COLLEGE OF MARY IMMACULATE

JP Rizal St., Poblacion, Pandi, Bulacan

(044) 769.2021
https://www.collegeofmaryimmaculate.edu.ph

II. FINANCIAL STATEMENTS

Financial statements are those that present financial information to various

interested parties. Inasmuch as the finance manager is responsible for managing the
financial activities of the firm, he is naturally one of the most concerned about getting
relevant information through the use of financial statements.

Financial statements are prepared and presented at least annually and are directed
toward the common information needs of a wide range of users.

Users of Financial Statements

a. Investors – determine whether they should buy, hold or sell. Assess also the
ability of the entity to pay dividends
b. Employees – concern about the stability and profitability of their employers.
Assess also the ability of the entity to provide remuneration and other benefits
c. Lenders – determine whether their loans, and the interest attaching to them,
will be paid when due
d. Suppliers and other trade creditors – interested whether amounts owing to
them will be paid when due
e. Customers – interest in information about the continuance of an entity
especially when they have a long-term involvement with or dependent on the
entity
f. Governments and their agencies – interested in the allocation of resources and
the activities of entities for regulation, taxation and economic statistics
g. Public – contribution to the local economy, e.g. employment and patronage of
local suppliers

Management Responsibility

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

Management is also interested in the information contained in the financial

statements even though it has access to additional management and financial
information that helps it carry out its planning, decision-making and control
responsibilities.

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For the exclusive use of Officially Enrolled CMIans only. Unauthorized use, reproduction,
sharing or distribution is strictly prohibited.
 COLLEGE OF MARY IMMACULATE
JP Rizal St., Poblacion, Pandi, Bulacan
(044) 769.2021
https://www.collegeofmaryimmaculate.edu.ph

Objective of Financial Statements

To provide information about:

1. Financial position;
2. Performance; and
3. Changes in financial position 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, or the
accountability of management for the resources entrusted to it.

However, financial statements do not provide all the information that users may need
to make economic decisions.

Information on Financial Position

➢ Economic Resources
• Useful in predicting the ability of the entity to generate cash and cash
equivalents in the future

➢ Financial Structure
• Useful in predicting future borrowing needs and how future profits and
cash flows will be distributed among those with an interest in the entity
• Useful in predicting how successful the entity is likely to be in raising
further finance

➢ Liquidity and Solvency

• Useful in predicting the ability of the entity to meet its financial
commitments as they fall due

Information on Financial Performance

➢ To assess potential changes in the economic resources that it is likely to control

in the future
➢ Useful in predicting the capacity of the entity to generate cash flows from its
existing resource base
➢ Useful in forming judgments about the effectiveness with which the entity
might employ additional resources

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For the exclusive use of Officially Enrolled CMIans only. Unauthorized use, reproduction,
sharing or distribution is strictly prohibited.
 COLLEGE OF MARY IMMACULATE
JP Rizal St., Poblacion, Pandi, Bulacan
(044) 769.2021
https://www.collegeofmaryimmaculate.edu.ph

Information on Changes in Financial Position

➢ Useful in order to assess its investing, financing and operating activities during
the reporting period
➢ Useful in providing the user with a basis to assess the ability of the entity to
generate cash and cash equivalents and the needs of the entity to utilize those
cash flows

ELEMENTS OF FINANCIAL STATEMENTS

The elements of financial statements refer to the quantitative information shown in

the statement of financial position (balance sheet) and statement of profit or loss
(income statement).

The elements directly related to the measurement of financial position are assets,
liabilities and equity.

The elements directly related to the measurement of financial performance are

income and expenses.

The elements of financial statements are the “building blocks” from which financial
statements are constructed.

The elements of financial statements are broad classes of events or transactions that
are grouped according to their economic characteristics.

The elements of financial statements are as follows:

1. Assets are defined as “resources controlled by the entity as a result of past

transactions or events and from which future economic benefits are expected
to flow to the entity”.

2. Liabilities are “present obligations of the entity arising from past transactions
or events the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits”.

3. Equity is the “residual interest in the assets of the entity after deducting all of
its liabilities”.

COLLEGE OF MARY IMMACULATE © 2021. All Rights Reserved.

For the exclusive use of Officially Enrolled CMIans only. Unauthorized use, reproduction,
sharing or distribution is strictly prohibited.
 COLLEGE OF MARY IMMACULATE
JP Rizal St., Poblacion, Pandi, Bulacan
(044) 769.2021
https://www.collegeofmaryimmaculate.edu.ph

4. Income is “increase in economic benefit during the accounting period in the

form of an inflow or increase of asset or decrease of liability that results in
increase in equity, other than contribution from equity participants”.

5. Expense is “decrease in economic benefit during the accounting period in the

form of an outflow or decrease of asset or increase of liability that results in
decrease in equity, other than distribution to equity participants”.

THE BALANCE SHEET / STATEMENT OF FINANCIAL POSITION

The Balance Sheet is the statement produced periodically, normally at the end of a
financial year, showing an entity’s assets, liabilities, and owner’s equity.

Current/Non-current Distinction

Assets and liabilities should be presented on the face of the balance sheet:
• Using a current / non-current classification; or
• Broadly in order of their liquidity

Whichever method is chosen, disclose amounts due for recovery or settlement after
more than 12 months for each asset and liability item.

Current Assets

Current Assets are:

a. Expected to be realized in, or is intended for sale or consumption in, the entity’s
normal operating cycle;
b. Held primarily for the purpose of being traded;
c. Expected to be realized within 12 months after the balance sheet date; or
d. Cash or cash equivalent (as defined in IAS 7 Cash Flow Statements) unless
restricted from being exchanged or used to settle a liability for at least 12
months after the balance sheet date

All other assets shall be classified as non-current.

Current Liabilities

Current Liabilities are:

a. Expected to be settled in the entity’s normal operating cycle;
b. Held primarily for the purpose of being traded;
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For the exclusive use of Officially Enrolled CMIans only. Unauthorized use, reproduction,
sharing or distribution is strictly prohibited.
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JP Rizal St., Poblacion, Pandi, Bulacan
(044) 769.2021
https://www.collegeofmaryimmaculate.edu.ph

c. Due to be settled within 12 months after the balance sheet date; or

d. The company does not have an unconditional right to defer settlement of the
liability for at least 12 months after the balance sheet date

All other liabilities shall be classified as non-current.

THE INCOME STATEMENT / STATEMENT OF PROFIT OR LOSS

The Income Statement represents the revenues realized from the sale of commodities
and services produced by the company, as well as the costs and expenses incurred in
connection with the realization of said revenues. The income statement is also
referred to as the Statement of Profit or Loss, as two possibilities are presented, i.e.,
net profit or net loss. Unlike the balance sheet which shows the financial condition of
the firm on a given date, the income statement presents a summary of the
transactions for a given period.

Minimum Information

Presented on the face of the income statement are the following:

a. Revenue;
b. Finance costs;
c. Share of the profit or loss of associates and joint ventures accounted for using
the equity method;
d. Tax expense;
e. A single amount comprising the total of (1) the post-tax profit or loss of
discounted operations and (2) the post-tax gain or loss recognized on the
measurement to fair value less costs to sell or on the disposal of the assets or
disposal group/s constituting the discontinued operation; and
f. Profit or loss

Additional Information Disclosed on the Face of the Income Statement or in the

Notes

Disclose on the face of the income statement as allocations of profit or loss for the
period:
a. Profit or loss attributable to minority interest; and
b. Profit or loss attributable to equity holders of the parent.

Disclose on the face of the income statement or in the notes an analysis of expenses
using a classification based on either the nature of expenses or their function.

COLLEGE OF MARY IMMACULATE © 2021. All Rights Reserved.

For the exclusive use of Officially Enrolled CMIans only. Unauthorized use, reproduction,
sharing or distribution is strictly prohibited.
 COLLEGE OF MARY IMMACULATE
JP Rizal St., Poblacion, Pandi, Bulacan
(044) 769.2021
https://www.collegeofmaryimmaculate.edu.ph

When the nature of expenses method is used, expenses are aggregated in the income
statement according to their nature (e.g., depreciation, transportation, employee
costs, advertising costs).

Revenue X
Other income X
Changes in inventories of finished goods and work in progress X
Raw materials and consumables used X
Employee benefits costs X
Depreciation and amortization expenses X
Other expenses X
Total expenses (X)
Profit X

When the cost of sales method or function of expenses method is used, expenses are
classified according to their functions as part of cost of sales, distribution or
administrative activities. Additional disclosure is required about the nature of
expenses, including depreciation, amortization and employee benefits expense.

Revenue X
Cost of Sales (X)
Gross Profit X
Other income X
Distribution costs (X)
Administrative expenses (X)
Other expenses (X)
Profit X

Disclose, either on the face of the income statement or the statement of changes in
equity, or in the notes, the amount of dividends recognized as distributions to equity
holders during the period, and the related amount per share.

THE BUDGET

Concerning the finance function of the manager, one of the useful tools he could use
is the budget.

The Budget is defined as an estimate of income and expenditures for a future period.
The budget completes the financial picture by referring to the future.

Budgets are essential elements in the planning and control of the financial affairs of
the business. Large corporations place so much emphasis in the annual budget which

COLLEGE OF MARY IMMACULATE © 2021. All Rights Reserved.

For the exclusive use of Officially Enrolled CMIans only. Unauthorized use, reproduction,
sharing or distribution is strictly prohibited.
 COLLEGE OF MARY IMMACULATE
JP Rizal St., Poblacion, Pandi, Bulacan
(044) 769.2021
https://www.collegeofmaryimmaculate.edu.ph

is normally broken down into monthly and weekly periods, and which may take several
months to prepare.

In preparing the budget, an estimate of sales and income for the period is made,
followed by estimates of expenditures in purchasing, administration, production,
distribution, and research. Detailed budgets of cash flow and capital expenditures are
also included.

SIGNIFICANCE OF FINANCIAL STATEMENTS AND BUDGETS

There are 5 distinct groups interested in knowing the financial standing of the firm.

1. The owners – primarily concerned with receiving information on the anticipated

financial benefits that will be generated by the firm

2. The management – is concerned with effective planning and control of the

activities of the firm

3. The creditors – interested to know if the firm is credit worthy

4. The government – for tax and regulatory purposes

5. Prospective investors – interested in the protection of their investments and

the earnings they require over a period of years

Budgets are especially important to management because they are able to do the
following:

1. Anticipate asset needs;

2. Plan for necessary financing; and
3. Establish standards by which to test current operating performance

In some cases, customers and employees require financial data about the firm.
Financial statements and budgets provide most of the information required by
interested parties.

Customers who would want to establish long-term relationship with the firm would
be particularly interested to know how stable the firm is.

Employees who would want to consider long-term employment with the firm would
also want to know the long-term prospect of the firm.

COLLEGE OF MARY IMMACULATE © 2021. All Rights Reserved.

For the exclusive use of Officially Enrolled CMIans only. Unauthorized use, reproduction,
sharing or distribution is strictly prohibited.
 COLLEGE OF MARY IMMACULATE
JP Rizal St., Poblacion, Pandi, Bulacan
(044) 769.2021
https://www.collegeofmaryimmaculate.edu.ph

THE ANNUAL REPORT

The report sent out each year by the company to its stockholders or members is
called the annual report. It normally contains the following:

1. Chairman and President’s reports

2. Operational highlights
3. Auditor’s report
4. Financial statements
5. Notes to financial statements
6. Other reports of the company

In case the firm is part of a group, the report must also contain a consolidated
balance sheet and a consolidated profit and loss statement.

REFERENCES:

Business Finance 2nd Edition, Roberto G. Medina, Ph.D., 2007

Analysis for Financial Management 3rd Edition, Robert C. Higgins
Introduction to Financial Accounting 7th Edition, Horngren/Sundem/Elliott
Theory of Accounts Volume 1, Conrado T. Valix/Christian Aris M. Valix
PICPA Module 1 Materials
www.investopedia.com
www.wikipedia.org

COLLEGE OF MARY IMMACULATE © 2021. All Rights Reserved.

For the exclusive use of Officially Enrolled CMIans only. Unauthorized use, reproduction,
sharing or distribution is strictly prohibited.