The statement of financial position reports the position of the entity's assets, liabilities, and equity at a given point in time. The statement of financial position is useful for assessing the entity's risks and future cash flows.
Judging from its contents, the Statement of Financial Position is the
basis for calculating the rate of return and evaluating the company's capital
structure. Information in the Statement of Financial Position can also be used
to assess a company's risk and future cash flows. In this case, the Statement
of Financial Position can be used to analyze the company's liquidity, solvency,
and financial flexibility.
Liquidity can be said to be a benchmark for describing the amount of
time needed until obligations can be realized or paid. This ratio can help
investors and creditors assess a company's ability to pay off its short-term
debt. Meanwhile, for shareholders, the liquidity ratio is used to evaluate the
possibility of future cash dividends or share buybacks. So it can be concluded that
the greater the liquidity ratio of a company, the smaller the risks faced by
the company.
Solvency is a ratio that refers to a company's ability to pay its debts
at maturity. It can be said that a company is at risk if it has both short-term
and long-term debt, while the assets owned by the company that should be
allocated for expansion and development of the company must be distributed to
cover these debts. So that the risks faced are not only reduced company assets,
but even worse, the assets cannot cover the company's debts.
Flexibility is a ratio that measures a company's ability to make
effective decisions in terms of company development related to its financial
condition. If the company's financial condition is said to be unhealthy, then
the decisions that will be issued by the owner of the company will be very
limited, considering the limited assets currently owned. So in other words, the
higher the level of flexibility of the company, the smaller the risk that will
be faced by the company.
In addition to the uses of the balance sheet for users of financial
statements, there are also several weaknesses in the balance sheet. Some of
them are: first, almost all assets and liabilities are recorded at historical
cost. As a result, the information disclosed on the balance sheet has a higher
level of reliability, while the use of the fair value principle, which is
considered more relevant, is not reported. Second, in determining the various
items reported in the balance sheet, use judgments and estimates. And finally,
in reporting a statement of financial position, there are often many items that
are of financial or material value to the company but are ignored because they
cannot be recorded objectively.
In compiling a statement of financial position or balance sheet, what
needs to be considered is the systematic placement of items so that the
relationship between these items can be seen and the level of liquidity of each
item can be identified. In this case, it is necessary to classify the balance
sheet so that a good balance sheet can be prepared.
The three common groups of items on the statement of financial position,
or balance sheet, are assets, liabilities, and equity.
- Assets are the results of
transactions that occurred in the past or present, assets that are fully
owned and controlled by the company, and economic benefits that may be
obtained in the future.
- Liability is the sacrifice
of economic benefits, which in this case are past, present, and future
assets as fulfillment of company needs.
- Equity is the capital that underlies the company's operational activities as the basis for funding these activities, which in the future will experience an increase or decrease due to the use and allocation of certain assets and liabilities.
Assets
The classification of assets is as follows:
- Assets are not current.
Non-current assets include the following items:
- long-term investment
Long-term investments are presented on the balance sheet just below
current assets. Long-term investments are usually held for many years.
Long-term investments consist of the following four types of investments:
- Investments in securities,
such as bonds, common stock, or long-term notes
- Investments in tangible
fixed assets that are not currently used in operations, such as land held
for speculation.
- Investments set aside in
special funds, such as sinking funds, retirement funds, or factory
expansion funds
- Investments in
unconsolidated subsidiaries or affiliates
- Property, plant, and
equipment
Property, plants, and equipment are types of long-lived and durable
assets that are used in the company's operational activities. These assets
consist of property or physical assets such as land, buildings, machinery,
equipment, and non-renewable resources. Most of these assets are also
depreciable, except for land. The accumulated depreciation assessment must be
disclosed as a deduction from the use value of the asset.
- Intangible assets
Intangible assets are not included in financial instruments because they
do not have physical substance. Intangible assets include patents, copyrights,
franchises, goodwill, trademarks, trade names, and customer trust. In general,
all intangible assets are amortized over their useful lives. Intangible assets
can be the most significant economic resources owned by a company, but many
companies ignore them when disclosing financial statements because their
objectivity is difficult to identify.
- Other assets
Items included in other assets include prepaid expenses such as retirement
expenses, long-term receivables, deferred income tax, and restricted cash and
securities. Companies should limit this section to only unusual items that are
sufficiently different from assets included in special categories.
- Current asset
Current assets represent cash and other forms of assets that are
expected to be converted into cash, sold, or allocated within one year or one
accounting period, whichever is longer. The operating cycle in question starts
with cash, which is realized from the sale of products originating from the use
of raw materials and equipment in production activities. Current assets are
presented on the balance sheet in order of liquidity. Current assets include
the following posts:
- Supply
In order to present inventories in the statement of financial position
accurately, the valuation basis, which is the lower of cost or market price,
and pricing methods such as FIFO, LIFO, or average cost must be fully disclosed
before total accumulation.
- Receivables
Any receivables used as collateral or in anticipation of uncollectible
accounts must be clearly identified. The categories of receivables must be
presented in the balance sheet or related records. whereas for receivables for
unusual transactions, the company must classify them separately as long-term
receivables unless they are expected to be received within one year.
- Prepaid expenses
Prepaid expenses are expenses that have been made for benefits to be
received within one year or the operating cycle. These costs are classified as
current assets because if they have not been paid, then cash needs to be used
during the current year or the following year. Prepaid expenses are reported at
the amount of fees that are not yet due or unused. Common examples are
insurance policy payments and prepaid building leases. So that costs are
incurred before receiving related benefits.
- short-term investment
Short-term investments, in this case, investments in debt and equity
securities, must be reported as current assets and grouped into three
classifications for separate reporting purposes.
- A held-to-maturity security
is a type of corporate liability security that has a positive value and
has the ability to be held until its maturity date.
- Trading securities are types
of liability and capital securities that are primarily authorized and held
to be sold in the near term in order to gain profits from the difference
in short-term prices.
- Available-for-sale
securities are types of liability and capital securities that cannot be
classified as held-to-maturity securities or trading securities.
- Cash
Generally, cash consists of cash and demand deposits. Cash, or in the
form of this currency, are all assets that are liquid and can be reduced. Or a
means of exchange that the bank can accept for deposit. Meanwhile, cash
equivalents are very liquid and safe investments, so in practice, they are the
same as cash. For financial reporting purposes, cash equivalents are defined as
highly liquid securities with known market values and maturities. Also
short-term money market securities.
- Capital
Owner's equity, or equity, is one of the groups that is disclosed in the
balance sheet in the amount of par value authorized, issued, and outstanding.
This capital, or owner's equity, can be obtained based on a capital share
agreement and retained earnings from a certain period. The posts contained in
the capital group are:
- Share capital, namely the
par value or set for the shares issued. Share capital includes ordinary
shares and preferred shares. For both common and preferred stock,
companies must disclose the par value and the value of the shares
authorized, issued, and outstanding.
- share premium, namely the
excess amount paid from the amount stated on the shares or the par value.
- Retained earnings, namely
company profits that are not distributed. Retained earnings are divided
into undue retained earnings, i.e., the value available to distribute
dividends, and limited retained earnings, such as loan agreements.
- accumulation of other
comprehensive income, namely the total of other comprehensive income
items.
- Treasury shares, namely
shares outstanding, are then bought back by the company.
- Uncontrollable interest,
namely the interests of shareholders who, when aggregated, own less than
half of the shares in a company. On the consolidated balance sheets of
companies whose subsidiaries are not wholly owned, it is reported as a
liability.
Liability
Liability items are grouped into two categories: long-term liabilities
and short-term liabilities.
- Long-term liabilities
Long-term liabilities are obligations that are not expected to be
liquidated in the normal operating cycle but will be paid on a certain date in
a period that is usually more than one accounting year. Examples of long-term
liabilities include bonds payable, notes payable, some deferred income taxes,
and rents payable. Long-term liabilities are classified as follows:
- Liabilities arising from
special financing situations, such as the issuance of bonds, long-term
lease payables, and long-term notes payable.
- liabilities originating from
company operations, such as deferred income tax liabilities and pension
obligations.
- Obligations that depend on
the occurrence or non-occurrence of an event in the future to confirm the
amount to be paid or the date of settlement, such as guarantees for
services or products and other contingencies.
- Short-term liabilities
Short-term liabilities are obligations that are expected to be
liquidated through the use of current assets or the existence of other
short-term liabilities. Generally, long-term liabilities are expected to be
repaid within one year or one accounting cycle. The classification of
short-term liabilities includes:
- debt originating from the
acquisition of goods and services, such as trade payables, payroll
payables, and tax payables.
- Bills received in advance
before the goods have been delivered or services have not been provided,
such as unearned rental income,
- Other liabilities that are
liquidated will be repaid in the operating cycle, such as the portion of
long-term bonds that must be paid in the current year or short-term ones
that come from the purchase of equipment.
IFRS does not specify the order or format in which companies present
items in the statement of financial position. A statement of financial position
can usually be in the form of an account form or report form. Or what is
commonly known as the Skontro Form and the Staffel Form.
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