Module 1

UNDERSTANDING FINANCIAL STATEMENTS

Part 1

Key Topics

 Basic Financial Statements

 Statement of Financial Position
 Income Statement
 Statement of Comprehensive Income

What is a Financial Statement?

 are the means by which the information accumulated and processed in financial accounting is
periodically communicated to the users.
 It is structured financial representation of the financial position and financial performance of an
entity.

Objectives

The objective of the general purpose financial statements is to provide useful information regarding:

 financial position of the company

 cash flows of an entity
 success of its operations
 policies and strategies of management
 insight into its future performance

Users of Accounting Information

Internal Users:

1. Business Owners
2. Board of Directors
3. Managerial Personnel

External Users:

1. Existing and potential investors

2. Lenders creditor (banks, suppliers)
 3. Government agencies
4. Non-managerial personnel
5. Customers
6. Public assurance, give service to people

Before
Four Basic Financial Statements

 Balance Sheet
 Income or Earnings Statement
 Statement of Changes in Equity
 Cash Flow Statement

Now
Six Basic Financial Statements

 Statement of Financial Position (Balance Sheet) asset, liability, equity

 Income or Earnings Statement regular operation (gain or lose)
 Statement of Changes in Equity retained earnings
 Cash Flow Statement operating activities, financing activities, investing activities
 Statement of Comprehensive Income other comprehensive income
 Notes to the Financial Statements composition of every line item accounts

Topic 1

Statement of Financial Position (Balance Sheet)

 comprises the assets, liabilities and equity of an entity at particular time

 Specifically, financial position pertains to the liquidity, solvency and the need of the entity for
additional financing

Assets

Economic resources controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the enterprise more than 5 years

CURRENT ASSETS NON – CURRENT ASSETS

Statement of Financial Position

 Current Assets
 Property, Plant and Equipment
 Other Non-current Assets
 Current Liabilities
 Non-current Liabilities
 Deferred tax liabilities
 Equity

Operating Cycle

Sell Products - Collect Cash – Time required to purchase or manufacture inventory

Current Assets cash and other cash items that can be convert to cash or consume within 1 year or 1 accounting
cycle whichever is longer
 Cash and cash Equivalents
 Financial Assets (Marketable Securities)
 Trade & Other Receivable
 Inventories
 Prepaid expenses

CASH AND CASH EQUIVALENTS 90 days from maturity date

 Short - term will not get 90 days to conversion

 Highly liquid investment anytime can be sell
 Readily convertible to cash
 Present insignificant risk of changes in value hindi nagbabago ang value o fluctuate

Cash on Hand

a) Local Currency
b) Foreign Currency

Checks & Other Cash Items

Cash Equivalents
Due from Banks

 Resident Banks
 Non-Resident Banks
 Resident Banks - Clearing Account

FINANCIAL ASSETS (MARKETABLE SECURITIES)

 Short - term more than 90 days from the purchase

 Must be relatively riskless anytime can be sell
 Must be highly liquid
 May be presented as Investment

TRADE RECEIVABLE open account, walang pinirmahan na written na utang

 Customer’s outstanding balance on credit sales

 Reported on the balance sheet at their Net Realizable Value doubtful accounts,

Receivables supported by oral or informal promises to pay or formal promise to pay reduce by
estimated losses from uncollectible accounts called Allowance for Doubtful Accounts.

 Trade Receivable refers to claims arising from sale of merchandise or services in the ordinary
course of business.
 Notes Receivables are those supported by formal promise to pay in the form of notes.
 Non-trade Receivables represent claims arising from sources other than the sale of
merchandise or services in the ordinary course of business. may inadvances, may bumali

Other Receivables

 Accrued Interest on Notes Receivables

 Advances to Employees & Officers, collectible currently

Inventories mga ibenebenta

 Items held for sale

 Items used in the manufacturing of products that will be sold raw materials

Inventories are assets held for sale in the ordinary course of business, in the process of production
for such sale or in the form of materials and supplies to be consumed in the production process or in
rendering of services.
 Inventories are broadly classified into inventories of a trading concern and inventories of
manufacturing concern.

 “Merchandise Inventory” is generally applied to goods held by a trading concern.

 Finished Goods are completed products which are ready for sale.
 Goods in Process or work in process are partially completed products which require further
process.
 Raw Materials are goods that are used in the production process.
 Factory or Manufacturing Supplies may be referred to as indirect materials.

Prepaid expenses

 Expenses paid in advance

 Examples: Rent, insurance, property taxes, etc.
 Advance rental, fire insurance, property/business taxes, advance interest payment

Property, Plant and Equipment

 Also called tangible long-lived or capital assets

 Encompasses company’s fixed assets
 Produce economic benefits
 Fixed assets other than land are depreciated over a period of time they benefit the firm.

Business Premises, Furniture, Fixtures & Equipment

 Names: PPE, fixed assets, tangible assets, long-lived assets

 Used in the conduct of the business operations
 Except Land, Acquisition Cost is spread over its useful life

Cost

Less: Accumulated Depreciation & Impairment Losses

Net Book Value

Other Non-current Assets

1. long term investment

 Investment in Subsidiaries
 Investment in Associates-Equity Method
 Investment Property
 Cash Surrender Value of Life Insurance
2. Intangibles
 Identifiable (separable or arises from contractual or from other legal rights)
 Non-monetary asset
 Without physical substance
 Common Examples: goodwill, patents, copyrights, trademarks, franchises
3. Long-term advances to Officers
4. Long-Term Refundable Deposits

Liabilities

Obligations of entity arising from past transactions or events, the settlement of which is
expected to result in an outflow from the entity resources embodying economic benefits.

Present obligation may be legal obligation or constructive obligation.

CURRENT ASSETS NON – CURRENT ASSETS

CURRENT LIABILITIES

 Trade and Other Payable

 Notes Payable-Short Term Debt
 Current Maturities of Long-Term Debt
 Warranty Liabilities

TRADE PAYABLE

Short term obligations: Accounts Payable

 Arises from credit extended by suppliers for the purchase of goods and services.
Short term obligations: Notes Payable

 Arises from credit extended by suppliers for the purchase of goods and services, in the form of
promissory note.

Short term obligations: Accrued Interest on Note payable, Income Tax Payable, Dividend Payable

 Arises from obligating event that creates either legal obligations or constructive obligations.

Trade and Other Payables

 Accounts Payable
 Notes Payable
 Interest Payable, Salaries Payable, Utilities Payable,
 Accrued liabilities
 Unearned Income

Accrued Liabilities

 Result from the recognition of an expense in the accounting records prior to the actual
payment of cash.

Period of Use - Cash Outlay - Reporting Date - Accrued Liabilities (Current Liability)

 If salaries of employees for the second half of the month are paid on the 5th day of the
succeeding month……
 Employees already rendered their services prior to actual payment of salaries, the unpaid
salaries is considered as ACCRUED LIABILITIES.

Deferred (Unearned) Revenues

 Cash is received but the goods/products are not yet delivered or services are not yet
performed.
 Example: The extra office room is rented out to a company starting Sept. 1, 20X1. One year rent
was collected in advance.
 Deferred Liabilities (Tax)
 Advance Cash Receipts of Rental of Properties for Lease
 Advance Interest Received
Short Term Debt: Notes Payable

 Short term obligations

 Bank loan evidence by a promissory notes

Other Liabilities

 Other taxes and licenses payable

 Withholding Tax, SSS, Philhealth, Pag-Ibig Contribution Payable
 Loan Payable, Bonds Payable

Current Maturities of Long-Term Debt

When a firm has a long term debt outstanding, the portion of the principal that will be repaid during
the upcoming year is considered as current liability.

Note: If the payment of this liabilities would come from Non-Current Assets, the same should remain
under long-term debts.

NON-CURRENT LIABILITIES

 Obligations with maturities beyond one year

Deferred tax liabilities

 These are the amounts of income taxes payable in future periods in respect of taxable
temporary differences
 Example: Installment sales

Equity

 Residual interest in assets that remain after deducting liabilities

It includes….

 Capital contribution by the owners of the entity

 Profit
 Loss
 Distribution to owners

Assets – Liabilities = EQUITY

EQUITY ACCOUNTS

 Cooperative
 Sole Proprietorship
 Partnership
 Corporation

Capital Contribution

 Paid-up Share Capital – (Common/Pref.) Subscribed Share Capital

 Owner’s Capital (e.g. Juan Cruz Capital)
 Partner A Capital
 Partner B Capital
 Paid-in Capital (Preference share, Ordinary Share, Share Premium)

Capital Withdrawal

 Treasury Share Capital – (Common/Pref.)

 Owner’s Drawings (e.g Juan Cruz Drawings)
 Partner A Drawings
 Partner B Drawings
 Treasury Stock

Income and Loss Accumulation

 Undivided Net Surplus

 Net Loss
 Income (Loss) Summary
 Retained Earnings
 Net Income/Loss
- Appropriated for future expansion/ unappropriated

Other Accounts

 Donations/Grants
 Statutory Funds
 Reserve Fund (>10% of net surplus); Coop Educ. & Training Fund (based on coop’s By-Laws;
Community Devt. Fund (>3% for projects &/or activities); Optional Fund (net surplus <7%)
 Reserves

Paid in Capital- Ordinary Share

 The amount listed under the share capital account is based on the par or stated value of the
shares issued.
ORDINARY SHAREHOLDERS

 Do not ordinarily receive a fixed return

 Have voting privileges.
 Can benefit from stock ownership through potential price appreciation.

Paid in Capital – Preference Share

 The amount listed under the share capital account is based on the par or stated value of the
shares issued.

PREFERENCE SHAREHOLDERS

 Ordinarily receive a fixed return

 Have NO voting privileges.
 Can benefit from claims on dividends and net assets in event of liquidation.

Share Premium

 Reflects the amount by which the original sales price of the stock shares exceeded par value.

Retained Earnings

 Accumulated earnings reinvested in the operations of the business.

 Sum of every peso a company has earned since its inception.
 Should not be confused with cash or other financial resources to satisfy financial obligations

Other Equity Accounts

 Accumulation of unrealized gains or losses on investment in debts.