What is “Financial Statements”? What is “Equity”?

• Equity is simply assets minus liabilities.

• Financial statements are the structured presentation of • Other term for equity are capital, net assets, and net
financial position and results of its operations. worth.
• It is the end product of the accounting cycle.
• The financial statements provide information on: What are the classification of Assets?
• How much resources are controlled by an entity • Assets are normally classified as current and non-
resources were generated (financial position) current.
• How well the entity performed during a certain period Current Assets- Realized within 12months from the end of
(results of the reporting period.
operation) • “Realized” means converted into cash or claim for cash.
• All assets that are not classified as current assets are
What are the five major kinds of considered non-current.
Financial Statements?
• Statement of Financial Position Current Assets:
• Statement of Profit/Loss and Other Comprehensive Cash
Income Accounts receivable
• Statement of Changes in Equity Allowance for bad debts
• Statement of Cash Flows Notes receivable
• Notes to Financial Statements Inventory
Prepaid supplies
What are the elements of Financial Prepaid rent
Statements? Prepaid insurance
Elements:
• Assets; Non-Current Assets
• Liabilities; Land
• Equity/Capital; Building
• Income; and Equipment
• Expenses Accumulated depreciation

What is “Assets”? What are the classification of Liabilities?

• Assets are the economic resources you control that have • Liabilities are also classified as current and non-current.
resulted from past events and can provide you future • Liabilities are classified as current when they are
economic benefits expected to be settled within 12 months from the end of
Elements: the reporting period.
Control
Past events Current Liabilities
Future Economic Benefits Accounts payable
Interest payable
What is “Liabilities”? Salaries payable
Liability Utilities payable
Liabilities are the entity’s present obligations that Unearned income
have resulted from past events and can require the
company to give up resources when settling them. Non Current Liabilities
Essential Elements in the definition of Liabilities: Notes payable
• Present Obligation Loans payable
• The responsibility of an entity to pay someone because Mortgage payable
of an obligating event.
• Obligating Event is an event that creates either (a) a
legal obligation or (b) Constructive obligation.
• Giving up of resources to settle the obligation
Is it possible to record a receivable/payable Formula:
as current even if it is collectible/payable Land xx
beyond 12 months? Building xx
• Yes. Some receivables and payables are presented as Acc. Depreciation- Bldg (xx)
current even if they are collectible or payable beyond 12 Equipment xx
months. Acc Depreciation- Bldg (xx)
RECEIVABLES and TRADE PAYABLES.
• Trade Receivables are receivables arising from the sale The line items in the statement of Financial Position
of goods or services LIABILITIES
• Trade Payables are obligations arising from purchases of • Trade and other payables
inventory that are sold in the ordinary course of business. • Short-term borrowings
• Current portion of long-term borrowings
Forms of Balance Sheet • Income tax payable
• Report Form-Assets, liabilities, and equity are presented
in a vertical manner Trade and other Payables
• Account Form-Assets, liabilities, and equity are Formula:
presented in horizontal manner somehow similar to the Accounts Payable
accounting equation. Notes Payable*
Interest Payable *
The line items in the Financial Position Salaries Payable*
ASSETS Utilities Payable *
• Cash and Cash Equivalents Unearned Income
• Trade and other receivables Trade and Other Receivables
• Inventory
• Prepaid Assets/Expenses
-PPE

Cash and Cash Equivalents What is “Statement of Comprehensive

Formula: Income”?
Cash xx
Cash Equivalents xx The Statement of Comprehensive Income is a financial
Cash and Cash Equivalents xx statement that presents the success or failures of the
Cash- includes cash on hand and cash on bank operation of company for a given period, in terms of
Cash Equivalents- are short term debt securities that are profitability.
acquired 3 months prior the maturity date.
What are the elements of the Statement of
Trade and Other Receivables Comprehensive Income?
Formula: The following are the elements of the Statement of
Accounts Receivable Comprehensive
Allowance for bad debts Income:
Notes Receivable* • Income
Advances to Supplier* • Expenses

Prepaid Assets/Expenses What is “Income”?

Formula: • Income are increases in economic benefits during the
Prepaid Supplies period in the terms of (1) inflows or enhancement of
Prepaid Rent assets (2) liabilities that decreases of results in increases in
Prepaid Insurance equity, other than those relating to investment by the
Prepaid Assets business owners
Property, • Income includes both revenue and gains.
What is the difference between revenue
and gains?
• Revenue arises in the course of the ordinary activities
of a business and is referred to by a variety of different
names including sales, fees, interest,
dividends, royalties, and rent.
• The revenue earned by a service business from
rendering services is commonly referred to as “Service
Fees”.
• The revenue earned by a merchandising business from
its sales of goods is commonly referred to as “Sales”.
• Gains represent other items that meet the definition of
income and may or may not arise in the course of the
ordinary activities of the entity
What is “Expenses”?
•Expenses are decreases in economic benefits during the
period in the form of (1) outflows or depletions of assets
or (2) increases of liabilities that result in decreases in
equity, other than those
relating to distributions to the business owners.
•Expenses include both expenses and losses
What is the difference between expenses
and losses?
• Expenses arise in the course of the ordinary activities of
the business.
• Losses represents other items that meet the definition
of expenses and may,
or may not, arise in the course of ordinary activities of the
entity.
What is the formula of profit/loss?
• Income – Expenses = Profit/Loss
• If income is greater than expenses, the difference is
profit.
• If income is less than expenses, the difference is loss
What are the different methods of
presenting expenses in the statement of
comprehensive income?
•Expenses may be presented in the statement of
comprehensive income using either of the following
methods:
• Nature of Expense method
•Function of Expense method (Cost of Sales method)
What are the major categories of expenses
under the function of expense method?
The following are the major categories of expenses under
the function of
expense method:
• Cost of Sales (Cost of Goods Sold)
• Distribution Costs (Selling Expenses)
• Administrative Expense (General and administrative
expenses)
• Finance Cost (Interestexpenses)
• Income Tax Expenses
What are Distribution Costs/Selling Expenses?
• Distribution Costs are costs attributableto selling
activities.
• Examples:
• Freight-out
• Sales commission
• Advertising Expenses
• Salaries of sales personnel
• Depreciation on delivery equipment (Freight Out)
• Rent pertaining to space occupied by sales department
What are Administrative Expenses?
• “Administrative expenses” is a residual category of
expenses, meaning, an
expense that does not qualify under the other categories
is included in
this category.
• Examples:
• Insurance Expense
• Taxes and licenses
• Salaries of non-sales personnel
• Depreciation of assets not used by the sales department
• Rent pertaining to office space