Financial Statements

Presentation of Financial Statements
Overview of the Financial Statements
The basic relationship of the financial statements is shown below:
1. The total comprehensive income directly affects the equity. Profit directly
affects the retained earnings account in the equity while the other
comprehensive income for the year forms part of the other comprehensive
income, or reserves, in the equity.
2. The total of the equity account balances carry as the equity balance in the
statement of financial position.
3. The statement of cash flows should also tie up with the cash balance in the
statement of financial position.
Further discussion on the following statements will happen after the midterm period.
Statement of Financial Position
The statement of financial position is where the economic resources, the claims of
those resources, and the equity is presented. The statement of financial position is
also known as the balance sheet.
The statement of financial position can answer the basic questions of the primary
users about the entity:
1. Can the entity pay its incoming liabilities?

2. Is the entity mainly financed by borrowings or by owner's capital?
The statement of financial position shows the snapshot of the entity’s assets,
liabilities, and equity at a certain point in time. The financial position of the business
changes regularly due to the business transactions that affect the accounting
equation. The statement of financial position today is most likely to be different from
the financial position tomorrow or yesterday.
Accountants should be able to prepare a statement of financial position in

accordance with the Accounting Standards, specifically the Philippine Accounting
Standards 1 (PAS 1)
The statement of financial position may be presented as classified or unclassified.

Classified presentation shows the distinction between current and noncurrent items
while unclassified presentation shows the order of liquidity and no distinction
between current and noncurrent items.
The classified presentation highlights the entity’s working capital that answers the
question in number one above.
Shown below are examples of statements of financial position. To the left is an

example of unclassified presentation while the right is an example of classified
presentation.
Current Assets and Current Liabilities
The statement of financial position is commonly prepared in classified format where

there is a distinction between current and noncurrent items. Below is the guidance
on how to distinguish current assets and current liabilities.
Current assets are asset that are:
1. Expected to be sold, consumed, or realized in the entity’s normal operating

cycle;
2. Held primarily for trading;
3. Expected to be realized within twelve months after the reporting period; or
4. Cash or cash equivalents, unless restricted.
Assets that are not qualified in any of the items above are considered as noncurrent
assets.
Current liabilities are liabilities that are:
1. Expected to be settled in the entity’s normal operating cycle;

2. Held primarily for trading;
3. Due to be settled within twelve months after the reporting period; or
4. The entity does not have an unconditional right to defer settlement of liability
for at least twelve months after the reporting period.
Liabilities that are not qualified in any of the items above are considered
as noncurrent liabilities.
Normal operating cycle means the time between the acquisition of assets for
processing and their realization in cash. For example, a manufacturing business has
a normal operating cycle of two months. From the purchase of raw materials, to
production, to delivery, and to the collection of cash from the sale of the
manufactured goods can take two months, therefore the operating cycle is two
months. Other businesses have longer operating cycles that can take more than
twelve months.
Realized means to be converted into cash. When an item is expected to be

converted into cash for the next twelve months, then it is considered a current asset.
Some cash accounts are restricted for noncurrent use, therefore these cash
accounts are considered noncurrent (like restricted for purchase of land and
equipment). When cash is restricted for current purposes, then it is still part of current
assets (like for tax fund, payroll fund, petty cash fund).
When the liability is current and the entity has no right to extend the liability for more
than twelve months from the original due date, then the liability remains current.
When the entity obtains the extensions agreement after the reporting date, then the
liability remains to be part of current liabilities. But when the extension agreement is
obtained before the reporting date, then the liability will be reclassified as
noncurrent.
Presentation of Statement of Comprehensive Income

The statement of comprehensive income is where the financial performance of
the entity is indicated. The primary users’ questions about the following can be
answered on this part of the financial statements:
1. Did the entity earn profit during the year?

2. What are the sources of income of the entity?
The statement of comprehensive income can be prepared either as:
1. A single statement presentation, or

2. A two statement presentation.
A single statement presentation joins in a single statement the information on
the components of the entity’s profit or loss and the components of the entity’s
other comprehensive income while a two statement presentation presents: first
is the statement of profit or loss and second is the statement of comprehensive
income.
The profit or loss is computed by subtracting the income less expenses, excluding
the components of other comprehensive income. Commonly, the items that form
part of the computation of profit or loss are income and expenses accounts that
are used in the primary business purpose of the entity, while the items in the
other comprehensive income are accounts that are not used in the primary
business purpose of the entity.
Below is an example of single and two statement presentation.
giseparate lang any statements !

Statement of profit or loss
The profit or loss statement includes income and expenses accounts that are used
in the primary business purpose.
Income accounts are required to be presented based on the nature of income. For
example, income from sale of goods is separately presented from income from
interest on loans.
Expenses accounts may be presented using either the nature of expense method or
function of expense method.
Nature of expense method presents the expenses based on the nature of the
expense. For example, all personnel expenses, utility expenses, depreciation and
amortization expenses are presented as one line item.
Function of expense method presents the expenses based on the function of the
expense into the business. For example, expenses in cost of goods sold,
administrative costs, and distribution costs are presented as separate line items.
Below are examples of presenting the profit or loss in nature of expense account
(left) and function of expense method (right).
Statement of comprehensive income
Other comprehensive income are income and expenses accounts that are not
used in the primary business purpose of the entity. These are separated from the
profit or loss computation since these accounts, although it increases or
decreases the equity by definition based on the conceptual framework, but these
items are not yet due as part of the equity that are distributable to the owners.
The components of other comprehensive income are:
1. Changes in revaluation surplus;

2. Remeasurement of the net defined benefit liability or asset;
3. Unrealized gains or losses on investments designated under fair value
through other comprehensive income (FVOCI)
4. Unrealized gains or losses from translating the financial statements of a
foreign operation; or
5. Effective portion of gains and losses on hedging instruments in a cash flow
hedge.
These income and expenses under other comprehensive income or OCI

accumulates in separate equity accounts until certain conditions are met.
Some items in the OCI, until certain conditions are met, are reclassified to profit or
loss while some items in the OCI are not reclassified to the profit or loss, but are
added or subtracted directly to the retained earnings, until certain conditions are
met. Further discussion on the certain conditions will be done in the higher
accounting subjects.
The total comprehensive income is equal to the profit or loss plus other
comprehensive income.
Below is an example of the statement of comprehensive income.
Presentation of Statement of Changes in Equity

The statement of changes in equity is where the details of the changes in equity
accounts are shown. The questions of the primary users about the following can
be answered on this report:
1. Why did the capital account increase or decrease during the year?
2. What is the amount of income that is available for distribution to the
owners? Retained = accumulated profits/loss
earnings
The statement of changes in equity shows the following information:
1. The changes in the capital accounts of the owners;

2. The changes in the accumulated profits or retained earnings;
3. The changes in the accumulated other comprehensive income; or
4. The effects of the changes in accounting policies or correction of prior
period errors.
When there are retrospective adjustments and restatements due to changes in

accounting policies, the effects to these retrospective applications are included
in the retained earnings, especially when these changes affect the equity
element of the financial statements.
owner changes =
equity
income
non-owner changes = comprehensive
Below is an illustration of a statement of changes in equity.

Financial Statements

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Presentation of Financial Statements

Overview of the Financial Statements

The basic relationship of the financial statements is shown below:

1. Can the entity pay its incoming liabilities?

Accountants should be able to prepare a statement of financial position in

The statement of financial position may be presented as classified or unclassified.

Shown below are examples of statements of financial position. To the left is an

The statement of financial position is commonly prepared in classified format where

Current assets are asset that are:

1. Expected to be sold, consumed, or realized in the entity’s normal operating

Current liabilities are liabilities that are:

1. Expected to be settled in the entity’s normal operating cycle;

Realized means to be converted into cash. When an item is expected to be

Presentation of Statement of Comprehensive Income

1. Did the entity earn profit during the year?

The statement of comprehensive income can be prepared either as:

1. A single statement presentation, or

Below is an example of single and two statement presentation.

giseparate lang any statements !

The components of other comprehensive income are:

1. Changes in revaluation surplus;

These income and expenses under other comprehensive income or OCI

Presentation of Statement of Changes in Equity

The statement of changes in equity shows the following information:

1. The changes in the capital accounts of the owners;

When there are retrospective adjustments and restatements due to changes in

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