Lesson 1.

Introduction to Statement
of Financial Position

Fundamentals of Accountancy, Business,

and Management 2
Accountancy, Business, and Management

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When you become a
business owner, you might
seek help from a financial
institution to fund your
business operations.

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However, creditors will not
lend you money without
proving that you can pay
your debts.

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Statement of Financial
Position
Document that records the
company's resources through
its assets while also providing
records of its debts and other
liabilities and the interest of the
company's owners in the
business. 4
From this financial
statement, users
of accounting
information can
make decisions
concerning a
business’s liquidity
and solvency.

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CM Construction, Inc.
CM Construction, Inc. is expanding
its operations and requires
additional funding. They need to
borrow ₱2,500,000 from the bank.
The bank wanted CM Construction
to provide a Statement of Financial
Position to determine whether they
could extend credit to CM 6
Learning Objectives
In this lesson, you should be able to do the
following:
● Differentiate the elements of a Statement
of Financial Position.
● Classify accounts as assets, liabilities, or
owner’s equity.
● Classify accounts as current or non-
current.
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Why should a business prepare
a Statement of Financial
Position?

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Different Types of Financial Statements
● Statement of Comprehensive Income
● Statement of Changes in Owner’s Equity
● Statement of Financial Position
● Statement of Cash Flows

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 Statement of Financial Position

Definition
● shows a business's financial condition as of
a given period
● shows what a business owns and what it
owes to its creditors and owners
● records a company's assets, liabilities, and
equity
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 Statement of Financial Position

Use
● to assess a company's ability to pay its
short-term (liquidity) and long-term
debts (solvency)

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Statement of Financial Position

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Statement of Financial Position

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 Elements of Statement of Financial
Position
Assets = Liabilities + Equity

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 Elements of Statement of Financial
Position

Assets = Liabilities + Equity

● things a
company
owns
● resources
used to
generate
revenue
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 Assets

Non-current
Assets
● difficult to dispose of
and can be used for
more than a year
● Examples: land,
equipment, building,
and the like

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Elements of Statement of Financial
Position
Current
Assets
● easy to liquidate and
are used within a year
● Examples: cash,
accounts receivable,
cash equivalents, and
inventories

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CM Construction’s Assets

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 CM Construction’s Assets

The CM Construction’s Statement of Financial Position shows

that the firm has total current assets of ₱12,874,000. It
consists of cash amounting to ₱7,314,000 and receivables
from its customers amounting to ₱5,560,000. The bank will
interpret this as the liquid assets the company can use to
settle its current obligations, i.e., monthly amortization of
loans.

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 CM Construction’s Assets

On the other hand, the largest portion of the

company’s long-term assets is its property and
equipment. These assets can be used as collateral for
loans. However, liquidating these assets takes time.

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 Elements of Statement of Financial
Position

Assets = Liabilities + Equity

obligations or
debts of a
business to
other entities,
individuals, or
institutions

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Elements of Statement of Financial
Position
Current
Liabilities
● due to be paid within
the next 12 months
● Examples: accounts
payable, short-term
loans, interest payable,
and the like

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Liabilities

Non-current Liabilities

● debts that will mature beyond

the one-year period
● Examples: long-term loans,
mortgages, and bonds

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CM Construction’s Liabilities

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 CM Construction’s Liabilities

The CM Construction’s Statement of Financial Position shows

that the firm has Accounts Payable of ₱9,060,000 and Notes
Payable of ₱3,349,000 under current liabilities. These are
the liabilities they need to settle within a year, including the
materials they purchased from their suppliers. On the other
hand, the company has fewer long-term liabilities.

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 CM Construction’s Liabilities

As CM Construction has total current liabilities of

₱12,409,000 while having total current assets of only
₱12,874,000, the bank will interpret this as the company
having just enough current assets to pay for its current
liabilities. The equity of owners is mostly invested in fixed
assets.

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 Elements of Statement of Financial
Position
Assets = Liabilities + Equity
residual interest
after liabilities are
deducted from the
assets

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Elements of Statement of Financial
Position
Equity
● Net income or net loss
from operations
● Owner’s withdrawal
● For partnerships:
capital balances of
each partner
● For corporations: stocks
and retained earnings
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CM Construction’s Liabilities

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 CM Construction’s Owner’s Equity

The CM Construction's Statement

of Financial Position shows that
the company has total owner's
equity of ₱11,567,000.

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 CM Construction’s Owner’s Equity

The bank will determine how the loan

being applied for will affect the
company's financial position. Will it
have enough assets to cover the
additional obligations? Can the
company make the fund grow to
increase its assets?

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 The Importance of a Statement of Financial Position

Potential investors use the Statement of Financial Position

to decide whether or not to invest in a company, while
stockholders use it to decide whether to pull out or retain
their investments. For the management, it can provide
insight into ways to boost a company's revenue. Moreover,
a Statement of Financial Position illustrates a company's
financial standing and potential.

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● The Statement of Financial Position shows a company's financial
condition as of a given period. It shows the assets, liabilities, and
equity of a business.

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● Assets are things a business owns and are used to make goods or
render services, giving a business revenue.
● Liabilities are obligations to other companies, such as debts,
loans, and other things that it should pay.
● Equity is the sum of all investments from the owner and the
business's net income, decreased by the owner’s drawings from
the business. If the business incurs a loss instead of an income,
the loss will decrease the equity.

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● A partnership's equity section shows the capital balances of each
business partner. In corporations, the equity section shows the
shares of stocks and the retained earnings.
● The shares of stocks of a corporation could be common stock or
preferred stock. The retained earnings represent the corporation's
accumulated profits.

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● One can differentiate current assets from non-current assets by
identifying which assets are liquid and can be used within 12
months. On the other hand, one can differentiate current liabilities
from non-current liabilities by determining which obligations need
to be settled within 12 months.

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 Practice Your Skills

Identify whether the following accounts belong to the Current Assets,

Non-current Assets, Current Liabilities, Non-current Liabilities, or
Owner’s Equity

Cash Accounts Equipment Inventory

Receivable
Loans Payable Salaries Expense Accounts Supplies
Payable
Notes Payable Building Utilities Payable Land
Owner’s Capital Mortgage Service Income Bonds Payable
Payable
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Practice Your Skills

Current Non- Current Non- Owner’s

Assets current Liabilities current Equity
Assets Liabilities

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Mr. Dimalugi wants to invest in his friend's business to gain extra
income. His friend told him that the business is earning well. He
visited the shop and saw that many customers regularly come to buy
his products. He wants to know if the business is performing well
financially and if it is wise to invest in the business.
1. Would it be a good idea for Mr. Dimalugi to invest in his friend's
business if the latter cannot give documents that can show the
business's financial health? Explain your answer.
2. What part of the Statement of Financial Position shows what the
business owns and the total investment the owner put into the
business? Explain your answer.
3. Mr. Dimalugi discovered that his friend's business liabilities are
more than its equity.
4. Knowing this, would you advise Mr. Dimalugi to invest? Explain 40