CONCEPTUAL FRAMEWORK

& ACCOUNTING
STANDARDS
Preparation & Presentation of
Financial Statements
Lecture 02

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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS
Financial statements refer to the summary report of all financial
transactions during a given period of time. All data incorporated in the
financial statements are derived from the trial balance, ledgers, journal,
and source documents.
The major components of financial statements are the following:
1. Income statement
2. Statement of owners’ equity (statement of capital)
3. Statement of financial position (balance sheet)
4. Cash flow statement
5. Notes to financial statements
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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS
Income statement
This financial statement shows the total revenues and total expenses
during a certain period of time. Ideally, revenues should be greater than
the total expenses, and the difference between the two is called net
income or net profit. In some unavoidable circumstances, total expenses
are greater than the total revenues. The difference is called net loss.
The net income or net loss are transferred to the owners’ equity. Net
income is added, while net loss is deducted.
Income statement shows the performance of the business in a certain
period of time.
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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS
Statement of Owners’ Equity (Shareholders’ Equity)
This statement shows the total capital of an entity at the end of the
accounting period. In a corporate entity, shareholders’ equity is
composed of the following:
1. Total contributed capital
2. Retained earnings
Contributed capital are the share capital contributions of the
shareholders.
Retained earnings are the net income of the company accumulated and
retained in this portion of the owners’ equity.
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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS
Statement of Financial Position (Balance Sheet)
The statement of financial position reflects the total assets, total
liabilities and the total owners’ equity of a business entity. It simply
shows the size of the business as well as its stability.
Ideally, the total capital or owners’ equity of a company must be greater
than the total liabilities. If that is the case, we can foresee stability. The
balance sheet usually, is presented in comparative figures (current year
vs. previous years). The reader of the financial statements can see
growth in assets and capital by means of the comparative figures.

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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
Cash Flow Statement
This simply shows, where the cash came from, and how it was used.
Cash flow statement is divided into three components:
1. Operating activities
2. Investing activities
3. Financing activities
Operating activities shows the cash generated or utilized from operations. Basically,
the company generates cash from revenues, short-term borrowings, etc. Cash were
utilized for operations in granting short-term credit, purchase of merchandise etc.
Ideally, operating activities showed a positive figure. But in some unavoidable
circumstances, it shows negative amount, which means, the company spent more in
operations. 6
 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS
Cash Flow Statement
Investing activities shows the cash utilized for the acquisition of
machines, equipment, land, building and other fixed assets. Investment
in other companies is part of investing activities. In General, investing
activities showed a negative amount because the company pay-out cash
for investments. It may show positive amount if the company sells some
of its assets or investments.

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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS
Cash Flow Statement
Financing activities reflect the cash generated when somebody finance
the business. Cash maybe coming from investment of existing owners,
new investors, borrowings from banks and sale of corporate bonds.
In general, financing activities showed a positive amount, but in some
instances, it may show negative amount when the company pay-out
dividends, pay loans, and payment to bond holders.

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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

The following data were taken from the records of Alby Corporation on
its first year of operation. The company started operations on January 1,
2021:
Cash P557,000
Accounts receivable 937,000
Merchandise inventory 238,000
Marketable securities 1,200,000
Prepaid insurance 24,000
Land 2,300,000

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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

Building P3,400,000
Accounts payable 272,000
Salaries payable 37,000
Accrued other expenses payable 14,600
Income tax payable 121,250
Accumulated depreciation 340,000
Notes payable (long term) 2,622,400
Share capital 3,000,000
Premium on share capital 260,000
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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

Retained earnings P1,988,750
Sales 1,156,000
Purchases 567,000
Operating expenses 589,000

Prepare the following as of December 31, 2021:

1. Trial balance
2. Income statement
3. Statement of owner’s equity
4. Statement of financial position
5. Cash flow statement
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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

SOLUTION TO ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

1. Trial balance
Debit Credit
Cash P557,000
Accounts receivable 937,000
Merchandise inventory 238,000
Marketable securities 1,200,000
Prepaid insurance 24,000
Land 2,300,000
Building 3,400,000
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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

SOLUTION TO ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

1. Trial balance
Debit Credit
Accounts payable 272,000
Salaries payable 37,000
Accrued other expenses payable 14,600
Income tax payable 121,250
Accumulated depreciation 340,000
Notes payable (long term) 2,622,400
Share capital 3,000,000
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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

SOLUTION TO ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

1. Trial balance
Debit Credit
Premium on share capital 260,000
Retained earnings 1,988,750
Sales 1,156,000
Purchases 567,000
Operating expenses 589,000
Totals P9,812,000 P9,812,000

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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

SOLUTION TO ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

2. Income Statement
Alby Corporation
Income Statement
December 31, 2021
Sales P1,156,000
Less: Cost of goods sold:
Purchases P567,000
Merchandise inventory 238,000 329,000
Gross profit P827,000
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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

SOLUTION TO ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

2. Income Statement
Gross profit (forwarded from prev slde) P827,000
Operating expenses 589,000
Net income before tax P238,000
Income tax payable 121,250
Net income after tax P116,750

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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

SOLUTION TO ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

3. Statement of Owner’s Equity

Alby Corporation
Statement of Shareholders’ Equity
December 31, 2021
Contributed capital:
Share capital P3,000,000
Premium on share capital 260,000 P3,260,000
Retained earnings 1,988,750
Total shareholders’ equity P5,248,750
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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

SOLUTION TO ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

4. Statement of Financial Position

Alby Corporation
Statement of Financial Position
December 31, 2021
ASSETS
Current Assets:
Cash P557,000
Accounts receivable 937,000
Merchandise inventory 238,000
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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

SOLUTION TO ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

4. Statement of Financial Position

ASSETS
Current Assets:
Marketable securities P1,200,000
Prepaid insurance 24,000 P2,956,000
Non-current assets:
Land P2,300,000
Building (P3,400,000-P340,000) 3,060,000 5,360,000
Total Assets P8,316,000
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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

SOLUTION TO ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

4. Statement of Financial Position

LIABILITIES & OWNERS’ EQUITY
Current liabilities:
Accounts payable P272,000
Salaries payable 37,000
Accrued other expenses payable 14,600
Income tax payable 121,250 P444,850
Non-current liability-Notes payable 2,622,400
Total liabilities P3,067,250
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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

SOLUTION TO ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

4. Statement of Financial Position

LIABILITIES & OWNERS’ EQUITY
Total liabilities (from previous slide) P3,067,250
Shareholders’ equity 5,248,750
Total liabilities and owners’ equity P8,316,000

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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

SOLUTION TO ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

5. Cash Flow Statement

Alby Corporation
Cash Flow Statement
December 31, 2021
Operating activities:
Net income P116,750
Accounts receivable (937,000)
Merchandise Inventory (238,000)
Marketable securities (1,200,000)
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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

SOLUTION TO ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

5. Cash Flow Statement

Prepaid insurance (P24,000)
Accounts payable 272,000
Salaries payable 37,000
Accrued other expenses payable 14,600
Income tax payable 121,250 (P1,837,400)
Investing activities:
Land (P2,300,000)
Building (3,060,000) (5,360,000)
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 PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

SOLUTION TO ILLUSTRATIVE PROBLEM (ALBY CORPORATION)

5. Cash Flow Statement

Financing Activities:
Notes payable P2,622,400
Shareholders’ Equity (P5,248,750-P116,750) 5,132,000 7,754,400
Cash balance 12/31/21 P557,000

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 ACCOUNTING FOR CORPORATIONS

CORPORATION (DEFINITION)
A corporation is an artificial being, created by operations of law, having
the right of succession, and the powers, attributes and properties
expressly authorized by law or incident to its existence.
• A corporation is a juridical person, with an identity separate from the
shareholders or owners. A juridical person can enter into a contract,
can file a case in court, can be sued in court, and can do its own
business transactions.
• The owners of a corporation is called shareholders (stockholders).
From the shareholders, they will elect members of the board of
directors from among themselves. The minimum number of the
board members is five, while maximum is 15. 25
 ACCOUNTING FOR CORPORATIONS

CORPORATION (DEFINITION)
• The original persons who formed a corporation are called
incorporators. The minimum and maximum numbers are the same
with the board of directors. Based on this statement, we can
conclude that:
 All incorporators are shareholders.
 All incorporators are members of the board.
 Not all shareholders are incorporators
 Not all board members are incorporators
 All board members are shareholders, but not all of them are
incorporators.
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 ACCOUNTING FOR CORPORATIONS

ILLUSTRATIVE PROBLEM: MAYLA CORPORATION

Fourteen individuals formed a corporation, and they call it Mayla
Corporation. They submitted the following documents to Securities and
Exchange Commission (SEC) for registration:
1. Articles of incorporation
2. By laws
3. Board resolution to open an account with a bank
4. General information system.
Articles of incorporation basically contained the authorized share capital
of the corporation, the names of the incorporators, and the board of
directors.
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 ACCOUNTING FOR CORPORATIONS

ILLUSTRATIVE PROBLEM: MAYLA CORPORATION

By Laws reflects the nature and purpose of the corporate business, rules
and regulations, and the manner the board and management oversee
operations.
Board Resolution to open bank account
A corporate entity must open an account in any bank as required by SEC.
The bank account should be under the name of the corporation because
it has a separate legal personality.
The board resolution will give authority to the bank to open deposit
account since this document was signed by all members of the board.
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 ACCOUNTING FOR CORPORATIONS

ILLUSTRATIVE PROBLEM: MAYLA CORPORATION

General Information Sheet (GIS)
This is the document that will show the duly appointed executive
officers of the corporation. The key officers may include the following:
1. President
2. Vice President for Finance
3. Vice President for Marketing
4. Vice President for Production and Operations
5. Vice President for Human Resource Management
6. Head of Internal Auditing Department

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 ACCOUNTING FOR CORPORATIONS

ILLUSTRATIVE PROBLEM: MAYLA CORPORATION

The following transactions occurred for Mayla Corporation. Prepare
journal entries for these events:
Date Transactions
√ 07/01/22 SEC approved the application of Mayla Corporation. The
authorized share capital as follows:
a. Ordinary shares …………500,000 shares, par P10
b. Preference shares……….200,000 shares, par P5
07/02/22 Mayla Corporation issued 200,000 ordinary shares at P15
√ per share.

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 ACCOUNTING FOR CORPORATIONS

ILLUSTRATIVE PROBLEM: MAYLA CORPORATION

Date Transactions
√ 07/03/22 Mayla Corporation issued 100,000 preference shares at P6.
√ 12/31/22 The corporation earned net income of P670,000
01/31/23 The board of directors approved the declaration of cash
√ dividends of P200,000
02/28/23 The corporation paid the cash dividends to its shareholders
√ on record as of December 31, 2022.

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 ACCOUNTING FOR CORPORATIONS

SOLUTION TO ILLUSTRATIVE PROBLEM: MAYLA CORPORATION

Journal entries:
Date Particulars Debit Credit
07/01/22 Memorandum Entry:
Authorized share capital for
ordinary – 500,000; for
preference – 200,000

07/02/22 Cash (200,000 x P15) P3,000,000

Ordinary share capital P2,000,000
Premium on ordinary shre 1,000,000
(200K x P10 = P2M)
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 ACCOUNTING FOR CORPORATIONS

SOLUTION TO ILLUSTRATIVE PROBLEM: MAYLA CORPORATION

Journal entries:
Date Particulars Debit Credit
07/03/22 Cash (100,000 x P6) P600,000
Preference share capital P500,000
Premium on pref. share 100,000
(100K x P5 = P500K)
12/31/22 Income summary P670,000
Retained earnings P670,000

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 ACCOUNTING FOR CORPORATIONS

SOLUTION TO ILLUSTRATIVE PROBLEM: MAYLA CORPORATION

Journal entries:
Date Particulars Debit Credit
01/31/23 Retained earnings P200,000
Dividends payable P200,000
02/28/23 Dividends payable 200,000
Cash 200,000

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