Introduction to Statement of Financial Position PDF

Lesson 1.1 Introduction to Statement of Financial Position Fundamentals of Accountancy, Business, and Management 2 Accountancy, Business, and Management 1 When you become a business owner, you might seek help from a financial institution to fund your busin...

Lesson 1.1 Introduction to Statement of Financial Position Fundamentals of Accountancy, Business, and Management 2 Accountancy, Business, and Management 1 When you become a business owner, you might seek help from a financial institution to fund your business operations. 2 However, creditors will not lend you money without proving that you can pay your debts. 3 A Statement of Financial Position is a document that records all investments of a company through its assets while also providing records of its debts and other liabilities. 4 From this financial statement, users of accounting information can make decisions concerning a business’s liquidity and solvency. 5 Quick Look CM Construction, Inc. CM Construction, Inc. is expanding its operations and requires additional funding. They need to borrow ₱2,500,000 from the bank. The bank wanted CM Construction to provide a Statement of Financial Position to determine whether they could extend credit to CM Construction, Inc. 6 Quick Look Questions to Ponder 1. What are the uses of a Statement of Financial Position? 2. What are the elements of Statement of Financial Position? 3. What are current and non-current elements of a Statement of Financial Position? 7 Learning Competencies This lesson aims to target the following DepEd competencies: Identify the elements of a Statement of Financial Position and describe each of them. (ABM_FABM12-Ia-b-1) Classify the elements of a Statement of Financial Position into current and non-current items. (ABM_FABM12-Ia-b-2) 8 Learning Objectives In this lesson, you should be able to do the following: Differentiate the elements of a Statement of Financial Position. Classify accounts as assets, liabilities, or owner’s equity. Classify accounts as current or non-current. 9 Why should a business prepare a Statement of Financial Position? 10 Different Types of Financial Statements Statement of Comprehensive Income Statement of Financial Position; and Statement of Cash Flows. 11  Statement of Financial Position Definition shows a business's financial condition for a given period shows what a business owns and what it owes to its creditors and owners records a company's assets, liabilities, and equity 12  Statement of Financial Position Use to assess a company's ability to pay its short-term (liquidity) and long-term debts (solvency) 13 Statement of Financial Position 14 Statement of Financial Position 15  Elements of Statement of Financial Position Assets = Liabilities + Equity 16  Elements of Statement of Financial Position Assets = Liabilities + Equity things a company owns resources used to generate revenue 17 Elements of Statement of Financial Position Current Assets easy to liquidate and are used within less than a year Examples: cash, accounts receivable, cash equivalents, and inventories 18  Assets Non-current Assets difficult to dispose of and may be used for more than a year Examples: land, equipment, building, and the like 19 CM Construction’s Assets 20  CM Construction’s Assets The CM Construction’s Statement of Financial Position shows that the firm has total current assets of ₱12,872,000. It consists of cash amounting to ₱7,314,000 and receivables from its customers amounting to ₱5,560,000. The bank will interpret this as the liquid assets the company can use to settle its current obligations, i.e., monthly amortization of loans. 21  CM Construction’s Assets On the other hand, the largest portion of the company’s long- term assets is its property and equipment. These assets can be used as collateral for loans. However, liquidating these assets takes time. 22  Check Your Progress 1 What is the difference between current and non-current assets? Answer area 23  Elements of Statement of Financial Position Assets = Liabilities + Equity obligations or debts of a business to other entities, individuals, or institutions 24 Elements of Statement of Financial Position Current Liabilities due to be paid within the next 12 months Examples: accounts payable, short-term loans, interest payable, and the like 25  Liabilities Non-current Liabilities debts that will mature after more than a year Examples: long-term loans, mortgages, and bonds 26  Check Your Progress 2 What is the difference between current and non-current liabilities? Answer area 27 CM Construction’s Liabilities 28  CM Construction’s Liabilities The CM Construction’s Statement of Financial Position shows that the firm has Accounts Payable of ₱9,060,000. These are the liabilities they need to settle in less than a year, including the materials they purchased from their suppliers. On the other hand, the company has fewer long-term liabilities. 29  CM Construction’s Liabilities The bank will interpret this as the company having just enough current assets to pay for its current liabilities. The equity of owners is mostly invested in fixed assets. 30  Elements of Statement of Financial Position Assets = Liabilities + Equity residual interest after liabilities are deducted from the assets 31 Elements of Statement of Financial Position Equity Owner’s investment Retained earnings gained during its operations 32  CM Construction’s Owner’s Equity The CM Construction's Statement of Financial Position shows that the company's owners invested ₱6,000,000 and gained from a retained earning of ₱5,567,000. The total owner's equity is ₱11,567,000. 33  CM Construction’s Owner’s Equity The bank will determine how the loan being applied for will affect the company's financial position. Will it have enough assets to cover the additional obligations? Can the company make the fund grow to increase its assets? 34  The Importance of a Statement of Financial Position Researchers Niraj Mahajan and Mr. Abhishek Yaday studied the importance of preparing and analyzing a Statement of Financial Position for a business. Niraj Mahajan, “Case Study for an Industry,” https://www.erpublication.org/ (International Journal of Engineering and Technical Research, July 3, 2016), (erpublication.org), last accessed on 03/08/2022. 35  The Importance of a Statement of Financial Position They examined the financial health of a leading graphite electrode plant in India. Through financial analysis, the researchers aim to understand the financial factors that influence the company in its decision-making. The researchers also assessed the financial ratios and their effect on the company's performance and position for the past five years. Niraj Mahajan, “Case Study for an Industry,” https://www.erpublication.org/ (International Journal of Engineering and Technical Research, July 3, 2016), (erpublication.org), last accessed on 03/08/2022. 36  The Importance of a Statement of Financial Position The researchers found out that the company's financial position is good as it has been profitable for the past four years. The company's ability to pay long-term debts is also good. The company kept its liquidity low to reach high profitability. The company pays its dividends to its shareholders yearly. However, its profit decreased in the fifth year to maintain its high liquidity. Niraj Mahajan, “Case Study for an Industry,” https://www.erpublication.org/ (International Journal of Engineering and Technical Research, July 3, 2016), (erpublication.org), last accessed on 03/08/2022. 37  The Importance of a Statement of Financial Position The preparation and analysis of financial statements, particularly the Statement of Financial Position, are essential for the management and stockholders. The Statement of Financial Position reflects the success and competence of a company. Niraj Mahajan, “Case Study for an Industry,” https://www.erpublication.org/ (International Journal of Engineering and Technical Research, July 3, 2016), (erpublication.org), last accessed on 03/08/2022. 38  The Importance of a Statement of Financial Position Stockholders use the Statement of Financial Position to decide whether to invest in a company or not. For the management, it can provide insight into ways to boost a company's revenue. Moreover, a Statement of Financial Position illustrates a company's performance and potential. Niraj Mahajan, “Case Study for an Industry,” https://www.erpublication.org/ (International Journal of Engineering and Technical Research, July 3, 2016), (erpublication.org), last accessed on 03/08/2022. 39 Keep in Mind The Statement of Financial Position shows a company's financial condition for a period of time. It shows the assets, liabilities, and equity of a business. 40 Keep in Mind Assets are things a business owns used to make goods or services, giving a business revenue. A business's liabilities are obligations to other companies, such as debts, loans, and other things that it should pay. Equity is the sum of all investments from the owner/s and the earnings that a business retains. 41 Keep in Mind One can differentiate current assets from non-current assets by identifying which assets are liquid and can be used within 12 months. On the other hand, one can differentiate current liabilities from non- current liabilities by determining which obligations need to be settled within 12 months. 42 Keep in Mind 43 Photo Credits Bibliography Slide 1: Close Up Shot of White Paper, by Rodnae Annand, David., Marchand, Donna. 2019. Introduction Production is free to use via Pexels. to Financial Accounting: U.S. GAAP Adaptation. Slide 2: Dollar, by Gerd Altmann is free to use Alberta, CA: Lyryx. under the Pixabay license via Pixabay. Bragg, Steven, M. 2020. Accountants' Guidebook: Slide 3: Credit Card, by Ahmad Ardity is free to use under the Pixabay license via Pixabay. Fourth Edition. Newfoundland and Labrador, CA: Accounting tools Inc. Slide 4: Office Work, by Jürgen Sieber is free to use under the Pixabay license via Pixabay. Gilbertson, Claudia and Mark Lehman. Century 21 Slide 5: Accounting, is free to use under the Accounting. Ohio: South-Western Cengage Pixabay license via Pixabay. Learning, 2008. 44