Mod4 Part 1 Essence of Financial Statements

ESSENCE OF FINANCIAL
S TAT E M E N T S
MO DULE 4
LEARNING OBJECTIVE:
After studying this module, students should be able to:
1. Explain the usefulness of financial statements.

2. Demonstrate skills in the preparation of financial
statements.
3. Explain how the financial statements are interrelated.
•Financing activities (Roots):
- Owners contribute cash and receive equity
shares in return.
- Creditors loan cash
• Investing activities (Trunk and branches):
Once the capital is collected it is invested in
producing assets,
• Operating activities (Fruit):
The assets are operated to produce goods
The Net Income of these sales can be used in three

ways:
1. Reinvested in the producing assets
2. Returned to the creditors
3. Returned to the owners as dividends

Financial Statements are designed to measure different aspects
of the business (the fruit tree):
• The Statement of Financial Position
Is a picture of the tree (fruit, branches, trunk & roots) at a certain point in time.
It includes assets (inventory of goods and producing assets) and financing sources
of the business.
• The Statement of Comprehensive Income

Accounts for all activities involved in the operation of the business (growing and
selling the fruit) over a period of time. It contains a list of all operating expenses and
revenues of the business.
• The Statement of Changes in Owner’s Equity reports the changes in the equity
account of the proprietor of the business while
The Statement of Changes in Retained Earnings
Reports how much of the net income from the operating activities are retained by
the business and how much paid as dividends.
• The Statement of Cash Flows

Details all the cash inflows and outflows that occurred over a period of time
associated with the operating (fruit), investing (trunk and branch) and financing (roots)
activities of the business.
WHY ARE FINANCIAL
STATEMENTS IMPORTANT?
• Financial statements are important because they contain significant information about a
company's financial health.
• It help companies make informed decisions since they highlight which areas of the company
provide the best ROI (return on investment).
• It provide a snapshot of a corporation's financial health, giving insight into its performance,
operations, and cash flow.
• Shareholders need them to make informed decisions about their equity investments,
especially when it comes time to vote on corporate matters.
CONTINUED...
• In order to make better decisions, it is important for them to analyze their
stocks using a variety of measurements, rather than just a few.
• Some of the metrics available include profitability ratios, liquidity ratios, debt
ratios, efficiency ratios, and price ratios.
STEP 7 : THE FINANCIAL STATEMENTS
After the preparation of the Worksheet is completed, the information it provides are now used to create the
financial statements which are the results of routine transactions of the accounting process. The primary
statements comprises of:
A. Statement of Comprehensive Income
B. Statement of Financial Position
C. Statement of Changes in Owner’s Equity
D. Statement of Cash Flows
E. Notes to FS, comprising a summary of significant accounting policies and other explanatory notes
comparative information prescribed by the standard.
F. Other titles for the statements other than those stated above which are required to be
presented with equal prominence.
These financial reports were used by the stakeholders to assess the business and to evaluate management’s
stewardship of the entity’s economic resources.
PREPARATION OF FINANCIAL
STATEMENTS
• The financial statements are the end product of the accounting process. Information from the
journal and the ledger are meaningless to most users unless they are summarized and
communicated through the financial statements. This is the very purpose of the accounting
system and the ultimate guide is the Worksheet.
A. STATEMENT OF COMPREHENSIVE INCOME (in conformity with PAS and PFRS)
 It is usually the first statement prepared by the bookkeeper or accountant.
 It shows the results of business operations for a given period and evaluates the success of the
business through its operating performance.
 It communicates to the interested users the profitability of the business.
 It covers a certain accounting period, monthly or annual and it presents revenues earned, expenses
incurred, gains and losses from other activities of the business and the NET INCOME or NET LOSS
recognized during the period.
CONTINUED...
Two major parts:
1. Heading – name of the business; name of the report and date of the statement written as “For
the year ended”, “For the month ended” or “For quarter ended” which indicates the
coverage period of the statement.
2. Body – it contains the two (2) accounting elements : INCOME and EXPENSES.
SOME GUIDELINES TO FOLLOW:

 Concentrate only on the section of statement of comprehensive income in the worksheet.
 The data on the credit side represents Revenues.
 The data on the debit side represents costs and expenses.
 The amount of net income or net loss should equal the amount in the worksheet.
B. STATEMENT OF FINANCIAL POSITION
 A structured financial statement that shows the resources employed by the business, and the
sources from which these resources were acquired.
 There are two claims against the assets of the business-claim of the creditors (technically known
as Liabilities) and claim of the owners (Capital).
 The SFP indicates Liquidity and Solvency status of the business.
Liquidity-the ability of the business to pay its currently maturing obligations.
Solvency –the capacity of the business to settle its non-current liabilities and still remain
stable.
 It presents three accounting elements-ASSETS, LIABILITIES and OWNER’S EQUITY and is
prepared at a given date in conformity with the requirements of PAS and PFRS.
 The date “As of” implies that the information presented in the statement is true and correct only
as of that date.
 It follows the line item presentation and the composition of the line item are properly disclosed
in the notes to financial statements.
 There two forms to present the SFP are: Account form and Report form.
GUIDELINES TO BE OBSERVED:
• The title of the statement is written at the center.
• The Asset and Liability section are properly divided into two parts: CURRENT
portion and the NON-CURRENT portion.
• The account titles are properly indented and in cases where there are contra-
accounts like allowance for Doubtful accounts and Accumulated depreciation,
the related main account is short extended and only the net amount or net
realizable value, is extended to the next money column.
• The final amount which is the Total Assets should be aligned with the Total
Liabilities and Owner’s Equity
The Philippine Financial Reporting Standards (PFRS) requires that the presentation of financial statement
follows the aggregation principle and line item concept.
As a minimum requirement , the Statement of Financial Position shall include the following:
For the Current Asset section
a. Cash and Cash equivalent
b. Financial Assets
c. Trade and Other Trade Receivables
d. Inventories
f. Prepaid Expenses
For the Non-Current Asset Section

a. Property,Plant and Equipment
b. Long-term Investments
c. Intangibles
d. Other Non-Current Assets
For Current Liabilities
a. Trade and Other Payables
b. Short-term bank borrowings
c. Current portion of long-term obligations
d. Current provisions
e. Current tax Liabilities
For the Long-term Liabilities

a. Bank Loan Payable
b. Mortgage Payable
c. Deferred Tax Liability
The Statement of Financial Position
The balance sheet provides a picture of the company’s financial situation at one point
in time. It is based on the fundamental accounting equation:
Assets = Liabilities + Equity
The capitalist/entrepreneur/proprietor own the company. It’s net worth is (Assets – Liabilities) = Equity.
This is called book value of the company which differs from market value.
Assets:
Items and right acquired through objectively measurable transactions that can be used
in the future to generate economic benefits.
Liabilities:
Primarily a firm’s debt and payables. The total amount of liabilities is the portion of
assets that a firm has borrowed and must repay.
Owner’s Equity
Consists of contributed capital and temporary withdrawals

C. THE STATEMENT OF CHANGES IN OWNER’S EQUITY
 It presents the different elements that affect the equity of the owner or owners
during a particular period.
 The presentation starts with the beginning capital of the owner or owners and
adjusted by the following items:
1. Net Income or loss during the period
2. Additional investments
3.Temporary withdrawal of capital
 The net income and additional investments are added to the beginning capital
while the Net Loss and temporary withdrawals are deducted.
o!
a tp
al a m
S
*Ma’am Wennie*

Mod4 Part 1 Essence of Financial Statements

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ESSENCE OF FINANCIAL

After studying this module, students should be able to:

1. Explain the usefulness of financial statements.

The Net Income of these sales can be used in three

1. Reinvested in the producing assets

2. Returned to the creditors

3. Returned to the owners as dividends

• The Statement of Comprehensive Income

• The Statement of Cash Flows

SOME GUIDELINES TO FOLLOW:

For the Non-Current Asset Section

For the Long-term Liabilities

Assets = Liabilities + Equity

Consists of contributed capital and temporary withdrawals

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