Financial Statement
o Definition: structured financial representation of
the financial position and performance of an
entity.
o Preparation: on accrual basis except for cash
flow information.
o Components: 6 components
1. Statement of Financial Performance
2. Income Statement
3. Statement of Comprehensive Income
4. Statement of Changes in Equity
5. Statement of Cashflows
6. Notes, comprising a summary of
significant accounting policies and
other explanatory information
o Objective: to provide information about the
financial position, financial performance and
cash flows of an entity that is useful to a
wide range of users in making economic
decision.
In order to achieve this objective, financial
statements provide information about:
 Assets
 Liabilities
 Equity
 Income and expenses (including gains
and losses)
 Contributions by and distributions to
owners in their capacity as owners.
 Cash flows
Statement of Financial Position:
o Composition: assets, liabilities and equity at
particular moment of time.
o Pertains to the liquidity, solvency, and the need
of the entity for additional financing.
Statement of Financial Performance:
o AKA: Results of Operation
o Composition: revenue, expenses and net income
or loss of an entity for a period of time
o Performance, defined: the level of income
earned by the entity through the “efficient” and
“effective use” of its resources.
o Presentation: in the Income Statement and
Statement of Comprehensive Income.
Cash Flows
o Definition: the cash receipts and payments
arising from the operating, investing and
financial activities of the entity.
o Presentation: in the Statement of Cash Flow
o Usefulness (objective): in assessing the ability of
the entity to generate cash and cash equivalents.
Financial Reporting
o Definition: the provision of financial
information about the entity to external users
that is useful to them in making economic
decisions and accessing the effectiveness of the
entity’s management.
o Done through the presentation of the annual
financial statements.
o However, financial reporting encompasses not
only financial statement but also other means of
communicating information that relates directly
or indirectly to the financial accounting process,
such as:
1. Financial highlight
2. Summary of important financial figures
3. Analysis of financial statement
4. Significant ratios
o General Objective of financial reporting:
“Provide information that is useful for decision
making”
Conceptual Framework for Financial Reporting,
states:
“the objective of financial reporting is to provide
financial information about the reporting entity
that is useful to existing and potential investors,
lenders and other creditors in making decisions
about the providing resources to the entity.
o Specific objective of Financial Reporting:
As stated by the Conceptual Framework for
Financial Reporting:
1. To provide information useful in making
investment and credit decisions about
providing resources to the entity.
2. To provide information useful in
assessing the cash flow prospects of the
entity
3. To provide information about the entity’s
resources, claims and changes in
resources and claims.
o Targets users of Financial Reporting Have the most
 Existing and potential investors critical and
immediate need for
information of
  Lenders
 Other creditors
a primary user of financial information
– parties that provide resources to the entity.
Note: information that meets the needs of the specified
primary users is likely to meet the needs of others users,
such as:
 Employees
 Customers
 government and their agencies.
o Limitations of Financial Reporting:
 Do not and cannot provide all of the
information that existing and potential
investors, lenders and other creditors need.
 Do not design to show the value of a
reporting entity – but rather “estimate” the
value of the entity.
“because not all people deserve to know your real
worth”
Responsibility for financial statements
Q1: Who shall have the primary responsibility to prepare
and present the financial statement?
- Management
Q2: What are the responsibilities of the Board of
Directors?
- In discharging its responsibilities, reviews and
authorizes the financial statement for issue
before submitting to shareholders of the entity.
General features of financial statements:
a fair presentation
b going concern
c accrual basis
d materiality and aggregation
e offsetting
f frequency of reporting
g Comparative information
h Consistency of preparation
A. Fair Presentation
B.
Q3: How is “fair presentation” achieved?
– if the financial statements are prepared in
accordance with the Philippine Financial
Reporting Standard which represent the GAAP
in the Philippines, with additional disclosure, if
necessary (presumed fairly presented).
Fair Presentation, defined
Faithful representation of the effects of transactions and
other events in accordance with the definition and
recognition criteria for assets, liabilities, income and
expenses laid down in the Conceptual Framework.
Q4: What does fair presentation require the entity to do?
- Select and apply accounting policies in
accordance with PFRS
- Present information, including accounting
policies, in a manner that provides relevant and
faithfully represented information.
- Provide additional disclosure if necessary, for
the users to understand the entity’s financial
statement.
Q5: Can an entity rectify inappropriate accounting
policies by disclosure of accounting policy or by notes
or explanatory information?
- No.
When an entity departs from a standard, entity should
disclose the ff:
a Management has concluded that FS is
fairly presented
b It has complied with applicable
standards and interpretation, except that
it has departed from a particular
requirement to achieve fair presentation.
c The title of the standard or interpretation
from which entity has departed. The
treatment adopted.
d Financial impact of the departure on
each item that would have been reported
in complying with the requirement
B. Going Concern
 AKA: continuity assumption
Assets are normally recorded at original
acquisition cost. As a rule, market value is
ignored unless required by a standard.
e.g. PAS 16 requires that PPE should be
subsequently recorded using either: Cost model
or Revaluation model.
Relevance of Going Concern
Going concern is relevant when management
shall make an estimate of the expected outcome
of future events, such as recoverability of AR
and useful life of noncurrent assets (foundation
of cost principle).
Q6: In what instance the going concern shall be
suspended?
- Financial statement shall be prepared on a going
concern basis unless management intends to
liquidate the entity or cease trading or has no
realistic option but to do so.
Q7: What shall the entity do if there are uncertainties
regarding the ability of the entity to continue as a going
concern?
- Uncertainties shall be fully disclosed
“If the financial statements are not prepared on
going concern basis, such fact shall be disclosed
together with the measurement basis and the
reason thereof (p. 10). “
Q8: In making assessment about the going concern
assumption, management shall take into account all
available information about the future which is?
- At least twelve months from the end of reporting
period.
C. Accrual Basis
 Entity shall prepare the financial statement on
accrual basis
Recognition using accrual method
- Income is recognized when earned regardless of
when received
- Expense is recognized when incurred regardless
of when paid.
Accrual accounting most essential in:
The recognition of
- Accounts receivable
- Prepaid expense
- Accrued expense
- Deferred income
- Accrued income
D. Materiality and Aggregation
o An entity shall present separately
 each material of “similar” items
 items of “dissimilar” nature or function
unless they are immaterial
Q9: What is the final stage in the process of aggregation
and classification?
- Presentation of condensed and classified data
which for line items in the financial statement.
GR Assets and liabilities, and income and
expenses, when material, shall not be offset
against each other.
XP Offsetting may be done when it is required or
N permitted by another PFRS
INVENTORY
Q10: What shall the company do if the line item is not
individually material?
- It is aggregated with other items either in those
statements or in the notes
- Example: an investor’s share in the net income
of an associate is presented as a separate line
item in the income statement, however, if this
amount is not individually material, it may be
aggregated with other income.
Q11: When is an item material?
- Relative
- There is no strict or uniform rule for determining
whether an item is material or not.
- Very often, this is dependent on good
judgement, professional expertise and common
sense.
General guide for materiality:
“An item is material if knowledge of it would affect the
decision of the informed users of the financial
statement”
Materiality is a relativity
Q12: Materiality of an item depends on?
- Relative size rather than absolute size.
- What is material for one entity may be
immaterial for another.
-
Factors of Materiality
a. Relative size of the item in relation to the
total of the group to which the item belongs
(e.g. the amount of advertising cost to total
administrative expense)
b. Nature of the item – an item may be
“inherently” material because of its very nature
it affects economic decision
e.g. A bribe of 20,000php is material to both
small and large entities.
E. Offsetting
- See offsetting examples on p.14

 Cash on hand F. Frequency of Reporting

Presented as one Q13: An entity shall present a complete set of financial
 Petty cash fund
item in: statements at least?
 Cash in bank - Annually
 Cash equivalent “CASH AND CASH
EQUIVALENT”
 Finished goods
 Goods in process
 Raw materials
Q14: What shall an entity do if it changes the end of the
reporting period and presents financial statements for a
period longer or shorter than one year?
- The entity shall disclose:
1. The period covered by the financial
statements
2. The reason for using a longer or shorter
period
3. The fact that amounts presented in the
financial statement are not entirely
comparable.

G. Comparable Information

Q15: How is “comparable” information achieved? GR Entity shall disclose comparative information
- Through consistency in respect of the previous period for all
amounts reported in the current period’s
F. Consistency of Preparation financial statement.
Principle of Consistency XP When permitted or require otherwise by PFRS.
Requires that the accounting methods and practices shall N
be applied on a uniform basis from period to period.

Q16: Does consistency mean there is no change in

accounting method can be made?
- No. It is inappropriate for an entity to leave
accounting policies unchanged when better and
acceptable alternatives exist.
- Therefore, if the change will result to
information that is faithfully represented and
more relevant to the users, then such change
should be made.
Change in the presentation and classification criteria:
a. When it is required by another PFRS
b. If significant change will demonstrate a more
appropriate revised presentation and
classification

Q17: What is the responsibility of an entity when there is

a change in the presentation and classification?
- An entity should fully disclose the change and
the peso effect of the change.
Third Statement of Financial Position
Required when an entity:
a. Applies an accounting policy retrospectively
b. Makes retrospective restatement of items in the
financial statement
c. Reclassifies items in the financial statement

Q18: What are the 3 statements of financial position?

1. The end of the current period
2. The end of the previous period
3. The beginning of the earliest comparative
period.