LESSON 2-1 THE FINANCIAL STATEMENTS

Lesson Objectives:

Classify the types of financial statements.

Identify the typical accounts used in financial statements.

Types of Financial Statements

The key product or the end product of the accounting process is a set
of documents called the financial statements compromised of the following:
1. Statement of Financial Position [Balance Sheet]-
Sheet]- shows the financial
condition of a business as of the given period. It consists of the assets,
liabilities, and owner’s equity.
2. Statement of Comprehensive Income [Income Statement] - shows the
result of operations for a given period. It consists of revenue, cost and
expense. It also contains components of other comprehensive income
(including reclassification adjustments) as follows: change in revaluation
surplus, gains and losses on benefit plans, gains and losses from
investments inequity instruments, finance costs, share of associates, and
joint ventures under the equity method, tax expense, gain or loss from
discontinued operations, gain or loss on realization of assets from
discontinued operations, gain or loss fro foreign operations, and all other
operating and financial events affecting the owner’s equity in the business.
3. Statements of Changes in Owner’s Equity or Statement of Owner’s Equity -
shows the changes in the capital or owner’s equity as a result o additional
investment or withdrawals by the owner, plus or minus the income or net
loss for the year.
4. Statement of Cash Flows - summarizes the cash receipts and cash
disbursements for the accounting period. It summarizes the cash activities of
the business by classifying cash inflows (receipts) and cash outflows
(payments) into operating, investing, and financing activities. It shows the
net increase or decrease of cash in a given period and the cash balance at the
end of the period. This allows management to assess the business’ ability to
generate cash and project future cash flow.

Type Account Titles Used

I. Statement of Financial Position [Balance Sheet]:
a. Assets - economic resources owned by the business expected to
future gain. They are property and rights of value owned by the business.
b. Liabilities - include debts, obligations to pay and claims of the
creditors on the assets of the business.
c. Owner’s Equity - includes the interest of the owners on the business;
claims of the owners on the assets of the business;and the investment of
 the owner plus or minus the results of operations. Owner’s equity or
capital comes from two main sources - investment of owners and
earnings of the business.

The Fundamental Accounting Equation

[Assets = Liabilities + Owenr’s Equity]
Illustration:
1. Given liabilities of P50,000 and the owner’s equity of P150,000, find the
value of assets.
Solution:
Assets = Liabities + Owner’s Equity
=P50,000 + P150,000
=P200,00
2. Given assets of P180,000 and the owner’s equity of P110,000, find the
liabilities.
Solution:
Liabilities = Assets - Owner’s Equity
= P180,000 - P110,00
= P70,000
3. Given assets of P250,000 and liabilities of P90,000, find the owner’s
equity.
Solution:
Owner’s equity = Assets - Liabilities
= P250,000 - P90,000
=P160,000
 Test Your Knowledge

Fill out the missing part of the fundamental accounting equation.

ASSETS LIABILITIES OWNER’S EQUITY
1) 650,000 340,000
2) 295,000 305,000
3) 967,000 660,000
4) 788,000 345,000
5) 845,000 533,000
6) 994,867 894,905
7) 674,990 113,765
8) 1,060,900 678,988
9) 743,998 233,877
10) 87,655 123,908