Dr.

Mary Joy Catipay – Teodosio, LPT

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Understanding
Financial Statements
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Financial Statements: Definition
Financial statements are the product of financial accounting. They show the
results of operation, financial condition, changes in owner’s equity, and sources
and uses of cash.

The basic financial statements are:

1. Income statement or statement of comprehensive income
2. Balance sheet or the statement of financial positon or statement of financial
condition
3. Statement of changes in owner’s equity or statement of changes in partner’s
equity or statement of changes in stockholders’ equity
4. Cash flow statement or statement of cash flows
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Income Statement

 It details the revenues earned and the expenses incurred by a

company.
 It shows the results of operation of a company.
 The “bottom line” in business parlance is the net profit or the net
loss of the business.
 It shows the profitability of the firm.
 It covers a certain accounting period, a month, a quarter, or a
six-month period, or a year.
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z Service Type of business
 Income Statement for a
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Merchandising Business
 Income Statement for Manufacturing
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Business
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Balance Sheet
 The statement of financial position shows the assets, liabilities, and owner’s
equity of a business.
 It shows the financial condition or financial position of the business.
 It details the company’s resources (assets) and obligations (liabilities) and the
composition of the owner’s equity.
 Assets = Liabilities + Owner’s Equity
 It shows the liquidity and solvency of the firm.
 Liquidity refers to a firm’s ability to meet its maturing obligations in the short
run.
 Solvency refers to the firm’s ability to meet maturing obligations in the long run.
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Statement of Changes in Owner’s
Equity
 It details the changes that occurred in the owner’s equity.
 It shows the beginning owner’s equity with additional
investments for a sole proprietorship or partnership or, for a
corporation, additional issuances of corporate stock.
 It shows the withdrawals made by a sole proprietor or partner(s)
or declaration of dividends of a corporation.
 It shows profit for the sole proprietorship or partnership or
changes in the retained earnings account if a separate
statement of retained earnings is not made.
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Cash Flow Statement

 The funds of flow statement or the statement of the sources and

uses of cash or the statement of sources and uses of funds.
 It can be a simple statement of cash receipts and cash disbursement
as is done in very small businesses.
 This statement is divided into three sections:
1. Net cash flow from operating activities
2. Net cash flow from investing activities
3. Net cash flow from financing activities
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Cash Flow Statement

1. Net cash flow from investing activities shows purchases and

sales of fixed assets.
2. Net cash inflow from financing activities shows sales of capital
stock, payment of dividends, and repayment of long-term
liabilities.
Operating activities – are all operation-related earnings activities of
the company rendering service for a firm, selling goods for trading
concern, and manufacturing and selling activities for a
manufacturing company.