Chapter Three

Statement of Financial Positions

and statement of Cash Flow

5-1
 PREVIEW OF CHAPTER 5

Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield
5-2
 5 Statement of Financial Position
and Statement of Cash Flows

LEARNING
LEARNING OBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:

1. Explain the uses and limitations of a 6. Prepare a basic statement of cash flows.
statement of financial position. 7. Understand the usefulness of the statement
2. Identify the major classifications of the of cash flows.
statement of financial position. 8. Determine additional information requiring
3. Prepare a classified statement of financial note disclosure.
position using the report and account formats. 9. Describe the major disclosure techniques for
4. Indicate the purpose of the statement of cash financial statements.
flows.
5. Identify the content of the statement of cash
flows.
5-3
 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.

5-4 LO 1
 STATEMENT
STATEMENT OF
OF FINANCIAL
FINANCIAL POSITION
POSITION

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

5-5 LO 1
 STATEMENT
STATEMENT OF
OF FINANCIAL
FINANCIAL POSITION
POSITION

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

5-6 LO 1
 5 Statement of Financial Position
and Statement of Cash Flows

LEARNING
LEARNING OBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:

1. Explain the uses and limitations of a 6. Prepare a basic statement of cash flows.
statement of financial position. 7. Understand the usefulness of the statement
2. Identify the major classifications of of cash flows.
the statement of financial position. 8. Determine additional information requiring
3. Prepare a classified statement of financial note disclosure.
position using the report and account formats. 9. Describe the major disclosure techniques for
4. Indicate the purpose of the statement of cash financial statements.
flows.
5. Identify the content of the statement of cash
flows.
5-7
 CLASSIFICATION IN THE STATEMENT

Elements of the Statement of Financial Position

ASSET LIABILITY EQUITY

 Resource controlled by the entity.

 Result of past events.
 Future economic benefits are expected to flow to the
entity.

5-8 LO 2
 CLASSIFICATION IN THE STATEMENT

Elements of the Statement of Financial Position

ASSET LIABILITY EQUITY

 Present obligation of the entity.

 Arising from past events.
 Settlement is expected to result in an outflow of
resources embodying economic benefits.

5-9 LO 2
 CLASSIFICATION IN THE STATEMENT

Elements of the Statement of Financial Position

ASSET LIABILITY EQUITY

 Residual interest in the assets of the entity after

deducting all its liabilities.

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 CLASSIFICATION IN THE STATEMENT
ILLUSTRATION 5-1
Subclassifications Statement of Financial
Position Classification

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

5-12 LO 2
 CLASSIFICATION IN THE STATEMENT

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.

5-13 LO 2
 CLASSIFICATION IN THE STATEMENT

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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 CLASSIFICATION IN THE STATEMENT

Long-Term Investments ILLUSTRATION 5-17

Classified Report-Form
Statement of Financial
Position

5-15 LO 2
 CLASSIFICATION IN THE STATEMENT

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).
 With the exception of land, a company either depreciates
(e.g., buildings) or depletes (e.g., oil reserves) these
assets.

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 CLASSIFICATION IN THE STATEMENT

Property, Plant, and Equipment ILLUSTRATION 5-17

Classified Report-Form
Statement of Financial
Position

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 CLASSIFICATION IN THE STATEMENT

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.

5-18 LO 2
 Intangible Assets ILLUSTRATION 5-17
Classified Report-Form
Statement of Financial Position

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 CLASSIFICATION IN THE STATEMENT

Other Assets
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

5-20 LO 2
 CLASSIFICATION IN THE STATEMENT

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. ILLUSTRATION 5-5
Current Assets and
Basis of Valuation

5-21 LO 2
 CLASSIFICATION IN THE STATEMENT

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

5-22 LO 2
 Inventories ILLUSTRATION 5-17
Classified Report-Form
Statement of Financial Position

5-23 LO 2
 CLASSIFICATION IN THE STATEMENT

Receivables
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.
 Receivables used as collateral.

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 Receivables ILLUSTRATION 5-17
Classified Report-Form
Statement of Financial Position

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 CLASSIFICATION IN THE STATEMENT

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

5-26 LO 2
 Prepaid Expenses ILLUSTRATION 5-17
Classified Report-Form
Statement of Financial Position

5-27 LO 2
 CLASSIFICATION IN THE STATEMENT

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

5-28 LO 2
 Short-Term Investments ILLUSTRATION 5-17
Classified Report-Form
Statement of Financial Position

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 CLASSIFICATION IN THE STATEMENT

Cash
 Generally any monies available “on demand.”
 Cash equivalents - short-term highly liquid investments
that mature within three months or less.
 Restrictions or commitments must be disclosed.

5-30 LO 2
 Cash ILLUSTRATION 5-17
Classified Report-Form
Statement of Financial Position

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 CLASSIFICATION IN THE STATEMENT

Equity

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 Equity ILLUSTRATION 5-17
Classified Report-Form
Statement of Financial Position

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 CLASSIFICATION IN THE STATEMENT

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.

5-34 LO 2
 Non-Current Liabilities ILLUSTRATION 5-17
Classified Report-Form
Statement of Financial Position

5-35 LO 2
 CLASSIFICATION IN THE STATEMENT

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.

5-36 LO 2
 Current Liabilities ILLUSTRATION 5-17
Classified Report-Form
Statement of Financial Position

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 5 Statement of Financial Position
and Statement of Cash Flows

LEARNING
LEARNING OBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:

1. Explain the uses and limitations of a 5. Identify the content of the statement of cash
statement of financial position. flows.
2. Identify the major classifications of the 6. Prepare a basic statement of cash flows.
statement of financial position. 7. Understand the usefulness of the statement
3. Prepare a classified statement of of cash flows.
financial position using the report 8. Determine additional information requiring
and account formats. note disclosure.

4. Indicate the purpose of the statement of cash 9. Describe the major disclosure techniques for
flows. financial statements.

5-38
 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

5-39 LO 3
 Statement of
Financial
Position Format
Report Form
lists the sections
one above the other.

ILLUSTRATION 5-17
Classified Report-Form
Statement of Financial
Position
5-40 LO 3
 5 Statement of Financial Position
and Statement of Cash Flows

LEARNING
LEARNING OBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:

1. Explain the uses and limitations of a 6. Prepare a basic statement of cash flows.
statement of financial position. 7. Understand the usefulness of the statement
2. Identify the major classifications of the of cash flows.
statement of financial position. 8. Determine additional information requiring
3. Prepare a classified statement of financial note disclosure.
position using the report and account formats. 9. Describe the major disclosure techniques for
4. Indicate the purpose of the statement financial statements.
of cash flows.
5. Identify the content of the statement of cash
flows.
5-41
 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).

5-42 LO 4
 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?

5-43 LO 4
 5 Statement of Financial Position
and Statement of Cash Flows

LEARNING
LEARNING OBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:

1. Explain the uses and limitations of a 6. Prepare a basic statement of cash flows.
statement of financial position. 7. Understand the usefulness of the statement
2. Identify the major classifications of the of cash flows.
statement of financial position. 8. Determine additional information requiring
3. Prepare a classified statement of financial note disclosure.
position using the report and account formats. 9. Describe the major disclosure techniques for
4. Indicate the purpose of the statement of cash financial statements.
flows.

5. Identify the content of the statement

of cash flows.
5-44
 STATEMENT OF CASH FLOWS

Content and Format

Operating Investing Financing
Activities Activities Activities
Transactions that Making and Transactions
enter into the collecting loans involving liability
determination of and acquiring and and equity items
net income disposing of
investments and
property, plant,
and equipment

5-45 LO 5
 CONTENT AND FORMAT ILLUSTRATION 5-19
Cash Inflows and Outflows

5-46 LO 5
 5 Statement of Financial Position
and Statement of Cash Flows

LEARNING
LEARNING OBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:

1. Explain the uses and limitations of a 6. Prepare a basic statement of cash

statement of financial position. flows.
2. Identify the major classifications of the 7. Understand the usefulness of the statement
statement of financial position. of cash flows.
3. Prepare a classified statement of financial 8. Determine additional information requiring
position using the report and account formats. note disclosure.
4. Indicate the purpose of the statement of cash 9. Describe the major disclosure techniques for
flows. financial statements.
5. Identify the content of the statement of cash
flows.
5-47
 STATEMENT OF CASH FLOWS

Preparation of the Statement of Cash Flows

Sources of Information
Information obtained from several sources:
1. comparative statements of financial position,

2. current income statement, and

3. selected transaction data.

5-48 LO 6
 Preparation
Preparation of
of Statement
Statement of
of Cash
Cash Flows
Flows

Illustration: On January 1, 2015, in its first year of

operations, Telemarketing Inc. issued 50,000 ordinary shares
of $1 par value for $50,000 cash. The company rented its
office space, furniture, and telecommunications equipment and
performed marketing services throughout the first year. In June
2015, the company purchased land for $15,000.

Illustration 5-20 shows the company’s comparative statements

of financial position at the beginning and end of 2015.

5-49 LO 6
 ILLUSTRATION 5-20

ILLUSTRATION 5-21

5-50
 Preparation of Statement of Cash Flows

Preparing the Statement of Cash Flows

Determine:
1. Net cash provided by (or used in) operating activities.

2. Net cash provided by (or used in) investing and financing

activities.

3. Determine the change (increase or decrease) in cash during

the period.

4. Reconcile the change in cash with the beginning and the

ending cash balances.

5-51 LO 6
 Preparing the Statement of Cash Flows

Net cash provided by operating activities

 Excess of cash receipts over cash payments from operating
activities.
 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.
 Requires an analysis of the current year’s income statement,
comparative statements of financial position and selected
transaction data.

5-52 LO 6
 ILLUSTRATION 5-20

Increase in accounts receivable

reflects a non-cash increase of
$41,000 in revenues.

Cash provided by operating activities ILLUSTRATION 5-22

5-53 LO 6
 ILLUSTRATION 5-20

Increase in accounts payable

reflects a non-cash increase of
$12,000 in expenses.

Cash provided by operating activities ILLUSTRATION 5-22

5-54 LO 6
 Preparing the Statement of Cash Flows

Telemarketing Inc.’s investing and financing activities.

 Purchased land for $15,000.
 Issued ordinary shares for $50,000.
 Paid $14,000 in dividends.

5-55 LO 6
 ILLUSTRATION 5-23

Investing
and
Financing
Activities

Purchased land
for $15,000
(Investing)

5-56 LO 6
 ILLUSTRATION 5-23

Investing
and
Financing
Activities

Issued ordinary
shares for
$50,000
(Financing)

5-57 LO 6
 ILLUSTRATION 5-23

Investing
and
Financing
Activities

Paid $14,000 in
dividends
(Financing)

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 Preparation of Statement of Cash Flows

BE 5-12: 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

Required: Determine if each item should be classified as an

operating, investing, or financing activity.
5-59 LO 6
 BE 5-12 Net income of $40,000

Statement of Cash Flow (in thousands)

Operating activities
Net income $ 40,000
Increase in accounts receivable (10,000)
Increase in accounts payable 7,000
Depreciation expense 4,000
Net cash provided by operating activities 41,000
Investing activities
Purchase of equipment (8,000)
Financing activities
Dividends paid (5,000)
Proceeds from notes payable 20,000
Net cash provided by financing activities 15,000
Increase in cash $ 48,000
5-60 LO 6
 BE 5-12 Dividends paid $5,000

Statement of Cash Flow (in thousands)

Operating activities
Net income $ 40,000
Increase in accounts receivable (10,000)
Increase in accounts payable 7,000
Depreciation expense 4,000
Net cash provided by operating activities 41,000
Investing activities
Purchase of equipment (8,000)
Financing activities
Dividends paid (5,000)
Proceeds from notes payable 20,000
Net cash provided by financing activities 15,000
Increase in cash $ 48,000
5-61 LO 6
 BE 5-12 Increase in accounts receivable of $10,000

Statement of Cash Flow (in thousands)

Operating activities
Net income $ 40,000
Increase in accounts receivable (10,000)
Increase in accounts payable 7,000
Depreciation expense 4,000
Net cash provided by operating activities 41,000
Investing activities
Purchase of equipment (8,000)
Financing activities
Dividends paid (5,000)
Proceeds from notes payable 20,000
Net cash provided by financing activities 15,000
Increase in cash $ 48,000
5-62 LO 6
 BE 5-12 Purchase equipment for $8,000

Statement of Cash Flow (in thousands)

Operating activities
Net income $ 40,000
Increase in accounts receivable (10,000)
Increase in accounts payable 7,000
Depreciation expense 4,000
Net cash provided by operating activities 41,000
Investing activities
Purchase of equipment (8,000)
Financing activities
Dividends paid (5,000)
Proceeds from notes payable 20,000
Net cash provided by financing activities 15,000
Increase in cash $ 48,000
5-63 LO 6
 BE 5-12 Increase in accounts payable of $7,000

Statement of Cash Flow (in thousands)

Operating activities
Net income $ 40,000
Increase in accounts receivable (10,000)
Increase in accounts payable 7,000
Depreciation expense 4,000
Net cash provided by operating activities 41,000
Investing activities
Purchase of equipment (8,000)
Financing activities
Dividends paid (5,000)
Proceeds from notes payable 20,000
Net cash provided by financing activities 15,000
Increase in cash $ 48,000
5-64 LO 6
 BE 5-12 Proceeds from notes payable of $20,000

Statement of Cash Flow (in thousands)

Operating activities
Net income $ 40,000
Increase in accounts receivable (10,000)
Increase in accounts payable 7,000
Depreciation expense 4,000
Net cash provided by operating activities 41,000
Investing activities
Purchase of equipment (8,000)
Financing activities
Dividends paid (5,000)
Proceeds from notes payable 20,000
Net cash provided by financing activities 15,000
Increase in cash $ 48,000
5-65 LO 6
 BE 5-12 Depreciation expense of $4,000

Statement of Cash Flow (in thousands)

Operating activities
Net income $ 40,000
Increase in accounts receivable (10,000)
Increase in accounts payable 7,000
Depreciation expense 4,000
Net cash provided by operating activities 41,000
Investing activities
Purchase of equipment (8,000)
Financing activities
Dividends paid (5,000)
Proceeds from notes payable 20,000
Net cash provided by financing activities 15,000
Increase in cash $ 48,000
5-66 LO 6
 BE 5-12
Statement of Cash Flow (in thousands)
Operating activities
Net income $ 40,000
Increase in accounts receivable (10,000)
Increase in accounts payable 7,000
Depreciation expense 4,000
Net cash provided by operating activities 41,000
Investing activities
Purchase of equipment (8,000)
Financing activities
Dividends paid (5,000)
Proceeds from notes payable 20,000
Net cash provided by financing activities 15,000
Increase in cash $ 48,000
5-67 LO 6
 Preparation of Statement of Cash Flows

Question
In preparing a statement of cash flows, which of the following
transactions would be considered an investing activity?
a. Sale of equipment at book value
b. Sale of merchandise on credit
c. Declaration of a cash dividend
d. Issuance of bonds payable.

5-68 LO 6
 Preparation of Statement of Cash Flows

Significant Non-Cash Activities

Reported in a separate note to the financial statements.

Examples include:
 Issuance of ordinary shares to purchase assets.
 Conversion of bonds into ordinary shares.
 Issuance of debt to purchase assets.
 Exchanges on long-lived assets.

5-69 LO 6
ILLUSTRATION 5-24
Comprehensive
Statement
of Cash Flows

5-70
 5 Statement of Financial Position
and Statement of Cash Flows

LEARNING
LEARNING OBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:

1. Explain the uses and limitations of a 6. Prepare a basic statement of cash flows.
statement of financial position.
7. Understand the usefulness of the
2. Identify the major classifications of the statement of cash flows.
statement of financial position.
8. Determine additional information requiring
3. Prepare a classified statement of financial note disclosure.
position using the report and account formats.
9. Describe the major disclosure techniques for
4. Indicate the purpose of the statement of cash financial statements.
flows.
5. Identify the content of the statement of cash
flows.
5-71
 Usefulness of Statement of Cash Flows

Without cash, a company will not survive.

Cash flow from Operations:

 High amount - able to generate sufficient cash from
operations to pay its bills without further borrowing.
 Low or negative amount - may have to
► borrow or
► issue equity securities.

5-72 LO 7
 Usefulness of Statement of Cash Flows

Financial Liquidity
ILLUSTRATION 5-26

Net Cash Provided by

Current Cash Operating Activities
Debt Coverage =
Ratio Average Current Liabilities

Ratio indicates the ability to pay off current liabilities from

operations.
Ratio near 1:1 is good.

5-73 LO 7
 Usefulness of Statement of Cash Flows

Financial Flexibility
ILLUSTRATION 5-27

Net Cash Provided by

Cash Debt Operating Activities
Coverage =
Ratio Average Total Liabilities

Ratio indicates the ability to repay liabilities from net cash

provided by operating activities, without having to liquidate
assets employed in operations.

5-74 LO 7
 Usefulness of Statement of Cash Flows

Free Cash Flow

ILLUSTRATION 5-29

Indicates the amount of discretionary cash flow available.

5-75 LO 7
 Usefulness of Statement of Cash Flows

Question
The current cash debt coverage ratio is often used to
assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.

5-76 LO 7
 5 Statement of Financial Position
and Statement of Cash Flows

LEARNING
LEARNING OBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:

1. Explain the uses and limitations of a 6. Prepare a basic statement of cash flows.
statement of financial position. 7. Understand the usefulness of the statement
2. Identify the major classifications of the of cash flows.
statement of financial position. 8. Determine additional information requiring
3. Prepare a classified statement of financial note disclosure.
position using the report and account formats. 9. Describe the major disclosure techniques for
4. Indicate the purpose of the statement of cash financial statements.
flows.
5. Identify the content of the statement of cash
flows.
5-77
 ADDITIONAL INFORMATION

IFRS requires that a complete set of financial statements be

presented annually. Comprised of the following:
1. Statement of financial position at the end of the period;
2. Statement of comprehensive income for the period to be
presented either as:
a) One single statement of comprehensive income.
b) A separate income statement and statement of comprehensive
income.

3. Statement of changes in equity;

4. Statement of cash flows; and
5. Notes, comprising a summary of significant accounting policies
and other explanatory information.
5-78 LO 8
 ADDITIONAL INFORMATION

Notes to the Financial Statements

Accounting Policies
 Specific principles, bases, conventions, rules, and
practices applied in preparing and presenting
financial information.
 First note generally titled, “Summary of Significant
Accounting Policies.”

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 Notes to the Financial Statements
ILLUSTRATION 5-30
Accounting Policies—
Inventory

ILLUSTRATION 5-31
Accounting Policies—
Intangible Asset

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 Notes to the Financial Statements

Additional Notes to the Financial Statements

IFRS requires specific disclosures. Examples include:
1. Items of property, plant, and equipment are disaggregated
into classes such as
 land,
 buildings, etc.,
 in the notes, with related accumulated depreciation
reported where applicable.

5-81 LO 8
 Additional Notes
ILLUSTRATION 5-36
Reconciliation Schedule for
Property, Plant, and Equipment

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 Notes to the Financial Statements

Additional Notes to the Financial Statements

IFRS requires specific disclosures. Examples include:
2. Receivables are disaggregated into amounts
 receivable from trade customers,
 receivables from related parties,
 prepayments, and
 other amounts.

5-83 LO 8
 Additional Notes
ILLUSTRATION 5-34
Maturity Analysis
for Receivables

5-84
 Additional Notes

Additional Notes to the Financial Statements

IFRS requires specific disclosures. Examples include:
3. Inventories are disaggregated into classifications such as
merchandise, production supplies, work in process, and
finished goods.

4. Provisions are disaggregated into provisions for employee

benefits and other items.

5-85 LO 8
 5 Statement of Financial Position
and Statement of Cash Flows

LEARNING
LEARNING OBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:

1. Explain the uses and limitations of a 6. Prepare a basic statement of cash flows.
statement of financial position. 7. Understand the usefulness of the statement
2. Identify the major classifications of the of cash flows.
statement of financial position. 8. Determine additional information requiring
3. Prepare a classified statement of financial note disclosure.
position using the report and account formats.
9. Describe the major disclosure
4. Indicate the purpose of the statement of cash techniques for financial statements.
flows.
5. Identify the content of the statement of cash
flows.
5-86
 Techniques of Disclosure

Parenthetical Explanations ILLUSTRATION 5-37

Parenthetical Disclosure
of Shares Issued

Parenthetical explanation is an advantage over a note

because it brings the additional information into the body of
the statement where readers will less likely overlook it.

5-87 LO 9
 Techniques of Disclosure

Cross-Reference and Contra Items

Companies “cross-reference” a direct relationship between an
asset and a liability on the statement of financial position.

ILLUSTRATION 5-38
Cross-Referencing and
Contra Items

5-88 LO 9
 ADDITIONAL INFORMATION

Other Guidelines

Fair
Offsetting Consistency
Presentation

 IAS No. 1 indicates that it is important that assets and

liabilities, and income and expense, be reported
separately.
 It is proper to measure assets net of valuation allowances,
such as allowance for doubtful accounts or inventory net
of impairment.
5-89 LO 9
 ADDITIONAL INFORMATION

Other Guidelines

Fair
Offsetting Consistency
Presentation

 The Conceptual Framework indicates that companies

should follow consistent principles and methods from one
period to the next.
 Accounting policies must be consistently applied for
similar transactions and events unless an IFRS requires a
different policy.
5-90 LO 9
 ADDITIONAL INFORMATION

Other Guidelines

Fair
Offsetting Consistency
Presentation

 Faithful representation of transactions and events using

the definitions and recognition criteria in the Conceptual
Framework.
 Presumed that the use of IFRS with appropriate disclosure
results in financial statements that are fairly presented.

5-91 LO 9
 APPENDIX 5A RATIO ANALYSIS—A REFERENCE

USING RATIOS TO ANALYZE PERFORMANCE

Qualitative information can be gathered from financial
statements by examining relationships between items on the
statements and identifying trends in these relationships.

5-92 LO 10 Identify the major types of financial ratios and what they measure.
 APPENDIX 5A RATIO ANALYSIS—A REFERENCE

USING RATIOS TO ANALYZE PERFORMANCE

ILLUSTRATION 5A-1
A Summary of Financial Ratios

5-93 LO 10
 APPENDIX 5A RATIO ANALYSIS—A REFERENCE

USING RATIOS TO ANALYZE PERFORMANCE

ILLUSTRATION 5A-1
A Summary of Financial Ratios

5-94 LO 10
 APPENDIX 5A RATIO ANALYSIS—A REFERENCE

USING RATIOS TO ANALYZE PERFORMANCE

ILLUSTRATION 5A-1
A Summary of Financial Ratios

5-95 LO 10