Intermediate Accounting

IFRS Edition
Kieso, Weygandt, Warfield
Fifth Edition

Chapter 4
Statement of Financial Position and Statement of Cash
Flows

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Copyright ©2024 John Wiley & Sons, Inc.
Learning Objectives

After studying this chapter, you should be able to:

LO 1 Explain the uses, limitations, and content of the statement of
financial position.
LO 2 Prepare a classified statement of financial position.
LO 3 Explain the purpose, content, and preparation of the
statement of cash flows.
LO 4 Describe additional types of information provided.

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PREVIEW OF CHAPTER 4

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 Learning Objective 1
Explain the uses, limitations, and
content of the statement of financial
position.

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Statement of Financial 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 nature and amount of
investments in enterprise resources.
3. Provides obligations to creditors, and equity in net
resources.
4. Helps in predicting amounts, timing, and uncertainty of
future cash flows.

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

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Statement of Financial Position
Usefulness
• Liquidity refers to the amount of time that is expected to elapse
until an asset is realized or otherwise converted into cash.

• Solvency refers to the ability of a company to pay its debts as

they mature.

• Financial flexibility measures the ability of a company to take

effective actions to alter the amounts and timing of cash flows.

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Statement of Financial Position
Limitations

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Statement of Financial Position
Limitations
• Most assets and liabilities are reported at historical cost.
• Example: Amazon (USA) reports $31.7 billion of land and
buildings on its balance sheet but only reports value increases
upon selling these assets.
• Use of judgments and estimates.
• Example: Dell (USA) estimates that $94 million of its accounts
receivable balance will be uncollectible.
• Many items of financial value are omitted.
• Example: Apple (USA) disclosed $8.2 million of off-balance-
sheet, non-cancelable purchase obligations in its financial
statements.

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Classification in the Statement of
Financial Position
• Items in financial statements are classified based on similar
characteristics and separate items with different characteristics:

1. Assets and liabilities with different general liquidity

characteristics
2. Assets that differ in their expected function
3. Liabilities that differ in their amounts, nature, and timing

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Elements of the Statement of Financial
Position
Asset

• Resource controlled by the entity.

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

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Elements of the Statement of Financial
Position
Liability

• 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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Elements of the Statement of Financial
Position
Equity

• Residual interest in the assets of the entity after

deducting all its liabilities.

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Statement of Financial Position
Classification

ILLUSTRATION 4.1 Statement of Financial Position Classification

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Classification
Non-Current Assets

• Non-current assets are those not meeting the definition of

current assets.

Generally consists of:

• Long-Term Investments
• Property, Plant, and Equipment
• Intangibles Assets
• Other Assets

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Non-Current Assets
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.

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Non-Current Assets
Long-Term Investments

• Companies group investments in debt and equity

securities into three separate portfolios for valuation and
reporting purposes:

1. Held-for-collection
2. Trading
3. Non-trading equity

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Statement of Financial Position
Presentation of Long-Term Investments

ILLUSTRATION 4.2 Statement of Financial Position Presentation of Long-Term

Investments

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Non-Current Assets
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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Statement of Financial Position
Presentation of Property, Plant, and Equipment

ILLUSTRATION 4.3 Statement of Financial Position Presentation of

Property, Plant, and Equipment

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Non-Current Assets
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.

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Statement of Financial Position
Presentation of Intangible Assets

ILLUSTRATION 4.4 Statement of Financial Position Presentation of Intangible Assets

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Non-Current Assets
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

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Current Assets
Inventories

Disclose:
• 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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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 4.5 Current Assets and Basis of Valuation

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Statement of Financial Position
Presentation of Inventories

ILLUSTRATION 4.6 Statement of Financial Position Presentation of Inventories

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Statement of Financial Position
Presentation of Inventories

ILLUSTRATION 4.7 Statement of Financial Position Presentation of Inventories

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Current Assets
Receivables

Major categories of receivables should be shown in the

statement of financial position or the related notes.
A company should clearly identify
• Anticipated loss due to uncollectible.
• Amount and nature of any non-trade receivables.
• Receivables used as collateral.

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Statement of Financial Position
Presentation of Receivables

ILLUSTRATION 4.8 Statement of Financial Position Presentation of Receivables

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

Prepayments often occur in regard to:

• Insurance
• Supplies
• Advertising
• Rent
• Taxes
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Statement of Financial Position
Presentation of Prepaid Expenses

ILLUSTRATION 4.9 Statement of Financial Position Presentation of Prepaid Expenses

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Statement of Financial Position
Presentation of Short-Term Investments

ILLUSTRATION 4.10 Statement of Financial Position Presentation of Short-Term

Investments

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Current Assets
Cash

• Generally consist of currency and demand deposits.

• Cash equivalents - short-term, highly liquid investments
that mature within three months or less.
• Restrictions or commitments must be disclosed.

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Statement of Financial Position
Presentation of Cash and Cash Equivalents

ILLUSTRATION 4.11 Statement of Financial Position Presentation of Cash

and Cash Equivalents

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Statement of Financial Position
Presentation of Restricted Cash

ILLUSTRATION 4.12 Statement of Financial Position Presentation of Restricted Cash

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Classification
Equity
1. Share Capital. The par or stated value of shares issued. It includes
ordinary shares (sometimes referred to as common shares) and
preference shares (sometimes referred to as preferred shares).
2. Share Premium. The excess of amounts paid-in over the par or
stated value.
3. Retained Earnings. The company’s undistributed earnings.
4. Accumulated Other Comprehensive Income. The aggregate amount
of the other comprehensive income items.
5. Treasury Shares. Generally, the amount of ordinary shares
repurchased.
6. Non-Controlling Interest (Minority Interest). A portion of the equity
of subsidiaries not owned by the reporting company.
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Statement of Financial Position
Presentation of Equity

ILLUSTRATION 4.13 Statement of Financial Position Presentation of Equity

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Statement of Financial Position
Presentation of Reserves

ILLUSTRATION 4.14 Statement of Financial Position Presentation of Reserves

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Classification
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.

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Statement of Financial Position
Presentation of Non-Current Liabilities

ILLUSTRATION 4.15 Statement of Financial Position Presentation of Non-Current

Liabilities

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Classification
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.

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Statement of Financial Position
Presentation of Current Liabilities

ILLUSTRATION 4.16 Statement of Financial Position Presentation of Current Liabilities

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 Learning Objective 2
Prepare a classified statement of
financial position.

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Statement of Financial Position
Account Form and Report Form
• IFRS does not specify the order or format of the items in
the statement.
• Two general forms:
o Account form
• Assets on left side
• Equity and liabilities on right side
o Report form
• Lists the sections one above the other

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Classified Report-Form Statement of
Financial Position
The report form lists assets,
followed by equity and
liabilities on the next page.

ILLUSTRATION 4.17
Classified Report-Form
Statement of Financial
Position (Part 1/2)

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Classified Report-Form Statement of
Financial Position
This part report form lists
equity and liabilities.

ILLUSTRATION 4.17
Classified Report-Form
Statement of Financial
Position (Part 2/2)

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 Learning Objective 3
Explain the purpose, content, and
preparation of the statement of cash
flows.

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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).

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Purpose of the 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?

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Content of the Statement of Cash Flows

Operating Investing Activities Financing

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

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Basic Format of Cash Flow Statement

ILLUSTRATION 4.18 Basic Format of Cash Flow Statement

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Cash Inflows and Outflows

ILLUSTRATION 4.19 Cash Inflows and Outflows

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Sources of Information

Information obtained from several sources:

1. comparative statements of financial position,
2. current income statement, and
3. selected transaction data.

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Preparation of the Statement of Cash Flows

Illustration: On January 1, 2025, 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 2025, the
company purchased land for $15,000.
Illustration 4.20 shows the company’s comparative
statements of financial position at the beginning and end of
2025.
Illustration 4.21 shows the company’s income statement data.

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Financial Statements Needed to
Prepare the Statement of Cash Flows

ILLUSTRATION 4.20 Comparative Statements of Financial Position

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Financial Statements Needed to
Prepare the Statement of Cash Flows

ILLUSTRATION 4.21 Income Statement Data

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Preparation of the Statement of Cash Flows
Four Steps

1. Determine the net cash provided by (or used in) operating

activities.
2. Determine the 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.

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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.

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Net Cash Provided by Operating
Activities
Analysis of Telemarketing’s comparative statements of financial position
reveals two items that will affect the computation of net cash provided by
operating activities:
1. The increase in accounts receivable reflects a non-cash increase of
$41,000 in revenues.
2. The increase in accounts payable reflects a non-cash increase of
$12,000 in expenses.
Therefore, to arrive at net cash provided by operating activities,
Telemarketing Inc. deducts from net income the increase in accounts
receivable ($41,000), and it adds back to net income the increase in
accounts payable ($12,000). As a result of these adjustments, the
company determines net cash provided by operating activities to be
$10,000.
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Computation of Net Cash Provided by
Operating Activities

ILLUSTRATION 4.22 Computation of Net Cash Provided by Operating Activities

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Net Cash Flows Provided by Investing
and Financing Activities
Telemarketing Inc.’s investing activities.
• Purchased land for $15,000.
Telemarketing Inc.’s financing activities.
• Issued ordinary shares for $50,000.
• Paid $14,000 in dividends.

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Investing and Financing Activities
Purchase of Land
Paid $15,000 to buy land

ILLUSTRATION 4.23 Determining Investing and Financing Activities

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Investing and Financing Activities
Issuance of Ordinary Shares
Receipt of $50,000 cash from issuance of shares

ILLUSTRATION 4.23 Determining Investing and Financing Activities

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Investing and Financing Activities
Payment of Dividends
Paid $14,000 for dividends

ILLUSTRATION 4.23 Determining Investing and Financing Activities

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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.

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Comprehensive Statement of Cash Flows

ILLUSTRATION 4.25 Comprehensive Statement of Cash Flows

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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
o borrow or
o issue equity securities.

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Usefulness of Statement of Cash Flows
Financial Liquidity

ILLUSTRATION 4.27 Formula for Current Cash Debt Coverage

Ratio indicates the ability to pay off current liabilities from

operations.
Ratio near 1:1 is good.

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Usefulness of Statement of Cash Flows
Financial Flexibility

ILLUSTRATION 4.28 Formula for Cash Debt Coverage

Ratio indicates the ability to repay liabilities from net cash

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

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Usefulness of Statement of Cash Flows
Free Cash Flow

ILLUSTRATION 4.29 Formula for Free Cash Flow

• Free cash flow is the amount of discretionary cash flow a

company has.

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Usefulness of Statement of Cash Flows
Free Cash Flow

ILLUSTRATION 4.30 Free Cash Flow Computation

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 Learning Objective 4
Describe additional types of information
provided.

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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.

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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
Examples of Footnote Disclosure

ILLUSTRATION 4.31 Accounting Policies—Inventory

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Notes to the Financial Statements
Examples of Footnote Disclosure

ILLUSTRATION 4.32 Accounting Policies—Intangible Asset

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Notes to the Financial Statements
Examples of Footnote Disclosure

ILLUSTRATION 4.33 Accounting Policies—Property, Plant, and Equipment

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Notes to the Financial Statements
Examples of Footnote Disclosure

ILLUSTRATION 4.34 Accounting Policies—Financial Liabilities

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Additional Notes to the Financial Statements Item 1

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.

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Additional Notes to the Financial Statements
Item 2
IFRS requires specific disclosures. Examples include:
2. Receivables are disaggregated into amounts
• receivable from trade customers,
• receivables from related parties,
• prepayments, and
• other amounts.

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Additional Notes to the Financial Statements
Items 3 and 4
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.

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Additional Notes
Maturity Analysis for Receivables

ILLUSTRATION 4.35 Maturity Analysis for Receivables

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Additional Notes
Maturity Analysis for Financial Liabilities

ILLUSTRATION 4.36 Maturity Analysis for Financial Liabilities

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Additional Notes
Reconciliation Schedule for Property, Plant, and Equipment

ILLUSTRATION 4.37 Reconciliation Schedule for Property, Plant, and Equipment

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Techniques of Disclosure
Parenthetical Disclosure of Shares Issued

ILLUSTRATION 4.38 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.

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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 4.39 Cross-Referencing and Contra Items

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Other Guidelines
Offsetting

• 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.
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Other Guidelines
Consistency

• 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 I FRS
requires a different policy.
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Other Guidelines
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.
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 Learning Objective *5
Identify the major types of financial
ratios and what they measure.

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Using Ratios to Analyze Performance

Major Types of Ratios

Liquidity Ratios. Measures of the company’s short-term ability to
pay its maturing obligations.
Activity Ratios. Measures of how effectively the company uses its
assets.
Profitability Ratios. Measures of the degree of success or failure of
a given company or division for a given period of time.
Coverage Ratios. Measures of the degree of protection for long-
term creditors and investors.

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A Summary of Financial Ratios
Liquidity and Activity Ratios

ILLUSTRATION 4A.1 A Summary of Financial Ratios

(1 of 3)
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A Summary of Financial Ratio
Profitability Ratios

ILLUSTRATION 4A.1 A Summary of Financial Ratios

(2 of 3)
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A Summary of Financial Ratios
Coverage Ratios

ILLUSTRATION 4A.1 A Summary of Financial Ratios

(3 of 3)

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Copyright
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