Republic of the Philippines

DEPARTMENT OF EDUCATION
Region I
Division of Ilocos Sur

SELF-LEARNING KIT IN
FUNDAMENTALS OF ACCOUNTANCY,

12
BUSINESS AND MANAGEMENT 2

LESSON TITLE:

FINANCIAL STATEMENT

CHERYLL VALLEJO-SORIANO
Teacher-writer

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 QUARTER # 1
SELF- LEARNING KIT # 1

FOREWORD

LEARNING COMPETENCY
LEARNING COMPETENCY

1. To identify the elements of the SFP and describe each of them.

2. ABM_FABM12-Ia-b-1
3. Prepare an SFP using the report form and the account form with
proper classification of items as current and non-current.
4. ABM_FABM12-Ia-b-4

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 QUARTER/WEEK
QUARTER/WEEK

Quarter 1 Week 1

SUBJECT MATTER
SUBJECT MATTER

STATEMENT OF FINANCIAL POSITION

REFERENCES
REFERENCES

Fundamentals of Accountancy, Business and Management 2

PRESENTATION OF
PRESENTATION OF THE
THE LESSON
LESSON

FINANCIAL INFORMATION

Financial information is contained and communicated through the financial statements. These
statements are like chapters of a novel, telling different stories of an interrelated subject. Financial
statements are organized depiction of the events that happened in a business.

Financial statements are collection of reports about an organization's financial results, financial
condition, and cash flows. They are useful for the following reasons:

 To determine the ability of a business to generate cash, and the sources and uses of
that cash.
 To determine whether a business has the capability to pay back its debts.
 To track financial results on a trend line to spot any looming profitability issues.
 To derive financial ratios from the statements that can indicate the condition of the
business.
 To investigate the details of certain business transactions, as outlined in the
disclosures that accompany the statements.

The standard contents of a set of financial statements comprises:

1. Statement of Financial Position as at the end of the period. (Balance sheet)
2. Statement of Comprehensive Income for the period. (Profit and Loss Statement)
3. Statement of Changes in Equity for the period. (Statement of Retained Earnings)
4. Statement of Cash Flows for the period.
5. Supplementary notes. Includes explanations of various activities, additional detail on some
accounts, and other items as mandated by the applicable accounting framework.

SHORT DISCUSSION
SHORT DISCUSSION 11
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STATEMENT OF FINANCIAL POSITION
Statement of Financial Position, also known as the Balance Sheet, presents the financial “snapshot”
of an entity at a given date in time. The accounts in the balance sheet are known as “Real Accounts”
(Permanent). It is comprised of the following three elements:

1. Assets: Something a business owns or controls (e.g. cash, inventory, plant and machinery,
etc)
2. Liabilities: Something a business owes to someone (e.g. creditors, bank loans, etc)
3. Equity: What the business owes to its owners. This represents the amount of capital that
remains in the business after its assets are used to pay off its outstanding liabilities. Equity
therefore represents the difference between the assets and liabilities. (Assets – Liabilities =
Equity).

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.
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
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, long-term solvency and assessing future cash flows.
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.

ILLUSTRATIVE EXAMPLES
ILLUSTRATIVE EXAMPLES

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ACTIVITY 11
ACTIVITY

Discuss the importance of Statement of Financial Position in a company. Write your answer in
Your answer in a separate sheet of paper.

SHORT DISCUSSION
SHORT DISCUSSION 22
Classification of ELEMENTS of SFP

ASSETS:
Classified and presented in decreasing order of liquidity (convertible into cash)

CURRENT ASSETS:
 An asset should be classified as current when:
 It expects to realize the asset, or intends to sell or consume it, in its normal operating
cycle;
 It holds the asset primarily for the purpose of trading;
 It expects to realize the asset within 12 months after the reporting period; or
 The asset is cash or cash equivalent unless the asset is restricted from being exchanges
or used to settle a liability for at least 12 months after the reporting period.
Examples:
1. Cash - cash on hand consisting of coins, currency and undeposited checks; money orders
and drafts and cash in banks (deposits in checking and savings account) that are readily
available for current use of the entity.
2. Cash equivalents – short-term , highly liquid investments that are readily convertible to known
amounts of cash or so near their maturity that they present insignificant risk of change in
value because of changes in interest rate. Example: 3-month commercial paper or money-
market instrument; 3-m0nth deposit and 3-month treasury bills.
3. Short-term investments in Marketable Securities- investment in debt and equity securities that
are classified as “Financial assets at fair value through profit and loss”. Ex. Available for sale
securities .
4. Receivables- presented at their amortized cost (FV less allowance for bad debts). Include
accounts and notes receivable, non-trade short-term receivables from affiliates, officers and
employees.
5. Inventories- presented at their historical cost or net realizable value(estimated selling price
less estimated costs to complete and to sell) , which ever is lower. Includes merchandise and
finished goods held for sale in the normal course of business, raw materials and goods in
process.
6. Prepaid expenses- presented at historical cost of the remaining amount. Created by the
prepayment of cash or incurrence of a liability. Examples: prepaid rent and insurance

NON-CURRENT ASSETS:
An entity shall classify all other assets as non-current
Examples:

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 1. Property Plant and Equipment- tangible assets held for use in the production or supply of
goods or services or for rental to others or for administrative purposes and which are
expected to be used during more than one period.
Examples: land ,buildings, machinery and equipment, furniture and fixtures, motor vehicles
and the like.
 May also include leased property when the lease arrangement s deemed to be a method
of financing the permanent acquisition of the facilities (capital or financial lease)
 Presented at their original cash equivalent costless accumulated depreciation to date.
 May be presented at its revalued amount which is its FV at the date of revaluation less
any subsequent accumulated depreciation and subsequent impairment losses.
2. Intangible assets-identifiable non-monetary asset without physical substance and from which
future economic benefits are expected to flow to the entity.
Examples: computer software, patents, franchise, copyrights etc.
 Presented at amortized cost (historical costs less accumulated amortization).
 Intangible assets with indefinite life (goodwill, copyright ad trademark) are not
amortized but periodically reviewed for possible impairment in value.
 May also be carried at revalued amount (FV at the date of revaluation less any
subsequent accumulate amortization or any subsequent accumulated impairment
loss).
3. Investment property- includes investment in land or a building or both held (by the owner or
by a lessee under a finance lease) with the intention of earning rentals or for capital
appreciation or both.
Examples: land held for long-term capital appreciation, investment in condominium units or
vacant building to be leased out one or more operating leases.

LIABILITIES
Classified and presented based on time to maturity. Thus, obligations current due are listed
first , and those carrying the most distant maturity dates are listed last.
CURRENT LIABILITIES
An asset should be classified as current when:
 It expects to settle the liability in its normal operating cycle;
 It is due to be settled with in one year after the reporting period;
 It holds primarily for the purpose of trading; or
 The entity does not have an unconditional right to defer settlement of the liability for at
least 12 months after the reporting period.
Guiding Principles on Current Liabilities:
 Some current liabilities (trade payables and accruals for employees and operating
costs) are part of the working capital used in the entity’s normal operating cycle.
They are classified as current liabilities even if they are due o be settled more
than 12 months after the reporting period. IF THE OPERATING CYCLE OF AN
ENTITY IS NOT CLEARLY IDENTIFIABLE, IT IS ASSUMED TO BE 12
MONTHS
 Other current liabilities not part of the normal operating cycle , but are due for
settlement within 12 months after the reporting period or held primarily for the
purpose of trading. Example: bank overdrafts, current portion of long-term
liabilities, dividends payable, income taxes and other non-trade receivables.
 Due to be settled within 12 months after the balance sheet date, even if:
 The original term is for a period of more than 12 months and

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  The intention supported by an agreement to refinance or to reschedule payments,
on a long-term basis is completed after the balance sheet date and completed
before the financial statements are authorize for issue.
 Refinancing or rolling over the obligation is not at the discretion of the entity.
 The entity breaches or has violated an undertaking under an long term loan
agreement on or before the balance sheet date. (non-payment of interest )
Examples:
 Trade accounts and Notes Payable- obligations arising from the firm’s
ongoing operations including purchase of merchandise, materials, supplies
and services used in the production and sale of goods and services.
 Accrued Expenses Payable- already incurred as of the financial reporting
date but has not been paid. Examples: accrued wages, interests and property
taxes.
 Unearned or Deferred Revenues/ Advances from customers- advance
collections from customers relating to future delivery of goods and services.
Examples: gift certificates, tuition fees, rent and magazine subscription.
 Income Taxes Payable- unpaid portion of the income tax payable to BIR.
“Agency Liabilities” – collection for 3rd parties from customers or employees
that will have to be remitted to BIR (withholding taxes,
GSIS/SSS/PhilHealth/Pag-ibig premiums payable, VAT and union dues) .
 Currently Maturing Long-term Debt- portions of long-term liabilities (bank
loans, notes) which become payable within one year or normal operating
cycle if longer than one year.
NON-CURRENT LIABILITIES
An entity shall classify all other liabilities as non-current.
Examples:
 Bonds Payable – long-term groups of notes payable (bonds) issued to
multiple lenders called bondholders. Recorded at exchange value of the
assets or services received and involved interest that is recognized as
expense over time.
 Long term Notes Payable- evidenced by a promissory note issued in
exchange for a loan from bank or for noncash asset like equipment
purchased on credit.
 Long-term Capital Lease Obligation- represents the present value of the
contract lease payments for properties held under finance or capital lease.

EQUITY
Classified and presented in order of permanence. Thus, capital contribution accounts, which
typically change the least, should be listed first. Equity accounts used to report accumulated earnings
and updated on an on-going basis are listed last.

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 In a sole proprietorship, this includes owner’s residual interest in the business; in partnership,
it represents partner’s equity and in corporation , it represents the shareholder’s equity.
In shareholder’s equity, the most commonly reported sources are Contributed Capital:
 Share capital- firm’s stated or legal capital specified in the articles of incorporation and
approved by SEC. It is the issued/outstanding / ordinary shares stated at par value and is
not available for dividend declaration
 Contributed capital in Excess of Par or share premium- excess of value of assets received by
the corporation over the par value or stated value of the share capital given in exchange
In shareholder’s equity, the most commonly reported sources are;
 Accumulated Profit (Loss) / Retained Earnings- accumulated earnings less dividends paid
out, since the company’s inception. A negative balance in the retained earnings is called
“Deficit” and usually arises when the company experience operating losses.
 Treasury shares- shares previously issued and then reacquired by the company, but not
retired. They are not assets of the issuing shares. The carrying value (cost) is deducted from
the total contributed capital and RE.

ILLUSTRATIVE EXAMPLES
ILLUSTRATIVE EXAMPLES
FORMAT OF SFP
ACCOUNT FORM
 Reflects the basic accounting equation:
Assets = Liabilities + Owner’s Equity
 Assets are listed on the left-hand side of the report while liabilities and owner’s equity on the
right-hand side in horizontal order.

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REPORT FORM
.
Lists the accounts in a vertical or downward sequence. Thus, assets are listed at the top and
liabilities and owner’s equity below.

ACTIVITY 2

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Write your answer in a separate paper.

GENERALIZATION
GENERALIZATION

Statement of Financial position or balance sheet present’s a company’s “position” when it

comes to the resources it owns (assets), obligations claimed against it (liabilities) and the
owner’s residual interest (equity). The date of this statement is always “as at” or “as of”
the end of the period.

APPLICATION/ASSESSMENT
APPLICATION/ASSESSMENT

1. Classification of Accounts: Classify the following accounts whether they are

asset, liability or equity accounts. For asset and liability accounts, classify
whether they are current or non-current. Write your answers in a separate sheet
of paper.

ACCOUNT ELEMENT CLASSIFICATION

Accounts payable
Utilities payable
Cash
Bonds payable
Finished goods
Ibe, Capital
Notes receivables
Supplies
Property and equipment
Prepaid rent
Ibe, Drawing
Cash on hand

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 Interest payable
Goodwill
Copyright

2. Below are the accounts of Red Services for the year ended December 31, 2019.
Cash in Bank Php 5,000,000
Petty cash fund 25,000
Change cash fund 12,500
Cash equivalents 50,000
Accounts Receivables 1,000,000
Notes receivables 100,000
Raw materials 300,000
Work in progress 200,000
Finished goods 500,000
Land used plant site 500,000
Vehicles 1,000,000
Accumulated depreciation-Vehicles (100,000)
Fixtures 500,000
Accumulated depreciation-fixtures (50,000)
Patents 500,000
Accumulated depreciation-patents (50,000)
Trademarks 500,000
Accumulated depreciation-trademarks (50,000)
Land held for fair value appreciation 5,000,000
Accounts payable 1,000,000
Notes payable 500,000
Interest payable 50,000
Income tax payable 450,000
Long term debt 2,500,000
Capital 10,437,500

Prepare a Statement of financial Position using report form and account form. Use
separate paper for your answer.

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