Financial statements

► It is a report to the proprietor which are considered the “end

products” of the account process.
► Financial statements are then means by which the information
accumulated and processed in the financial accounting are
periodically communicated to the users. They are designed to serve
the needs of variety of users, particularly the owner and creditors.
The objective of financial statement is to provide information about
the financial position, performance and cash flows of and enterprise
that is vital in making a sound economic decision.
USERS OF FINANCIAL STATEMENTS

1. INVESTORS
2. EMPLOYEES
3. LENDERS
4. SUPPLIERS AND OTHER TRADE CREDITORS
5. CUSTOMERS
6. GOVERNMENT AND THEIR AGENCIES
7. PUBLIC
8. MANAGEMENT
1. Investors

They need the information to help them determine

whether should buy, hold, or sell. Shareholders are
also interested in information which enable them
to asses the ability of the enterprise to pay
dividends.
2. Employees

Employees are interested in information about the

stability and profitability of the enterprise. They are
interested in information which enables them to
asses the ability of the enterprise to provide
renumeration, retirement, benefits and
employment opportunities.
3. Lenders

Lenders are interested in information which

enables them to determine whether their
loan and interest thereon will be paid when
due.
4. Suppliers and other trade
creditors
These users are interested in information which
enables them to determine whether the amount
owing to them will be paid on maturity.
5. Customers

Customers have an interest in the information

about the continuance of an enterprise especially
when they have a long-term involvement with or
are dependent on the enterprise.
6. Government and their agencies

These users require information to regulate the

activities of the enterprise, determine taxation
policies and as a basis for national income and
similar statistics.
7. Public

Enterprise affect members of the public on a variety of ways. For

example, enterprise makes substantial contributions to the local
economy in many ways including the number of people they employ
and their patronage of local suppliers. Financial statement may assist
the public by providing information about the trends and recent
developments in the prosperity of the enterprise and the range of its
activities.
8. Management

The management is interested in the information contained

in the financial statements to carry out its planning,
decision-making, and control responsibilities. The
information provide basis in evaluating management
performance relative to the resource utilization.
BASIC GUIDELINES IN THE PREPARATION OF
FINANCIAL STATEMENTS
1. Fair Presentation
2. Going Concern Assumption
3. Accrual Basic of Accounting
4. Consistency of Preparation
5. Materiality and Aggregation
6. Offsetting Principle
7. Comparability of Information
8. Disclosure of Accounting Policies
FAIR PRESENTATION

► Financial statements are fairly presented when they include all the
necessary information that will influence the decision of economic
users. However, the financial statements will still be impartially
presented even if some pieces of information are omitted , but only
when such omissions will not influence the decisions of the users.
GOING CONCERN ASSUMPTION

► Financial statements are prepared on a going concern basis unless

the management intends to liquidate the business or to cease
trading, or has no realistic alternative but to do so.
ACCRUAL BASIS OF ACCOUNTING

► The business must prepare its financial statements using the accrual
basis of accounting except for cash flow information.
► Under this basis, the effects of transactions and other events are
recognized when they occur and not when cash is received or paid
and the transactions are recorded in the accounting records and
reported in the financial statements within the period to which they
relate. The time of cash collection and cash payment does not
significantly influence the time of incurrence or recognition of the
transaction.
CONSISTENCY OF PRESENTATION

► Consistency requires that the presentation and classification of items

in the financial statements are retained to one period to the next.
Thus, presentation of items in the financial statements is consistently
applied in all reporting periods.
MATERIALITY AND AGGREGATION
1. Omission or misstatement of item is material if it, individually or collectively,
influences the economic decision of users taken on the basis of the financial
statements.
2. Materiality depends on the size and nature of the omission or misstatement
determined in the surrounding circumstances. The size or nature of the item , or
a combination of both, can be determining factor.
3. Each material class of similar items shall be presented separately in the financial
statements. Items of a dissimilar nature of function shall be presented
separately unless they are immaterial.
4. If a line item is not individually material, it is aggregated with other items and
included in the financial statements or in the notes.
5. An item that is not sufficiently material to warrant separate reporting in the
financial statements may, nevertheless, be sufficient to be presented
separately in the note.
6. The specific Disclosure requirement in a Standard need not be satisfied if the
information is not material.
OFFSETTING PRINCIPLE

► Offsetting requires that assets and liabilities, and income and

expenses, are reported separately. They shall not be offset unless
required or permitted by a Standard.
Comparability of information

This means that the financial statement prepared

are comparing with other companies of the same
line of business by pointing out similarities and
differences.
Disclosure of accounting policies

The standards requires that business disclose the accounting policies

adopted. The disclosure of accounting policies is usually made on the
notes to the financial statement.
Accounting policies are the specific principles, bases, convention,
rules, and practices applies by an entity in preparing and presenting
the financial statements.
ELEMENTS OF FINANCIAL STATEMENTS

1. ASSETS
2. LIABILITIES
3. OWNER’S EQUITY OR CAPITAL
4. REVENUE OR INCOME
5. EXPENSES
ASSETS

Assets are resources controlled by the entity as a result of past

events and from which future economic benefits are expected to flow
to the entity.
 ASSETS

CURRENT ASSETS- assets that are expected to be NON-CURRENT ASSETS- the rest of assets that are not
realize on the normal operating or course of classified as current asset.
business ► PROPERTY AND EQUIPMENT
► LAND
► CASH
► BUILDING
► PETTY CASH FUND ► EQUIPMENT
► FURNITURE AND FIXTURES
► CASH EQUIVALENTS
► ACCUMULATED DEPRECIATION
► NOTES RECEIVABLE

► ACCOUNT RECEIVABLE

► ESTIMATED UNCOLLECTIBLE ACCOUNTS

► ACCRUED INCOME
► ADVANCES TO EMPLOYEES
► INVENTORIES
► PREPAID EXPENSES
► UNUSED SUPPLIES
LIABILITIES

► Liabilities are present obligations of the entity arising from past events,
the settlement of which is expected to result in an outflow from the
entity resources embodying economic benefits.
 LIABILITIES
CURRENT LIABILITIES- liabilities of the company that isNON-CURRENT LIABILITIES- liabilities
expected to be settled within the normal operatingthat is expected to be settled in
cycle
of the business more than a year.
► ACCOUNTS PAYABLE ► NOTES PAYABLE (LONG TERM)
► MORTGAGE PAYABLE
► NOTES PAYABLE (SHORT TERM)
► ACCRUED EXPENSES
► PRE-COLLECTED OR UNEARNED INCOME
EQUITY

Equity is the residual interest in the assets of the entity after deducting
all its liabilities.
The financial position of a business entity is usually expressed in terms of
its liquidity, solvency, financial structure, and capacity for adaptation.
 OWNER’S EQUITY

► CAPITAL
► WITHDRAWAL
► INCOME AND EXPENSE SUMMARY
INCOME

Income is the summary of increases in economic benefits during the

accounting period in the form of inflows or enhancement of assets or
decreases of liabilities that result in increases in equity other than those relating
to distribution to equity participants.
 INCOME OR REVENUE

► SALES
► SERVICE INCOME
► PROFESSIONAL INCOME
► RENTAL INCOME
► INTEREST INCOME
► MISCELLANEOUS INCOME
EXPENSES

Expenses are decreases in economic benefits during the accounting

period in the form of outflows or depletion of assets or incurrences of
liabilities that result in decreases in equity, other than those relating to
distribution to equity participants.
 EXPENSES
► COST OF SALES OR COST OF GOODS SOLD
► INTEREST EXPENSE
► RENT EXPENSE
► REPAIRS AND MAINTENANCE
► STATIONARY AND OFFICE SUPPLIES EXPENSE
► SALARIES EXPENSE
► UNCOLLECTIBLE ACCOUNTS
► DEPRECIATION EXPENSE
► TAXES AND LICENSES
► INSURANCE EXPENSE
► UTILITIES EXPENSE
► MISCELLANEOUS EXPENSE
6 Basic Financial Statements

1. Statement of financial position as at the end of the period (Balance

Sheet)
2. Statement of comprehensive income for the period( Income Statement
3. Statement of change in equity for the period
4. Statement of cash flows for the period
5. Notes, comprising a summary of significant accounting policies and
other explanatory information
6. Statement of financial position as at the beginning of the earliest
comparative period when an entity applies accounting policy
retrospectively or makes a retrospective restatement of items in its
financial statements.
Only 1-3 financial statement will be use in our discussion.
BALANCE SHEET
-a financial statement which shows the financial position of an enterprise as
of a particular date. It consists of three(3) section which are the Assets,
Liabilities and Owner’s equity section. A balance sheet is always dated as
follows:
“As of specific date “
Statement of financial position of the business entity is usually expressed in
terms of liquidity, solvency, financial structure, and capacity for adaptation.
Liquidity- refers to the ability of the business entity to settle its current maturing
obligations.
Solvency- is the ability of the business to pays its long-term financial
obligation.
Financial structure- indicates the amount of the capital or resources finance
by the creditors and the amount provided by the owners.
Capacity for adaptation- refers to the ability of the business to invest excess
available resources or raise needed funds through borrowings without
difficulty in times of need.
BASIC ACCOUNTING EQUATION

ASSETS = LIABILITIES + OWNER’S EQUITY

INCOME STATEMENT

-is a financial statement which shows the performance of the

enterprise for a given period of time. The performance of the enterprise
is primarily measured in terms of the level of income earned by the
enterprise through effective and efficient utilization of its resources. This
income performance used to be known as the “result of operations” of
the enterprise consists of revenues, expenses and operating result
which would either be a net income or a net loss.
EXPANDED ACCOUNTING EQUATION

Assets = Liabilities + Owner’s Equity (-Drawing +Revenue -Expenses)

STATEMENT OF CHANGES IN
OWNER’S EQUITY
-It is a financial statement that summarizes
the changes in equity for a given period of
time. The beginning equity of the owner is
increased by the additional investment
and profit. Correspondingly, it is
decreased by withdrawal and loss.
ACCOUNTING PERIODS

-periods when financial statements are prepared:

• 1 MONTH/ MONTHLY BASIS
• 3 MONTHS/ QUARTERLY BASIS
• 6 MONTHS/ SEMI-ANNUAL BASIS
• 12 MONTHS/ YEARLY OR ANNUAL BASIS
ANNUAL ACCOUNTING PERIOD

► CALENDAR YEAR- Annual accounting period

that starts Jan. 1 and ends Dec. 31.
► FISCAL YEAR-Annual accounting period that
start any month of the year except Jan. and end
after 12 mos.
► NATURAL BUSINESS YEAR- is a twelve month of
period that ends on any month when the
business is at the lowest or experiencing slack
season.
TWO WAY COMMUNICATION