1 statement of_financial_position

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C H A P T E RC H A P T E R 55
STATEMENT OF FINANCIAL POSITIONSTATEMENT OF FINANCIAL POSITION
STATEMENT OF CHANGES IN EQUITYSTATEMENT OF CHANGES IN EQUITY
AND STATEMENT OF CASH FLOWSAND STATEMENT OF CASH FLOWS
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield

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1. Explain the uses and limitations of a statement of financial position.
2. Identify the major classifications of the statement of financial position.
3. Prepare a classified statement of financial position using the report
and account formats.
4. Prepare a basic statement of changes in equity.
5. Indicate the purpose of the statement of cash flows.
6. Identify the content of the statement of cash flows.
7. Prepare a basic statement of cash flows.
8. Understand the usefulness of the statement of cash flows.
9. Determine additional information requiring note disclosure.
10. Describe the major disclosure techniques for financial statements.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

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Statement ofStatement of
Financial PositionFinancial Position
AdditionalAdditional
InformationInformation
UsefulnessUsefulness
LimitationsLimitations
ClassificationClassification
NotesNotes
Techniques ofTechniques of
disclosuredisclosure
Other guidelinesOther guidelines
Statement of Financial PositionStatement of Financial Position
and Statement of Cash Flowsand Statement of Cash Flows
Statement of Financial PositionStatement of Financial Position
and Statement of Cash Flowsand Statement of Cash Flows
Statement of CashStatement of Cash
FlowsFlows
PurposePurpose
Content andContent and
formatformat
PreparationPreparation
UsefulnessUsefulness

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Statement of Financial PositionStatement of Financial PositionStatement of Financial PositionStatement of Financial Position
LO 1 Explain the uses and limitations of a statement of financial position.LO 1 Explain the uses and limitations of a statement of financial position.
Statement of Financial Position, also referred to as the
balance sheet:
1. Reports assets, liabilities, and equity at a specific date.
2. Provides information about resources, obligations to
creditors, and equity in net resources.
3. Helps in predicting amounts, timing, and uncertainty of
future cash flows.

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Computing rates of return.
Evaluating capital structure.
Assess risk and future cash flows.
Analyze company’s:
 Liquidity
 Solvency
 Financial flexibility
Usefulness

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Most assets and liabilities are reported at historical
cost.
Use of judgments and estimates.
Many items of financial value are omitted.
Limitations

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Classification
LO 2 Identify the major classifications of the statement of financial position.LO 2 Identify the major classifications of the statement of financial position.

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Subclassifications
Illustration 5-1
In some countries, such as Germany, companies often list current assets first.
IAS No. 1 requires companies to distinguish current assets and liabilities from
non-current ones, except in limited situations.

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Generally consists of:
Long-term Investments
Property, Plant, and Equipment
Intangibles Assets
Other Assets
ClassificationClassificationClassificationClassification
Non-Current Assets

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Long-term Investments
1. Securities (bonds, ordinary shares, or long-term notes).
2. Tangible assets not currently used in operations (land held
for speculation).
3. Special funds (sinking fund, pension fund, or plant
expansion fund.
4. Non-consolidated subsidiaries or associated companies.
Non-Current Assets

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Investments in Debt and Equity Securities
Portfolio Type Valuation Classification
Held-for-
Collection
Debt
Amortized
Cost
Current or
Noncurrent
Trading Debt or Equity Fair Value Current
Non-Trading
Equity
Equity Fair Value
Current or
Noncurrent

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Long-Term Investments
Illustration 5-2
Statement of Financial
Position Presentation of
Long-Term Investments

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Tangible long-lived assets used in the regular operations
of the business.
Physical property such as land, buildings, machinery,
furniture, tools, and wasting resources (minerals).
With the exception of land, a company either depreciates
(e.g., buildings) or depletes (e.g., oil reserves) these
assets.
Property, Plant, and Equipment

5-15 LO 2 Identify the major classifications of the statement of financial position.LO 2 Identify the major classifications of the statement of financial position.
Illustration 5-3
Statement of Financial Position
Presentation of Property, Plant,
and Equipment

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Lack physical substance and are not financial
instruments.
Patents, copyrights, franchises, goodwill, trademarks,
trade names, and customer lists.
Amortize limited-life intangible assets over their useful
lives.
Periodically assess indefinite-life intangibles for
impairment.
Intangible Assets

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Intangible Assets
Illustration 5-4
Intangible Assets

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Items vary in practice. Can include:
 Long-term prepaid expenses
 Non-current receivables
 Assets in special funds
 Property held for sale
 Restricted cash or securities
Other Assets

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Cash and other assets a company expects to convert
into cash, sell, or consume either in one year or in the
operating cycle, whichever is longer.
Current Assets
Illustration 5-5

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Inventories
Disclose:
Basis of valuation (e.g., lower-of-cost-or-market).
Cost flow assumption (e.g., FIFO or average cost).
LO 2LO 2
Illustration 5-6

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Inventories
LO 2LO 2
Manufacturing Company
Illustration 5-8
Presentation of Inventories

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Claims held against customers and others for
 money,
 goods, or
 services.
Major categories of receivables should be shown in the
statement of financial position or the related notes.
Receivables

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Receivables
Illustration 5-8
Presentation of Receivables

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Payment of cash, that is recorded as an asset becausePayment of cash, that is recorded as an asset because
service or benefit will be received in the future.service or benefit will be received in the future.
insuranceinsurance
suppliessupplies
advertisingadvertising
Cash PaymentCash Payment Expense RecordedExpense RecordedBEFORE
rentrent
maintenance on equipmentmaintenance on equipment
Prepayments often occur in regard to:Prepayments often occur in regard to:
Prepaid Expenses

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Prepaid Expenses
LO 2LO 2
Illustration 5-9
Presentation of Prepaid Expenses

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Portfolios
Short-Term Investments
Type Valuation Classification
Held-to-
Maturity
Debt Amortized Cost
Current or
Noncurrent
Trading Debt or Equity Fair Value Current
Available- for-
Sale
Debt or Equity Fair Value
Current or
Noncurrent

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Short-Term Investments
Illustration 5-10
Presentation of Short-Term Investments

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Generally any monies available “on demand.”
Cash equivalents - short-term highly liquid investments
that mature within three months or less.
Restrictions or commitments must be disclosed.
Cash
Illustration 5-11

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Cash
Illustration 5-12
Position—Restricted Cash

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Equity

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Equity
 Ordinary shares and preference shares - must disclose
the par value and the authorized, issued, and outstanding
amounts.
 Share premium - company usually presents one amount
for ordinary and preference shares.
 Retained earnings - amount may be divided between the
unappropriated and restricted amounts.
 Treasury shares - shown as a reduction of equity.

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Equity
Illustration 5-13
Position—Equity

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Non-Current Liabilities
Obligations that a company does not reasonably expect to
liquidate within the longer of one year or the normal
operating cycle. Three types:
1. Obligations arising from specific financing situations.
2. Obligations arising from the ordinary operations of the
company.
3. Obligations that depend on the occurrence or non-
occurrence of one or more future events to confirm the
amount payable, or the payee, or the date payable.

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Illustration 5-15

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Current Liabilities
Obligations that a company generally expects to settle in its
normal operating cycle or one year, whichever is longer.
This concept includes:
1. Payables resulting from the acquisition of goods and
services: accounts payable, wages payable, and so on.
2. Collections received in advance for the delivery of goods or
performance of services, such as unearned rent revenue.
3. Other liabilities whose liquidation will take place within the
operating cycle or one year.

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Current Liabilities
Illustration 5-16
Current Liabilities

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Statement of Financial Position Format
IFRS does not specify the order or format in which
a company presents items in the statement of
financial position.
Account form or report form.
LO 3 Prepare a classified statement of financial positionLO 3 Prepare a classified statement of financial position
using the report and account formats.using the report and account formats.

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Account Form Illustration 5-17
LO 3 Prepare a classified statement of financial positionLO 3 Prepare a classified statement of financial position
using the report and account formats.using the report and account formats.

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LO 3LO 3
Report Form
Illustration 5-17

5-40 LO 9 Indicate how to present and analyze equity.
Illustration 15-12
Presentation and Analysis of EquityPresentation and Analysis of EquityPresentation and Analysis of EquityPresentation and Analysis of Equity
Presentation of Equity

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Illustration 15-13
LO 9 Indicate how to present and analyze equity.
Presentation of Statement of Changes in Equity
Presentation and Analysis of EquityPresentation and Analysis of EquityPresentation and Analysis of EquityPresentation and Analysis of Equity

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The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows
One of the three basic objectives of financial
reporting is
“assessing the amounts, timing, and
uncertainty of cash flows.”
IASB requires the statement of cash flows
(also called the cash flow statement).

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Primary Purpose: To provide relevant information
about the cash receipts and cash payments of an
enterprise during a period.
The statement provides answers to the following
questions:
1. Where did the cash come from?
2. What was the cash used for?
3. What was the change in the cash balance?
Purpose of the Statement of Cash FlowsPurpose of the Statement of Cash FlowsPurpose of the Statement of Cash FlowsPurpose of the Statement of Cash Flows
LO 4 Indicate the purpose of the statement of cash flows.LO 4 Indicate the purpose of the statement of cash flows.

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OperatingOperatingOperatingOperating
Cash inflows
and outflows
from
operations.
InvestingInvestingInvestingInvesting
Cash inflows
and outflows
from non-
current assets.
FinancingFinancingFinancingFinancing
Cash inflows
and outflows
from non-
current
liabilities and
equity.
Statement helps users evaluate liquidity, solvency, and
financial flexibility.
LO 5 Identify the content of the statement of cash flows.LO 5 Identify the content of the statement of cash flows.
Content and FormatContent and FormatContent and FormatContent and Format

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Financial Statements and NotesFinancial Statements and NotesFinancial Statements and NotesFinancial Statements and Notes
IFRS requires that a complete set of financial statements be
presented annually. Comprised of the following:
LO 8 Determine additional information requiring note disclosure.LO 8 Determine additional information requiring note disclosure.
1. Statement of financial position at the end of the period;
2. Statement of comprehensive income for the period to be
presented either as:
a) One single statement of comprehensive income.
b) A separate income statement and statement of comprehensive
income.
3. Statement of changes in equity;
4. Statement of cash flows; and
5. Notes, comprising a summary of significant accounting policies
and other explanatory information.

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Accounting policies
Specific principles, bases, conventions, rules, and
practices applied by a company in preparing and
presenting financial information.
First note generally titled, “Summary of Significant
Accounting Policies.”
Notes to the Financial Statements

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Additional Notes to the Financial Statements
In many cases, IFRS requires specific disclosures. Examples
include:
 Items of property, plant, and equipment are disaggregated into
classes.
 Receivables are disaggregated into amounts receivable from trade
customers, receivables from related parties, prepayments, and other
amounts.
 Inventories are disaggregated into classifications such as
merchandise, production supplies, work in process, and finished
goods.

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Techniques of DisclosureTechniques of DisclosureTechniques of DisclosureTechniques of Disclosure
LO 9 Describe the major disclosure techniques for financial statements.LO 9 Describe the major disclosure techniques for financial statements.
Cross-Reference and Contra Items
Parenthetical Explanations
Illustration 5-37
Illustration 5-38

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Other GuidelinesOther GuidelinesOther GuidelinesOther Guidelines
LO 9 Describe the major disclosure techniques for financial statements.LO 9 Describe the major disclosure techniques for financial statements.
Offsetting
IAS No. 1 indicates that it
is important that
assets and liabilities,
and income and
expense, be reported
separately.
Consistency
IAS No. 8, for example, notes
that users of the financial
statements need to be
able to compare the financial
statements of a company
over time to identify
trends
in financial position, financial
performance, and cash
flows.
Fair Presentation
Faithful representation of
transactions and events
using the definitions and
recognition criteria in the
Framework.

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 IFRS requires that specific items be reported on the statement of
financial position. No such general standard exists in U.S. GAAP.
However under U.S. GAAP, public companies must follow U.S. SEC
regulations, which require specific line items.
 U.S. GAAP statements report current assets first, followed by non-
current assets. Current liabilities, noncurrent liabilities, and
shareholders’ equity then follow.
 While the use of the term “reserve” is discouraged in U.S. GAAP,
there is no such prohibition in IFRS.

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 There are many similarities between IFRS and U.S. GAAP related
to statement of financial position presentation. For example:
 U.S. GAAP specifies minimum note disclosures, similar to IFRS
on accounting policies and judgments. These must include
information about (1) accounting policies followed, (2)
judgments that management has made in applying the entity’s
accounting policies, and (3) key assumptions and estimation
uncertainty that could result in a material adjustment to the
carrying amounts of assets and liabilities.
 Financial statements must be prepared annually.

5-53 LO 10 Identify the major types of financial ratios and what they measure.LO 10 Identify the major types of financial ratios and what they measure.
Using Ratios to Analyze Performance
Illustration 5A-1
A Summary of Financial Ratios

Illustration 5A-1

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programs or from the use of the information contained herein.
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