Fabm2 PPTG1

Fundamentals of
Accounting and
Business Management
2
ALBERTO Q. UBAY MEMORIAL AGRO TECH SCIENCE HIGH SCHOOL
Preparation and Analysis of
Financial Statements of a Service
and Merchandising Using
Horizontal and Vertical Analyses
and Financial Ratios
Lesson 1: Statement of Financial
Position
Statement of Financial Position,
also known as the Balance Sheet,
presents the financial position of
an entity in a given date. It has
three main components: assets,
liabilities and equity.
Purpose and Importance
The statement of financial position is crucial for assessing an
entity’s financial health over time. It aids in identifying trends,
evaluating liquidity, financial, credit, and business risks. When
analyzed alongside other financial statements, it helps uncover
relationships and trends, enabling users to predict the entity’s
future earnings in terms of amount, timing, and volatility.
Overall, it provides a comprehensive snapshot of an entity’s
financial position, aiding stakeholders in making informed
decisions.
Elements of Statement of Financial Position
The elements of statement of financial consist of the

following key elements:
1). Assets
An asset is something that an entity owns or control in
order to drive 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. Assets which deliver economic benefits to the entity
over the long term are 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.
2. Liabilities
A liability is an obligation that a

business owes to someone. 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.
3. Equity
Equity 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.
Statement of Financial
Position, is also known
as__________
It Is derived by deducting
total liabilities from the total
assets.
It Is an obligation that a
business owes to someone.
Assets which deliver
economic benefits to the
entity over the long term are
classified as _____
Liabilities that are expected
to be settled within one year
from the reporting date are
classified as _____
Check for Understanding
Classify the following accounts as to:
A. Assets
B. Liabilities
C. Equity
On the blank before each number, write the letter of the correct classification
for each of the ff:
_____1. Cash Dividends Payable

_____2. Estimated Liability under Warranty
_____3. Investments in Marketable Securities
_____ 4. Cash and Cash Equivalents
_____ 5. Patents
_____6. Notes Payable to Bank due in 5 years
_____7. Accounts Receivable
_____ 8. Accumulated depreciation
_____9. Franchise
_____10. Prepaid Rent
Classification of the Elements of Financial Position
Classification of Assets, Liabilities, and Equity is necessary, otherwise the Statement of

Financial Position may fail to provide meaningful information. The various items of assets,
liabilities, and equity in the Statement of Financial Position should be properly grouped.
Classification of Assets
Assets may be divided into two categories: current and noncurrent.
1.1. Current assets are items listed on a company’s balance sheet that are expected to be
converted into cash within one fiscal year.
Ex. Cash, Accounts
Receivable and
Inventory
1.2. Noncurrent assets are long-term assets that a
company expects to hold over one fiscal year that
cannot be readily converted to cash within a year.
Contrary to current assets, noncurrent assets are long-
term assets that a company expects to hold longer than
one fiscal year.
Ex. Fixed Assets, Intangible Assets and Long-term

Investments
2. Classification of Liabilities
2.1. Current liabilities are those that the company expects to

settle within 12 months of the date on the balance sheet.
Examples of current liabilities are accounts payable, notes

payable, and unearned income, wages payable, and taxes
payable.
2.2. Noncurrent or long-term liabilities are the ones
the company reckons and are not going anywhere
soon. In other words, the company doesn’t expect to
liquidate them within 12 months of the balance sheet
date.
Examples are Long-Term Bank Loan, Bonds Payable,
Mortgage Payable.
3. Equity is usually presented in the statement of
financial position under the following categories:
3.1. For Sole proprietorship – Owner’s Equity, net of

withdrawal
3.2. For Partnership- Partners’ Equity, net of

partners’ withdrawal and share in net income(net
loss)
3.3. For Corporation
a. Share capital represents the amount invested by the owners in the

entity
b. Retained Earnings comprises the total net profit or loss retained

in the business after distribution to the owners in the form of
dividends.
C. Revaluation Reserve contains the net surplus of any upward

revaluation of property, plant and equipment recognized directly in
equity.
T/F Classification of Assets,
Liabilities, and Equity is not
necessary
_____ are items listed on a
company’s balance sheet
that are expected to be
converted into cash within
one fiscal year.
T/F Cash, Accounts
Receivable and Inventory is
an example of current
liabilities
A fiscal year is composed of
how many months?
When can we say that an
asset is non current?
Classify the following accounts as to:
A. Current Assets
B. Non-current Assets
C. Current Liabilities
D. Non-current Liabilities
E. Equity
On the blank before each number, write the letter of the correct classification
for each of the ff:
_____1. Marketable Securities
_____2. Cash and Cash Equivalents
_____3. Notes Payable to Bank due in 5 years
_____4. Equipment
_____5. Prepaid Rent
_____6. Building
_____7.Accounts Receivable
_____ 8. Office Supplies
_____9. Accounts Payable
_____10. Taxes Payable
Statement of Financial Position of a Single
Proprietorship
The balance sheet or the statement of
financial position is one of the major
components of financial statements which
includes the income statement, statement of
cash flow, statement of changes in equity and
the notes to financial statements.
The following are the simple steps in preparing a
simple statement of financial position:
1. Start with the heading. The heading includes the
name of entity (individual or company), name of the
statement (statement of financial position), and the
reporting period (ex as of December 31, 2011).
2. Present the assets. Classify the assets into current
and noncurrent assets. Current assets are cash; cash
equivalent; assets held for collection, sale, or
consumption within the entity’s normal operating
cycle; or assets held for trading within the next 12
months. The rest are considered noncurrent assets.
3. Present the liabilities. After presenting the total
assets, next are the liabilities. Liabilities should also
be classified as current and noncurrent. Considering
the example is only for single proprietorship business,
it only includes current liabilities. The current
liabilities include accrued expenses, loans, and income
tax payable.
4. Add the owner’s equity. The statement of financial
position is an equation of “Assets = Liabilities +
Equity”. Thus, there is need to add the owner’s equity
in the “liabilities and equity” section of the statement
of financial position.
Note that the “total assets” and the “total liabilities and
owner’s equity” must be balanced.
Forms of the Statement of Financial Position
The Statement of Financial Position may be prepared using the Account form or the
Report form.
Account Form
The account form of the statement of financial position gives information in an

essentially horizontal format. The account form consists of two columns, set side by side.
The left column lists the company’s assets. The final line on the left side of the statement
provides the total value of all assets. The column on the right lists both liabilities and
equity, with liabilities coming first. The final line on the right provides the total
combined value of liabilities and equity.
Report form
The report form of the statement of financial position

provides information in a vertical format – essentially
one column that goes the full width of the page. The
report form starts with assets, providing a total value at
the end of the assets section. It then lists liabilities and
finishes with equity, with the final line of the report
providing the total combined value of liabilities and
equity.
Advantages of the Account and the Report form
Neither format is inherently better than the other. It comes down

to preference. By putting total assets and total liabilities and
equity side by side. The account form is so named because it
resembles an accounting ledger which allows verification at a
glance that the equation is in balance. The report form may
require to flip from one page to the next. On the other hand, an
account form that spans more than one page can be harder to
read, since both columns “jump” from one page to the next.
Prepare statement of financial

position as of november 31, 2017 for
M. Abesamis in the previous activity
using Account Form
Prepare ¼ sheet of paper and number it from 1-20
1). Statement of Financial

Position, also known
as__________
2). T/F Classification of
Assets, Liabilities, and
Equity is not necessary
3). _____ are items listed on
a company’s balance sheet
that are expected to be
converted into cash within
one fiscal year.
4). It Is derived by
deducting total liabilities
from the total assets.
5).It Is an obligation that a
business owes to someone.
6). T/F Cash, Accounts
Receivable and Inventory is
an example of current
liabilities
7). A fiscal year is
composed of how many
months?
8). When can we say that an
asset is non current?
9). Assets which deliver
economic benefits to the
entity over the long term are
classified as _____
10). Liabilities that are
expected to be settled within
one year from the reporting
date are classified as _____
11). T/F The balance sheet or the
statement of financial position is
one of the major components of
financial statements
12)-15). Enumerate the
simple steps in preparing a
simple statement of
financial position in order
start from step 1 to step 4
16). T/F “total assets”
and the “total liabilities
and owner’s equity” must
not be balanced.
17). It provides the statement
of Financial Position
information in a vertical format
– essentially one column that
goes the full width of the page.
18). It gives and provides
the statement of financial
position information in an
essentially horizontal
format.
19). Arranged the following steps In
preparing a simple statement of
financial position
l. Present the assets

ll. Start with a heading
lll. Add the owners equity
lV. Present the liabilities
20). What is the lesson
all about?
THANKS

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Fundamentals of

The elements of statement of financial consist of the

A liability is an obligation that a

Equity is what the business owes to its

_____1. Cash Dividends Payable

Classification of Assets, Liabilities, and Equity is necessary, otherwise the Statement of

Ex. Fixed Assets, Intangible Assets and Long-term

2.1. Current liabilities are those that the company expects to

Examples of current liabilities are accounts payable, notes

3.1. For Sole proprietorship – Owner’s Equity, net of

3.2. For Partnership- Partners’ Equity, net of

a. Share capital represents the amount invested by the owners in the

b. Retained Earnings comprises the total net profit or loss retained

C. Revaluation Reserve contains the net surplus of any upward

The account form of the statement of financial position gives information in an

The report form of the statement of financial position

Neither format is inherently better than the other. It comes down

Prepare statement of financial

1). Statement of Financial

l. Present the assets

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