5th
5th Lecture
Lecture
Chapter
Chapter 55
STATEMENT
STATEMENT OF
OF FINANCIAL
FINANCIAL POSITION
POSITIONAND
AND
STATEMENT
STATEMENT OF
OF CASH
CASH FLOWS
FLOWS
Dr. Rawan Hamed
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PREVIEW OF CHAPTER 5
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield
2-2
STATEMENT
STATEMENT OF
OF FINANCIAL
FINANCIAL POSITION
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
STATEMENT OF
OF FINANCIAL
FINANCIAL POSITION
POSITION
Usefulness
Computing rates of return.
Evaluating the capital structure.
Assess risk & future cash flows: through assessing:
Liquidity: the amount of time that is expected to elapse until an asset is realized or
otherwise converted into cash or until a liability has to be paid.
Solvency: refers to the ability of a Financial flexibility:
company to pay its debts as they
the ability of a company to
mature.
take effective actions to
alter the amounts and
timing of cash flows so it
can respond to unexpected
needs and opportunities.
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STATEMENT
STATEMENT OF
OF FINANCIAL
FINANCIAL POSITION
POSITION
Limitations
Most assets and liabilities are reported at historical cost,
overriding Fair Values which are more relevant.
Use of judgments and estimates, e.g. useful lives,
allowances, warranty costs.
Many items of financial value are omitted,
e.g. knowledge & skills of employees,
reputation,
& customer relationships.
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CLASSIFICATION IN THE STATEMENT
Statement of financial position accounts are classified (a
statement of financial position groups together similar
items to arrive at significant subtotals).
The material is arranged so that important relationships
are shown.
The IASB discourages the reporting of summary accounts
alone (total assets, net assets, total liabilities, etc.). Instead,
companies should report and classify individual items in
sufficient detail to permit users to:
assess the amounts, timing, and uncertainty of
future cash flows.
evaluate the company’s liquidity and financial
flexibility, profitability, and risk.
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CLASSIFICATION IN THE STATEMENT
To classify items in financial statements, companies group
those items with similar characteristics and separate items
with different characteristics.
Companies should report separately:
1. Assets and liabilities with different general liquidity
characteristics. e.g., reporting cash separately from
inventories.
2. Assets that differ in their expected function. e.g., reporting
inventories separately from property,
plant, & equipment or assets used in the co.’s operations
separately from assets held for investments.
3. Liabilities that differ in their amounts, nature, and
timing. e.g., reporting accounts payable separately from
pension liability.
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CLASSIFICATION IN THE STATEMENT
Elements of the Statement of Financial Position
ASSET LIABILITY EQUITY
Resource controlled Present obligation of Residual interest
by the entity. the entity. in the assets of the
Result of past events. Arising from past entity after
events. deducting all its
Future economic
liabilities.
benefits are expected Settlement is expected
to flow to the entity. to result in an outflow
of resources
embodying economic
5-8 benefits.
CLASSIFICATION IN THE STATEMENT
Subclassifications
A recent survey shows that companies are moving toward
reporting current assets first on the statement of financial
position, which is a change from a few years ago.
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CLASSIFICATION IN THE STATEMENT
Non-Current Assets
Generally consists of:
Long-term Investments
Property, Plant, and Equipment
Intangibles Assets
Other Assets
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(1) Long-Term Investments
Generally consists of four types:
(1) Investment in Securities, such as bonds, ordinary
shares, or long-term notes (recorded at cost not Fair
value)
(2) Investment in Tangible Fixed assets Not currently
used in operations, such as land held for speculation.
(3) Investment set aside in Special funds, such as
sinking fund, pension fund, or plant expansion fund.
(4) Investment in Non-consolidated subsidiaries or
affiliated companies.
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(1) Long-Term Investments
Investments:
Invesment in ABC bonds 321,657
Investment in UC Inc. 253,980
Notes receivable 150,000
Land held for speculation 550,000
Sinking fund 225,000
Pension fund 653,798
Cash surrender value 84,321
Investment in Uncon. Sub. 457,836
Total investments 2,696,592
Property, Plant, and Equip.
Building 1,375,778
Land 975,000
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(1) Long-Term Investments
Investments in Debt and Equity Securities
Portfolio Type Valuation Classification
Held-for- Current or
Debt Amortized Cost
Collection Non-current
Trading Debt or Equity Fair Value Current
Non-Trading Current or
Equity Fair Value
Equity Non-current
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(1) Long-Term Investments
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(1) Long-Term Investments
Example:
Included in ABC Company’s December 31,
2019, trial balance are the following
accounts:
Prepaid Rent $5,200; Held-for-Collection
Securities $61,000; Unearned Fees $17,000;
Land Held for Investment $39,000; Long-
term Note Receivable $42,000.
Prepare the long-term investments section of
the balance sheet.
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(1) Long-Term Investments
Long-term investments
Held-for-collection securities............ 61,000
Land held for investment........... …39,000
Long-term note receivables .......... 42,000
Total investments............................ $142,000
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(2) Property, Plant, and Equipment
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).
PPE are presented at Book Value = (Cost -
Accumulated Dep).
• With the exception of land, a company either depreciates
(e.g., buildings) or depletes (e.g., oil reserves) these
assets.
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(2) Property, Plant, and Equipment
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Example:
Lowell Company’s December 31, 2019, trial
balance includes the following accounts:
Inventories $120,000; Buildings $207,000;
Accumulated Depreciation–Equipment
$19,000; Equipment $190,000; Land Held
for Investment $46,000; Accumulated
Depreciation–Buildings $45,000; Land
$61,000; Timberland $70,000.
Prepare the property, plant, and equipment
section of the balance sheet.
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Property, plant, and equipment
Land..................................................... $ 61,000
Buildings........................................... $207,000
Less: Accumulated depreciation..... (45,000)
162,000
Equipment................................... $190,000
Less: Accumulated depreciation..... (19,000)
171,000
Timberland............................................ 70,000
Total property, plant, and equipment ... $464,000
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(3) 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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(3) Intangible Assets
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(3) Intangible Assets
(BE5-6): KC’s adjusted trial balance contained the
following asset accounts at December 31, 2019:
Prepaid Rent $12,000; Goodwill $50,000; Franchise
Fees Receivable $2,000; Franchises $47,000; Patents
$33,000; Trademarks $10,000.
Prepare the intangible assets section of the balance
sheet.
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(4) Other Assets
This section should include only unusual items sufficiently
different from assets in the other categories.
Items vary in practice,Can include:
Long-term prepaid expenses
Non-current receivables
Assets in special funds
Property held for sale
Restricted cash or securities
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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.
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Current Assets
(1) Inventories
Company Discloses:
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
(2) Prepaid Expenses
Payment of cash, that is recorded as an asset because
service or benefit will be received in the future.
Cash Payment BEFORE Expense Recorded
Prepayments often occur in regard to:
Insurance Rent
Supplies Taxes
Advertising Maintenance
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Current Assets
(3) Receivables
• Claims held against customers and others for money, goods,
or services.
• AR are presented at Net Realizable Value, that is, after
deducting allowance for doubtful accounts AFDA.
• Major categories of receivables should be shown in the
balance sheet or the related notes.
• A company should clearly identify
Anticipated loss due to uncollectibles.
Amount and nature of any non-trade receivables.
5-28 Receivables used as collateral.
Current Assets
(4) Short-term Investments
3 types of Investment in Securities:
(1)Held-for-collection: securities that the co has the
intention & ability to hold to maturity, valued at cost &
classified as current or non-current.
(2)Trading: securities bought & held primarily for sale in the
near future to generate income from price differences,
valued at fair value, & classified as Current.
(3)Non-trading: securities not classified as either held-for-
collection or trading, valued at fair value & classified as
current or non-current.
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Current Assets
(4) Short-Term Investments
Portfolio Type Valuation Classification
Held-for- Current or
Debt Amortized Cost
Collection Non-current
Trading Debt or Equity Fair Value Current
Non-Trading Current or
Equity Fair Value
Equity Non-current
5-30 LO 2
Current Assets
(5) Cash
Generally any monies available “on demand”
(currency & demand deposits).
Cash equivalents - short-term highly liquid investments
that mature within three months or less.
Restrictions or commitments related to the availability
of cash must be disclosed.
Cash restricted for long term obligations, it will be
disclosed in “other assets” section.
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Current Assets
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Example:
Harding Corporation has the following accounts
included in its December 31, 2019, trial balance:
Accounts Receivable $110,000; Inventories
$290,000; Allowance for Doubtful Accounts $8,000;
Patents $72,000; Prepaid Insurance $9,500;
Accounts Payable $77,000; Cash $27,000.
Prepare the current assets section of the balance
sheet listing the accounts in proper sequence.
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Current Assets:
Inventories ..................................................... 290,000
Prepaid insurance ........................................... 9,500
Accounts receivable ...................................110,000
Less: Allowance for doubtful accounts ... (8,000)
102,000
Cash ............. ..................................................
$27,000
Total current assets ................................ $428,500
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Example:
Koch Corporation’s adjusted trial balance
contained the following asset accounts at
December 31, 2019:
Cash $7,000; Land $40,000; Patents $12,500;
Accounts Receivable $90,000; Prepaid Insurance
$5,200; Inventory $34,000; Allowance for Doubtful
Accounts $4,000; Trading Securities $11,000.
Prepare the current assets section of the balance
sheet, listing the accounts in proper sequence.
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Current assets
Inventory ......................................................... 34,000
Prepaid insurance .......................................... 5,200
Accounts receivable ........................... $90,000
Less: Allowance for doubtful accounts (4,000)
86,000
Trading securities .................................... 11,000
Cash ............................... .........................
7,000
Total current assets ........................... $143,200
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E 5-7: Presented below are selected accounts of Aramis Company at December 31, 2015.
Finished Goods $ 52,000 Cost of Goods Sold $2,100,000
Unearned Service Revenue 90,000 Notes Receivable 40,000
Equipment 253,000 Accounts Receivable 161,000
Work-in-Process 34,000 Raw Materials 187,000
Cash 42,000 Supplies Expense 60,000
Licenses 18,000 Short-term Investments in Stock 31,000
Allowance for Doubtful Accounts 12,000 Treasury Stock 22,000
Customer Advances 36,000 Cash Restricted for Plant Expansion 50,000
Share Premium –Ordinary 88,000
The following additional information is available.
1. Inventories are valued at lower of cost or market using FIFO.
2. Equipment is recorded at cost. Accumulated depreciation, computed on a straight-line basis,
is $50,600.
3. The short-term investments have a fair value of $29,000. (Assume they are trading
securities.)
4. The notes receivable are due April 30, 2017, with interest receivable every April 30. The
notes bear interest at 6%. (Hint: Accrue interest due on December 31, 2015.)
5. The allowance for doubtful accounts applies to the accounts receivable. Accounts receivable
of $50,000 are pledged as collateral on a bank loan.
6. Licenses are recorded net of accumulated amortization of $14,000.
7. Treasury stock is recorded at cost.
Instructions
Prepare the current assets section of Aramis Company’s December 31, 2015, balance sheet,
with appropriate disclosures.
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Current assets
Inventories at lower of cost (determined
using FIFO) or market
Finished goods............................................. 52,000
Work-in-process .......................................... 34,000
Raw materials ............................................. 207,000 273,000
Accounts receivable ($50,000 is
pledged as collateral on a bank loan) .......... 161,000
Less: Allowance for doubtful accounts ........... (12,000)
149,000
Interest receivable [40,000 X 6% X 8/12] ...... 1,600
Trading securities at fair value (cost $31,000) ........ 29,000
Cash ................................................................ $ 92,000*
Less: Cash restricted for plant expansion....... (50,000) 42,000
Total current assets ............................... $494,600
*An acceptable alternative is to report cash at €42,000 and simply report the
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Stockholders’ Equity
(1) Share Capital , the par or stated value of shares
issued.
It includes ordinary (common) shares & preference
(preferred) shares.
The co must disclose the par value & the number of
authorized, issued, & outstanding shares.
(2)Share Premium, the excess of amounts paid-in over the
par or stated value.
(3) Retained Earnings, the corporation’s undistributed
earnings. RE can be divided between:
*Unappropriated (available for distribution) &
* Restricted for special purposes
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(4) Accumulated other Comprehensive Income:
the aggregate amount of the other comprehensive
income items (referred to as Reserves).
----unrealized gains & losses on non-trading equity
securities.
(5) Treasury shares:
the amount of ordinary shares repurchased.
Co. shows any Common Shares reacquired as a
Reduction of SH’s equity.
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Equity ILLUSTRATION 5-17
Classified Report-Form
Statement of Financial Position
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Example:
Stowe Company’s December 31, 2015, trial balance includes
the following accounts:
Share capital-Ordinary 70,000
Retained Earnings 114,000
Trademarks 31,000
Share capital-Preference 172,000
Trading securities 55,000
Deferred Income Taxes 88,000
Share premium -ordinary 174,000
Accumulated other comprehensive income (150,000)
Treasury Shares 50,000
Prepare the stockholders’ equity section of the balance sheet.
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Stockholders’ equity
Share capital-Preference $172,000
Share capital-Ordinary 70,000
Share premium-Ordinary 174,000
Retained earnings 114,000
Accumulated other comprehensive
income (loss) (150,000)
Treasury Shares (50,000)
Total stockholders’ equity............ $330,000
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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. e.g. NP &
bonds payable
2. Obligations arising from the ordinary operations of the company.
e.g. deferred income taxes
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. i.e. liabilities associated with loss
contingencies, such as litigation & warranty costs
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Non-Current Liabilities ILLUSTRATION 5-17
Classified Report-Form
Statement of Financial Position
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Long-Term Liabilities (BE5-9):
Included in Adams Company’s December 31, 2010, trial balance are
the following accounts:
Accounts Payable $220,000; Pension Liability $375,000;
Deferred income taxes $29,000; Advances from Customers
$41,000; Bonds Payable $400,000; Wages Payable $27,000;
Interest Payable $12,000; Income Taxes Payable $29,000.
Prepare the long-term liabilities section of the balance sheet.
Long-term liabilities
Pension liability
Bonds payable
$375,000
Deferred income taxes 29,000
400,000
Total
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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.
3. Other liabilities whose liquidation will take place within the
operating cycle or one year.
This may include AP, short term NP, advances from
customers, unearned revenues, wages/ salaries/ rent/
dividends/ interest/ tax payable, & current maturities of
long term debt.
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Current Liabilities ILLUSTRATION 5-17
Classified Report-Form
Statement of Financial Position
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Example:
Included in Adams Company’s December 31, 2010, trial
balance are the following accounts:
Accounts Payable $240,000; Pension Liability $375,000;
deferred income taxes $29,000; Advances from
Customers $41,000; Bonds Payable $400,000; Wages
Payable $27,000; Interest Payable $12,000; Income
Taxes Payable $29,000.
Prepare the current liabilities section of the balance
sheet.
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Current liabilities
Accounts payable .............................. $240,000
Advances from customers ................ 41,000
Wages payable .................................... 27,000
Interest payable................................... 12,000
Income taxes payable ........................ 29,000
Total current liabilities ................... $349,000
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E5-8 (Current vs. non-current Liabilities) Pascal Corporation is preparing its
December 31, 2010, balance sheet. The following items may be reported
as either a current or long-term liability.
1. On December 15, 2010, Pascal declared a cash dividend of $2.00 per
share to stockholders of record on December 31. The dividend is payable
on January 15, 2011. Pascal has issued 1,000,000 shares of ordinary
stock, of which 50,000 shares are held in treasury.
2. At December 31, bonds payable of $100,000,000 are outstanding. The
bonds pay 10% interest every September 30 and mature in installments of
$25,000,000 every September 30, beginning September 30, 2011.
3. At December 31, 2009, customer advances were $12,000,000. During
2010, Pascal collected $30,000,000 of customer advances, and advances
of $25,000,000 were earned.
Instructions
For each item above indicate the dollar amounts to be reported as a current
liability and as a non-current liabilities, if any.
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1. Dividends payable of $1,900,000 will be reported as a
current liability. Amount to be reported
= # of shares outstanding x dividends per share
= (1,000,000 – 50,000) X $2.00 = 1,900,000
2. Bonds payable of $25,000,000 and interest payable of
$2,500,000($100,000,000 X 10% X 3/12) will be reported as a
current liability.
Bonds payable of $75,000,000 will be reported as a non-current
liability.
3. Customer advances (unearned Revenues) of $17,000,000
will be reported as a current liability
Amount reported = ($12,000,000 + $30,000,000 – 25,000,000).
i.e. beginning balance + additional collections – revenue
earned.
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E5-10 (Current Liabilities) Mary Pierce is the controller of Arnold Corporation
and is responsible for the preparation of the year-end financial statements.
The following transactions occurred during the year.
(a) On December 20, 2010, an employee filed a legal action
against Arnold for $100,000 for wrongful dismissal.
Management believes the action to be frivolous and without
merit. The likelihood of payment to the employee is remote.
(b) Bonuses to key employees based on net income for 2010 are
estimated to be $150,000.
(c) On December 1, 2010, the company borrowed $900,000 at
8% per year. Interest is paid quarterly.
(d) Credit sales for the year amounted to $10,000,000. Arnold’s
expense provision for doubtful accounts is estimated to be 2%
of credit sales.
(e) On December 15, 2010, the company declared a $2.00 per
share dividend on the 40,000 shares of common stock
outstanding, to be paid on January 5, 2011.
(f) During the year, customer advances of $160,000 were received; $50,000
of this amount was earned by December 31, 2010.
Instructions
For each item above, indicate the dollar amount to be reported as a current
liability. If a liability is not reported, explain why. 53
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(a) In order for a liability to be reported for threatened litigation,
the amount must be probable and payment reasonably
estimable. Since these conditions are not met an accrual is
not required.
(b) A current liability of $150,000 should be recorded.
(c) A current liability for accrued interest of $6,000 ($900,000 x 8% x
1/12) should be reported. Also, the $900,000 note payable
should be a current liability if payable in one year. Otherwise,
the $900,000 note payable would be a long-term liability.
(d) Although bad debts expense of $200,000 should be debited
and the allowance for doubtful accounts credited for $200,000,
this does not result in a liability. The allowance for doubtful
accounts is a valuation account (contra asset) and is deducted
from accounts receivable on the balance sheet.
(e) A current liability of $80,000 (40,000 x 2) should be reported.
The liability is recorded on the date of declaration.
(f) Customer advances of $110,000 ($160,000 – $50,000) will be
reported as a current liability.
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CLASSIFICATION IN THE STATEMENT
Statement of Financial Position Format
IFRS does not specify the order or format of the
items in the statement.
Two general forms:
► Account form
● Assets on left side
● Equity and liabilities on right side
► Report form
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Statement of
Financial
Position Format
Report Form
lists the sections
one above the other.
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Supplemental BS Information
Generally consists of four types:
(1) Contingencies, material events that have an
uncertain outcome.
(2) Accounting Policies, explanations of the valuation
methods used or the basic assumptions made
concerning inventory, depreciation ……
(3) Contractual Situation, explanations of certain
restrictions or covenants attached to specific asset or
liabilities.
(4) Fair Values, particularly for financial tools.
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