ISU MODULE TEMPLATE

Subject: INTERMEDIATE ACCOUNTING III

Title of the Module
Chapter 1: Financial Statements
Learning Outcome
At the end of the chapter, the students should be able to:

 Identify the components of financial statements.

 Know the objective of financial statements.
 Know the objective of financial reporting.
 Understand the primary responsibility for the preparation of financial statements.
 Identify the general features in the preparation of financial statements.

Financial Statements are the means by which the information accumulated and processed in financial accounting is periodically
communicated to the users.

Financial Statements are a structured financial representation of the financial position and financial performance of an entity.

Financial Statements are the “structured representation of an entity’s financial position and results of its operation.” (PAS1.9)

General purpose financial statements (financial statements) are “those intended to meet the needs of users who are not in a position
to require an entity to prepare reports tailored to their particular needs.” (PAS 1.7)

Components of Financial Statements

A complete set of financial statements comprises the following components:

 Statement of Financial Position

 Statement of Financial Performance
 Statement of Comprehensive Income
 Statement of Changes in Equity
 Statement of Cash Flows
 Notes, comprising a summary of significant accounting policies and other explanatory information

Objective of Financial Statements

The objective of general purpose financial statements is to provide information about the financial position, financial performance
and cash flows of an entity that is useful to a wide range of users in making economic decisions.

Financial statements also show the results of the stewardship of management of the resources entrusted to it.

To meet this objective, financial statements provide information about the following:

 Assets
 Liabilities
 Equity
 Income and Expenses, including gains and losses
 Contributions by and distributions to owners in their capacity as owners
 Cash flows
Financial position
The financial position comprises the assets, liabilities, and equity of an entity at a particular moment in time.

Specifically, financial position pertains to the liquidity, solvency, and the needs of the entity for additional financing.

Financial Performance
The financial performance comprises the revenue, expenses, and net income or loss of an entity for a period of time

Performance is the level of income earned by the entity through the efficient and effective use of its resources.

The financial performance of an entity is also known as results of operations and its portrayed in the income statement and
statement of comprehensive income.

Cash Flows
Cash flows are the cash receipts and cash payments arising from the operating, investing, and financing activities of the entity.

The information about cash receipts and cash payments is presented in the statement of cash flows.

Financial Reporting
Financial reporting is the provision of financial information about an entity to external users that is useful to them in making
economic decisions and for assessing the effectiveness of the entity’s management.

The principal way of providing financial information to external users is through the annual financial statements.

Responsibility for financial statements

The management of an entity has the primary responsibility for the preparation and presentation of financial statements.

General Features of Financial Statements

Fair Presentation
 Present fairly the financial position, financial performance, and cash flows of an entity
 In accordance with PFRS
 PAS 1 requires an entity whose financial statements comply with PFRSs to make an explicit and unreserved statement of
such compliance in the notes. However, an entity shall not make such statement unless in complies with all the
requirements of PFRSs.

Fair presentation is defined as faithful representation of the effects of transactions and other events in accordance with the
definitions and recognition criteria for assets, liabilities, income and expenses laid down in the conceptual framework

Going Concern
 Means that the accounting entity is viewed as continuing in operation indefinitely in the absence of evidence to the
contrary.
 Financial statements are prepared normally on the assumption that the entity shall continue in operation for the foreseeable
future
 When preparing financial statements, management shall assess the entity’s ability to continue as a going concern,
considering all available information.

Financial statements shall be prepared on a going concern basis unless management intends to liquidate the entity or cease trading
or has no realistic option but to do so

Accrual Basis
 An entity shall prepare the financial statements, using the accrual basis of accounting expect for cash flow information.
 The effects of transactions and other events are recognized when they occur and not as cash or cash equivalent is received
or paid, and they are recorded and reported in the financial statements of the periods to which they relate.

Accrual accounting means that income is recognized when earned regardless of when received and expenses is recognized when
incurred regardless of when paid.
Materiality and Aggregation
 An entity shall present separately each material class of similar items
 Financial statements result from processing large number of transactions or other events that are aggregated into classes
according to their nature or function

Materiality dictates that “an entity need not provide a specific disclosure required by PFRS if the information is not material”.

Information is material if omitting, misstating, or obscuring it could reasonably be expected to influence the economic decisions
that primary users of general purpose financial statements make on the basis of those statements which provide information about a
specific reporting.

Offsetting
 Assets and liabilities, and income and expenses when material, shall not be offset against each other.
 Offsetting may be done when it is required or permitted by another PFRS

Frequency of Reporting
 An entity shall present a complete set of financial statements at least annually

When an entity changes the end of the reporting period and presents financial statements for a period longer or shorter than one
year, the entity shall disclose:

 The period covered by the financial statements.

 The reason for using a longer or shorter period.
 The fact that amounts presented in the financial statements are not entirely comparable.

Comparable Information
 Financial statements of the current period shall be presented with comparable figures of the financial statements of the
immediately preceding year.
 Comparative information shall be included for narrative and descriptive information when it is relevant to an understanding
of the current period’s financial statements.

PAS 1 requires an entity to present comparative information in respect of the preceding period for all amounts reported in the
current period’s financial statements, unless another PFRS requires otherwise.

Consistency of Presentation
 The principle of consistency requires that the accounting methods and practices shall be applied on a uniform basis from
period to period.

A change in the presentation and classification of items in the financial statements is allowed:
 When it is required by another standard
 When significant change in the nature of the operations of the entity will demonstrate a more appropriate revised
presentation and classification

Additional Statement of Financial Position

 The entity applies an accounting policy retrospectively, makes a retrospective restatement of items in its financial
statements, or reclassifies items in its financial statements; and
 The instance in (1) has a material effect on the information in the statement of financial position at the beginning of the
preceding period.