ARELLANO UNIVERSITY

Andres Bonifacio Campus

Pag asa st., Caniogan Pasig City

PRE-LESSON HANDOUTS NO.4

LESSON 01:
FINANCIAL STATEMENT PREPARATION

FINANCIAL STATEMENTS

Murphy C. (2022) defines Financial statements as written records that convey the
business activities and the financial performance of a company.
Financial statements are often audited by government agencies, accountants, firms,
etc. to ensure accuracy and for tax, financing, or investing purposes.

FINANCIAL STATEMENTS

INCOME STATEMENTS BALANCE SHEET STATEMENT OF STATEMENT OF

CASH FLOWS CHANGES IN EQUITY

1. INCOME STATEMENT
primarily focuses on a company’s revenues and expenses during a particular period. Once
expenses are subtracted from revenues, the statement produces a company's profit figure called
NET INCOME.

Formula:

REVENUE less EXPENSE = NET INCOME

 Keep in mind that in the income statement, usually, the role of the accountant is to determine the
Net Income of a certain entity.

Example 01:

You are an Accountant of ABC Company. On the given documents and receipts, the Sales of
Supplies was amounted to 900,000. Meanwhile, the Expenses are as follows:

Cost of Goods Sold: 10,000

Salaries Expense : 20,000
Rent Expense : 15,000
Utilities Expense : 10,000

How much was the Net Income to be Recognized by ABC Company?

ABC COMPANY
Income Statement
For the year ended, December 31 2022

Revenues:

Sales P 900,000.00

Expenses:

Cost of Goods Sold: 10,000

Salaries Expense : 20,000
Rent Expense : 15,000
Utilities Expense :10,000 P 55,000.00

Net Income P 845,000.00

2. BALANCE SHEET

The balance sheet displays the company’s total assets and how the assets are financed, either
through either debt or equity.

It can also be referred to as a statement of net worth or a statement of financial position.

The balance sheet is based on the fundamental equation: Assets = Liabilities + Equity.
 Example 02:

The XYZ Company’s Total Liabilities amounted to 500,000.00 and the Total Equity
amounted to 1,000,000.00. How much was the Total Assets?

Keep in mind that the Formula for the Balance sheet is:

ASSETS= LIABILITIES+ OWNER’S EQUITY

ASSETS = 500,000.00 + 1,000,000.00

ASSETS = 1,500,000.00
1,500,000.00 = 1,500,000.00

The total Liabilities and Owners Equity is equal to 1500,000.00. Since the Assets is equal to the
total to the liabilities and owner’s equity, then the Assets is 1,500,000.00

Example 03:

ANGELBABY Company’s total Assets is equal to 2,500,000. The Owner’s Equity is

Equal to 800,000. How much was the TOTAL Liabilities of ANGELBABY Company?

Keep in mind that the Formula for the Balance sheet is:

ASSETS= LIABILITIES+ OWNER’S EQUITY

2,500,000.00 = LIABILITIES + 800,000

The Total of Liabilities and Equity must be equal to the Total Assets. To get the missing liability,
Subtract the Owner’s Equity to the Assets.

2,500,000.00 – 800,000 = 1,700,000

The Total Liabilities is 1,700,000

Example 04

SYCHROUNOUS Company has a total Assets of 1,000,000.00. The owners equity has a
total of 200,000.00. How much was the total Liabilities?

Keep in mind that the Formula for the Balance sheet is:

ASSETS = LIABILITIES+ OWNER’S EQUITY

1,000,000.00 = 200,000.00 + OWNER’S EQUITY

The Total of Liabilities and Equity must be equal to the Total Assets. To get the missing Equity,
Subtract the Liabilities to the Assets.

1,000,000.00 – 200,000 = 800,000

The Total Owner’s Equity is 800,000
 3. STATEMENT OF CASH FLOWS

The cash flow statement (CFS), is a financial statement that summarizes the movement of cash
and cash equivalents (CCE) that come in and go out of a company.

OPERATING ACTIVITIES include cash activities related to net income.

For example, cash generated from the sale of goods (revenue) and cash paid for merchandise
(expense) are operating activities because revenues and expenses are included in net income.

INVESTING ACTIVITIES include cash activities related to noncurrent assets. Noncurrent

assets include (1) long-term investments; (2) property, plant, and equipment; and (3) the principal amount
of loans made to other entities.

For example, cash generated from the sale of land and cash paid for an investment in another
company are included in this category. (Note that interest received from loans is included in operating
activities.)

FINANCING ACTIVITIES include cash activities related to noncurrent liabilities and owners’
equity. Noncurrent liabilities and owners’ equity items include (1) the principal amount of long-term debt,
(2) stock sales and repurchases, and (3) dividend payments.

The main focus of the Statement of Cash Flows is the MOVEMENT of Cash and the NET
INCREASE/DECREASE of Cash. To get the net increase or decrease in cash, just total the Cash flow
from the 3 Activities.

4. STATEMENT OF CHANGES IN EQUITY

Statement of Changes in Equity is the reconciliation between the opening balance and closing balance
of shareholder’s equity. It is a financial statement which summarises the transactions related to the
shareholder’s equity over an accounting period.
ORDER OF FINANCIAL STATEMENT PREPARATION

STATEMENT
INCOME OF BALANCE CASH FLOW
STATEMENTS CHANGES IN SHEET STATEMENT
EQUITY

References:
Business Finance by Cayanan A. (2017)
Business Finance for Senior High School by Flores M. (2018)