Financial Statements – economic activities and its result.

- internally for economic decisions

- representation of the company’s management

- fairly presented and comparable to other enterprise

Notes* affected by accounting Policies

Accounting Policies – specific principles applied in preparing FS

Note* Must comply to financial reporting framework

Note: All components of FS except Cash flow is prepared with accrual basis

Components of Financial Statement

1. Statement of Financial Position

2. Statement of Comprehensive Income
3. Statement of Cash Flow
4. Statement of Changes in Equity
5. Notes in Financial Statement

1. Statement of Financial Position

- balance sheet

- Basic Accounting Equation Assets = Liabilities + Owner’s Equity

PAS 1 – Presentation of Financial Statements

a. Presentation of Assets and Liabilities using Current and Non-Current

Note* Unless presentation based on liquidity

- Most liquid to less liquid assets

- most urgent to least urgent liabilities

- aids the ability to meet its current obligations

Current Assets (par. 66 IAS 1)

a. Consumption in normal operating cycle (inventories, prepaid expenses)

b. For trading purposes (financial assets (profit or loss, e.g. investment in debt or equity)
c. Realized in 12 months after reporting period (trade receivable)
d. Cash or cash equivalents , or settle transaction at least 12 months (non-trade receivable, e.g.
interest receivable)

If the criteria is not meet then it is a NON-CURRENT ASSETS

Non-Current Assets

a. PPE
b. Intangible Assets
c. Investment Property / restricted
d. Financial assets not expected to realized (comprehensive income)

Operating Cycle- from acquisition of asset to the conversion on cash or cash equivalents

NOTE* if not stated, it is assumed to be 12 months

Current Liabilities

a. Settled in normal operating cycle

b. For trading Purposes
c. Settled in 12 months after the reporting period
d. Does not have unconditional right to defer/ delay settlement of the liability for at least 12
months after the reporting period

1. Trade Payables
2. Accrued Expense
3. Dividends Payable
4. Unearned Revenues
5. Long terms of Notes payable due every 12 months

Non-Current Liabilities

a. Long term notes due more than 12 months

b. Bonds Payable due beyond 12 months
c. Long term Notes due within 12 months but extended on long term after negotiation \
d. Share Dividend Payable

Equity

- depends on the form of business organization

b. Sole proprietorship

- Only Capital Account of proprietor

c. Partnership

- Equity balance with the sum of capital and drawing accounts of the partner, each
partners’ equity is presented separately

d. Corporation

- Presented According to source

- contributed capital

- retained earnings

- cumulative other comprehensive income

Contributed Capital

- Share Capital (preference or/and ordinary share)

Share Premium or Additional CC

- excess in CC

Cumulative Other Comprehensive Income (OCI)

- equity arise from non-owner trasaction

1. revaluation surplus

e.g. Land is purchase on Jan 1 2020 for 100,000. On Jan 1 2025, revaluation of land and
now is worth 500,000 so there is 400,000 revaluation surplus

2. Unrealized gains or losses

e.g. increase of market value of share ( from P40 per share to P80 per share). There is
P20 per share x shares is unrealized gain or loss

3. Foreign currency translation adjustments

Exchange rate like from parent company to subsidiary company

4. Actuarial gains or losses on defined benefit pension plans

STATEMENT OF FINANCIAL STATEMENT

Forms:

a. Account Form- T account (asset is on left and liability and equity on right)
b. Report Form- Continuous format
c. Financial Position form- working capital

- Working Capital = Current Asset – Current Liability

NOTE* SMEs do not report OCI

Statement of Comprehensive Income

- performance of the entity

Two Sections

a. Profit and loss section (income statement)

- interest expense or finance cost is required
- income tax is presented separately
b. OCI

Forms:

1. One statement form

 Combined two sections
2. Two-statement form
Separate sections

Two Methods in Presentation

1. Function Method
- merchandising or manufacturing
- expenses is COGS, Selling expense, and general and administrative expense

a. Distribution Cost or Selling Expense

 Sales Salaries,
 Sales Commissions,
 Advertising Expense,
 Store Supplies,
 Delivery Expense,
 Depreciation of Store Equipment
b. Administrative Expense
 Office Salaries
 Office Supplies
 Taxes and Licenses
 Bad Debt
 Depreciation of Office Equipment

c. Other Expenses and Loses

 Loss on Sale of Investment or Property or Casualty Losses

d. Finance Cost
 Interest
 Finance Charge

a) Other Income
 Gain on FVPL
 Gain on sale
 Dividend Income

2. Nature Method
-any type of business

- expenses is presented based on ledger

NOTE* Gain on FVOCI need income tax = Gain on FVOCI x (100% - income tax percentage)

NOTE* Large or/and public publicly accountable entities are required earning per share

Earning per Share

- Profit / weighted average outstanding shares

STATEMENT OF CASH FLOWS

- inflows and outflows of operating, investing and financing

Operating Activities

 Income Statement
 Current Asset
 Current Liability

Investing Activities – Cash Transactions affects asset not in Normal Operating Cycle

 Non-current Assets

Financing Activities

 Non-current Liability
 Shareholder’s Equity

Not Included but Shall disclose

a. Acquisition of assets either by assuming directly related liabilities pr by means of a finance lease
- like renting but have option to buy on the end of term

b. Acquisition of an entity by means of an equity issue

- ABC company bought XYZ company using ABC company's shares

c. Conversion pf debt to equity

- e.g. ABC company has debt to X, instead of paying ABC offers shares and X accept it

d. Declaration and issuance of bonus issue (stock dividends)

Methods of Presenting Cash Flow from Operating Activities

Direct Method

- Gross Cash Receipts and Gross Cash Payments

Indirect Method

- Starts with Profit before Taxation and adjust it

a) Working Capital
 Inventories
 Operating Receivables
 Payables
b) Non-cash Items
 Depreciation
 Unrealized foreign exchange gain or losses etc.
c) Items associated with investing or financing activities
Inflows

 Depreciation and Amortization

 Losses
 Increase in A/R
 Increase in Accounts Payable

Outflows

 Gains
 Increase in Inventories
 Increase in Prepaid expense

Statement of Changes in Equity

Notes to the Financial Statements

a) Basis for presentation of FS

 Company Information
 Summary of Significant Accounting Policies
o Criteria determining which investments are treated as cash equivalents
 Financial Framework
 Measurement of Classes
 Useful lives
 Accounting Methods

b) Supporting Schedule
 Balance of Inventories
 PPE
 Intangible Assets
 List of items

c) Other disclosure
 Contingent Liability – legal claims
 Contractual Commitments
 Events after reporting period that may be relevant
 Leasing Agreement

Effects of Events After the Reporting Period

- requires assessment from the management

- favorable and unfavorable events

- from end of reporting period until issuance of FS

Date of Issuance = Date of approval and authorized by managements

Two Types of Events

a) Adjusting Period – events at the end of reporting period

1) Settlement of court case (Liability)
2) Receipt of information of asset impaired
- e.g. bankruptcy (impairment loss and derecognition of receivables)
3) Gains or loss on sale
4) Profit-sharing or bonus payments
5) Fraud or error (correction)
b) Non-adjusting Events – events after the end of reporting period that does not need adjustment

- can be ignored

- be disclosed if material (nature of an event and estimate of financial effect)

1) Major Business Combination or disposal of a major subsidiary

2) Discontinue business
3) Major purchase and disposal of assets
4) Destruction of major plant
5) Major reconstruction
6) Major ordinary share transaction
7) Abnormally Large Changes (Inflation)
8) Change of tax rate
9) Contingent liabilities
10) Major litigation

- fixing court disputes