Intermediate accounting IFRS 3rd ch05

Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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CHAPTER 5

Statement of Financial Position and
Statement of Cash Flows

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

1.

Explain the uses, limitations, and content of the

3.

statement of financial position.

2.

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Prepare a classified statement of financial position.

Explain the purpose, content, and preparation of
the statement of cash flows.

4.

Describe additional types of information provided.


PREVIEW OF CHAPTER 5

Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
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LEARNING OBJECTIVE 1

Statement
Statementof
ofFinancial
FinancialPosition
Position

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

Statement of financial position, also referred to as the balance sheet:

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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
Statementof
ofFinancial
FinancialPosition
Position

Usefulness

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

Computing rates of return.



Evaluating the capital structure.



Assess risk and future cash flows.



Assess the company’s:

►

Liquidity,

►

Solvency, and

►

Financial flexibility.

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Statement of Financial Position

Limitations

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

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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Classification

Elements of the Statement of Financial Position

ASSET

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LIABILITY



Resource controlled by the entity.



Result of past events.



Future economic benefits are expected to flow to the entity.

EQUITY

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Classification

Elements of the Statement of Financial Position

ASSET

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LIABILITY

EQUITY



Present obligation of the entity.



Arising from past events.



Settlement is expected to result in an outflow of resources embodying economic benefits.

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Classification

Elements of the Statement of Financial Position

ASSET



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LIABILITY

EQUITY

Residual interest in the assets of the entity after deducting all its liabilities.

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Classification

ILLUSTRATION 5.1

Subclassifications

Statement of Financial
Position Classification

A survey of 175 companies showed that companies appear to favor reporting current assets first on the
statement of financial position.

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Classification

Non-Current Assets
Generally consists of:

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

Long-Term Investments



Property, Plant, and Equipment



Intangibles Assets



Other Assets

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Classification

Long-term Investments

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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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Classification

Investments in Debt and Equity Securities

Portfolio

Held-for-Collection

Trading

Non-Trading Equity

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Type

Valuation

Debt

Amortized Cost

Debt or Equity

Fair Value

Equity

Fair Value

Classification
Current or
Non-current

Current

Current or
Non-current

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Classification

Long-Term Investments

ILLUSTRATION 5.17
Classified Report-Form Statement of Financial
Position

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Classification

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

Property, Plant, and Equipment

ILLUSTRATION 5.17
Classified Report-Form Statement of Financial
Position

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Classification

Intangible Assets
Lack physical substance and are not financial instruments.

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

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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Intangible Assets

ILLUSTRATION 5.17
Classified Report-Form Statement of Financial Position

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Classification

Other Assets
Items vary in practice. Can include:

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

Long-term prepaid expenses



Non-current receivables



Assets in special funds



Property held for sale



Restricted cash or securities

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Classification

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

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Classification

Inventories
Disclose:

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

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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Inventories

ILLUSTRATION 5.17
Classified Report-Form Statement of Financial Position

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Classification

Receivables
Major categories of receivables should be shown in the statement of financial position or the related notes.
A company should clearly identify

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

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

Prepaid Expenses
Payment of cash, that is recorded as an asset because service or benefit will be received in the future.

Cash
Cash Payment
Payment

Expense
Expense Recorded
Recorded

BEFORE

Prepayments often occur in regard to:

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

Insurance



Rent



Supplies



Taxes



Advertising

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