when the company expects to make good on repairing or replacing goods sold to customers and the obligation extends beyond 12 months from the balance sheet date.
Evaluation
At least 5 Easy questions can focus on the two formats of the SFP. Computation of total assets, total liabilities, and equity using the accounting equation and definition of terms are also part of the easy questions.
At least 5 Medium questions can focus on the computation of the total assets and total liabilities and equity assuming that individual accounts are given and the learner will have to identify each account as either asset, liability, or equity to compute for the missing amount. Identification of current and noncurrent items can also be part of Medium questions.
At least 5 Difficult questions can focus on the computation of individual accounts provided that the SFP is given as a whole.
The teacher can ask the class to go back to their groups and give account titles with amounts for the groups to prepare the SFP. The groups can discuss the results of their group discussions after.
Another activity can be focused on the school. Let students group themselves and identify the different assets and liability accounts of the school. From the accounts identified, the groups can prepare a hypothetical statement of financial position for the school.
Easy:
1. Learning is Fun Company had current assets amounting to Php 100,000. Noncurrent assets for the year totaled Php 76,000. How much is the company’s total assets?
2. Happy Selling Company’s total liabilities amounted Php 10,000. Total equity had an ending balance of Php 20,000. How much are total assets?
Medium:
1. Happy Selling had the following accounts at year-end: Cash-250,000, Accounts Payable-70,000, Prepaid Expense-15,000. Compute the company’s current assets.
2. Happy Selling’s Accounts Receivable amounted to Php 500,000. Prepaid Expenses and Unearned Income totaled Php 30,000 and Php 10,000 respectively. Cash balance amounted to Php 100,000 while Accounts Payable and Inventory totaled Php 20,000 and Php 10,000 respectively. How much are the company’s current assets? Current liabilities?
Difficult
1. Company’s Total Liabilities and Equity amounted to Php 285,000. Total noncurrent assets ended at Php 85,000. Cash totaled Php50,000. Inventory amounted to Php100,000. Assuming the company had no other assets, how much are Accounts Receivable?
2. Total assets amounted to Php575,000. Total equity amounted to Php 250,000. Accounts Payable amounted to Php 50,000 while Unearned Income totaled Php 85,000. Assuming there are no other current liabilities, compute for the company’s noncurrent liabilities.
Conclusion
To summarize our lesson for today, We have discussed the Statement of Financial Position; its elements, formats, and preparation.
Credits
References and Supplementary Materials
Books and Journals Jimenez, C.E., Palo, R.R, &Ocampo, L.B. (2017). Fundamentals of Accounting 2: Theory and Practice. Manila: JMS Publishing House
Jimenez, C.E., &Ocampo, L.B. (2015). Fundamentals of Accounting, Quicknotes and Exercises. Manila: JMS Publishing House
Online Supplementary Reading Materials
What is the Statement of Financial Position?
https://www.accountingcoach.com/blog/what-is-the-statement-of-financial…; 10 April 2017
https://blog.udemy.com/the-statement-of-financial-position/; June 3, 2014
http://www.dummies.com/business/accounting/current-and-noncurrent-liabi…
Online Instructional Videos
5 minute Finance Lessons, Financial Statement basics; https://youtu.be/mhmaHayMha8; 23 March 2017