Accounting &

Financial Reporting

External Financial Statements

ACC913
 FINANCIAL STATEMENTS

The Main objective of Financial

Reporting is to report financial
information that is useful in making
General-Purpose
decisions about providing resources of financial reporting
to the reporting entity

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 FINANCIAL STATEMENTS

In order for Financial statements to

be useful to all its users. It must be
prepared in conformity with the
General-Purpose
GAAP. of financial reporting
Generally Accepted Accounting Principals

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 FINANCIAL STATEMENTS

thousands)
Income Statement (in
Revenues:
$ 285,000
Sales
17,000
Interest revenue
Total revenu e 302 ,000 An integral part of the
Expenses:
Cost of goods sold
Advertisi ng exp ens e
149,000
10,000 financial statements. The
e 43,000
Depreciation expens
Interest exp ens e
Income tax expense
21,000
24,000 purpose of the notes is to
es 247 ,000
Total expens
Net income
$ 55,000
provide informative
$ 0.75
Earnings per share
disclosure that are required
by the GAAP (Description
not correction)

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 FINANCIAL STATEMENTS
Include items that must bypass the Measures the entity Cash in and
income statement because they have out over a given period of time.
not been realized.

Measures the earnings of Clarify the capital

an entity’s operations over Measure the entity’s structure of the
a given period of time. financial position on a entity
certain point of time. 5
 FINANCIAL STATEMENTS

thousands)
Income Statement (in
Revenues:
$ 285,000
Sales
17,000
Interest revenue
30 2,000
Total revenue
Expenses:
149,000
Cost of goods sold
10,000
Advertising expense
43,000
Depreciation expense
21,000
Interest expense
24,000
Income tax expense
24 7,000
Total expenses
$ 55 ,000
Net income

$ 0.75
Earnings per share

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 INCOME STATEMENT
The Income statement reports the
results of an entity’s operations
over a period of time such as a
year. It is used to measure
profitability, creditworthiness,
and investment value of an entity.
Also called profit and loss statement
Income statement accounts are
Temporary Accounts which are
closed in the permanent account
“Retained Earnings” on the balance
sheet, at the end of each period.
Thus at the beginning of each fiscal
year, the balances of Income
Statement are ZERO
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 INCOME STATEMENT

Income Statement
Equitation
Income (Loss) = Revenues + Gains - Expenses - Loss

Revenues Inflows from delivering or producing goods, providing

services or any other activities that qualifies as firm’s main
activity

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 INCOME STATEMENT

Income Statement
Equitation
Income (Loss) = Revenues + Gains - Expenses - Loss

Gain Other inflows from activities that doesn’t qualify as firm’s

main activity

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 INCOME STATEMENT

Income Statement
Equitation
Income (Loss) = Revenues + Gains - Expenses - Loss

Expenses Outflows from delivering or producing goods, providing

services or any other activities that qualifies as firm’s main
activity

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 INCOME STATEMENT

Income Statement
Equitation
Income (Loss) = Revenues + Gains - Expenses - Loss

Losses Other outflows from activities that doesn’t qualify as firm’s

main activity

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 INCOME STATEMENT
Income Statement (in thousands)
Revenues: Formats of Income Statement
Sales $ 285,000
Interest revenue 17,000 1. Single Step Income Statement
Total revenue 302,000
Expenses:
It subtracts total expenses and
Cost of goods sold 149,000
Advertising expense 10,000 losses from the total revenues and
Depreciation expense 43,000 gains in single step. No attempt to
Interest expense 21,000
Income tax expense 24,000
categorize expenses or revenues to
Total expenses 247,000 reach subtotals.
Net income $ 55,000

Earnings per share $ 0.75

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 INCOME STATEMENT
Income Statement (in thousands)
Sales $ 285,000
Cost of goods sold 149,000 Formats of Income Statement

Operating
Gross profit 136,000
Operating expenses: 2. Multiple Step Income Statement
Advertising expense 10,000
Depreciation expense 43,000
Total operating expense 53,000
More popular. The presentation
Income from operations 83,000 divides information operating and
Other revenue (expense):
non operating categories

Operating
Interest revenue 17,000
Non-
Interest expense (21,000)
Total other (4,000)
Income before taxes 79,000
Income tax expense 24,000
Net income $ 55,000

Earnings per share $ 0.75 13

 INCOME STATEMENT

Discontinued Operations
Is a component of the company that has
or will be eliminated from the +/- Discontinued Operations

Additional
operations. It is recorded in a separate

Items
section after continuing operations Net Income

Discontinued operations are shown net of tax

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 INCOME STATEMENT

Extraordinary Items:
FASB had removed this concept from GAAP for both public and
private companies.
An entity is required to separately present items that are of an
unusual nature and/or occur infrequently on a pretax basis within
income statement from continuing section.

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 INCOME STATEMENT
Income Statement Matching Principal
Is an essential principal in recording Cost and Expenses, associating
cause and effect.

Ex. There is a direct relationship found when

the cost of good sold is recognized in the
same period as the revenue from sale of the
goods

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 FINANCIAL STATEMENTS

thousands)
Income Statement (in
Revenues:
$ 285,000
Sales
17,000
Interest revenue
30 2,000
Total revenue
Expenses:
149,000
Cost of goods sold
10,000
Advertising expense
43,000
Depreciation expense
21,000
Interest expense
24,000
Income tax expense
24 7,000
Total expenses
$ 55 ,000
Net income

$ 0.75
Earnings per share

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COMPREHENSIVE INCOME STATEMENT

Includes all changes in equity “Net

Assets” of a business during a period
except those transactions with the
owners such as (distribution to owners
or dividends or sale of shares).

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COMPREHENSIVE INCOME STATEMENT

Other comprehensive Income Items “OCI”

1. Foreign currency translation adjustments
2. Gains or losses and prior service costs or
credits related to defined benefit pension
plan
3. Unrealized holding gains or losses in
available for sale securities
4. The effective portion of the gain or loss
on a derivative designated as a cash flow
hedge. Shown net of tax
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 COMPREHENSIVE INCOME STATEMENT

Firms has the option of presenting comprehensive income statement either

part of an income statement “appended at end” or as a separate
statement. Comprehensive income statement can
V. Gill Inc.
Combined Statement of Comprehensive Income no longer be presented as a part of
For the Year Ended December 31, 2007 statement of shareholder’s equity
Sales revenue $ 800,000
Cost of goods sold 600,000
Gross profit 200,000
Operating expenses 90,000
Net income 110,000
Unrealized holding gain, net of tax 30,000
Comprehensive income $ 140,000

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 INCOME STATEMENT
In a multiple-step income statement for a retail company, all of the
following are included in the operating section except

A. Sales.
B. Cost of goods sold.
C. Dividend revenue.
D. Administrative and selling expenses.

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 INCOME STATEMENT
Which one of the following would be shown on a multiple-step
income statement but not on a single-step income statement?

A. Loss from discontinued operations.

B. Gross profit.
C. Cost of goods sold.
D. Net income from continuing operations.

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 INCOME STATEMENT
Comprehensive income is best defined as
A. Net income excluding extraordinary gains and losses.
B. The change in net assets for the period including
contributions by owners and distributions to owners.
C. Total revenues minus total expenses.
D. The change in net assets for the period excluding owner
transactions.

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 INCOME STATEMENT
Which one of the following items is included in the determination of
income from continuing operations?

A. Discontinued operations.
B. Extraordinary loss.
C. Cumulative effect of a change in an accounting principle.
D. Unusual loss from a write-down of inventory.

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 INCOME STATEMENT
In recording transactions, which of the following best describes the
relation between expenses and losses?
A. Losses are extraordinary charges to income, whereas
expenses are ordinary charges to income.
B. Losses are material items, whereas expenses are immaterial
items.
C. Losses are expenses that may or may not arise in the course
of ordinary activities.
D. Expenses can always be prevented, whereas losses can never
be prevented.
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 INCOME STATEMENT
An entity has a 50% gross margin, general and administrative
expenses of $50, interest expense of $20, and net income of $10 for
the year just ended. If the corporate tax rate is 50%, the level of sales
revenue for the year just ended was
A. $90
B. $135
C. $150
D. $180

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FINANCIAL STATEMENTS

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 BALANCE SHEET

Called also “statement of financial position”. It

provide information about entity’s assets,
Statement Liabilities and owners equity at a certain point
of time. It is a permanent (Real) accounts
Objective because balances are carried forward to the
following accounting period.

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 BALANCE SHEET

This statement helps users assess

1. Liquidity.
Statement 2. Financial Flexibility.
3. The effectiveness with which assets are
Objective used.
4. Capital Structure.
5. Risk.

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 BALANCE SHEET

Balance Sheet Equitation Based on the proprietary Theory

Assets = Liabilities + Owner’s Equity

Resource Structure Side Finance Structure Side

Value Debt Net Worth

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 BALANCE SHEET

Horizontal Form or Account Form

Lists assets on the left side
and liabilities and
shareholder’s equity on the
right side.

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BALANCE SHEET

Vertical Form or Report Form

Lists assets on the top and
liabilities and shareholder’s
equity at the bottom.

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BALANCE SHEET

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BALANCE SHEET

Assets & Liabilities are

generally reported in
order of liquidity

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BALANCE SHEET

Assets and Liabilities are

separated in the statement
of financial position to
Current & Non Current
Categories

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BALANCE SHEET

Are cash and other assets expected to be

converted into cash, sold or consumed within
one year or one operating cycle, whichever
is longer.

Cash and Cash Equivalent – Marketable Securities –

Receivables – Inventory – Prepaid Expenses

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 BALANCE SHEET

The Current Asset items are not considered

current if they are not expected to be realized in
one year or one operating cycle
Ex. Cash restricted for purpose other than
current obligation payment.

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BALANCE SHEET

Are those not qualify as current. They are

expected to be held beyond the longer of 1
year or the operating cycle

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BALANCE SHEET

The followings assets are included:

1. Investment in securities
2. Available for sale and held to Maturity
debt securities
3. Funds restricted as to withdrawal or use
for other than current operations
Ex. Retire long-term debt
4. Lessor’s net investment in a sales type
lease

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BALANCE SHEET

Physical facilities used in the operations of the

business and are not intended for sale to
customers.

They are generally long lived and are

expected to provide benefit for numbers of
years to come.

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BALANCE SHEET

Lack physical substance and are not financial

instruments.

Ex. Goodwill – Patent – Trademarks –

Franchise - Copyrights

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BALANCE SHEET

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 BALANCE SHEET

Debts or obligations that can reasonably

be expected to be paid from the existing
current assets within one year or an
operating cycle whichever is longer.

Ex. Accounts & Notes Payable - Current

Maturity of long term debt – Unearned
Revenues – Accrued Expenses

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 BALANCE SHEET

Current liabilities don’t include short-term debt if

an entity intends to refinance them on a
noncurrent basis and demonstrate and ability to
do so Ex. Entering into a refinancing agreement before balance
sheet is issued.

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 BALANCE SHEET

The residual ownership interest in the

assets of an entity that remains after
deducting its liabilities

Ex. Capital – Retained Earnings – Treasury

Stock – Additional Paid in capital

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 BALANCE SHEET

Paid-in
Capital Common
Stock Retained
Capital earnings
Stock
Preferred
Stock

Common
Stock
Additional
Paid-in
Capital Preferred
Stock
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 BALANCE SHEET
TERMONOLOGY NUMBER OF SHRES DISCLOSED
Share authorized Number specified in the corporate charter.
Number of shares that have been issued to
Shares issued
share owners.
Number of shares still held by share
Shares outstanding
owners
Number of issued share purchased by
Treasury stock corporation form share owners and not
formally retired.
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 BALANCE SHEET

Equity is affected not only by

operations but also by
Equity transactions with owners, such
as

Dividends and Contributions

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 BALANCE SHEET

Investment by owners Distributions to owners

Are increases in equity Are decreases in equity
They results from transfers of They result from transferring assets
something of a value to increase the to owners which will decrease the
ownership interest. ownership interest.

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 BALANCE SHEET
The primary purpose of the statement of financial position is to
reflect
A. The fair value of the firm’s assets at some moment in time.
B. The status of the firm’s assets in case of forced liquidation of
the firm.
C. The success of a company’s operations for a given amount of
time.
D. Items of value, debt, and net worth.

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 BALANCE SHEET
Prepaid expenses are valued on the statement of financial position at
the
A. Cost to acquire the asset.
B. Face amount collectible at maturity.
C. Cost to acquire minus accumulated amortization.
D. Cost less expired or used portion.

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 BALANCE SHEET
Long-term obligations that are or will become callable by the
creditor because of the debtor’s violation of a provision of the debt
agreement at the balance sheet date should be classified as
A. Long-term liabilities.
B. Current liabilities unless the debtor goes bankrupt.
C. Current liabilities unless the creditor has waived the right to
demand repayment for more than 1 year from the balance
sheet date.
D. Contingent liabilities until the violation is corrected

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 BALANCE SHEET
A corporation uses a calendar year for financial and tax reporting
purposes and has $100 million of mortgage bonds due on January
15, Year 2. By January 10, Year 2, the corporation intends to
refinance this debt with new long-term mortgage bonds and has
entered into a financing agreement that clearly demonstrates its
ability to consummate the refinancing. This debt is to be
A.Classified as a current B. Classified as a long-term liability on
liability on the statement of the statement of financial position at
financial position at December 31, Year 1.
December 31, Year 1. C. Retired as of December 31, Year 1.
D. Considered off-balance-sheet debt.
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FINANCIAL STATEMENTS

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 OWNER’S EQUITY STATEMENT

Statement of changes in Equity

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 OWNER’S EQUITY STATEMENT

A statement of changes in equity presents a reconciliation for the

accounting period of the beginning balance for each component of
equity to the ending balance.

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 OWNER’S EQUITY STATEMENT

❶
❷
❸
❹
❺

Each item change is disclosed separately

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Retained Earnings

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 OWNER’S EQUITY STATEMENT

Retained Earnings Beginning

Net Income (Loss) for the Period

Dividends distributed during the period
Prior year Adjustments

Retained Earnings Ending

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 PRIOR-PERIOD ADJUSTMENTS
Prior-period adjustments includes:
• Changes in accounting
principle (e.g., change in
inventory valuation method)
• Corrections of prior-period
financial statement errors.
Retrospective Application
Adjustment of the carrying
amounts of assets, liabilities,
and retained earnings at the
beginning of the first period
reported for the cumulative
effect of the new principle or
the error on the prior periods
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 PRIOR-PERIOD ADJUSTMENTS

Prior-period adjustments

Correction of prior-period errors and the

cumulative effect of changes in accounting
principle must not be included in the calculation
of current-period net income.

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 CHANGES IN ACCOUNTING ESTIMATE

Changes in accounting estimate like Prospective application

a change in the percentage of credit
sales for estimation of bad debt The effect of a change in
expense accounting estimate is
accounted for only in the
period of change and any future
periods affected

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 OWNER’S EQUITY STATEMENT

Items reported as prior-period adjustments

A. Do not include the effect of a mistake in the application of
accounting principles, as this is accounted for as a change in
accounting principle rather than as a prior-period adjustment.
B. Do not affect the presentation of prior-period comparative
financial statements.
C. Do not require further disclosure in the body of the financial
statements.
D. Are reflected as adjustments of the opening balance of the
retained earnings of the earliest period presented.
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 OWNER’S EQUITY STATEMENT

The statement of shareholders’ equity shows a

A. Reconciliation of the beginning and ending balances in
shareholders’ equity accounts.
B. Listing of all shareholders’ equity accounts and their
corresponding dollar amounts.
C. Computation of the number of shares outstanding used for
earnings per share calculations.
D. Reconciliation of net income to net operating cash flow

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FINANCIAL STATEMENTS

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 CASH FLOW STATEMENT

Provide relevant information about the cash

receipts “Cash Inflow” and cash payments
Statement “Cash Outflow” of an entity during the period.

It helps the users to assess the entity’s ability to

Objective generate positive future cash flow (Liquidity),
and its ability to meet the obligations (Solvency)

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STATEMENT RELATIONS

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NOTES

Additional information is provided by

financial statement notes, supplementary
information (such as management’s
discussion and analysis), and other
disclosures.

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NOTES

The notes are considered part of the

basic financial statements.

They amplify or explain information

recognized in the statements and are an
integral part of statements prepared in
accordance with GAAP.

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 NOTES

Financial statement notes should not be used to

correct improper presentation

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 NOTES

To be useful, information presented in

the financial statements must be
relevant and faithfully represented

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NOTES

To enhance the usefulness, the

information should be comparable
with similar information for

• Other entities
• The same entity for another
period or date.

Comparability allows users to understand

similarities and differences.

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 NOTES

Financial statements are prepared under the going-concern assumption

Means that the entity is assumed to
continue operating indefinitely or It is
assumed that the entity is not going to be
liquidated in the near future.

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 SUBSEQUENT EVENTS

A subsequent event is an event occurring

between the balance sheet date and the
Subsequent issuance date of the annual report

Event Subsequent events provide evidence regarding

conditions that didn’t exist on the balance
sheet date should be disclosed in a note,
supplemental schedule, or pro forma
statement

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External Financial Reporting
Decisions

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