Professional Documents
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Introduction
Topic Outline:
The financial statements are the financial reports of the business entity in order to
provide information that is useful for the decision-making of its users.
As different groups of users will use the financial statements, it should be useful and
understandable to someone who has a reasonable understanding of accounting and
business and who is willing to study and analyze the information presented. The
financial statements must be relevant, reliable and comparable. Most of all, it must
follow the applicable Philippine Financial Reporting Standards.
The financial statements are prepared at least once a year and can be presented as
frequent as monthly or quarterly. A complete set of Financial Statements comprises the
following:
Income Statement
The Income Statement, also called Statement of Financial Performance, presents the
financial results of a business for a given period of time. The statement presents the
amount of revenue generated and expenses incurred by the business during a reporting
period, as well as the resulting net income or net loss.
Revenues are increases in economic benefits during the accounting period in the form
of inflows or enhancements of assets or decreases of liabilities (or a combination of
both) from the delivery or production of goods, rendering of services, or other activities
that constitute the entity’s ongoing major or central operations.
Expenses are decreases in economic benefits during the accounting period in the form
of outflows or using up of assets or incurrences of liabilities (or a combination of both)
from the delivery or production of goods, rendering of services, or other activities that
constitute the entity’s ongoing major or central operations.
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Exercise 2:
Prepare the Statement of Changes in Equity of Pacioli General Services (Exercise 1).
Balance Sheet
An asset is a resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity (IASB Framework). Examples
of assets include the following:
Cash – includes coins, currencies, checks, bank deposits and other cash items
ready for use in the operations of the business.
Accounts Receivable – amounts collectible from customers for goods provided
and services rendered on credit.
Merchandise Inventory – unsold goods for sale to customers.
Prepaid Expenses – expenses paid but not yet used.
Investments – assets for the accretion of wealth through capital returns or
capital appreciation or for other benefits to the business.
Property, Plant and Equipment – tangible assets used in the production or
supply of goods and services, or for business administration purposes.
Intangible Assets – includes identifiable, non-monetary properties without
physical substance, like licenses, copyrights, patents, trademarks and others.
A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits (IASB Framework). Examples of liabilities include the
following
Equity is the residual interest in the assets of the entity after deducting all the liabilities
(IASB Framework). It represents the capital investments, net of the capital withdrawals of
the owner in the entity, and the net income or loss in the operation of the business.
Equity accounts include the following:
Capital account –the equity investment of the owner (in a single proprietorship)
or for each partner (in a partnership), and the cumulative effect of the
withdrawals of capital and business net profits and losses.
Drawing – the equity withdrawals of the owner or for each partner.
Common Stock, Preferred Stock – the equity of the owners of a corporation
Retained Earnings – the cumulative balance of the net income or losses of the
corporation, investments of the owners, less the distribution to the owners.
Exercise 3:
Operating activities are the principal activities of the enterprise. They are the transactions and
events that enter into the determination of profit or loss. Operating Activities include the
following:
Investing activities include the acquisition and disposal of non-current assets of the business.
Examples of investing activities are
Financing activities include equity transaction of the business and the owners, as well as
borrowing of funds from financial institutions. Examples are
Exercise 4.
Prepare the Statement of Cash Flows of Pacioli General Services (Exercise 1).
Assignment. Financial Statements
PACIOLI GENERAL SERVICES
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1. Income Statement
2. Statement of Changes in Equity
3. Balance Sheet
4. Statement of Cash Flows