LEARNING MODULE

Subject: Fundamentals of Accountancy, Business and Semester: Second

Management II Quarter: 1st
Grade Level: Grade 12

I. Module Title: The Financial Statements

II. Module Coverage

Lesson No. Title Reference/s Time Frame
1 The Statement of Financial Position (SFP) FunAcc Book page 2-32 Week 1
2 The Statement of Comprehensive Income (SCI) FunAcc Book page 33-56 Week 2-3
3 Statement of Changes in Equity (SCE) FunAcc Book page 57-67 Week 4
4 Statement of Cash Flow (SCF) FunAcc Book page 72-93 Week 5

III. Module Map

The Statement of The Statement of

Financial Position Comprehensive Income
(SFP) (SCI)

The Financial
Statements

Statement of Changes Statement of Cash Flow

in Equity (SCE) (SCF)

IV. Expected Skills and Values

After accomplishing all the tasks in this module, I can: I should be able to manifest the following:
1. Identify the elements of the SFP and describe each of 1. Integrity
them; 2. Responsibility
2. Prepare an SFP using the report form and the account 3. Analysis
form with proper classification of items as current and 4. Critical Thinking
noncurrent; 5. Patience
6. Perseverance
7. Accuracy
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 3. Identify the elements of the SCI and describe each of 8. Orderliness
these items for a service business and a merchandising 9. Decision-Making
business;
4. Prepare an SCI for a service business using the single-
step approach;
5. Prepare an SCI for a merchandising business using the
multi-step approach;
6. Prepare an SCE for a single proprietorship;
7. Discuss the components and structures of an SCF; and
8. Prepare an SCF.

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 Lesson 1 Statement of Financial Position (SFP)

We will start our learning journey with one of the financial statements which is the Statement Of
Financial Position (SFP). This a sort of a review since most of the account titles you will encounter are
already taken from the FABM 1 so we will focus more on the preparation and presentation of a properly
classified SFP.

The statement of financial position is a structured financial statement that shows the assets, liabilities,
and equity of a business entity as of a given date. Take note of the highlighted words “as of”, it tells the
reader that the balances reported in the SFP is the net effect of all transactions related to the specific account
from the date of the establishment of the company up to the date of the SFP. The information presented the
face of the SFP is true and correct only as of the date indicated. Hence, if the date of the SFP is December
31, 2018, the statement is only true as of such and may no longer true as of January 1, 2019.

It is a report based on the accounting equation: Assets = Liabilities + Equity. It was previously called a
Balance Sheet because the sum of the assets should be “balanced” to the sum of liabilities and equity. The
SFP is balanced as a consequence of the double-entry accounting. It reports the permanent accounts or real
accounts as of the end of the accounting period and forwarded the balances as beginning balances in the next
accounting period.

Statement of Financial Position

Report Form Account Form
Assets
Liabilities Liabilities
Assets

Equity Equity

✓ Fast Check!
Before we move on to the next part, answer the following review questions:
1. What is the other name of the SFP and why is it called such?

2. Differentiate an “as of” and “for the period” report.

Elements of the Statement of Financial Position

Let’s start dissecting the SPF. To start we have the assets. Assets are the resources controlled by the
enterprise as a result of a past events and from which future economic benefits are expected to flow to the
enterprise. Assets are sub-classified as current assets and the non-current assets. Below summarizes the two
sub-classifications of assets:

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 Current Assets Non-current Assets
Cash Property, Plant, and Equipment (PPE)
Receivables Intangible Assets
Inventory
Prepaid Expenses

Current Assets
An asset shall be classified as current when it satisfies any of the following criteria:

1. it is expected be to realized or is intended for sale or consumed in the entity’s normal operating cycle;
2. it is held primarily for the purpose of being traded;
3. it expected to be realized within twelve months after the date of the SPF; or
4. it is cash or a cash equivalent (as defined in IAS 7) unless the asset is restricted from being exchanged
or used to settle a liability for at least 12 months after the date of SFP.

Cash is the money owned by the company that are readily available to be spent for the company’s
operation. It categorized into three types:

➢ Cash on Hand – funds that are kept in the company’s premises.

➢ Cash in Bank – funds deposited in the bank which can be a savings or checking account. Note that
time deposits are not classified as cash in bank, rather they are considered as cash equivalents since
they are restricted to be spent until they reach their maturity.
➢ Petty Cash – funds in the company that are dedicated for small amounts of expenses.

Receivables is a general term that refers to the company’s right to collect or claim payment.
➢ Accounts Receivable – claims of the business from customers for sales of products or rendering or
services.

Note that there is a contra-asset account called Allowance for Bad Debts/Allowance for Doubtful
Accounts that are deducted against the accounts receivables to arrive at the net amount called net
realizable value.

➢ Notes Receivable – claims of the business from customers and third parties that are evidenced by a
formal instruments of credit such as promissory notes.
➢ Other Receivables – claims from other business transactions other that from selling products or
rendering services. It includes interest receivables, advances to employees, advances to affiliates,
advances to suppliers.

Inventory reports the cost of unsold merchandise. PAS 2 defines inventories as assets of the business
that are held for sale in the ordinary course of business in the process of production for such sale, or in form
of materials or supplies to be consumed in the production process on in the rendering of services.

Goods “on-consignment” are generally not part of the inventory. These are goods placed in the premise
of the store owner. The store is not obliged to purchase the goods. The store owner’s income from this
transaction may be in the form of commissions from the sale and/or rent from the store space used to display
the consigned goods. A perfect example of this are the delicacies displayed on the racks of Susie’s Cuisine
and other pasalubong stores.
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 Prepaid Expenses refer to future expenses that the company had paid for in advance. It is placed in this
account until the services or the items are used and become expenses. Recall the concept of accrual from the
FABM 1, expenses are recorded only when purchased goods and services are used. Examples of prepaid
expenses are prepaid rent prepaid insurance, prepaid supplies and etc.

Non-Current Assets
Assets that do not meet any of the criteria required for current assets are classified as non-current
assets.

Property, Plant, and Equipment (PPE) are long term assets that are owned and used in the operations
of the company. These are classified as long term assets because PPEs will be used in the business for more
than one year. Examples are land, building, warehouse, vehicle, manufacturing equipment, furniture and
fixture.

Since the PPEs are used to in the company’s operation, these items undergo physical wear and tear that
diminishes their value and this process is called depreciation. PPEs are generally depreciable except for the
land because this asset does not have useful life. More so, the value of land increases with the passage of
time. Straight-line method of depreciation is used in determining the annual depreciation on an asset.

A contra-asset account called Accumulated Depreciation is used to catch the depreciation and decrease
asset value to be reported in the SFP. The cost of the PPE, net balance of accumulated depreciation as of the
SFP date is called Net Book Value of the PPE.

Intangible Assets are long-term assets that has no physical substance or no tangible properties. The
allocation of the cost of intangible assets to the year it was used is called amortization which is similar to
the computation of the depreciation. Some examples of intangible assets are:
➢ Patent – a grant conferred by the government to the creator of an invention, whether a product or a
process, for the sole right to make, use, and sell that invention for a specified period of time.
➢ Brand-name – refers to word or words used to identify a specific product and its manufacturer.
➢ Trademark – is a symbol that represents the brand.

✓ Fast Check!
Before we move on to the part of this lesson, challenge yourself in identifying the assets described
below:
1. These are assets that can be used in the company’s business over many years. __________
2. These are company’s right to claim payments as evidenced by a promissory note signed by the
debtor. __________
3. This is a class of PPE that is not subject to depreciation. __________
4. This is a contra-asset account used to provide provision for possible uncollected accounts. ________
5. These are assets that has no physical substance. __________

We are halfway there! Done with the assets, next portion of the SFP is the liabilities. Liabilities are the
obligations that the company is required to pay. Just like the assets, liabilities are also sub-classified as
current and non-current.

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 Current Liabilities Non-current Liabilities
Payables Long-term Liabilities
Accrued Expenses
Unearned Income

Current Liabilities
A liability shall be classified as current when it satisfies any of the following criteria:
1. it is expected to be settled in the entity’s normal operating cycle;
2. it is held primarily for the purpose of being traded;
3. it is due to be settled within twelve months after the balance sheet date; and
4. the entity does not have an unconditional rights to defer settlement of the liability for at least twelve
months after the balance sheet date.

Payables are obligations to make payments to creditors. There are generally two kinds of payables:
➢ Accounts payable – obligation to suppliers of inventories. It is evidenced by the supplier’s sales
invoices and delivery receipt.
➢ Notes payable – obligation evidenced by a promissory note.

Accrued Expenses refers to the unpaid expenses of the company as of the cut-off date of the SFP. This
account is the counterpart of the prepaid expenses. Examples of these are salaries payable, utilities payable,
rent payable, interest payable, withholding taxes payable and the premiums payable like SSS, HDMF and
PhilHealth.
Unearned Income this are customer deposits or down payments before the delivery of goods or
services. It is a liability payable by delivery of goods or rendering a service.

Non-current Liabilities

Liabilities that do not meet any of the criteria required for current liabilities are classified as non-
current liabilities.

Long-term Liabilities refers to obligations with due dates that falls more than one year form the date of
the SPF. Common example of these are bank loans, long-term notes payable, mortgage payable, and bonds
payable.

✓ Fast Check!
Before we move on to the part of this lesson, challenge yourself in identifying the liabilities described
below:
1. These are advance collections from client or costumers. __________
2. These are liabilities supported by suppliers’ sales invoice and delivery receipt. __________
3. These are expense that are already incurred but not yet paid. __________

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 Equity

Equity is the net assets of the business. It is composed of the owner’s investments and the accumulated
net income of the company, net of any distributions to the owners. It reflects the residual interest that belongs
to the owners of the business.

This portion of the SFP varies from every form of business. For a sole proprietorship, only one capital
account is maintained while on a partnership there are two or more capital accounts that are kept. In a
corporation no individual accounts are maintained instead the equity of the corporation is reflected using
shareholders capital.

Presentation of Statement of Financial Position

There are two acceptable format of the SFP – the report form and the account form. The report form of
SPF list all the asset, liabilities, and equity in a horizon manner. Below is a pro forma of the SFP presented
in report form.

ABC Company
Statement of Financial Position
Heading
as of December 31, 20x1
in Php/USD
ASSETS
XXXXX
Current Assets XXXXX
Non-current Assets Asset Section
XXXXX
Total Assets
LIABILITIES
XXXXX
Current Liabilities
XXXXX
Non-current Liabilities Liabilities Section
XXXXX
Total Liabilities

EQUITY
Capital XXXXX Owner’s Equity Section
Total Liabilities and Owner’s XXXXX
Equity

On the other hand, the account form mimic the general ledger T-account format. Assets are reported on
the left and the list of liabilities and equity on the right.

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 ABC Company
Statement of Financial Position
as of December 31, 20x1
in Php/USD

ASSETS LIABILITIES
Current Assets XXXXX Current Liabilities XXXXX
Non-current XXXXX Non-current Liabilities XXXXX
Assets Total Liabilities
Total Assets XXXXX XXXXX
EQUITY
Capital XXXXX

Total Liabilities and Owner’s XXXXX

Equity

Account Name

Debit Credit
Account form SFP vis-à-vis T-Account

It is very important that you have already mastered the normal balances of each the balance sheet
accounts in order for you to easily plot the accounts on the above formats.

✓ Fast Check!
Before we move on to the part of this lesson, challenge yourself in identifying the liabilities described
below:
1. What is the SFP format that presents the accounts vertically? __________
2. What is the normal balance of equity? __________
3. What must be placed on the amounts in the SFP to indicate the final balance? __________
4. What SFP format that presents assets on the left and liabilities and equity on the right? ________
5. What differentiates account form of SFP from report form of SPF? __________

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 Illustration
The preparation on the SFP takes place after all the nominal accounts or income statements accounts are
already closed in the post-closing trial balance. Take note of the information below and it will serve as our
reference in preparing the SFP in report form and account form.

Carlo Perez Accessories

Post-Closing Trial Balance
December 31, 20x1
(in Philippine Peso)

Dr Cr
Cash on Hand ₱ 485,500
Cash in Bank 146,400
Petty Cash Fund 5,000
Accounts Receivable 175,000
Allowance for Bad Debts ₱ 12,000
6-months Notes Receivable 11,443
Merchandise Inventory 774,307
Unused Supplies 135,000
Prepaid Insurance 2,000
Rental Deposit 150,000
Office Equipment 70,000
Accumulated Depreciation - Office Equipment 4,500
Laboratory Equipment 400,000
Accumulated Depreciation - Laboratory Equipment 5,000
Patent 15,000
Utilities Payable 5,000
Accounts Payable 27,250
Loans Payable 65,000
18-month Notes Payable 356,000
Withholding Taxes Payable 14,500
SSS/EC Premiums Payable 4,900
HDMF Premiums Payable 2,000
PhilHealth Premiums Payable 3,500
Perez, Capital 2,120,000
Perez, Drawing 250,000 __________

Totals ₱2,619,650 ₱2,619,650

Below is a properly classified SFP prepared using report form. Take a closer look on each line item,
accounts are presented in order according to their liquidity. Liquidity is the ease in which an asset, or
security, can be converted into ready cash. In other words, liquidity describes the degree to which an asset
can be quickly bought or sold in the market. Cash is the most liquid asset since it can be already used for
payments. Receivables comes next because upon collection they are already disposable cash

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 Carlo Perez Accessories
Statement of Financial Position
As of December 31, 20x1
(in Philippine Peso)
Assets
Current Assets
Cash on Hand ₱ 485,500
Cash in Bank 146,400
Petty Cash Fund 5,000
Accounts Receivable 175,000
*Allowance for Bad Debts -12,000
6-months Notes Receivable 11,443
Merchandise Inventory 774,307
Unused Supplies 135,000
Prepaid Insurance 2,000
Rental Deposit 150,000
Total Current Assets ₱ 1,872,650
Non-current Assets
Office Equipment 70,000
*Accumulated Depreciation - Office Equipment -4,500
Laboratory Equipment 400,000
*Accumulated Depreciation - Laboratory
Equipment -5,000
Patent 15,000
Total Non-current Assets 475,500
Total Assets ₱ 2,348,150

Liabilities and Owner's Equity

Current Liabilities
Accounts Payable 27,250
Utilities Payable 5,000
Withholding Taxes Payable 14,500
SSS/EC Premiums Payable 4,900
HDMF Premiums Payable 2,000
PhilHealth Premiums Payable 3,500
Total Current Liabilities 57,150

Non-current Liabilities
18-month Notes Payable 356,000
Loans Payable 65,000
Total Non-current Liabilities 421,000
Total Liabilities 478,150

Owner's Equity
**Perez, Capital 1,870,000
Total Liabilities and Owner's Equity ₱ 2,348,150

*These line items are contra-asset accounts that are have credit normal balances and are deducted on the
total assets.

**Take note that withdrawal account was omitted in the above SFP. Why do you think so? It is because
withdrawal account is a temporary account and is closed against the capital account. The amount reflected
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 on the capital account is computed as ₱2,120,000 – ₱250,000 = ₱1,870,000 and this amount is the ending
balance of the capital as of December 31, 20x1.

Account Form
Carlo Perez Accessories
Statement of Financial Position
As of December 31, 20x1
(in Philippine Peso)
Assets Liabilities and Owner's Equity
Current Assets Current Liabilities
Cash on Hand ₱485,500 Accounts Payable ₱27,250
Cash in Bank 146,400 Utilities Payable 5,000
Petty Cash Fund 5,000 Withholding Taxes 14,500
Accounts Payable
Receivable 175,000 SSS/EC Premiums 4,900
Allowance for Payable
Bad Debts -12,000 HDMF Premiums 2,000
6-months Notes Payable
Receivable 11,443 PhilHealth Premiums
Merchandise Payable 3,500
Inventory 774,307 Total Current ₱ 57,150
Unused Supplies 135,000 Liabilities
Prepaid Insurance 2,000
Rental Deposit 150,000
Total Current Assets ₱1,872,650 Non-current Liabilities
18-month Notes 356,000
Non-current Assets Payable
Office Equipment 70,000 Loans Payable 65,000
Accumulated Total Non-current 421,000
Depreciation - Liabilities
Office Equipment -4,500 Total Liabilities 478,150
Laboratory
Equipment 400,000
Accumulated
Depreciation - Owner's Equity
Laboratory
Equipment -5,000 1,870,000
Patent 15,000 Perez, Capital
Total Non-current Assets 475,500 Total Liabilities and Owner's Equity ₱2,348,150
Total Assets ₱2,348,150

Some SPF prepared using account form presents amounts in a single-column for simpler reading. In this
case we used two-column SFP to give emphasis on the amounts of the total current assets, total non-current
assets and so on.

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