Intermediate Accounting

IFRS Edition
Kieso, Weygandt, Warfield
Fifth Edition
Chapter 3

Statement of Financial
Position and Statement of
Cash Flows
Copyright ©2025 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.
LO *5 Identify the major types of financial ratios and what
they measure.
LO 6 Compare the statement of financial position and
statement of cash flows under IFRS and U.S. GAAP.
Copyright ©2025 John Wiley & Sons, Inc. 2
PREVIEW OF CHAPTER 3

Copyright ©2025 John Wiley & Sons, Inc. 3

Learning Objective 1

Explain the uses, limitations, and

content of the statement of financial
position.

Copyright ©2025 John Wiley & Sons, Inc. 4

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 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 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.

ILLUSTRATION
3.1
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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.

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Elements of the Statement of Financial
Position


Asset
ASSET LIABILITY EQUITY

• 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

ASSET 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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Elements of the Statement of Financial
Position


Equity
ASSET LIABILITY EQUITY

• Residual interest in the assets of the entity after

deducting all its liabilities.

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Statement of Financial Position Classification

ILLUSTRATION 3.2

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Classification


Non-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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Statement of Financial Position
Presentation of Long-Term Investments

ILLUSTRATION 3.3

LO 1 Copyright ©2025 John Wiley & Sons, Inc. 14

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 3.4

LO 1 Copyright ©2025 John Wiley & Sons, Inc. 16

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 3.5

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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


Operating Cycles


• The operating cycle is the average time between
when a company acquires materials and supplies and
when it receives cash for sales of the product (for
which it acquired the materials and supplies).
• The cycle operates from cash through inventory,
production, receivables, and back to cash.

ILLUSTRATION 3.6
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Classification


Current Assets
• Generally, if a company expects to convert an asset
into cash or to use it to pay a current liability within a
year or the operating cycle, whichever is longer, it
classifies the asset as current.
• The five major items found in the current assets
section, and their bases of valuation, are generally
presented in the following order.

ILLUSTRATION 3.7
LO 1 Copyright ©2025 John Wiley & Sons, Inc. 21
Current Assets


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

• Prepayments often occur in regard to:

o Insurance
o Supplies
o Advertising
o Rent
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Statement of Financial Position
Presentation of Prepaid Expenses

ILLUSTRATION 3.8

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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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Statement of Financial Position
Presentation of Inventories

ILLUSTRATION 3.9

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Statement of Financial Position
Presentation of Inventories

ILLUSTRATION 3.10

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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 3.11

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Statement of Financial Position
Presentation of Short-Term Investments

ILLUSTRATION 3.12

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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 3.13

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Statement of Financial Position

Presentation of Restricted Cash

ILLUSTRATION 3.14

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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. Other Equity (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 3.15

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Statement of Financial Position

Presentation of Reserves

ILLUSTRATION 3.16

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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 3.17

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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 3.18

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Learning Objective 2

Prepare a classified statement of

financial position.

Copyright ©2025 John Wiley & Sons, Inc. 40

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 ( 帳戶式)
• Assets on left side
• Equity and liabilities on right side
o Report form ( 報告式)
• 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
directly below, on the
same page.

ILLUSTRATION 3.19
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Learning Objective 3

Explain the purpose, content, and

preparation of the statement of cash
flows.

Copyright ©2025 John Wiley & Sons, Inc. 43

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 Financing

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

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Basic Format of Cash Flow
Statement

ILLUSTRATION 3.20

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Cash Inflows and Outflows

ILLUSTRATION 3.21
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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 Statement of Cash
Flows
Illustration: On January 1, 2026, 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 2026, the
company purchased land for $15,000.
Illustration 3.22 shows the company’s comparative
statements of financial position at the beginning and end of
2026.
Illustration 3.23 shows the company’s income statement data.

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Comparative Statements of Financial Position

ILLUSTRATION 3.22

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Income Statement Data

ILLUSTRATION 3.23

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Preparation of Statement of Cash
Flows


Four Steps

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Preparation of Statement of Cash
Flows


Four
Step 1.Steps
Determine:
1. Net cash provided by (or used in) operating
activities.
2. 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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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.

LO 3 Copyright ©2025 John Wiley & Sons, Inc. 56

Net Cash Provided by Operating
Activities


Computation of Net Cash Provided by
Operating
• Therefore,Activities
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.

ILLUSTRATION 3.24
LO 3 Copyright ©2025 John Wiley & Sons, Inc. 57
Step 2. Determine


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
3.22

LO 3 Copyright ©2025 John Wiley & Sons, Inc. 59

 Investing and Financing Activities


Issuance of Ordinary Shares

Receipt
of
$50,000
cash
from
issuance
ILLUSTRATION
of shares 3.22

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 Investing and Financing Activities


Payment of Dividends

Paid
$14,000
for ILLUSTRATION
dividends 3.22

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Step 3. Determine


Change (Increase or Decrease) in Cash
During the Period
Telemarketing Inc.’s statement of cash flows
• The company determines the net increase in cash.
• A net increase in cash of $31,000.

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Statement of Cash Flows

Net increase
in cash of
$31,000

ILLUSTRATION
3.26
LO 3 Copyright ©2025 John Wiley & Sons, Inc. 63
Step 4. Reconcile


Change in Cash with the Beginning and
the Ending Cash Balances
• The increase in cash of $31,000 reported in the
statement of cash flows is equal to $31,000 in
cash calculated from the comparative statements
of financial position.

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Preparation of Statement of Cash
Flows


Significant Non-Cash
Reported in a separate note Activities
to the financial
statements.
Examples include:
1. Issuance of ordinary shares to purchase assets.
2. Conversion of bonds into ordinary shares.
3. Issuance of debt to purchase assets.
4. Exchanges on long-lived assets.

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Comprehensive Statement of Cash
Flows

ILLUSTRATION 3.27
LO 3 Copyright ©2025 John Wiley & Sons, Inc. 66
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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Negative Net Cash Provided by Operating
Activities
• Substantial increases in receivables and/or inventory
can explain the difference between positive net
income and negative net cash provided by operating
activities.
• For example, in its first year of operations Hu Inc.
reported a net income of HK$80,000. Its net cash
provided by operating activities, however, was a
negative HK$95,000.

ILLUSTRATION 3.28
LO 3 Copyright ©2025 John Wiley & Sons, Inc. 68
Usefulness of Statement of Cash Flows

Liquidity
• 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
• 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
• It can use this cash flow to purchase additional
investments, retire its debt, purchase treasury shares, or
simply add to its liquidity.

• In a free cash flow analysis, we first deduct capital

spending, to indicate it is the least discretionary
expenditure a company generally makes.
• We then deduct dividends. Although a company can cut
its dividend, it usually will do so only in a financial
emergency.
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Usefulness of Statement of Cash Flows


Free Cash Flow

ILLUSTRATION 3.29

• Indicates the amount of discretionary cash flow

available.

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Learning Objective 4

Describe additional types of information

provided.

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Additional Information
I F R S 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 Disclosure

ILLUSTRATION 3.30

ILLUSTRATION 3.31

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Notes to the Financial Statements


Examples of Disclosure

ILLUSTRATION 3.32
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Notes to the Financial Statements


Examples of Disclosure

ILLUSTRATION 3.33

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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.

LO 4 Copyright ©2025 John Wiley & Sons, Inc. 79

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 andspecific
IFRS requires 4 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 3.34

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Additional Notes


Maturity Analysis for Financial Liabilities

ILLUSTRATION 3.35

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Additional Notes


Maturity Analysis for Financial Liabilities

ILLUSTRATION 3.36

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Techniques of Disclosure

Parenthetical Disclosure of Shares
Issued

ILLUSTRATION 3.37
• 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 3.38

LO 4 Copyright ©2025 John Wiley & Sons, Inc. 86

Other Guidelines


Offsetting

Fair
Offsetting Consistency
Presentation

• I A S 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.

LO 4 Copyright ©2025 John Wiley & Sons, Inc. 87

Other Guidelines


Consistency

Fair
Offsetting Consistency
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.

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Other Guidelines


Fair Presentation

Fair
Offsetting Consistency
Presentation

• Faithful representation of transactions and events

using the definitions and recognition criteria in the
Conceptual Framework.
• Presumed that the use of I FR S 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
• Liquidity ofMeasures
Ratios. Ratiosof 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 3A.1

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A Summary of Financial Ratios


Profitability Ratios

ILLUSTRATION 3A.1

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A Summary of Financial Ratios


Coverage Ratios

ILLUSTRATION 3A.1

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Learning Objective 6

Compare the statement of financial

position and statement of cash
flows under IFRS and U.S. GAAP.

Copyright ©2025 John Wiley & Sons, Inc. 95

Global Accounting Insights

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.

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Global Accounting Insights


Similarities
Following are the key similarities between U.S. G AAP
and I FRS related to the statement of financial
position.
• Both U.S. G AAP and I FRS allow the use of the title
“balance sheet” or “statement of financial position
.” I FRS recommends but does not require the use
of the title “statement of financial position” rather
than balance sheet.

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Global Accounting Insights


More Similarities
• Both U.S. G AAP and I FRS 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.
• U.S. G AAP and I FRS require presentation of non-
controlling interests in the equity section of the
LO 6
statement of financial position.
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Global Accounting Insights


Differences
• U.S. G AAP follows the same guidelines as
presented in the chapter for distinguishing
between current and noncurrent assets and
liabilities. However, under U.S. G AAP, public
companies must follow U.S. S E C regulations,
which require specific line items. In addition,
specific U.S. G AAP mandates certain forms of
reporting for this information. IFRS requires a
classified statement of financial position except
in very limited situations.

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Global Accounting Insights


More Differences
• Under U.S. G AAP cash is listed first, but under I FR
S it is many times listed last. That is, under I FRS,
current assets are usually listed in the reverse
order of liquidity than under U.S. G AAP.
• U.S. G AAP has many differences in terminology
that you will notice in this textbook. One example
is the use of common stock under U.S. G AAP,
which is referred to as share capital—ordinary
under I FRS.
• Use of the term “reserve” is discouraged in U.S. G
AAP, but there is no such prohibition in I FRS.
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Global Accounting Insights


About the Numbers
The order of presentation in the statement of financial
position differs between U.S. GA A P and I F R S. 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.

ILLUSTRATION GAAP3.1
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Global Accounting Insights


On the Horizon
At one time, the IASB and the FASB worked 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.
That original convergence project is on hold, but both Boards
have pivoted to focus on performance reporting (the income
statement).
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Copyright

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