Subject: FINANCIAL MANAGEMENT

Author: Mr. Viron R. Calma

Editor:
Reviewer:

Lesson 3: THE FINANCIAL STATEMENTS

(Module No. 3)

Description of the Lesson:

At first glance, financial statements can be overwhelming—but if

we know what we are looking for, we can quickly learn a great deal
about a company after a quick review of its financial statements.

Looking at the balance sheet, we can see how large a company is,
the type of assets it holds, and how it finances those assets. Looking at the
income statement, we can see if the company’s sales increased or
declined and whether the company made a profit. Glancing at the
statement of cash flows, we can see if the company made any new
investments, if it raised funds through financing, repurchased debt or
equity, or paid dividends.

Objectives:

At the end of this lesson, the student is expected to do the following:

1. List each of the key financial statements and identify the kinds of information they provide to
corporate managers and investors;
2. appreciate the components, objectives, responsibility, general features, and identification of
financial statements; and
3. know the accountability of management.

Day 1: Pre-assessment (What I know)

Direction: Write IS if the account could be shown in the Income Statement and BS if in the Balance
Sheet.

Date Accomplished: ____________________________

1.

2. Salaries Expense _____

3. Cash on Hand _____
4. Accounts Receivable _____
5. Sales _____
6. Accounts Payable _____

Day 2: Lesson Content (What’s new)

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How was activity above? I hope you enjoyed answering it. Before we proceed with our lesson I want
you to ask yourself the following questions.

Are you that familiar with the financial statements of an entity?

Now, let’s start our lesson.

A. The Financial Statements

Financial statements are 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. (https://www.investopedia.com/terms/f/financial-statements.asp)

Financial statements are the main source of financial information for most decision
makers. That is why financial accounting and reporting places such a high emphasis on the
accuracy, reliability, and relevance of the information on these financial statements.
(https://www.myaccountingcourse.com/accounting-dictionary/financial-statements)

Financial statements are written records of a business's financial situation. They include
standard reports like the balance sheet, income or profit and loss statements, and cash flow
statement. They stand as one of the more essential components of business information, and as
the principal method of communicating financial information about an entity to outside parties.
In a technical sense, financial statements are a summation of the financial position of an entity at
a given point in time. Generally, financial statements are designed to meet the needs of many
diverse users, particularly present and potential owners and creditors. Financial statements result
from simplifying, condensing, and aggregating masses of data obtained primarily from a
company's (or an individual's) accounting system. (https://www.inc.com/encyclopedia/financial-
statements.html)

Day 3: Let’s Keep on Learning!

B. Components of Financial Statements

The components of Financial Statements are the building blocks that together form the
Financial Statements and helps in understanding the financial health of the business consist of
Income Statement, Balance Sheet, Statement of Cash Flow, Statement of Changes in Equity,
and the Notes to Financial Statements. Each component serves a purpose and helps in
understanding the financial affairs of the business in a summarized fashion.
(https://www.wallstreetmojo.com/components-of-financial-statements/)

1. Statement of Financial Position or the Balance Sheet

Balance Sheet reports the financial position of the business at a particular point in time. It
is also known as the Statement of Financial Position or Statement of Financial Condition or
Position Statement.

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 Source: https://www.istockphoto.com/
It shows the Assets owned by the business on one side and sources of funds used by the
business to hold such assets in the form of Capital contribution and liabilities incurred by the
business on the other side. In a nutshell, the Balance Sheet shows how the money has been
made available to the business of the company and how the company employs the money.

2. Statement of Comprehensive Income or the Income Statement

The Income Statement reports the financial performance of the business over some time
and comprise of Revenue (which comprise of all cash inflows from the manufacturing of goods
and rendering of services), Expenses (which comprise of all cash outflows incurred in the
manufacturing of goods and rendering of services) and also comprise of all gains and losses
which are not attributable in the ordinary course of business. Excess of Revenues over
Expenses result in Profit and vice versa, resulting in Loss for the business during that period.

Source: https://www.istockphoto.com/

Under IFRS, Income Statement also comprises of Other Comprehensive Income, which
consists of all changes in Equity except for shareholder transactions and, as such, can be
presented together as a single statement. However, as per US GAAP guidelines, Statement of
Comprehensive Income forms part of Statement of Changes in Equity.

Day 4-5: Let’s Keep on Learning!

3. Statement of Changes in Equity

This statement is one of the components of the financial statement which reports the
amount and sources of changes in Equity Shareholders Investment in the business over a while.
It summarizes the changes in the capital and reserves attributable to equity holders of the
company over the accounting period, and accordingly, all the increase and decrease during the
year when adjusted with the Beginning balance results in Ending balance.

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 Source: https://www.istockphoto.com/

The statement includes transactions with shareholders and reconciles the beginning and
ending balance of each equity account, including capital stock, additional paid-in capital,
retained earnings, and accumulated other comprehensive income. The statement shows how the
composition of equity (share capital, other reserves, and Retained Earnings) has changed over
the year.

4. Statement of Cash Flow

This statement shows the changes in the financial position of the business from the
perspective of the movement of cash into and from the business. The primary rationale behind
the preparation of a cash flow statement is to supplement the Income Statement and Statement
of Financial Position as these statements don’t provide sufficient insight into movements in
cash balances.

Source: https://www.istockphoto.com/

The cash flow statement bridges that gap and helps various stakeholders of the business
to understand the sources of cash and utilization of cash.

5. Notes to the Financial Statements

Also referred to as footnotes. These provide additional information pertaining to a

company's operations and financial position and are considered to be an integral part of the
financial statements. The notes are required by the full disclosure principle.

Day 6: Post-Assessment (What I have learned?)

Activity 1: Instruction: Write the correct answer on a yellow paper for the following.

Date Accomplished: ____________________________

________________1. These are written records of a business's financial situation.

________________2. These are the building blocks that together form the Financial Statements and
helps in understanding the financial health of the business consist of Income Statement, Balance Sheet,
Statement of Cash Flow, and Statement of Changes in Equity.

________________3. It reports the financial position of the business at a particular point in time. It is
also known as the Statement of Financial Position or Statement of Financial Condition or Position
Statement.
________________4. It reports the financial performance of the business over some time and comprise
of Revenue (which comprise of all cash inflows from the manufacturing of goods and rendering of
services), Expenses (which comprise of all cash outflows incurred in the manufacturing of goods and

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rendering of services) and also comprise of all gains and losses which are not attributable in the ordinary
course of business.

________________5. It summarizes the changes in the capital and reserves attributable to equity holders
of the company over the accounting period, and accordingly, all the increase and decrease during the
year when adjusted with the beginning balance results in ending balance.

________________6. This statement shows the changes in the financial position of the business from
the perspective of the movement of cash into and from the business.

_________________7. . These provide additional information pertaining to a company's operations and

financial position and are considered to be an integral part of the financial statements.

Activity 2: Instruction: Write a short essay on a yellow paper for the question below.

Discuss briefly the five (5) financial statements, based on your own
understanding.

Congratulations! I am happy that you were able to finish our module on The Financial
Statements. Now I am encouraging you to share with me, what is your most favorite part of this
module? Your answer will help me improve the module for our next topic. Please write your answer on
the space provided.

____________________________________________________________________________________
____________________________________________________________________________________
REMINDERS:

Things you have to remember before you finish this module.

1. Keep the following and put it in your portfolio

-Notes and activities written on one whole sheet of short bond paper.
2. If you have questions, clarification and suggestions please send a message to your teacher via SMS or
CHAT.

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