Overview
This lecture introduces the statement of financial position (balance sheet), focusing on its elements, classification of assets and liabilities, and how to prepare it in both account and report form.
Financial Statements: Purpose and Types
- Financial statements provide structured information about an entity's financial position, performance, and cash flows.
- Main types: statement of financial position, comprehensive income, changes in equity, and cash flows.
- They inform users' economic decisions and show management’s stewardship over resources.
Elements of the Statement of Financial Position
- The statement of financial position (balance sheet) details assets, liabilities, and equity.
- Follows the accounting equation: Assets = Liabilities + Equity.
- Assets and liabilities are split into current and non-current categories.
Assets: Current vs Non-Current
- Current assets: expected to be realized, sold, or consumed within 12 months or the normal operating cycle, whichever is longer.
- Examples of current assets: cash, trade receivables, inventory, prepaid expenses (within a year), marketable securities.
- Non-current assets: not expected to be realized within 12 months; include land, buildings, equipment, intangible assets, investment property, investments in associates/equity securities.
Liabilities: Current vs Non-Current
- Current liabilities: expected to be settled within 12 months or the normal operating cycle, whichever is longer.
- Examples: accounts payable, short-term notes payable, salaries payable, taxes payable.
- Non-current liabilities: obligations due beyond 12 months, e.g., bonds payable, long-term notes payable.
Equity
- Equity is the residual interest in assets after deducting liabilities (owner's/shareholders’ equity).
Preparing the Statement of Financial Position
- Two formats: account form (assets left, liabilities/equity right) and report form (assets above, liabilities and equity below).
- Steps: classify accounts, group into current/non-current, subtotal each section, and ensure total assets equal total liabilities plus equity.
Sample Account Classification
- Current assets: cash, trade receivables, inventory, supplies, prepaid assets.
- Non-current assets: property, plant, and equipment, intangible assets, investments.
- Current liabilities: accounts payable, short-term notes payable, accrued expenses.
- Non-current liabilities: bonds payable, long-term notes payable.
- Equity: owner’s or shareholders’ capital.
Problem Solving & Practice
- Practice multiple choice questions to test understanding of classifying and totaling statement of financial position elements.
- When solving, classify items correctly and ensure the accounting equation balances.
Key Terms & Definitions
- Asset — Resource controlled by the entity expected to bring future economic benefits.
- Liability — Present obligation likely to result in an outflow of resources.
- Equity — Owner’s residual interest in the entity’s assets after liabilities.
- Current Asset/Liability — Realizable/settled within 12 months or normal cycle.
- Non-Current Asset/Liability — Realizable/settled after 12 months.
- Statement of Financial Position (Balance Sheet) — Financial statement showing assets, liabilities, and equity at a specific date.
Action Items / Next Steps
- Download and review handout 035 from the provided link.
- Practice classifying balance sheet elements and preparing statements in account/report form.
- Prepare for upcoming lesson: income statement (statement of comprehensive income).