Chapter 3 – Financial Statements and the Reporting Entity

- Financial statements are structured reports that provide financial information about the
reporting entity’s assets, liabilities, equity, income and expenses that are useful to users
of financial statements.

The four (4) basic financial statements are:

1. Income Statement (or Statement of Financial Performance)

2. Statement of Financial Position (previously called Balance Sheet)

3. State of Changes in Equity

4. Statement of Cash Flows

What is a reporting entity?

- In accounting, a reporting entity is a business entity that is either a sole proprietorship,

partnership, or corporation.

The elements of financial statements are:

a. assets, liabilities, and equity, which relate to a reporting entity’s financial position; and

b. income and expenses, which relate to a reporting entity’s financial performance.

What are assets?

- They are present economic resources controlled by the entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits. In
short, economic resources are assets of the business.

What are liabilities?

- They are present obligations of the entity to transfer economic resources as a result of
past events. Liabilities are the sources of the resources.

What is equity?

- It is the residual interest in the assets of the entity after deducting all its liabilities. Equity
is also a source of the business’ resources.

What is income?
 - They are increases in assets, or decreases in liabilities, that result in increases in equity,
other than those relating to contributions from holders of equity claims

What are expenses?

- They are decreases in assets, or increases in liabilities, that result in decreases in equity,
other than those relating to distributions to holders of equity claims