PFM 4

Presentation of Financial Statements

FINANCIAL STATEMENTS
Financial Statements are the means by which the information accumulated and processed in
financial accounting is periodically communicated to the users.

Financial statements are structured financial representation of the financial position and financial
performance of an entity.

General purpose financial statements

General purpose financial statements are those statements intended to meet the needs of users
who are not in the position to require an entity to prepare reports tailored to their particular
information needs.

Components of financial statements

A complete set of financial statements comprises the following components:
1. Statement of financial position
2. Income statement
3. Statement of comprehensive income
4. Statement of changes in equity
5. Statement of cash flow
6. Notes, comprising a summary of significant accounting policies and other explanatory
information.

Objective of financial statements

The objective of general purpose financial statements is 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 decisions.

Financial Position
The financial position comprises the assets, liabilities, and
equity of an entity at a particular moment in time.

Financial Performance
The financial performance comprises the revenue, expenses and
net income or loss of an entity for a period of time.

The financial performance of an entity is also known as results of

operations and is portrayed in the income statement and
statement of comprehensive income.

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Cash flows
Cash flows are the cash receipts and cash payments arising from operating, investing and
financing activities of the entity.

Financial reporting
Financial reporting is the provision of financial information about an entity to external users that
is useful to them in making economic decisions and for assessing the effectiveness of entity’s
management. (Valix et. al., 2017).

Responsibility for financial statements

The management of an entity has the primary responsibility for the preparation and presentation
of financial statements.

General features of financial statements

1. Fair Presentation and compliance with PFRS
The financial statements shall present fairly the financial position, financial performance
and cash flows of an entity.

2. Going Concern
Going concern means that the accounting entity is viewed as continuing in operation
indefinitely in the absence of evidence to the contrary.

3. Accrual Basis
Accrual accounting means that the income is recognized when earned regardless of when
received and expense is recognized when incurred regardless of when paid.

4. Materiality and Aggregation

An entity shall present separately each material class of similar items.

There is no strict or uniform rule for determining whether an item is material or not. Very
often, this is dependent on good judgment, professional expertise and common sense.
However, a general guide may be given to wit: An item is material if knowledge of it
would affect the decision of the informal users of the financial statements.

5. Offsetting
Assets and liabilities, income and expenses, when material, shall not be offset against
each other.

Annotations: Example of offsetting that is not really allowed are those significant
amount of gains and losses, it should be reported separately.
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6. Frequency of reporting
An entity shall present a complete set of financial statements at least annually.

7. Comparable information
Except when permitted or required otherwise by PFRS, an entity shall disclose
comparative information in respect of the previous period for all amounts reported in the
current period’s financial statements.

8. Consistency of presentation
The principle of consistency requires that “the accounting methods and practices shall be
applied on a uniform basis from period to period.”

Identification of financial statements

Financial statements shall be clearly identified and distinguished from other information in the
same published document.

Each component of the financial statements shall be clearly identified.

In addition, the following information shall be prominently displayed:
a. The name of the reporting entity.
b. Whether the financial statements cover the individual entity or a group of entities.
c. The end of the reporting period or the period covered by the financial statements or notes.
d. The presentation currency.
e. The level of rounding used in the amounts in the financial statements.

Interim Statements and Subsequent Events

Interim Financial Statements
Quarterly and semi-annual financial statements are called interim financial statements and are
normally prepared in a condensed form.

Subsequent Events
Subsequent events (also called events after balance sheet date) can be defined as the events that
occur after the balance sheet date but before the authorization of financial statements for issue.

Date of Financial Statements

The date of the financial statements is the balance sheet’s date i.e., it is the point of time to which
a balance sheet relates. For example, if a balance sheet is prepared to show the as at December
31, 2019 then December 31, 2019 is the date of the financial statements.

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Activity:

Academic-Multiple Choice Questions

1. The primary responsibility for the preparation and presentation of the financial statements
of an entity is reposed in the
a. Management of the entity
b. Internal Auditor
c. External Auditor
d. Controller
2. Which of the following is not a component of the financial statements?
a. Statement of financial position
b. Statement of changes in equity
c. Report of board of directors
d. Notes to financial statements
3. What is the objective of financial statements?
a. To provide information about the financial position, financial performance and
changes in financial position of an entity that is useful to a wide range of users in
making economic decisions.
b. To prepare and present a statement of financial position, statement of comprehensive
income, statement of cash flows and statement of changes in equity.
c. To prepare and present relevant, reliable, comparable and understandable information
to investors and creditors.
d. To prepare and present financial statements in accordance with all applicable PFRS
and Interpretations.
4. To meet the objective of providing information about financial position, financial
performance and cash flows of an entity, financial statements should provide information
about all of the following, except
a. Assets, liabilities and equity
b. Income and expenses, including gains and losses
c. Contributions by and distribution to owners in their capacity as owners.
d. Nature of business activities
5. Financial statements must be prepared at least
a. Annually
b. Quarterly
c. Semiannually
d. Every two years
6. It is the presentation and classification of financial statement items on a uniform basis
from one accounting period to next.
a. Comparable information
b. Consistency of presentation
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c. Aggregation
d. Accrual basis
7. The effects of transactions and other events on economic resources and claims are
depicted in the periods in which those effects occur even if the resulting cash receipts and
payments occur in a different period.
a. Accrual accounting
b. Cash accounting
c. Modified accrual accounting
d. Modified cash accounting
8. The primary focus of financial reporting has been on meeting the needs of which
following?
a. Managers of an entity
b. Existing and potential investors, lenders and other creditors
c. National and local taxing authorities
d. Independent CPAs
9. Which of the following best describes the term financial position?
a. The net income and expenses of an entity
b. The net of financial assets less liabilities of an entity
c. The potential to contribute to the flow of cash and cash equivalents to the entity
d. The assets, liabilities, and equity of an entity
10. Which of the following best describes the term financial performance?
a. The revenue, expenses and net income or loss for a period of an entity.
b. The assets, liabilities and equity of an entity.
c. The total assets minus total liabilities.
d. The total cash inflows minus total cash outflows

References:
Lessambo, F. I. (2018). Financial Statements Analysis and Reporting. Palgrave Macmillan.
Valix et. al., (2017). Financial Accounting (Vol. 3). Manila, PH: GIC Enterprises & Co., Inc.

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