COLLEGE OF ACCOUNTANCY

C-AE13: Financial Accounting and Reporting

First Semester | AY 2020-2021

Module 3

A. Course Code – Title : C-AE13: Financial Accounting and Reporting

B. Module No – Title : M03 – The Financial Statements
C. Time Frame : 1 week (wk 3)– 6 hrs
D. Materials : Course Syllabus

1. Overview
This learning material provides a discussion of the simple financial
statements, their purpose, and the elements found in each statement. Illustrative
simple financial statements are presented.
You should read clearly and understand well the topics explained herein. It
is also expected that you answer the assigned problems and exercises.

2. Desired Learning Outcomes

At the end of the learning session, you should be able to:
a) Explain the purpose of each of the four financial statements;
b) Cite and describe the elements of the financial statements; and,
c) Prepare simple financial statements in good form.

3. Content/Discussion

Lesson 1 - Financial Statements

The financial reports are prepared annually, but interim reports such as
monthly or quarterly reports may be prepared. Since only the common needs of
all stakeholders are considered, these reports are called general purpose financial
statements.
There are four financial statements prepared on an annual basis from which
vital financial information about the business can be obtained or extracted:
1. Income Statement – reports the financial performance of the business for
a period of time. It is also called Profit or Loss Statement or Statement
of Earnings. It shows how wealth is produced by listing the income or
revenue earned as well as the expenses incurred by the business. A
favorable operation called profit or net income results when the
revenues exceed the expenses. Profit increases the assets of the
business, which in turn increases the owner’s wealth. On the other
hand, a loss occurs when the expenses are more than the revenues. A
loss decreases the assets of the business, which in turn decreases the
net worth or wealth of the owner. Profit ensures a long life for the
business, boosts its financial strength, and is a basis for tax, salaries and
bonuses. Now you know why accounting is important to the
stakeholders.

Faculty: SISINIA T. QUIZON 1 | Page

 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

Income – increase in economic benefits in the form of cash inflows (cash

receipts), increase in assets or decrease in liabilities that result in
increases in equity, other than those relating to contributions from
holders of equity claims.
Expenses – decreases in economic benefits in the form of cash
outflows (cash payments) or depletion of assets or increases in
liabilities that result in decreases in equity, other than those relating
to distributions to holders of equity claims.

2. Statement of Changes in Owner’s Equity – explains the activities that

caused the owner’s equity (capital) to change during a period of time.
There are four activities that affect owner’s equity: investments,
withdrawals or recovery of capital, profits, and losses. Investments and
profits will increase owner’s equity or net worth, while personal
drawings (usually in cash) and losses will decrease owner’s equity.
Example: If the beginning capital on May 1 is P200,000, what may have
caused it to change to P232,000 on May 31, after one month? This is
explained by the profit of P32,000 earned during the month, which is
added to the beginning capital. What if the profit is P32,000 but the
ending capital is only P227,000? Then, there must be another item that
caused the change or decrease, and the only possible answer is that the
owner may have withdrawn cash or another asset for his personal use
in the amount of P5,000.

3. Statement of Cash Flows – shows what caused the change in cash during
a period of time. It answers the question: The business started this
month with cash of P200,000. How come after one month, there is only
P70,000 cash left? The statement shows the cash inflows/receipts (cash
investment and cash sales) and cash outflows/payments (purchase of
supplies, payment of expenses, and cash withdrawals of the owner).
Since the outflows are higher than the inflows, the cash decreased to
P70,000. This financial statement shows three kinds of activities:
financing (owner’s cash investment, cash withdrawals and cash loans),
investing (cash acquisition and sale of properties), and operating
(revenues and expenses). The operating activities are found in the
Income Statement, while the investing and financing activities are
found in the Statement of Financial Position.

4. Statement of Financial Position (also called Balance Sheet) – shows the

financial condition of the business as of a given date by presenting a
list of the accumulated assets or resources (cash and properties) owned,
as well as a list of the accumulated liabilities (debts or obligations to

Faculty: SISINIA T. QUIZON 2 | Page

 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

pay) owed by the business. After deducting the liabilities from the
assets, the remaining assets show the net worth of the firm which
belongs to the owner; hence, it is also called the owner’s equity. For
example, at the end of June total assets amounted to P532,000, while
total liabilities amounted to only P200,000. The net worth of the
business or the assets belonging to the owner is P332,000. (Manuel
2018)

Illustrative financial statements

Based on the recorded effects of the given transactions in Module 2, simple

financial statements can be prepared:

Labango Laundromat
Income Statement
For the month ended June 30, 2020

Service Income P 27,500

Less Operating Expenses:
Utilities Expense P 2,500
Laundry Supplies Expense 4,000
Rent Expense 3,000 9,500
Net Profit P 18,000

Labango Laundromat
Statement of Changes in Owner’s Equity
For the month ended June 30, 2020

Abot, Capital, June 1, 2020 P 300,000

Add: Net Profit for the month 18,000
Total P 318,000
Less: Owner’s drawing 2,000
Abot, Capital, June 30, 2020 P 316,000

Faculty: SISINIA T. QUIZON 3 | Page

 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

Labango Laundromat
Statement of Financial Position
As of June 30, 2020

Assets
Cash P 215,000
Accounts Receivable 5,000
Laundry Supplies 6,000
Laundry Equipment 120,000
Total Assets P 346,000

Liabilities and Owner’s Equity

Accounts Payable P 30,000
Abot, Capital 316,000
Total Liabilities and Owner’s Equity P 346,000

Labango Laundromat
Statement of Cash Flows
For the month ended June 30, 2020

Cash received from customers (P27,500-

P 22,500
5,000)
Payments for:
Laundry Supplies (10,000)
Utilities (Water & Electricity) ( 2,500)
Rent ( 3,000)
Net cash provided by operating activities P 7,000

Cash Flows from Investing Activities:

Payments to acquire laundry equipment P ( 90,000)
Net cash used in investing activities (90,000)

Cash Flows from Financing Activities:

Cash investment of the owner P 300,000
Cash withdrawal of the owner ( 2,000)
Net cash provided by financing
activities 298,000

Net increase in cash during the month P 215,000

Add Cash balance on June 1, 2020 -
Cash balance, June 30, 2020 P 215,000

Faculty: SISINIA T. QUIZON 4 | Page

 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

Note: The profit in the Income Statement is added to the beginning capital
balance to determine the capital balance at the end of June in the Statement
of Changes in Equity. This capital balance is shown in the Statement of
Financial Position. The cash balance at the end of June shown in the
Statement of Cash Flows is forwarded to the Statement of Financial
Position. As you can see, the financial statements are inter-related, and they
do not serve the needs of only a particular user or stakeholder, but the
needs of all users or stakeholders. As such, they are called general-purpose
financial statements.

4. Progress Check
a) Explain the purpose of each financial statement.
b) Describe briefly the financial statements.

5. Assignment
From your answer in Prob 10, prepare the financial statements after you
have proven the accounting equation. Answer also Probs 11 and 12,
following the same requirement in Prob 10.

6. Assessment
a) Prepare the Income Statement and the Statement of Changes in Owner’s
Equity, and the Statement of Cash Flows for the month ended May 31, 2020,
and the Statement of Financial Position as of May 31, 2020 in good form,
based on your answers in the “Luzon Bus Lines” in Module 2.
b) Submit the requirements within 90 mins.

7. References

Manuel, Zenaida Vera-Cruz (2018) 21st Century Accounting Process, Basic Concepts
and Procedures, Manila, Philippines: Zenaida Vera-Cruz Manuel.

Ballada, Win. (2020) Basic Financial Accounting and Reporting, Cavite, Philippines:
Dom Dane Publishers & Made Easy Books.

Cabrera, Ma. Elenita B. & Cabrera, Gilbert Anthony B. (2018) Financial Accounting
and Reporting, Manila, Philippines: GIC Enterprises & Co., Inc.

Ferrer, Rodiel C. & Millan, Zeus Vernon B. (2017) Fundamentals of Accountancy,

Business and Management, Part 1, Baguio City, Philippines: Bandolin Enterprise.

Faculty: SISINIA T. QUIZON 5 | Page

 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

Warren, Carl S., Reeve, James M., & Duchac, Jonathan E. ((2015) Accounting 25th
Edition, Pasig City, Philippines: Cengage Learning Asia Pte Ltd (Philippine
Branch).

Gilbertson, Claudia B., Lehman, Mark W., & Gentene, Debra H. (2017) Century 21
Accounting Multi-column Journal 10th Edition, Boston, MA 02210 USA: Cengage
Learning.

Wild, John; Kwok, Winston; Venkatesh, Sundar; Shaw, Ken W. & Chiappetta,
Barbara. (2016) Fundamental Accounting Principles 2nd Edition, 2 Penn Plaza, New
York: McGraw-Hill Education.

Faculty: SISINIA T. QUIZON 6 | Page