CHAPTER 31

Statement of Financial Position

Questions
Q31-1

Three elements, as defined by the PASB, are contained in a statement of

financial position: assets, liabilities, and equity. These elements mea-sure the
worth of an enterprise at a given point in time. The statement of financial
position thus reports what resources an enterprise has and who has claim against
those resources. Two other elements, investments by owners and distribution to
owners, are related to the equity element. Information concerning the change in
equity is often contained in a separate statement that supplements the statement
of financial position.

Q31-2

In order to meet the definition of an asset, an item need not be associated with
certain future benefit. To acknowledge the uncertainty inherent in business, the
definition of an asset stipulates that the future benefit need be only probable.

Q31-3

Some liabilities, such as accounts payable and long-term debt, are denominated
in precise monetary terms. However, the amounts of many liabilities must be
estimated based on expectations about future events.

Q31-4

a.

Q31-5

a.

Assets are classified as current if

(1) the asset will be realized in cash during the normal operating cycle of
the business or 1 year, whichever is longer, or
(2) the asset will be sold or consumed within a normal operating cycle or 1
year, whichever is longer.
b. Liabilities are classified as current if liquidation of the liability is expected
to require
(1) the use of current assets or
(2) the creation of other current liabilities.
Cash is classified as noncurrent when it is a part of a fund that will be used
to discharge noncurrent obligations. Such funds include bond retirement
funds, pension funds, and preferred stock redemption funds. Cash to be
used for the acquisition of land, buildings, and equipment or cash received
on long-term deposits from customers would also be reported as
noncurrent.
b. Receivables not reportable as current assets include those arising from
unusual transactions, such as the sale of land, buildings, and equipment or
advances to affiliates or employees that would not be collectible within 12

31-2
Q31-6

Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)

months.
If a short-term loan is expected to be refinanced or paid back with the proceeds
of a replacement loan, the existing short-term loan is not classified as current.
This is true as long as the intent of the company is to refinance the loan on a
long-term basis and the companys intent is evidenced by an actual refinancing
after the statement of financial position or by the existence of an explicit
refinancing agreement.

Q31-7

Contingent liabilities could or could not give rise to actual obligations;

estimated liabilities are known to exist but the amount is not definitely known.
A company could, for example, win or lose a lawsuit, but it is actually liable for
income tax. The exact amount of the income tax is unknown until the final tax
return is completed. The tax liability could have to be estimated at the time
financial statements are prepared.

Q31-8

Offset balances are used to adjust the gross amount of statement of financial
position items to arrive at proper valuations. For example, allowance for bad
debts is properly offset against the gross amount of accounts receivable to show
the net amount estimated collectible. It is generally not proper to offset an asset
account against a liability or owners equity account because such an offset
would not be for the purpose of correctly valuing either account but rather to
condense financial data at the expense of adequate disclosure.

Q31-9

Assets are usually presented in the order of their liquidity, with the most liquid
items listed first.

Q31-10

There are at least four types of notes used by management to support the
financial statements and provide users with additional relevant information.
They can be classified as follows:
(a) Summary of significant accounting policies
(b) Additional information, both numerical and descriptive, to support
summary totals included in the financial statements
(c) Information about items that does not meet the recognition criteria but
that is still useful to decision makers
(d) Supplementary schedules required by the PASB or the SEC to fulfill the
full disclosure principle

Q31-11

Many assets are reported at historical cost, which is usually less than market
value, and other assets (such as homegrown goodwill) are not included in the
statement of financial position at all. Accordingly, the statement of financial
position numbers are often a very poor reflection of what a company is worth.
Typically, a going concern is worth significantly more than the reported book
value of equity.

Statement of Financial Position

31-3

Q31-12

The statement of financial position provides information about the nature and
amounts of investments in enterprise resources, obligations to enterprise
creditors, and the owners equity in net enterprise resources. That information
not
only
complements
information
about
the
components
of income, but also contributes to financial reporting by providing a basis for (1)
computing rates of return, (2) evaluating the capital structure of the enterprise,
and (3) assessing the liquidity and financial flexibility of the enterprise.

Q31-13

Financial flexibility is the ability of an enterprise to take effective actions to

alter the amounts and timing of cash flows so it can respond to unexpected
needs and opportunities. An enterprise with a high degree of financial flexibility
is better able to survive bad times, to recover from unexpected setbacks, and to
take advantage of profitable and unexpected investment opportunities.
Generally, the greater the financial flexibility, the lower the risk of enterprise
failure.

Q31-14

Some situations in which estimates affect amounts reported in the statement of

financial position include:
(a) allowance for doubtful accounts.
(b) depreciable lives and estimated salvage values for plant and equipment.
(c) warranty returns.
(d) determining the amount of revenues that should be recorded as
unearned.

Q31-15

Liquidity describes the amount of time that is expected to elapse until an asset is
converted into cash or until a liability has to be paid. The ranking of the assets
given in order of liquidity is:
(1) (d) Short-term investments.
(2) (e) Accounts receivable.
(3) (b) Inventories.
(4) (c) Buildings.
(5) (a) Goodwill.

Q31-16

The major limitations of the statement of financial position are:

(a) The values stated are generally historical and not at fair value.
(b) Estimates have to be used in many instances, such as in the determination
of collectibility of receivables or finding the approximate useful life of
long-term tangible and intangible assets.
(c) Many items, even though they have financial value to the business,
presently are not recorded. One example is the value of a companys
human resources.

31-4
Q31-17

Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)

(a)

(b)
(c)
(d)
(e)

Trade accounts receivable should be stated at their estimated amount

collectible, often referred to as net realizable value. The method most
generally followed is to deduct from the total accounts receivable the
amount of the allowance for doubtful accounts.
Land is generally stated in the statement of financial position at cost.
Inventories are generally stated at the lower of cost or net realizable
value.
Trading securities (consisting of ordinary shares of other companies) are
stated at fair value.
Prepaid expenses should be stated at cost less the amount apportioned to
the previous accounting periods.

Q31-18

Battle is incorrect. Retained earnings are a source of assets, but are not an asset
itself. For example, even though the funds obtained from issuing a note payable
are invested in the business, the note payable is not reported as an asset. It is a
source of assets, but it is reported as a liability because the company has an
obligation to repay the note in the future. Similarly, even though the earnings
are invested in the business, retained earnings is not reported as an asset. It is
reported as part of equity because it is, in effect, an investment by owners which
increases the ownership interest in the assets of an entity.

Q31-19

The notes should appear as non-current liabilities with full disclosure as to their
terms. Each year, as the profit is determined, notes of an amount equal to twothirds of the years profits should be transferred from the non-current liabilities
to current liabilities until all of the notes have been liquidated.

Q31-20

(a)

Allowance for doubtful accounts receivable should be deducted from

accounts receivable in current assets.
(b) Merchandise held on consignment should not appear on the consignees
statement of financial position except possibly as a note to the financial
statements.
(c) Advances received on sales contract are normally a current liability and
should be shown as such in the statement of financial position.
(d) Accumulated other comprehensive income should be shown as part of
equity.
(e) Land should be reported in property, plant, and equipment unless held for
investment.
(f) Merchandise out on consignment should be shown among current assets
under the heading of inventories.
(g) Franchises should be itemized in a section for intangible assets.
(h) Accumulated depreciation of plant and equipment should be deducted from
the plant and equipment accounts.
(i) Materials in transit should not be shown on the statement of financial

Statement of Financial Position

31-5

position of the buyer, if purchased f.o.b. destination.

Exercises
E31-1

Cash Inflow
(Outflow)
P13,400
(600)
(1,850)
P10,950

Operating
(d) Cash collected from customers
(b) Cash paid for interest
(f) Cash paid for income taxes
Total
Investing
(a) Cash received from sale of a building

P4,200

Financing
(c) Cash paid to repurchase shares of stock (treasury
stock)
(e) Cash paid for dividends
Total
E31-2

Company A
Company B
Company C

start-up, high-growth
cash cow
steady state

E31-3
(a)
(b)
(c)
(d)
Total
E31-4

P(1,100)
(930)
P(2,030)

Investing
P(40,000)
0
0
0
P(40,000)

Financing
P
0
0
0
56,000
(30,000)
P26,000

Noncash
(Disclose only)
P 80,000
67,000
100,000

(a) Not cash equivalent because it is an equity investment; no maturity date.

(b) Cash equivalent of $5,700 because time to maturity at date of purchase was less
than three months.
(c) Cash of $3,400.
(d) Not cash equivalent because time to maturity at date of purchase was greater
than three months.
P5,700 + P3,400 = P9,100

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Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)

E31-5

Cash flow from operating activities

Cash flow from investing activities
Cash flow from financing activities
Net decrease in cash
Cash balance, beginning of year
Cash balance, end of year

P6,200
(9,400)
5,000
P1,800
2,800
P4,600

E31-6

1.

750

2.
3.

4.
5.

E31-7

(a)

(b)

Accounts Receivable
Service Revenue
Utilities Expense
Utilities Payable
Depreciation Expense
Accumulated DepreciationDental Equipment
Interest Expense
Interest Payable
Insurance Expense (P15,000 X 1/12)
Prepaid Insurance
Supplies Expense (P1,600 P400)
Supplies
Ending balance of supplies
Add: Adjusting entry
Deduct: Purchases
Beginning balance of supplies
Total prepaid insurance
Amount used (6 X P400)
Present balance

750
520
520
400
400
500
500
1,250
1,250
1,200
1,200
P 900
950
850
1,000
4,800
2,400
2,400

(P400 X 12)

The policy was purchased six months ago (August 1, 2014)

(c)

The entry in January to record salaries paid was

Salaries Expense
Salaries Payable
Cash
The T account for salaries payable is
Salaries Payable

Paid
January

900

Beg. Bal.

End Bal.

800

1,800
900
2,700

31-7

Statement of Financial Position

The beginning balance is therefore
Ending balance of salaries payable
Plus: Reduction of salaries payable
Beginning balance of salaries payable
(d)

E31-8

(a)
(b)
(c)

(d)

E31-9

P 800
900
P1,700

Service revenue
Cash received
Unearned revenue reduced

P2,000
1,600
P 400

Ending unearned revenue January 31, 2015

Plus: Unearned revenue reduced
Beginning unearned revenue December 31, 2014

P 750
400
P1,150

Wages Expense
Wages Payable
Utilities Expense
Accounts Payable
Interest Expense (P60,000 X 8% X
1/12)
Interest Payable
Telephone Expense
Accounts Payable

2,900
2,900
600
600
400
400
117
117

(a)

LIGAYA CORP.
Statement of Profit or Loss and Other Comprehensive Income
(Cash Basis)
For the Year Ended December 31,
2014
2015
Sales
P290,000
P515,000
Expenses
225,000
282,000
Net income
P 65,000
P233,000

(b)

LIGAYA CORP.
Statement of Profit or Loss and Other Comprehensive Income
(Accrual Basis)
For the Year Ended December 31,
2014
2015
Sales*
P480,000
P445,000
Expenses**
277,000
265,000
Net income
P203,000
P180,000

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Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)

*2014:
2015:
**2014:
2015:

E31-10

1.

2.
3.
4.
5.

P290,000 + P160,000 + P30,000 = P480,000

P355,000 + P90,000 = P445,000
P185,000 + P67,000 + P25,000 = P277,000
P40,000 + P170,000 + P55,000 = P265,000

Depreciation Expense (P250 X 3)

Accumulated Depreciation
Equipment
Unearned Rent Revenue (P6,300 X 1/3)
Rent Revenue
Interest Expense
Interest Payable
Supplies Expense
Supplies (P2,800 P650)
Insurance Expense (P300 X 3)
Prepaid Insurance

750
750
2,100
2,100
500
500
2,150
2,150
900
900

Problems
P31-1

JOHANN COMPANY
Statement of Financial Position
December 31, 2015
Assets
Non-current assets
Long-term investments
Land held for future use
Property, plant, and equipment
Building
Less: Accum. depr.building
Office equipment
Less: Accum. depr.office
equipment

P175,000
P730,000
160,000
265,000
105,000

Intangible assets
Goodwill
Other identifiable assets
Total non-current assets
Current assets
Inventories, at lower of
average
cost or net realizable value
Accounts receivable

P570,000
160,000

80,000
90,000

401,000
357,000

730,000

170,000
1,075,000

Statement of Financial Position

Less: Allowance for doubtful
accounts
17,000
Prepaid expenses
Trading securitiesat fair
value
Cash
Total current assets
Total assets
Equity and Liabilities
Equity
Share capitalordinary, P1
par, authorized 400,000
shares, issued 290,000
P290,000
shares
Share premiumordinary
180,000
Retained earnings
Total equity
Non-current liabilities
Bonds payable
Add: Premium on bonds
payable
Pension obligation
Total non-current
liabilities

31-9

340,000
12,000
120,000
260,000
1,133,000
P2,208,000

P470,000
794,000*
P1,264,000

500,000
53,000

Current liabilities
Notes payable (due next year)
Accounts payable
Rent payable
Total current liabilities
Total liabilities
Total equity and liabilities

553,000
82,000
P635,000

125,000
135,000
49,000
309,000
944,000
P2,208,000

*P2,208,000 P944,000 P470,000

P31-2

Current assets
Inventories at lower-of-cost (determined
using FIFO) or net-realizable-value
Finished goods
Work-in-process
Raw materials
Accounts receivable (of which P50,000 is
pledged as collateral on a bank loan)
Less: Allowance for doubtful accounts
Interest receivable [(P40,000 X 6%) X 8/12]
Trading securities at fair value

P 52,000
34,000
187,000
161,000
12,000

P273,000
149,000
1,600
29,000

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Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)

(cost, P31,000)
Cash
Less: Cash restricted for plant expansion
Total current assets

92,000*
(50,000)

42,000
P494,600

*An acceptable alternative is to report cash at P42,000 and simply report the
cash restricted for plant expansion in the investments section.
(a)
AGNES COMPANY
Statement of Financial Position (Partial)
December 31, 2015
Current assets
Inventories
P161,000*
Accounts receivable
P91,300**
Less: Allowance for doubtful
accounts
7,000
84,300
Prepaid expenses
9,000
Cash
30,476***
Total current assets
P284,776

P31-3

*
**

Inventories
Less: Inventory received on consignment
Adjusted inventory
Accounts receivable balance
Add: Accounts reduced from January collection
(P23,324 98%)
Deduct: Accounts receivable in January
Adjusted accounts receivable

***

Cash balance
Add: Cash disbursement after discount
[(P35,000 X 98%)]
Less: Cash sales in January (P30,000 P21,500)
Cash collected on account
Bank loan proceeds (P35,324 P23,324)
Adjusted cash
Current liabilities
Notes payable
Accounts payable
Total current liabilities

Notes payable balance

Less: Proceeds of bank loan
Adjusted notes payable

P171,000
10,000
P161,000
P89,000
23,800
112,800
21,500
P91,300
P40,000
34,300
74,300
8,500
23,324
12,000
P30,476
P55,000a
113,000b
P168,000
P67,000
12,000
P55,000

Statement of Financial Position

b

(b)

P31-4

Accounts payable balance

Add: Cash disbursements
Purchase invoice omitted (P27,000 P10,000)
Adjusted accounts payable

31-11
P61,000

P35,000
17,000

Adjustment to retained earnings balance:

Add: January sales discounts
[(P23,324 98%) X .02]
Deduct: January sales
January purchase discounts (P35,000 X 2%)
December purchases
Consignment inventory
Change (decrease) to retained earnings

52,000
P113,000

P476
P30,000
700
17,000
10,000

(57,700)
P(57,224)

WALTER CORPORATION
Statement of Financial Position
December 31, 2015
Assets
Non-current assets
Long-term investments
Investments in bonds
Investments in capital shares
Total long-term investments
Property, plant, and equipment
Land
Buildings
Less: Accum. Depreciation
Equipment
Less: Accum. Depreciation
Total property, plant, and
equipment

P299,000
277,000
P576,000
260,000
P1,040,000
352,000
600,000
60,000

540,000
1,488,000

Intangible assets
Franchise
Patent
Total intangible assets
Total non-current assets
Current assets
Inventories
Accounts receivable
Less: Allowance for doubtful
accounts

688,000

160,000
195,000
355,000
2,419,000
597,000
435,000
25,000

410,000

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Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)

Trading securities
Cash
Total current assets
Total assets

153,000
197,000
1,357,000
P3,776,000

Equity and Liabilities

Equity
Share capitalordinary
(P5par)
Retained earnings*
Accumulated other
comprehensive income
Less: Treasury shares
Total equity
Non-current liabilities
Bonds payable
Long-term notes payable
Provision for pensions
Total non-current liabilities

130,000
80,000
191,000
P1,019,000

P1,000,000
900,000
80,000

Current liabilities
Short-term notes payable
Accounts payable
Dividends payable
Accrued liabilities
Total current liabilities
Total liabilities
Total equity and liabilities
*

P1,000,000

1,980,000
P90,000
455,000
136,000
96,000
777,000

Computation of Retained Earnings:

Sales
Investment revenue
Cost of goods sold
Selling expenses
Administrative expenses
Interest expense
Net income
Beginning retained earnings
Net income
Ending retained earnings

2,757,000
P3,776,000
P7,900,000
63,000
(4,800,000)
(2,000,000)
(900,000)
(211,000)
P52,000
P78,000
52,000
P130,000

Or ending retained earnings can be computed as follows:

Total equity (P3,776,000 P2,757,000)
Add: Treasury shares

P1,019,000
191,000

Statement of Financial Position

Less: Share capital and Accum. other
comprehensive income
Ending retained earnings

31-13

1,080,000
P130,000

Note to instructor: There is no dividends account. Thus, the 12/31/15 retained

earnings balance already reflects any dividends declared.
P31-5

MJ Corporation
Statement of Financial Position
December 31, 2016
Assets
Liabilities
Current assets:
Current liabilities:
Cash
P8,500
Accounts payable
P3,400
Investment securities
5,250
Current portion of
Accounts receivable,
bonds payable
2,500
net
21,350
Loan due on demand
Inventory
31,000
7,000
Land held for resale
8,000
Dividends payable
15,000
Other current assets
10,200
Other
2,000
Total current assets
P84,300
Total current
liabilities
P29,900
Noncurrent assets:
Long-term liabilities:
Investments
P2,750
Bonds payable
P7,500
Property, plant, and
Other liabilities
15,750
equipment, net
56,800
Total long-term
Restricted cash:
liabilities
23,250
For preferred stock
19,000 Total liabilities
53,150
For equipment
4,000
Owners Equity
Advance to company
Preferred stock
19,000
president
4,000 Common stock
50,000
Other noncurrent
Retained earnings
66,800
assets
13,600 Less treasury stock
(4,500)
Total noncurrent
Total owners equity
P131,300
assets
P100,150 Total liabilities and
Total assets
P184,450
owners equity
P184,450
COMPUTATIONS:
Cash: P12,500 P4,000 (a)
Investment securities: P8,000 P2,750 (b)
Land held for resale: P8,000 (h)
Other current assets: P14,200 P4,000 (c)
Property, plant, and equipment: P64,800 P8,000 (h)
Restricted cash: P19,000 (g)
P4,000 (a)
Investments: P2,750 (b)

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Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)

Advance to company president: P4,000 (c)
Current portion of bonds payable: P2,500 (d)
Loan due on demand: P7,000 (e)
Dividends payable: P15,000 (f)
Bonds payable (long-term): P10,000 P2,500 (d)
Other long-term liabilities: P32,750 P2,500 (d) P7,500(d) P7,000 (e)
Preferred stock: P19,000 (g)
Retained earnings: P81,800 P15,000 (f)
Treasury stock: formerly shown incorrectly as a noncurrent asset

Q31-6

Q31-7

(a)
(b)
(c)
(d)
(e)

22,642
129,515
380,465
295,772
88,484

(f)
(g)
(h)
(i)
(j)

145,372
159,991
21,842
43,911
65,753

(k)
(l)
(m)
(n)

78,145
468,770
441,732
792,514

(a) Report the amount as a subtraction in the Equity section of the statement of
financial position.
(b) Note disclosure.
(c) Report the detail in the statement of profit or loss and other comprehensive
income or as a note disclosure.
(d) Report the amount in the statement of financial position as Allowance for
Bad Debts.
(e) Contingent liability mentioned in the body of the statement of financial
position, but no amount recognized because the contingency is not described
as being probable. Note description of the potential liability.
(f) Report the amount in the statement of profit or loss and other comprehensive
income.
(g) Report the amount as a long-term asset.
(h) Note disclosure.
(i) No financial statement disclosure.
(j) Note disclosure.
(k) No financial statement disclosure.
No financial statement disclosure.

Q31-8

Note 1. Summary of Significant Accounting Policies

Receivables. An allowance account is provided for the estimated
accounts.

uncollectible

Inventories. Inventory is valued using the LIFO method. If the Company had

Statement of Financial Position

31-15

used the FIFO inventory method, the ending inventory would be

reduced by P50,000 and net income for the year would be reduced
by P35,000 after taxes. Consignment inventory is carried as an asset
by Delta until it is sold by the consignee.
Equipment. The Company depreciates its equipment using the straight-line
method. The current value of the equipment is P525,000.
Note 2. Receivables
The receivables amount of P126,000 includes the following balances:
Customers accounts
Customers notes
Advances to sales representatives
Advance to president of company
Total
Less allowance for bad debts
Net receivables

P70,000
30,000
10,000
25,000
P135,000
9,000
P126,000

Note 3. Anticipated Merger

The Board of Directors is discussing a merger with another chemical company.
No final decision has been made as of the date these statements are being
issued; however, it is anticipated that additional shares of stock will be issued as
part of any merger.
Note 4. Notes Payable
The Company borrowed P350,000 on a 10-year note at 14% interest. The note is
due on July 1, 2023. Equipment has been pledged as collateral for the loan. The
terms of the note prohibit any additional long-term borrowing without the
express permission of the note holders. Because of a need for additional
financing next year, management is planning to make such a
request.