5-1 PREVIEW OF CHAPTER Intermediate Accounting IFRS 2nd Edition Kieso, Weygandt, and Warfield 5-2 Statement of Financial Position and Statement of Cash Flows LEARNING OBJECTIVES After studying this chapter, you should be able to: Explain the uses and limitations of a statement of financial position Identify the major classifications of the statement of financial position Prepare a classified statement of financial position using the report and account formats Indicate the purpose of the statement of cash flows Identify the content of the statement of cash flows 5-3 Prepare a basic statement of cash flows Understand the usefulness of the statement of cash flows Determine additional information requiring note disclosure Describe the major disclosure techniques for financial statements STATEMENT OF FINANCIAL POSITION Statement of financial position, also referred to as the balance sheet: Reports assets, liabilities, and equity at a specific date Provides information about resources, obligations to creditors, and equity in net resources Helps in predicting amounts, timing, and uncertainty of future cash flows 5-4 LO STATEMENT OF FINANCIAL POSITION Usefulness Computing rates of return Evaluating the capital structure Assess risk and future cash flows Assess the company’s: ►Liquidity, ►Solvency, ►Financial 5-5 and flexibility LO STATEMENT OF FINANCIAL 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 Statement of Financial Position and Statement of Cash Flows LEARNING OBJECTIVES After studying this chapter, you should be able to: Explain the uses and limitations of a statement of financial position Identify the major classifications of the statement of financial position Prepare a classified statement of financial position using the report and account formats Indicate the purpose of the statement of cash flows Identify the content of the statement of cash flows 5-7 Prepare a basic statement of cash flows Understand the usefulness of the statement of cash flows Determine additional information requiring note disclosure Describe the major disclosure techniques for financial statements CLASSIFICATION IN THE STATEMENT Elements of the Statement of Financial Position ASSET 5-8 LIABILITY EQUITY Resource controlled by the entity Result of past events Future economic benefits are expected to flow to the entity LO CLASSIFICATION IN THE STATEMENT Elements of the Statement of Financial Position ASSET 5-9 LIABILITY EQUITY Present obligation of the entity Arising from past events Settlement is expected to result in an outflow of resources embodying economic benefits LO CLASSIFICATION IN THE STATEMENT Elements of the Statement of Financial Position ASSET 5-10 LIABILITY EQUITY Residual interest in the assets of the entity after deducting all its liabilities LO 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 ADDITIONAL INFORMATION Other Guidelines Offsetting 5-89 Consistency Fair Presentation IAS No 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 LO ADDITIONAL INFORMATION Other Guidelines Offsetting 5-90 Consistency Fair 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 LO ADDITIONAL INFORMATION Other Guidelines Offsetting 5-91 Consistency Fair 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 LO GLOBAL ACCOUNTING INSIGHTS STATEMENT OF FINANCIAL POSITION AND STATEMENT OF CASH FLOWS As in IFRS, the statement of financial position and the statement of cash flows are required statements for U.S GAAP In addition, the content and presentation of a U.S GAAP statement of financial position and cash flow statement are similar to those used for IFRS 5-92 GLOBAL ACCOUNTING INSIGHTS Relevant Facts Following are the key similarities and differences between U.S GAAP and IFRS related to the statement of financial position Similarities • Both U.S GAAP and IFRS allow the use of the title “balance sheet” or “statement of financial position.” IFRS recommends but does not require the use of the title “statement of financial position” rather than balance sheet • Both U.S GAAP and IFRS require disclosures about (1) accounting policies followed, (2) judgments that management has made in the process of applying the entity’s accounting policies, and (3) the key assumptions and estimation uncertainty that could result in a material adjustment Comparative prior period information must be presented and financial statements must be prepared annually 5-93 GLOBAL ACCOUNTING INSIGHTS Relevant Facts Similarities • U.S GAAP and IFRS require presentation of non-controlling interests in the equity section of the statement of financial position Differences • U.S GAAP follows the same guidelines as presented in the chapter for distinguishing between current and noncurrent assets and liabilities However, under U.S GAAP, public companies must follow U.S SEC regulations, which require specific line items In addition, specific U.S GAAP mandates certain forms of reporting for this information IFRS requires a classified statement of financial position except in very limited situations 5-94 GLOBAL ACCOUNTING INSIGHTS Relevant Facts Differences • Under U.S GAAP cash is listed first, but under IFRS it is many times listed last That is, under IFRS, current assets are usually listed in the reverse order of liquidity than under U.S GAAP • U.S GAAP has many differences in terminology that you will notice in this textbook One example is the use of common stock under U.S GAAP, which is referred to as share capital—ordinary under IFRS • 5-95 Use of the term “reserve” is discouraged in U.S GAAP, but there is no such prohibition in IFRS GLOBAL ACCOUNTING INSIGHTS About The Numbers The order of presentation in the statement of financial position differs between U.S GAAP and IFRS As indicated in the following table, U.S companies generally present current assets, non-current assets, current and non-current liabilities, and shareholders’ equity In addition, within the current asset and liability classifications, items are presented in order of liquidity 5-96 GLOBAL ACCOUNTING INSIGHTS On the Horizon The IASB and the FASB are working on a project to converge their standards related to financial statement presentation A key feature of the proposed framework is that each of the statements will be organized, in the same format, to separate an entity’s financing activities from its operating and investing activities and, further, to separate financing activities into transactions with owners and creditors Thus, the same classifications used in the statement of financial position would also be used in the statement of comprehensive income and the statement of cash flows 5-97 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 5-98 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 5-99 LO 10 APPENDIX 5A RATIO ANALYSIS—A REFERENCE USING RATIOS TO ANALYZE PERFORMANCE ILLUSTRATION 5A-1 A Summary of Financial Ratios 5-100 LO 10 APPENDIX 5A RATIO ANALYSIS—A REFERENCE USING RATIOS TO ANALYZE PERFORMANCE ILLUSTRATION 5A-1 A Summary of Financial Ratios 5-101 LO 10 COPYRIGHT Copyright © 2014 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein 5-102 ...PREVIEW OF CHAPTER Intermediate Accounting IFRS 2nd Edition Kieso, Weygandt, and Warfield 5-2 Statement of Financial Position and Statement of Cash Flows LEARNING OBJECTIVES After studying this chapter, ... Statement of Financial Position and Statement of Cash Flows LEARNING OBJECTIVES After studying this chapter, you should be able to: Explain the uses and limitations of a statement of financial position