FINANCIAL

AN INTRODUCTION TO

STATEMENTS
what? how? why?

Hazel Joy M. Demagante, CPA

 ACCOUNTING defined as

the process of identifying, measuring and communicating

economic information to permit informed judgment and
decision by users of the information.
- American Accounting Association
 a system of 2 parts

Accounting
primarily deals with

FINANCIAL INFORMATION

Input Output
journal entries identifying, measuring, summarize, communicate financial statements
recording / reports

to make

Informed Decisions
purpose
 QUESTION:

What branch of accounting deals with the

preparation of financial statements?
 How do we define
FINANCIAL
STATEMENTS?
Financial Statements are the means by which the
information accumulated and processed in financial
accounting is periodically communicated to the users.

These are a structured financial representation of the

financial position and financial performance of an entity
(Valix, 2015)
 COMPLETE SET OF
FINANCIAL STATEMENTS
According to IAS 1.10

01 Statement of Financial Position

02 Statement of Comprehensive Income
03 Statement of Changes in Equity
04 Statement of Cash Flows
05 Notes, comprising a summary of significant accounting
policies and other explanatory notes
 STATEMENT OF
FINANCIAL POSITION
a.k.a. the balance sheet

shows
at a certain day

COMPANY POSITION
thru

Asset
Liabilities
Equity
 STATEMENT OF
COMPREHENSIVE INCOME a.k.a. the income statement

reflects
for a period of time
COMPANY PERFORMANCE

has two parts

Other Comprehensive Income

Profit or Loss Statement
(P/L) (OCI)

total income less expenses, items of income and expenses that

excluding the components of other are not recognized in profit or loss
comprehensive income (IAS 1.7) (IAS 1.7)

ABM 2 Class Financial & Advanced Accounting

 STATEMENT OF
CHANGES IN EQUITY
reflects its

NET WORTH

by showing

total income/loss
beginning equity balance
investments/withdrawals
- sole proprietorship -
STATEMENT OF
CASH FLOWS
reports its

CASH INFLOWS AND OUTFLOWS

by showing its

operating activities
investing activities
financing activities
 QUESTION:

If financial statements deal with financial

information, why is there a need for the
notes and other summary?
NOTES TO FINANCIAL
STATEMENTS
presents

BOTH FINANCIAL AND NON-FINANCIAL INFORMATION

which includes but not limited to

basis of preparation
accounting policies
other relevant information
 TIME PERIOD OF FINANCIAL
STATEMENTS

Statement of Comprehensive Income

Statement of Changes in Equity
Statement of Cash Flows
Notes to Financial Statements Statements of Financial Position

Jan. 1, '21 Dec. 31, '21 Apr. 15, '22

Reporting Period
Release of financial statements
OTHER KEY DETAILS

01 Result of past
transactions
02 Cannot reflect
ALL information
03 Complies with
acct. standards

The figures presented in these Users still need to consider For SME's and larger company,
financial statements reflects pertinent information from FS are required to comply with
events that happened during other sources. International/Philippine
the reporting period. Financial Reporting Standard.
 CONCEPTUAL
The role of

FRAMEWORK and other accounting standards

 a complete. comprehensive and single
document promulgated by International a summary of the terms and concepts
Accounting Standards Board (IASB). that underlie the preparation and
presentation of financial statements for
external users.

WHAT
IT IS
CONCEPTUAL FRAMEWORK

for financial reporting

the underlying theory for the
an attempt to provide an overall development of accounting
theoretical foundation for accounting standards
 QUESTION:

What are the difference/s between the

Conceptual Framework and different
accounting standards?
CONCEPTUAL
FRAMEWORK
a body of interrelated objectives
and fundamentals / the
foundation of establishing new
accounting standards
These concepts provide guidance in
selecting transactions, events and
circumstances to be accounted for, how
they should be recognized and measured,
and how they should be summarized and
reported (FASB).
ACCOUNTING
vs. STANDARDS
international principles and rules
for the presentation of financial
accounts (Donnelly, 2021)
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 7 Statement of Cash Flows
IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors
IAS 10 Events after Reporting Period
IAS 11 Construction Contracts
 QUESTION:

What do you think overrides in making

professional judgment, conceptual
framework or accounting standards?
FRAMEWORK
or STANDARD
If there is a standard governing a certain transaction,
accounting standards overrides the framework

In the absence of standards, the framework may be

used to develop and apply accounting policies

In case of conflict, reporting standards should prevail

over the conceptual framework.
 QUESTION:

What do you think are the differences

and similarities between financial reports
and financial statements?
FINANCIAL
Conceptual Framework for

REPORTING
 FINANCIAL REPORTING
according to conceptual framework

according to the
conceptual framework

also includes not only financial

is the provision of financial information about an statements but also other information
entity to external users such as financial highlights, summary of
important financial figures, analysis
primarily through and ratios, etc.

as well as nonfinancial information such

Financial Statements as description of major products and a
listing of corporate officers and
directors, etc.
 QUESTION:

Who is the primary user of financial

reports?
 USERS IN FINANCIAL
REPORTING
according to conceptal framework

PRIMARY USERS OTHER USERS

the parties to whom financial users of financial information other

statements are primarily directed than the existing primary users

Existing and potential investors / lenders employees / customers / government

/ creditors and their agencies
 deals with
the why

OBJECTIVES OF
FINANCIAL REPORTING
according to conceptual framework

Overall Objective Specific Objectives

The overall objective of financial reporting is
to provide financial information about the
reporting entity that is useful to existing and
potential investors, lenders and creditors in
making decisions about providing resources
to the entity.
to provide information useful in making decisions
about providing resources to the entity
provide information useful in assessing the
prospects of future net cash flows to the entity
provide information about entity resources, claims,
and changes in resources and claims
 UNDERLYING
The role of

ASSUMPTIONS to avoid misunderstandings

 the only In the absence of evidence,
assumption that entity will continue indefinitely
is mentioned in
the framework
Going Concern
TIme Period

the indefinite life of an

UNDERLYING
entity is subdivided into
equal length of time

amounts are stated in terms

ASSUMPTIONS
AKA POSTULATES
of a unit of measure

Monetary Unit Economic Entity

the entity is separate from the
owners, managers, and
employees
 QUESTION:

What type of information should be

included in financial reports?
 QUALITATIVE
Useful attributes

CHARACTERISTICS of financial statements

 QUALITATIVE
CHARACTERISTICS
attributes that make financial
information useful to users

classified into

Enhancing Qualities
Fundamental Qualities

these qualitative characteristics these qualitative characteristics

relate to the content or substance of relate to the presentation or form of
financial information the financial information

usefulness presentation/format
 FUNDAMENTAL
bare minimum

CHARACTERISTICS
Without these qualities, information are deemed useless.

RELEVANCE FAITHFUL REPRESENTATION

the capacity to influence decision reports reflect what really happened

1 Predictive Value 1 Free from error

2 Confirmatory Value 2 Completeness
3 Neutrality

Information must both be both relevant AND faithfully represented for it to be useful.
 RELEVANCE
fundamental qualities
1 Predictive Value
It is predictive if it increases the
likelihood of accurately forecasting
outcome / events.
Quarterly net income (interim reporting) may be
used to forecast annualy figures.
2 Confirmatory Value
It provides feedback about previous
evaluations. In other words, it
enable users to confirm or correct
earlier expectations.
Financial reporting figures/amounts can
confirm whether an entity exceeded its budget
or not.
FAITHFUL REPRESENTION
fundamental qualities

1 Free from Error

There are no errors or omissions in the description or transactions, as

well as the process in which the information went through.

However, free from error does not mean it is perfectly accurate in

all aspects.
 FAITHFUL REPRESENTION
fundamental qualities

2 Completeness
Information should be presented in a way that facilitates
understanding and avoids erroneous implications. It is the result
significant and of adequate disclosure standard or the principle of full
relevant information
disclosure.
recorded transactons

Completeness applies to both financial and non-financial

information.
disclosures
 NEUTRALITY
fundamental qualities

3 Neutrality
Neutrality means "free from bias". It is not slanted, weighted,
emphasized, de-emphasized, nor manipulated to make it more
favorable or unfavorable to users.

It should not favor one party to the detriment of another and

should be directed to the common needs of many users.
 QUESTION:

What is the difference between

relevance and materiality?
 general guide:
if knowledge of it would
affect or influence decision
a "quantitative threshold"
linked closely to relevance a "subquality" of relevance
based on nature or magnitude
(or both) of items

MATERIALITY
in relation to relevance

dependent on good judgment,

no specific threshold was
professional expertise and
provided by the conceptual
common sense
framework depends on relative size
rather than absolute size
 ENHANCING
enhances usefulness

CHARACTERISTICS
relate to the presentation or form of financial information

1 Verifiability

2 Comparability
3 Understandability
4 Timeliness

Enhancing qualitative characteristics does not make the information useful.

 ENHANCING QUALITIES

1 Verifiability

Verifiability means that different knowledgeable and independent

observes could reach consensus, although not necessarily complete
agreement.

Verifiability implies consensus and verification could be direct or

indirect.
 ENHANCING QUALITIES

2 Comparability

The characteristic that enables users to identify and understand

similarities and differences among items.

Comparison can be made within an entity or across industries.

 ENHANCING QUALITIES

3 Understandability

Information must be comprehensible or intelligible. It should be

presented in a form and expressed in terminology that a user
understand.

In short, it is readily understandable by users.

 QUESTION:

Financial statements cannot be

realistically be understood by everyone. If
reports should be readily understandable,
who are these people?
 ENHANCING QUALITIES

4 Timeliness

Financial information must be available or communicated early enough

when a decision is to be made.

Relevant and faithfully represented information made available

after a decision is made is useless and of no value.
REFERENCES:
Financial Accounting Standards Board (FASB)
Retrieved from https://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1176168367774

IAS 1 - Presentation of Financial Statements

Retrieved from https://www.iasplus.com/en/standards/ias/ias1

Peralta, J.F., Valix, C.A., & Valix, C.T. (2015). Financial Accounting Volume I, Part I.
GIC Enterprises & Co., Inc. Manila, Philippines