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ABM 2 Module (Unit 1) - Unit 1 lesson/chapter for ABM 2

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Fundamentals of Accountancy, Business and Management 2 (Jose Rizal Memorial State
University)

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Unit 1: Statement of Financial Position

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Unit 1: Statement of Financial Position

UNIT 1: Statement of Financial Position

The following are some reminders in using this module:

1. Use the module with care. Do not put unnecessary mark/s on any part of the module.
Use a separate sheet of paper in answering the exercises.
2. Answer all the exercises/activities and take note of the date of submission. Read the
instruction carefully before doing each task.
3. Observe honesty and integrity in doing the tasks and checking your answers.
4. Finish the task at hand before proceeding to the next.

Learning Outcomes

At the end of the unit, you will be able to:

1. Identify the elements of the SFP and describe each of them

2. Classify the elements of the SFP into current and noncurrent items
3. Prepare the SFP of a single proprietorship
4. Prepare an SFP using the report form and the account form with proper
classification of items as current and non-current

Pretest

As a prerequisite to FABM2 is FABM1. You must recall through your stock knowledge
the Elements of Financial Statements. The basic purpose of accounting is to provide information
that is useful for making economic decision accounting information is most commonly
communicated to users of accounting information through the financial statements.

Identification: Fill in the blank with the correct answer (To be submitted on October 15,
2020)
_________ 1. The book of original entry.
_________ 2. Assets are equal to liabilities and owner’s equity.
_________ 3. Users of accounting information is mostly communicated
__________4. Are what the company owns.
__________5. Are what the company owed.
_________ 6. Inflows of cash because of services rendered.
_________ 7. Assets from cash spent because of sales of goods.
_________ 8. The second accounting cycle.
_________ 9. Is called the book of the final entry.
________ 10. Is the next cycle after journalizing.

Accounting Equating Ledger Liabilities Journalizing

Liabilities Posting to ledger Income

Expenses Journal Assets

True or False: Write True if the statement is correct and false if the statement is incorrect. (To
be submitted on October 15, 2020)

__________1. The left side of the account is Debit

__________2. The permanent accounts are the nominal account.
__________3. The right side of the account is credit.
__________4. The elements of the statement of financial position are Assets and expenses.
__________5. Current Assets are easily convertible into cash within the normal operating
cycle of the business
__________6. The elements of Statement of financial position are Assets, Liabilities and
Owner’s Equity account.
___________7. Kinds of Assets are Current Assets and Non-Current Assets
___________8. Kinds of Liabilities are Current Liabilities and Non-Current Liabilities
___________9. Under owner’s Equity Account includes Capital, Owner’s withdrawal,
Revenue and Expenses.
___________10. Account form and Report form are the two kinds of forms of the Statement of
Financial Position

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Unit 1: Statement of Financial Position

Content

Introduction

Financial statements are structured representation of an entity’s financial position

which is balance sheet and results of its operations which is the statement of performance.
Financial statements are product of the accounting process.

Purpose and Importance of Financial Positions

Statement of financial position helps users of financial statements to assess the financial
health of an entity. When analyzed over several accounting periods, balance sheets may assist
in identifying underlying trends in the financial position of the entity. It is particularly helpful in
determining the state of the entity’s liquidity risk, financial risk, credit risk and business risk.
When used in conjunction with other financial statements of the entity and the financial
statements of its competitors, balance sheet may help to identify relationships and trends which
are indicative of potential problems or areas for further improvement. Analysis of the statement
of financial position could therefore assist the users of financial statements to predict the
amount, timing and volatility of entity’s future earnings.

The elements of the financial positions are as follows:

1. Assets are resources you control that have resulted from past events and can provide
you with the future economic benefits. It is something that an entity owns or controls in
order to derive economic benefits from its use. Assets must be classified in the balance
sheet as current or non-current depending on the duration over which the reporting
entity expects to derive economic benefit from its use. An asset which will deliver
economic benefits to the entity over the long term is classified as non-current whereas
those assets that are expected to be realized within one year from the reporting date are
classified as current assets.

Current Assets (Short-Term)

The first class of assets is the current asset which refers to short-term assets and
these kinds of assets are not depreciated. The movement or usages of them are directly
charged to the income statement. Current assets are considered short-term assets
because they generally are convertible to cash within a firm's fiscal year, and are the
resources that a company needs to run its day-to-day operations and pay its current
expenses. Current assets are generally reported on the balance sheet at their current
or market price.

Current assets may include items such as:

 Cash and cash equivalents

 Accounts receivable
 Prepaid expenses
 Inventory
 Marketable securities

Non-Current Assets (Long-Term)

The second types of assets are fixed assets. These kinds of assets normally
refer to assets that use more than one year and with large amounts as well as are not for
trading or holders for price appreciation. In other words, fixed assets are the resources
based on nature are converted into cash or cash equivalent in more than one year
accounting period. Noncurrent assets are reported on the balance sheet at the price a
company paid for them, which is adjusted for depreciation and amortization and is
subject to being re-evaluated whenever the market price decreases compared to
the book price.

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Unit 1: Statement of Financial Position

Noncurrent assets may include items such as:

 Land
 Property, plant, and equipment (PP&E)
 Trademarks
 Long-term investments and goodwill—when a company acquires another company

Noncurrent assets may be subdivided into tangible and intangible assets—such as fixed
and intangible assets.

 Fixed assets include property, plant, and equipment because they are tangible,
meaning that they are physical in nature; we may touch them. A company cannot
liquidate its PP&E easily. For example, an auto manufacturer's production facility would
be labeled a noncurrent asset.
 Intangible assets are nonphysical assets, such as patents and copyrights. They are
considered as noncurrent assets because they provide value to a company but cannot
be readily converted to cash within a year. Long-term investments, such as bonds and
notes, are also considered noncurrent assets because a company usually holds these
assets on its balance sheet for more than a year.

Assets are also classified in the statement of financial position on the basis of their nature:

 Tangible & intangible: Non-current assets with physical substance are classified
as property, plant and equipment whereas assets without any physical substance are
classified as intangible assets. Goodwill is a type of an intangible asset.
 Inventories balance includes goods that are held for sale in the ordinary course of
the business. Inventories may include raw materials, finished goods and works in
progress.
 Trade receivables include the amounts that are recoverable from customers upon
credit sales. Trade receivables are presented in the statement of financial position
after the deduction of allowance for bad debts.
 Cash and cash equivalents include cash in hand along with any short term
investments that are readily convertible into known amounts of cash.

2. Liabilities are your present obligations that have resulted from past events and can
require you give up resources when settling them. It is an obligation that a business
owes to someone and its settlement involves the transfer of cash or other resources.
Liabilities must be classified in the statement of financial position as current or non-
current depending on the duration over which the entity intends to settle the liability. A
liability which will be settled over the long term is classified as non-current whereas
those liabilities that are expected to be settled within one year from the reporting date
are classified as current liabilities.

Classification of Liabilities

These are the three main classifications of liabilities:

1. Current liabilities (short-term liabilities) are liabilities that are due and payable within
one year. Current liabilities should be closely watched by management to make sure that
the company possesses enough liquidity from current assets to guarantee that the debts
or obligations can be met.

Examples of current liabilities:

 Accounts payable
 Interest payable
 Income taxes payable
 Bills payable
 Bank account overdrafts
 Accrued expenses
 Short-term loans

Current liabilities are used as a key component in several short-term liquidity

measures. Below are examples of metrics that management teams and investors look
at when performing financial analysis of a company.

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Unit 1: Statement of Financial Position

2. Non-current liabilities (long-term liabilities) are liabilities that are due after a year or
more. Long-term liabilities are an important part of a company’s long-term financing.
Companies take on long-term debt to acquire immediate capital to fund the purchase of
capital assets or invest in new capital projects.

List of non-current liabilities:

 Bonds payable
 Long-term notes payable
 Deferred tax liabilities
 Mortgage payable
 Capital leases

3. Contingent liabilities are liabilities that may or may not arise, depending on a certain
event. They are liabilities that may occur, depending on the outcome of a future
event. Therefore, contingent liabilities are potential liabilities. For example,
when a company is facing a lawsuit of $100,000, the company would incur a
liability if the lawsuit proves successful. However, if the lawsuit is not
successful, then no liability would arise. In accounting standards, a contingent
liability is only recorded if the liability is probable (defined as more than 50%
likely to happen) and the amount of the resulting liability can be reasonably
estimated.

Examples of contingent liabilities:

 Lawsuits
 Product warranties
Liabilities are also classified in the statement of financial position on the basis of their
nature:
 Trade and other payables primarily include liabilities due to suppliers and
contractors for credit purchases. Sundry payables which are too insignificant to be
presented separately on the face of the balance sheet are also classified in this
category.
 Short term borrowings typically include bank overdrafts and short term bank loans
with a repayment schedule of less than 12 months.
 Long-term borrowings comprise of loans which are to be repaid over a period that
exceeds one year. Current portion of long-term borrowings include the installments
of long term borrowings that are due within one year of the reporting date.
 Current Tax Payable is usually presented as a separate line item in the statement of
financial position due to the materiality of the amount.

3. Equity means assets minus liabilities. Other terms for equity are capital, net assets, and
net worth. It is what the business owes to its owners. Equity is derived by deducting total
liabilities from the total assets. It therefore represents the residual interest in the
business that belongs to the owners.

Equity is usually presented in the statement of financial position under the following
categories:

 Share capital represents the amount invested by the owners in the entity
 Retained Earnings comprises the total net profit or loss retained in the
business after distribution to the owners in the form of dividends.
 Revaluation Reserve contains the net surplus of any upward revaluation of
property, plant and equipment recognized directly in equity.

The above elements are termed Permanent Accounts because their life or usefulness
continues throughout the life of the company.

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Unit 1: Statement of Financial Position

Rationale - Why the balance sheet always balances?

The balance sheet is structured in a manner that the total assets of an entity equal to the
sum of liabilities and equity. This may lead you to wonder as to why the balance sheet must
always be in equilibrium.

Assets of an entity may be financed from internal sources (i.e. share capital and profits)
or from external credit (e.g. bank loan, trade creditors, etc.). Since the total assets of a business
must be equal to the amount of capital invested by the owners (i.e. in the form of share capital
and profits not withdrawn) and any borrowings, the total assets of a business must equal to the
sum of equity and liabilities.

This leads us to the Accounting Equation: Assets = Liabilities + Equity

LIABILITIES
ASSETS EQUALS = +
OWNER’S EQUITY

Assets of an entity may be financed from internal sources (i.e. share capital and
profits) or from external credit (e.g. bank loan, trade creditors, etc.). Since the total
assets of a business must be equal to the amount of capital invested by the owners (i.e.
in the form of share capital and profits not withdrawn) and any borrowings, the total
assets of a business must equal to the sum of equity and liabilities.

Example: Statement of Financial Position as at 31st December 2020

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Unit 1: Statement of Financial Position

Forms of Statement of Financial Position

There are two forms of statement of financial position, the report form and account
form. Report form is usually the form used for submission to the government agencies and
financial institution such banks. You can use any of the form depending on the one who makes
the report in the company. See table below for the format

The format given above is the Account form. All assets

are found on the left side of the account and the
liabilities and owner’s equity account are found on the
right side of then account

The table below shows the Report form format for the statement of financial
position. Assets, liabilities and owner’s equity accounts are in one direction.
You must place the assets first, then the total liabilities and owner’s equity
account. This is usually the format that will be submitted to the government
and private agencies such as Banks. Financial institutions, Bureau of Internal
Revenue, City Treasurer’s office and others.

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Unit 1: Statement of Financial Position

Activity 1 Multiple Choice: Choose the answer that corresponds for each of the question
provided below: Write letter only of the best letter. (To be submitted on October 20, 2020)

1. Information about the revenue and expenses is provided by

a. Statement of changes in equity

b. Statement of Cash Flow
c. Statement of Financial position
d. Statement of performance

2. Information on changes in Assets, Liabilities and Owners Equity account

a. Statement of changes in equity
b. Statement of Cash Flow
c. Statement of Financial position
d. Statement of performance

3. Cash, Cash Equivalents, merchandise inventory are classified as

a. Current Liability
b. Current Asset
c. Long Term Liability
d. Owner’s Equity

4. The following are examples of contra asset account except

a. Accumulated depreciation- Equipment

b. Accumulated depreciation-Building
c. Bad debt Expense
d. Allowance for Bad Debts

5. The elements of financial Statements are

1. Assets
2. Liabilities
3. Equity
4. Income
5. Expenses

a. 1, 2, 4, 5
b. 1, 2, 3
c. 4, 5, 1
d. 1, 2, 3, 4, 5

Activity 2 Solve the following according to the Accounting Equation (To be submitted on
October 20, 2020)

Remember the equation? Assets is equals to Liability and Owner’s Equity Account

1. Angels Tutorial Center has an asset amounting to P 200,000, Liability is P 75,000. How
much is the owner’s equity account?

2. Assets of TMAM are P15, 000 and Total Equity is P10, 000, how much is total
Liabilities?

3. Assets are equal to P350, 000, Owner’s equity is 250,000, and how much is Equity?

4. Sure Fresh Company’s total liabilities amount to P30, 000. Total equity had an ending
balance of P50, 000. How much is total assets?

5. Current Assets is P50, 000, Non- Current Assets is P150, 000.00, Current Liabilities is
P10, 000 and Non- Current Liabilities is P40, 000, How much is the Equity of the
company?

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Unit 1: Statement of Financial Position

Summary

Statement of Financial position is one of the financial reports submitted by the

company to the users of information such as banks and other financial institutions. They are
called permanent because of their existence is continuous and the balance is forwarded to the
next accounting period. The elements of financial position are assets, liabilities and owner’s
equity account. The kinds of Assets are Current and Non-Current while the kinds of liabilities
are Current and Long-Term Liabilities. Under current assets are cash, receivables,
Inventories and prepaid expenses. Non-current assets include Land, Building Equipment and
furniture and their accumulated depreciation. While for Current Liabilities includes Accounts
Payables and Notes Payable and for the Long-Term Liabilities

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Unit 1: Statement of Financial Position

Learning Activity

Instructions: Solve for the unknown: In answering the problems below, you must have
to recall the kinds of assets and liabilities account and their examples. (To be submitted on
October 22, 2020)

1. The Art Company had the following accounts at year end: Cash-150,000, Accounts
Payable-70,000, and Prepaid Expenses-35,000. Compute for the company’s current
assets.

2. Theo Company’s Accounts Receivable amounted to P500, 000. Prepaid Expense and
Unearned Income are 30,000 and 10,000 respectively. Cash balance amounted to P100,
000 while Accounts Payable and Inventory are P20, 000 and P 10,000 respectively. How
much is the company’s current assets? Current liabilities?

3. Company’s Total Liabilities and Equity amounted to P825, 000. Total non-current assets
ended at P 550,000. Cash totaled P50, 000. Inventory amounted to Php100, 000.
Assuming the company had no other assets, how much is the accounts receivable?

4. Total assets amounted to P755, 000. Total equity amounted to P350,000. Accounts
Payable amounted to P80, 000 while Unearned Income is P 85,000.

5. Assuming there are no other current liabilities, compute for the company’s noncurrent
liabilities. Cash of P100,000, Accounts Receivables of P200,000, Prepaid Expenses of
P30,000.00, Equipment of P180,000 and Furniture of P20,000, How much is the total
assets?

Assessment

Apply your Knowledge (To be passed on October 22, 2020)

Instructions: Compute for the missing amount of the account titles taken from the SPF of
independent company Critical Thinking and Communication).

_______1. Assets are Php 27,000 and owner's equity is Php15, 000, how much is liabilities?

_______2. At the end of the first month of operations for TMAM Transportation, the business
had the following accounts: Accounts Receivable, Php2, 800; Prepaid Insurance,
Php700; Equipment, Php85, 500 and Cash, Php75, 550. On the same date, TMAM
owed the following creditors: Mely’s Supply Company, Php8, 000; Mark’s
Equipment, Php19, 500. The current assets for the Juana’s Delivery Service are

_______3. At the end of the first month of operations for Mary Anne’s, the business had the
following accounts: Accounts Receivable, Php4,800; Prepaid Insurance,
Php15,000; Equipment, Php68,200 and Cash, Php40,650. On the same date,
Juana owed the following creditors: Bonny Supply Company, Php42,000 (due in 6
months); Maria’s Equipment, Php90,500 (due after 2 years). Current liability is
_______4. If during the year total assets increase by Php85,000 and total liabilities decrease by
Php15,000, by how much did owner's equity increase/decrease?

_______5. Using the following accounts Cash – 15, 000 loans payable – 77,500 Accounts
Receivable – 6,300 Inventory, 7,400 Supplies – 4, 200 Equipment – 52, 000,
Owners Equity – 98, 000, Accounts Payable – 22, 400, Building – 113, 000. How
much is the Total Assets and Total Liabilities and Owner’s Equity.

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Unit 1: Statement of Financial Position

REFERENCES

Books

Ferrer, R., & Millan, Z. V. (2017). Fundamentals of Accountancy, Business & Management Part
2. 1st Edition

Haddock, M., Price, J., & Farina, M. (2012). College Accounting: A Contemporary
Approach, Second Edition. New York: McGraw-Hill/Irwin.

Valencia, E. G., & Roxas, G. F. (2010). Basic Accounting (3rd ed.).

Mandaluyong City, Philippines: Valencia Educational Supply.

Teaching Guide in Senior High School Fundamentals of Accountancy Business

and Management 2, donated by the Commission on Higher Education in
Collaboration with the Philippine Normal University to Department of Education
Websites
accounting coach.com
https://www.moneymanagement.org/blog/financial-proverbs-that-are-still-true-today

https://accounting-simplified.com/financial/statements/statement-of-financial-
position/#:~:text=Statement%20of%20Financial%20Position%2C%20also,%3A%20Assets
%2C%20liabilities%20and%20equity.

https://corporatefinanceinstitute.com/resources/knowledge/accounting/types-of-
liabilities/

Answer Key

Pretest 1 Pretest 2 Activity 1 Activity 2

1. Journal 1. True 1. d 1. 125, 000
2. Accounting Equating 2. False 2. c (200, 000-75,000)
3. Financial Statement 3. True 3. b 2. 5, 000
4. Assets 4. False 4. d (15,000 -10,000)
5. Liabilities 5. True 5. b 3. 100, 000
6. Income 6. True (350,000-250,000)
7. Expenses 7. True 4. 80,000
8. Journalizing 8. True (30,000+50,000)
9. Ledger 9. True 5. 150, 000
10. Posting to ledger 10. True (200,000-50,000)

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