Business Finance

CHAPTER 2
Review of Financial
Statement Preparation,
Analysis, and
Interpretation
Basic Financial
Statements
 Learning Objective
• To know the information found in the different
financial statements
 Basic Financial Statements:
The Statement of Financial Position
What are the important concepts we need to know
about the STATEMENT OF FINANCIAL POSITION?

 The Statement of Financial Position provides information

regarding the liquidity position and capital structure of a
company as of a given date.
 It must be noted that the pieces of information found in
this report are only true as of a given date.
 Liquidity refers to the ability of a company to pay
maturing obligations.
 Capital structure provides information regarding the
amount of assets financed by debt or liabilities and
equity.
 Basic Financial Statements:
The Statement of Profit or Loss
What are the important concepts we need to know
about the STATEMENT OF PROFIT OR LOSS?

 The Statement of Profit or Loss provides information

regarding the revenues or sales, expenses, and net
income of a company over a given accounting period, a
period which may be for a month, a quarter, or a year.
 In analyzing earnings performance, a comparison with
the previous periods and with other companies,
especially those coming from the same industry, is a
must. Such comparison will not be made possible without
knowing the accounting periods covered in the statement
of profit or loss.
 Basic Financial Statements:
The Statement of Profit or Loss
What are the important concepts we need to know
about the STATEMENT OF PROFIT OR LOSS?

 In analyzing Statement of Profit or Loss, it is important to

identify how much of the income comes from core
business (the main business of the company) and how
much comes from the non-core business.
 There are two options in presenting the Statement of
Profit or Loss:
 The first option is to present it as a separate financial
statement; and
 The second option is to present it together with other
comprehensive income (OCI), which represents transactions
that are not reported in the profit or loss statement but affects
the stockholders’ equity.
 Basic Financial Statements:
The Statement of Cash Flows
What are the important concepts we need to know
about the STATEMENT OF CASH FLOWS?

 The Statement of Cash Flows provides an explanation

regarding the change in cash balance from one
accounting period to another.
 The Cash Flows are classified into three main categories:
1. Operating;
2. Investing; and
3. Financing.
 Basic Financial Statements:
The Statement of Cash Flows
What are the important concepts we need to know
about the STATEMENT OF CASH FLOWS?

 The Cash Flows are classified into three main categories:

1. Operating. In the cash flows from operating activities, the
income reported from the statement of profit or loss which
is based on accrual principle is converted to cash.
2. Investing. The cash flows from investing activities provide
information regarding the future direction of the company; it
shows how much investment the company is making over
a given accounting period.
3. Financing. The cash flows from financing activities provide
information whether there is a proper matching of investing
and financing activities.
 Basic Financial Statements:
The Statement of Changes in Stockholders’ Equity
What are the important concepts we need to know
about the STATEMENT OF CHANGES IN
STOCKHOLDERS’ EQUITY?

 The Statement of Changes in Stockholders’ Equity

provides information that explains the changes in the
stockholders’ equity account from one accounting period
to another.
 The changes may be due to the following:
1. Profit or loss for the accounting period;
2. Cash dividend declaration;
3. Issuance of new shares of stocks; and
4. Other transactions that affect the stockholders’
equity such as other comprehensive income,
treasury stocks, and revaluation of assets.
 Notes to Financial Statements
What are the additional pieces of
information that the NOTES TO
FINANCIAL STATEMENTS provide?

1. Brief Description of the Company

Information may include the nature of business of the
company and the owners behind the company.
 Notes to Financial Statements
What are the additional pieces of
information that the NOTES TO
FINANCIAL STATEMENTS provide?

2. Summary of Significant Accounting Policies

This is very important because the existing generally
accepted accounting principles provide alternative
accounting policies to companies. It is therefore important
to find out what specific accounting policies are used by
the company.
 Notes to Financial Statements
What are the additional pieces of
information that the NOTES TO
FINANCIAL STATEMENTS provide?

3. Breakdown of Amounts Found in the Financial

Statements
The company’s property, plant, and equipment (PPE)
account may have too many components. Putting all the
details on the face of the balance sheet may make the
balance sheet too long. An alternative presentation is to
provide a single amount on the face of the balance sheet
for PPE but the breakdown of PPE can be presented in
the notes to financial statements.
 Self-Test Question
How can you identify and describe the financial
information that can be found in the following financial
statements:
a. Statement of Financial Position;
b. Statement of Profit or Loss;
c. Statement of Cash Flows; and
d. Statement of Changes in Stockholders’ Equity?