Week 004

Basic Financial Statements

and Its Components
Week 004: Basic Financial Statements and its Components

Module Coverage
• The basic financial statements and its
composition, in terms of account titles.

Income Statement

Statement of Financial Position

Statement of Cash Flows

• The significance of each financial statement.

Week 004: Basic Financial Statements and its Components

Learning Objectives
After studying this module, the students should
be able to
• Enumerate and define the three basic financial
statements.
• Understand the importance of each financial
statement.
• Enumerate, define, and understand the
components of each financial statement.
• Understand the relationships among the
financial statements.
Week 004: Basic Financial Statements and its Components

Financial Statements: Definition and Objective

• Definition of Financial Statements

Financial statements are reports of a company's

management showing the financial performance and
position of the firm at a given time.

• Objective of Financial Statements

The primary objective of financial statements is to provide

information about the financial position, performance and
changes in financial position of an enterprise that is useful https://ph.images.search.yahoo.com/yhs/search;_yl
t=AwrxhSlSlZFZ4UoAzV_fSQx
Retrieved: August 14, 2017
to wide range of users in making economic decisions
(International Accounting Standards Board, IASB).
Week 004: Basic Financial Statements and its Components

Users of Financial Statements

The wide-ranging financial statement
users include the following:
• Management
• Owners of the business
• Potential Investors
• Financing Institutions
• Suppliers
• Clients
• Competitors
https://ph.images.search.yahoo.com/yhs/search;_ylt=
• Employees AwrxhSlSlZFZ4UoAzV_fSQx.;_ylu=?p=Financial+Stat
ements+Image
• Government Retrieved: August 14, 2017

• General Public
Week 004: Basic Financial Statements and its Components

The Basic Financial Statements

Three basic financial statements according to the
Accounting Standards Council (ASC)
• Income Statement
• Balance Sheet or Statement of Financial
Position
• Statement of Cash Flows.
The International Accounting Standards Board
(IASB) has added two more reports to complete
the set of financial statements:
• Statement of Changes in Equity
https://ph.images.search.yahoo.com/yhs/search;
• Notes to Financial Statements (Summary of _ylt=AwrxhSlSlZFZ4UoAzV_fSQx.;_ylu=?p=Fina
significant accounting policies and other ncial+Statements+Image
Retrieved: August 14, 2017
explanatory notes) .
Week 004: Basic Financial Statements and its Components

Income Statement
Definition : Also named Statement of Comprehensive Income,
Statement of Revenue and Expense, Profit and Loss Report, this
statement summarizes the revenues, expenses, net profit or net
loss over a given period of time.
Key components :
Revenues or Income. increases in economic benefits during the
accounting period in the form of inflows or enhancements of
assets or decreases of liabilities that result in increases in
equity, other than those relating to contributions from equity
participants (IASB Framework).
Expenses. decreases in economic benefits during the
accounting period in the form of outflows or depletions of
assets or incurrences of liabilities that result in decreases in https://www.google.com.ph/search?q=images+and+
equity, other than those relating to distributions to equity photos+income+statement&tbm
Retrieved: August 14, 2017
participants (IASB Framework).
Week 004: Basic Financial Statements and its Components
Types of Income and Expenses
Types of Income
Income earned in the ordinary course of business of
the firm. Examples are Sales, Service Income.
Income that does not arise from the core operations of
the firm. Examples are gains from sale of an old
machine or equipment, gain from revaluation of
assets, interest received on a bank deposit.
Categories of Expenses include the following:
Cost of goods sold Finance charges https://www.google.com.ph/search?q=images+a
nd+photos+income+statement&tbm
Distribution costs Impairment losses Retrieved: August 14, 2017

Selling, General and Administrative expenses

Week 004: Basic Financial Statements and Its Components

Accrual Concepts on Revenues and Expenses

Accrual of Revenues or Income –the recognition of all

income or revenue for the whole or entire accounting
period regardless of whether cash payments have been
received or not.
Accrual of expenses -the recognition of all expenses for
the whole accounting period irrespective of whether
cash payments have been made or not.
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cash+basis+accounting+images+and+photo
Retrieved: August 14, 2017
Week 004: Basic Financial Statements and Its Components

Purpose of the Income Statement

Income Statement serves as the basis for

measuring and evaluating the firm’s
performance for a given accounting period.

https://www.google.com.ph/search?q=purpose+of+i
ncome+statement++images+and+photos
Retrieved: August 14, 2017
Week 004: Basic Financial Statements and Its Components

Statement of Financial Position or the Balance Sheet

Balance Sheet Defined:
The balance sheet, also called the
statement of financial position, lists the
company’s assets, liabilities, and owner’s
equity as of a particular date.
Purpose: Balance sheet is use in
evaluating the financial health of a firm in
https://www.google.com.ph/search?biw=1242&bih=6
02&tbm=isch&sa=1&q=purpose+of+balance+sheet+
terms liquidity, financial, credit, and +images+and+photos
Retrieved: August 14, 2017

business risks.
Week 004: Basic Financial Statements and Its Components
Elements of the Balance Sheet
Assets-
Liabilities
Owner’s Equity
Asset is something that the company owns
and utilizes for economic benefits.
1. Current assets are asset that are
anticipated to be used by the entity within
one year from its reporting date. Examples
are Cash, Accounts Receivable, Notes
Receivable – trade https://www.google.com.ph/search?q=image
Accrued Income, Prepaid Expenses, s+for+elements+of+balance+sheet&tbm=
Retrieved: August 14, 2017
Merchandise Inventory,
Supplies
Week 004: Basic Financial Statements and Its Components

Elements of the Balance Sheet (continued)

2. Non-current assets, on the other hand, are those
expected to yield economic benefits over a long
period of time or more than a year. Examples are
Land, Building, Equipment, Plant, Machineries,
Furniture and Fixtures
Assets are also classified according to their nature.
•Tangible assets- assets with physical substance.
•Intangible assets – assets without physical https://www.google.com.ph/search?biw=1242&bih=6
02&tbm=isch&sa=1&q=non-
current+assets+images+and+photos
substance. Retrieved: August 14, 2017
Week 004: Basic Financial Statements and Its Components

Elements of the Balance Sheet (continued)

Liabilities are present obligations 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).
Current liabilities -business obligations which are
expected to be paid within a year from the reporting
date. Examples of short-term liabilities are Trade Payables,
https://www.google.com.ph/search?biw=1242&bih=602&
Accrued Expenses, Current portion of long-term liabilities. tbm=isch&sa=1&q=liabilities++images+and+photos
Retrieved: August 14, 2017
Week 004: Basic Financial Statements and Its Components

Elements of the Balance Sheet (continued)

Non-current liabilities are debts which will be paid over
a long period of time or more than a year. Examples are
Notes payable, Long- term Bank Loans, Bonds Payable.
Owner’s Equity. Refers to the residual or outstanding
interest in the business that belongs to the owners.
Categories of equity as presented in the statement of
financial position are Capital (for Sole proprietorship
and Partnership), Shareholders’ Equity (corporation). https://www.google.com.ph/search?biw=1242&bih=60
2&tbm=isch&sa=1&q=owners+equity++images+and+
photos
Retrieved: August 14, 2017
Week 004: Basic Financial Statements and Its Components

Balance Sheet (continued)

Example of traditional balance sheet (service type of
business) Gonzales Accounting Services
Statement of Financial Position
As of April 30, 2017

Assets
Current Assets
Cash P236,950
Accounts Receivable 15,000
Office Supplies 1,000
Prepaid Rent 10,500
Total current P263,450
Non-Current Assets
Office Equipment P36,500
OfficeFfurniture 10,000
Total non-current 46,500
Total Assets P309,950
Liabilities and Owner's Equity
Liability
Notes Payable P10,950
Capital
R. Gonzales, Capital 299,000
Total Liabilities and Capital P309,950
Week 004: Basic Financial Statements and Its Components

Statement of Cash Flows

Statement of Cash Flows Defined

The statement of cash flows reports the amounts of
cash inflows (cash receipts) and cash outflows (cash
disbursements) during the accounting period.
Purposes:
Shows the liquidity and solvency of a firm.
Aids in making projections of future cash flows.
https://www.google.com.ph/search?biw=1242&bih=60
2&tbm=isch&sa=1&q=purpose+of+statement+of+cash
+flows+images+and+photo
Retrieved: August 14, 2017
Week 004: Basic Financial Statements and Its Components

Statement of Cash Flows (continued)

The elements of Statement of Cash Flows :
Operating Activities – consist of cash receipts from
income or revenues and cash payments on expenses.
Investing activities – results from buying and selling
long-term assets that the firm uses for operations.
Financing activities – involves cash receipts from
owners and lenders who finance the firm and payments https://www.google.com.ph/search?q=images
+and+photos+statement+of+cash+flow&tbm=i
sch&tbo=u&source
to these people in return like payments of dividends Retrieved: August 14, 2017

and loans.
Week 004: Basic Financial Statements and Its Components

Statement of Cash Flows (continued)

Steps in Preparing the Statement of Cash Flows

1. Distinguish the activities that decrease or increase cash.

2. Classify each activity in number 1 as to operating activity,

investing activity, or financing activity.

3. Indicate the cash effect (increase or decrease) of every

activity.

4. Prepare the statement of cash flows grouping the https://www.google.com.ph/search?biw=1242&bih

=602&tbm=isch&sa=1&q=steps+in+cash+flow+stat
activities as to operating, investing, or financing activity. ement++images+and+photos
Retrieved: August 14, 2017
Week 004: Basic Financial Statements and Its Components
Statement of Cash Flows (continued)
Methods of Presenting the Statement of Cash Flows

Direct Method – list all the specific operating activities

that generate cash receipts and each core operating
activities that result to cash disbursements.

Indirect method – this format of presenting the cash

flows from operating activities starts with the Net
Income and reflects the reconciliation of net income to
operating cash flows.
https://www.google.com.ph/search?biw=1242&bih=
602&tbm=isch&sa=1&q=direct+and+indirect+metho
d+cash+flow+statemetn+images+and+photos
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Week 004: Basic Financial Statements and Its Components
Statement of Cash Flows (Direct Method)
RST Co rp o ra ti o n
Sta te me n t o f Ca s h Fl o ws
Fo r th e Ye a r En d e d D e ce mb e r 31, 2016

Ca s h fl o ws fro m Op e ra ti n g Acti vi ti e s
Ca s h I n fl o ws :
Co l l e cti o n s fro m cu s to me rs P 650,000
I n te re s t re ce i ve d o n n o te s re ce i va b l e 15,000
D i vi d e n d s re ce i ve d o n s to ck i n ve s tme n ts 8,500
To ta l Ca s h I n fl o ws P 673,500
Ca s h Ou tfl o ws :
Pa yme n ts to s u p p l i e rs (Tra d e p a ya b l e s ) P (150,000)
Pa yme n ts to e mp l o ye e s (s a l a ri e s a n d o th e r b e n e fi ts ) (60,000)
Pa yme n ts fo r i n te re s t (10,000)
Pa yme n ts fo r i n co me ta xe s (18,500)
To ta l Ca s h Ou tfl o ws (238,500)
Ne t Ca s h I n fl o ws (Ou tfl o ws ) fro m o p e ra ti n g a cti vi ti e s P 435,000

Ca s h Fl o ws fro I n ve s ti n g Acti vi ti e s
Ca s h I n fl o ws :
Pro ce e d s fro m s a l e o f p l a n t a s s e ts P 65,000
Co l l e cti o n s o f p ri n i ci p a l a mo u n t o f l o a n s to a n o th e r co mp a n y 25,000
To ta l Ca s h I n fl o ws P 90,000
Ca s h Ou tfl o ws :
Lo a n s to a n o th e r co mp a n y P (30,000)
Acq u i s i ti o n o f p l a n t a s s e ts (300,000)
To ta l Ca s h Ou tfl o ws (330,000)
Ne t Ca s h I n fl o ws (Ou tfl o ws ) fro m i n ve s ti n g a cti vi ti e s P (240,000)

Ca s h fl o ws fro m Fi n a n ci n g Acti vi ti e s
Ca s h I n fl o ws :
Pro ce e d s fro m th e i s s u a n ce o f o rd i n a ry s h a re s P 100,000
p ro ce e d s fro m th e i s s u a n ce o f l o n g-te rm n o te s p a ya b l e 50,000
To ta l Ca s h I n fl o ws P 150,000
Ca s h Ou tfl o ws :
Pa yme n t o f l o n g -te rm n o te s p a ya b l e s (p ri n ci p a l ) P (20,000)
Pa yme n t o f d i vi d e n d s (12,000)
To ta l Ca s h Ou tfl o ws (32,000)
Ne t ca s h i n fl o ws (o u tfl o ws ) fro m fi n a n ci n g a cti vi ti e s P 118,000

I n cre a s e (d e cre a s e ) i n CAs h P 313,000

Ca s h Ba l a n ce , D e ce mb e r 31, 2015 75,700
Ca s h Ba l a n ce , D e ce mb e r 31, 2016 P 388,700
Week 004: Basic Financial Statements and Its Components

Statement of Changes in Owner’s Equity (SCOE

Definition
Statement of Changes in Owner’s Equity is a financial
statement that shows the changes in the equity portion
of the balance sheet during the accounting period.
Purpose
Statement of changes in equity assists the users of
financial statement to categorize the factors that cause
https://www.google.com.ph/search?biw=1242&bih=6
a change in the owners' equity throughout the 02&tbm=isch&sa=1&q=purpose+of+statemetn+of+o
wners+equity+images+and+photos
Retrieved: August 14, 2107
accounting period.
Week 004: Basic Financial Statements and Its Components

Relationships of Financial Statements

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_ylt=AwrxhSlSlZFZ4UoAzV_fSQx.;_ylu=?p=Fina
ncial+Statement
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Thank you very
much and God
bless everyone!