Intermediate Accounting

IFRS Edition
Kieso, Weygandt, Warfield
Fourth Edition

Chapter 5

Statement of Financial Position and Statement of Cash

Flows

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PREVIEW OF CHAPTER 5

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 Learning Objective 1
Explain the uses, limitations, and
content of the statement of financial
position.

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Statement of Financial Position

Statement of financial position, also referred to as the

balance sheet:
1. Reports assets, liabilities, and equity at a specific date.
2. Provides information about resources, obligations to
creditors, and equity in net resources.
3. Helps in predicting amounts, timing, and uncertainty of
future cash flows.

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Statement of Financial Position
Usefulness
• Computing rates of return.
• Evaluating the capital
structure.
• Assess risk and future cash
flows.
• Assess the company’s:
o Liquidity,
o Solvency, and
o Financial flexibility.

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Statement of Financial Position
Limitations
• Most assets and liabilities are
reported at historical cost.
• Use of judgments and estimates.
• Many items of financial value
are omitted.

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Elements of the Statement of Financial
Position
Asset

• Resource controlled by the entity.

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Elements of the Statement of Financial
Position
Liability

• Present obligation of the entity.

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Elements of the Statement of Financial
Position
Equity

• Residual interest in the assets of the entity after

deducting all its liabilities.

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Statement of Financial Position
Classification

ILLUSTRATION 5.1

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Current Assets
Cash and other assets a company expects to convert into cash, sell,
or consume either in one year or in the operating cycle, whichever
is longer.
• Cash and cash equivalents
• Inventories
• Receivables
• Prepaid expenses
• Short-term investments

Cash and cash equivalents :

• Generally consist of currency and demand deposits.
• Cash equivalents - short-term, highly liquid investments that mature within three
months or less.

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Current Assets
Cash and other assets a company expects to convert into cash, sell,
or consume either in one year or in the operating cycle, whichever
is longer.
• Cash and cash equivalents
• Inventories
• Receivables
• Prepaid expenses
• Short-term investments

Inventories:
• Basis of valuation (e.g., lower-of-cost-or-net realizable value).
• Cost flow assumption (e.g., FIFO or average cost).

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Current Assets
Cash and other assets a company expects to convert into cash, sell,
or consume either in one year or in the operating cycle, whichever
is longer.
• Cash and cash equivalents
• Inventories
• Receivables
• Prepaid expenses
• Short-term investments

Receivables:
A company should clearly identify expected loss due to uncollectible and report
receivables at their net realizable value.

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Current Assets
Cash and other assets a company expects to convert into cash, sell,
or consume either in one year or in the operating cycle, whichever
is longer.
• Cash and cash equivalents
• Inventories
• Receivables
• Prepaid expenses
• Short-term investments

Prepaid expenses:
• Supplies
• Advertising
• Rent
• Taxes
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Statement of Financial Position
Classification

ILLUSTRATION 5.1

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Non-Current Assets
Generally consists of:
• Long-Term Investments
• Property, Plant, and Equipment (PP&E)
• Intangibles Assets
• Other Assets

Long-Term Investments:
1. Securities (bonds, ordinary shares, or long-term notes).
2. Tangible assets not currently used in operations (land held for speculation).
3. Special funds (sinking fund, pension fund, or plant expansion fund).
4. Non-consolidated subsidiaries or associated companies.

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Non-Current Assets
Generally consists of:
• Long-Term Investments
• Property, Plant, and Equipment (PP&E)
• Intangibles Assets
• Other Assets

PP&E:
Tangible long-lived assets used in the regular operations of the business.
• Physical property such as land, buildings, machinery, furniture, tools, and wasting
resources (minerals).
• With the exception of land, a company either depreciates (e.g., buildings) or depletes
(e.g., oil reserves) these assets.

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Non-Current Assets
Generally consists of:
• Long-Term Investments
• Property, Plant, and Equipment (PP&E)
• Intangibles Assets
• Other Assets

Intangible assets:
Lack physical substance and are not financial instruments.
• Patents, copyrights, franchises, goodwill, trademarks, trade names, and customer lists.
• Amortize limited-life intangible assets over their useful lives.
• Periodically assess indefinite-life intangibles for impairment.

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Statement of Financial Position
Classification

ILLUSTRATION 5.1

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Current Liabilities

Obligations that a company generally expects to settle in its

normal operating cycle or one year, whichever is longer.
Includes:
1. Payables resulting from the acquisition of goods and services.
2. Collections received in advance for the delivery of goods or
performance of services.

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Non-Current Liabilities
Obligations that a company does not reasonably expect to liquidate
within the longer of one year or the normal operating cycle. Three
types:
1. Obligations arising from specific financing situations.
2. Obligations arising from the ordinary operations of the
company.
3. Obligations that depend on the occurrence or non-occurrence
of one or more future events to confirm the amount payable, or
the payee, or the date payable.

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Statement of Financial Position
Classification

ILLUSTRATION 5.1

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Classification
Equity

1. Share Capital. The par or stated value of shares issued. It includes

ordinary shares (sometimes referred to as common shares) and
preference shares (sometimes referred to as preferred shares).
2. Share Premium. The excess of amounts paid-in over the par or
stated value.
3. Retained Earnings. The company’s undistributed earnings.
4. Accumulated Other Comprehensive Income. The aggregate amount
of the other comprehensive income items.
5. Treasury Shares. Generally, the amount of ordinary shares
repurchased.
6. Non-Controlling Interest (Minority Interest). A portion of the equity
of subsidiaries not owned by the reporting company.
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 Learning Objective 3
Explain the purpose, content, and
preparation of the statement of cash
flows.

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Statement of Cash Flows

An important element of the objective of financial reporting is

“assessing the amounts, timing, and uncertainty of cash
flows.”
IASB requires the statement of cash flows (also called the
cash flow statement).

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Purpose of the Statement of Cash
Flows
Primary Purpose: To provide relevant information about the
cash receipts and cash payments of an enterprise during a
period.
Statement provides answers to the following questions:
1. Where did the cash come from?
2. What was the cash used for?
3. What was the change in the cash balance?

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Basic Format of Cash Flow Statement

ILLUSTRATION 5.18

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Content of the Statement of Cash Flows

Operating Activities
• Transactions that enter into the determination of net income.
• Determined by converting net income on an accrual basis to a
cash basis.
• Add to or deduct from net income those items in the income
statement that do not affect cash.

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Net Cash Provided by Operating
Activities
Telemarketing’s net income this year is $39,000. It has
two items that will affect the computation of net cash
provided by operating activities:

1. The increase in accounts receivable reflects a non-

cash increase of $41,000 in revenues.

2. The increase in accounts payable reflects a non-

cash increase of $12,000 in expenses.
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Computation of Net Cash Provided by
Operating Activities

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Content of the Statement of Cash Flows
Investing Activities
Making and collecting loans and acquiring and
disposing of investments and property, plant, and
equipment.

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Content of the Statement of Cash Flows
Financing Activities
Transactions involving liability and equity items.

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Usefulness of Statement of Cash Flows
Free Cash Flow

ILLUSTRATION 5.29

Indicates the amount of discretionary cash flow available.

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Cash Inflows and Outflows

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Brief Exercise 5-12
Keyser Beverage Company reported the following items in the
most recent year.
Activity
Net income $40,000
Dividends paid 5,000
Increase in accounts receivable 10,000
Increase in accounts payable 7,000
Purchase of equipment 8,000
Depreciation expense 4,000
Issue of notes payable 20,000

Required: Determine if each item should be classified as an operating,

investing, or financing activity.

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Brief Exercise 5-12
Solution
Keyser Beverage Company reported the following items in the
most recent year.
Activity
Net income $40,000 Operating
Dividends paid 5,000 Financing
Increase in accounts receivable 10,000 Operating
Increase in accounts payable 7,000 Operating
Purchase of equipment 8,000 Investing
Depreciation expense 4,000 Operating
Issue of notes payable 20,000 Financing

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 Learning Objective 5
Identify the major types of financial
ratios and what they measure.

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Using Ratios to Analyze Performance

Major Types of Ratios

Liquidity Ratios. Measures of the company’s short-term ability to
pay its maturing obligations.
Activity Ratios. Measures of how effectively the company uses its
assets.
Profitability Ratios. Measures of the degree of success or failure of
a given company or division for a given period of time.
Coverage Ratios. Measures of the degree of protection for long-
term creditors and investors.

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A Summary of Financial Ratios
Liquidity and Activity Ratios

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A Summary of Financial Ratios
Liquidity and Activity Ratios

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A Summary of Financial Ratio
Profitability Ratios

ROA – Return on Assets

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A Summary of Financial Ratios
Coverage Ratios

ILLUSTRATION 5A.1

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