Conceptual Framework and Accounting Standards 1

Financial Statements
Conceptual Framework and Accounting Standards 1

Learning objectives
-Definition of Financial Statements
-Components of Financial Statements
Conceptual Framework and Accounting Standards 1

Financial Statements
- written summary reports showing information about
the financial position, performance, changes in equity
and cash flows of the business
- the end-product or main output of the accounting
process
- Financial statements are interrelated to each other
Conceptual Framework and Accounting Standards 1

General purpose 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 information needs
- These are directed to all common users and not to
specific users.
Conceptual Framework and Accounting Standards 1

Complete Set of Financial Statements

1. Statement of Financial Position (Balance Sheet)
2. Statement of Profit or Loss (Income Statement)
3. Statement of Comprehensive Income
(includes profit or loss section and other comprehensive income items)
4. Statement of Changes in Equity
5. Statement of Cash Flows
6. Notes to Financial Statements
(comprising of significant accounting policies and other notes)
 PAG ONG DELIVERY EXPRESS
Income Statement
For the month ended January 31, 2020

Service revenue P 129,000

Less: Cost of Service
Direct charges - Salaries P 30,000
Direct charges - Gas & oil 16,000
Direct charges - Repairs & maintenance 13,000
Direct charges - Depreciation-Delivery Equipment 2,500 61,500
Gross Income P 67,500
Add: Interest income 80
Total Operating Income P 67,580
Less: Operating Expense
Salaries expense P 12,000
Rent expense 11,000
Taxes & licenses expense 9,000
Utilities expense 7,000
Supplies expense 3,000
Doubtful accounts expense 2,350
Depreciation Expense-Furniture 1,000
Depreciation Expense-Offi ce equipment 1,100
Interest expense 5,000 51,450
NET INCOME P 16,130
 PAG ONG DELIVERY EXPRESS
Income Statement
For the month ended January 31, 2020

Service revenue P 129,000

Less: Cost of Service
Direct charges - Salaries P 30,000
Direct charges - Gas & oil 16,000
Direct charges - Repairs & maintenance 13,000
Direct charges - Depreciation-Delivery Equipment 2,500 61,500
Gross Income P 67,500
Add: Interest income 80
Total Operating Income P 67,580
Less: Operating Expense
Salaries expense P 12,000
Rent expense 11,000
Taxes & licenses expense 9,000
Utilities expense 7,000
Supplies expense 3,000
Doubtful accounts expense 2,350
Depreciation Expense-Furniture 1,000
Depreciation Expense-Offi ce equipment 1,100
Interest expense 5,000 51,450
NET INCOME P 16,130
 PAG ONG DELIVERY EXPRESS
Statement of Changes in Owner's Equity
For the month ended January 31, 2020

Ong Capital, Jan.1 P 500,000

Add: Net Income 16,130
Additional investments 20,000
Total P 536,130
Less: Withdrawals 3,000
Ong Capital, Dec.31 P 533,130
 PAG ONG DELIVERY EXPRESS
Statement of Changes in Owner's Equity
For the month ended January 31, 2020

Ong Capital, Jan.1 P 500,000

Add: Net Income 16,130
Additional investments 20,000
Total P 536,130
Less: Withdrawals 3,000
Ong Capital, Dec.31 P 533,130
 PAG ONG DELIVERY EXPRESS
Statement of Financial Position
As of January 31, 2020

ASSETS LIABILITIES AND OWNER'S EQUITY

Current Assets: Current Liabilities:

Cash on hand P 100,000 Accounts payable P 37,000
Cash in bank 539,000 P 639,000 Salaries payable 2,000
Accounts receivable P 47,000 Unearned service revenue 30,000
Less: Allowance for doubtful accounts 2,350 44,650 Interest payable 5,000
Notes receivable 16,000 Total current liabilities P 74,000
Interest receivable 80
Office supplies 2,000 Noncurrent Liabilities:
Total current assets P 701,730 Notes payable 500,000

Noncurrent Assets: Owner's equity:

Furnitures P 36,000 Ong Capital 533,130
Less: Accumulated Depreciation-Furnitures 1,000 P 35,000
Office equipment P 74,000 TOTAL LIABILITIES AND OWNER'S EQUITY P 1,107,130
Less: Accumulated Depreciation-Office Equipment 1,100 72,900
Delivery equipment P 300,000
Less: Accumulated Depreciation-Delivery Equipment 2,500 297,500
Total noncurrent assets P 405,400

TOTAL ASSETS P 1,107,130

 PAG ONG DELIVERY EXPRESS
Statement of Financial Position
As of January 31, 2020

ASSETS LIABILITIES AND OWNER'S EQUITY

Current Assets: Current Liabilities:

Cash on hand P 100,000 Accounts payable P 37,000
Cash in bank 539,000 P 639,000 Salaries payable 2,000
Accounts receivable P 47,000 Unearned service revenue 30,000
Less: Allowance for doubtful accounts 2,350 44,650 Interest payable 5,000
Notes receivable 16,000 Total current liabilities P 74,000
Interest receivable 80
Office supplies 2,000 Noncurrent Liabilities:
Total current assets P 701,730 Notes payable 500,000

Noncurrent Assets: Owner's equity:

Furnitures P 36,000 Ong Capital 533,130
Less: Accumulated Depreciation-Furnitures 1,000 P 35,000
Office equipment P 74,000 TOTAL LIABILITIES AND OWNER'S EQUITY P 1,107,130
Less: Accumulated Depreciation-Office Equipment 1,100 72,900
Delivery equipment P 300,000
Less: Accumulated Depreciation-Delivery Equipment 2,500 297,500
Total noncurrent assets P 405,400

TOTAL ASSETS P 1,107,130

 PAG ONG DELIVERY EXPRESS
Statement of Cash Flows
For the month ended January 31, 2020

Cash flow from operating activities

Cash received from customers P 96,000

Cash paid to supplier (37,000)
Cash paid for cost of service (59,000)
Cash paid for salaries expense (10,000)
Cash paid for other operating expense (27,000)
Cash paid for supplies (5,000) P (42,000)

Cash flow from investing activities

Acquisition of furnitures (36,000)

Cash flow from financing activities

Cash investment by the owner P 220,000

Cash withdrawal by the owner (3,000)
Cash loan from the bank 500,000 717,000

Increase in cash P 639,000

Cash, Jan. 1, 2020 -

Cash, Jan. 31, 2020 P 639,000

Conceptual Framework and Accounting Standards 1

Objectives
-
of 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.
- To meet this objective, financial statements provide information about the following:
a. Assets
b. Liabilities
c. Equity
d. Income and Expenses
e. Contributions by and distributions to owners in their capacity as owners
f. Cash flows
Statement of Financial Position (Balance Sheet)
it shows the financial standing of an entity as to its assets, liabilities and equity
Assets
resources controlled by the business

Liabilities
obligations to pay by the business

Equity (Net Assets/Net Worth)

residual interest in the assets of the business after deducting liability
Assets
Current Assets
assets that are expected to be realized or consumed within 12 months

Noncurrent Assets
assets that are not classified as current assets
Current Assets
PAS 1, paragraph 66, provides that an entity shall classify an asset as current
when:

a. The asset is cash or cash equivalent unless the asset is restricted to settle
a liability for more than 12 months after the reporting period
b. The entity holds the asset primarily for the purpose of trading
c. The entity expects to realize the asset within 12 months after reporting
period
d. The entity expects to realize the assets or intends to sell or consume it
within the entity’s normal operating cycle.
Operating cycle – the time between the acquisition of assets for processing
and their realization in cash or cash equivalents.
Example of Current Assets
Cash and cash equivalents (cash on hand, cash in bank
and petty cash)
Short-term investments (trading securities)
Trade and other receivables
(accounts receivable, notes receivable, interest receivable,
commission receivable, rent receivable and others)
Inventory
Prepaid expense (prepaid supplies, prepaid insurance,
prepaid rent, prepaid advertising and others)
Example of Current Assets
Cash and cash equivalents (cash on hand, cash in bank
and petty cash)
Short-term investments (trading securities)
Trade and other receivables
Arranged according to
its liquidity

(accounts receivable, notes receivable - trade, interest receivable,

commission receivable, rent receivable and others)
Inventory
Prepaid expense (prepaid supplies, prepaid insurance,
prepaid rent, prepaid advertising and others)
Example of Noncurrent Assets
Property, plant and equipment (PPEs)
- Land, Building, Machines, Furnitures, Computers, Delivery Equipment,
and other equipment
Intangible assets
- Patent, Copyright, Trademark and Franchise
Other noncurrent assets
- Long-term investments, long-term refundable deposits and deferred tax
asset
Liabilities
Current Liabilities
liabilities that are expected to be settled within 12 months

Noncurrent Liabilities
liabilities that are not classified as current liabilities
Current Liability
PAS 1, paragraph 69, provides that an entity shall classify a liability as current
when:

a. The entity expects to settle the liability within the entity’s normal operating
cycle
b. The entity holds the liability primarily for the purpose of trading
c. The liability is due to be settled within twelve months after the reporting
period
d. The entity does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting period.
Discretion to refinance
- if the entity has the discretion to refinance or roll over an obligation for at
least twelve months after the reporting period under an existing loan facility, the
obligation is classified as non-current liability even if it would be due within a
shorter period of time. Refinancing on a long term basis should be completed on
or before the end of the reporting period, it will be still classified as current
liability.
Breach of Covenants
- If certain conditions relating to the borrower’s financial situation are
breached, the liability becomes payable on demand. But if the lender has agreed
on or before the end of reporting date to provide a grace period ending at least
twelve months after the end of the reporting period, the liability is classified as
noncurrent liability
Example of Current Liabilities
Trade and other payables
(accounts payable, notes payable - trade, salaries payable, rent
payable, interest payable, tax payable, utilities payable and others)
Current provisions
Short-term borrowings
Current portion of long-term debt
Current tax liability
Example of Noncurrent
Liabilities
Notes payable- non trade (due for more than 12
months)
Mortgage payable
Bonds payable
Deferred tax liability
Other long term payables
Conceptual Framework and Accounting Standards 1

Forms of Statement of Financial Position

A. Report Form - sets forth three major sections in a

downward sequence of assets, liabilities and equity
B. Account Form - assets are shown on the lest side and
liabilities and equity are shown on the right side
Conceptual Framework and Accounting Standards 1

Comprehensive Income - change in equity during a period

resulting from transaction and other events, other than changes
resulting from transactions with owners in their capacity as owners
Profit - total of income less expenses excluding the components of
other comprehensive income

Other comprehensive income (OCI) – income and

expense items that are not recognized in profit or loss as required or
permitted by PFRS
Conceptual Framework and Accounting Standards 1

Presentation of Comprehensive Income

1. Two Statements:
a) Income Statement
b) A Statement of Comprehensive income beginning with
profit or loss shown in the income statement plus or minus
components of OCI
2. Single Statement
Combined statement showing the components of profit or
loss and components of OCI in a single presentation
Conceptual Framework and Accounting Standards 1

Statement of Comprehensive Income

- it shows the profit or loss section plus other comprehensive income of an entity
Other comprehensive income items are income and expenses that are not
recognized in the income statement as required by the accounting standards

Examples of “other comprehensive income” includes

1. Unrealized gain or lost of debt instrument measured at fair value thru OCI
2. Gain or loss from translating financial statements of foreign operation
3. Revaluation surplus during the year
4. Unrealized gain or lost of equity instrument measured at fair value thru OCI
Conceptual Framework and Accounting Standards 1

Statement of Profit or Loss (Income Statement)

it shows the revenues or income and expenses of an entity for a period, and
summarize the performance of the operation whether net income or net loss
Conceptual Framework and Accounting Standards 1

Income
Revenues
these are income arising from ordinary operating activities of an entity
- Sales of merchandise to customers
- Rendering of service
Gains - Use of entity resources
these are other income items that may or may not arise from
ordinary operating activities of an entity
- Disposal of resources other than products
Conceptual Framework and Accounting Standards 1

Expense
Cost of Sales
these refers to direct costs attributable for the purchase of goods
that are sold to customers (for merchandising)
or
these refers to costs attributable for the production of goods
that are sold to customers (for manufacturing)

Cost of Service
these refers to direct costs attributable for rendering service to customers
Conceptual Framework and Accounting Standards 1

Expense
Administrative expense
these are expenses related to general or administering cost

Selling expense (Distribution Cost)

these are expenses related to marketing and delivery cost

Finance Cost
these are expenses related to finance charges on borrowings

Other Expense
these are expenses not classified as administrative, selling and finance cost
Conceptual Framework and Accounting Standards 1

Examples
Administrative expense Selling expense
Doubtful accounts Salesmen’s salaries
Office Salaries Sales commissions
Expense of executives Traveling and marketing expense
Expense of general accounting Advertising expense
Office supplies used Freight-out
Depreciation of office building & equipment Depreciation of delivery equipment and
Amortization of intangible assets store equipment
Taxes and licenses Store supplies

Finance cost Other expense

Interest expense on bank loan
Interest expense of bonds payable
Loss on sales of trading investments
Loss on disposal of PPEs
Loss on disposal of Intangible assets
Loss on sale of noncurrent investment
Casualty losses
Net Profit
this is when total income exceeds
total expenses of the business

Net Loss
this is when total expense exceeds
total income of the business
Conceptual Framework and Accounting Standards 1

Forms of Income Statement

PAS 1, paragraph 99, provides that an entity shall present an
analysis of expense recognized in profit or loss using a classification
based on either the function of expense or their nature within the
entity, whichever provides information that is reliable and more
relevant
A. Functional Form - classifies expense according to
their function (known as Cost of Goods Sold method)
B. Natural Form - classifies expense according to their
nature
Statement of Changes in Equity
it shows the movements of equity items, equity items across a sole
proprietorship or partnership or a corporation or other forms of business
An entity shall present a statement of changes in
equity showing the following
1. Comprehensive income for the period
2. For each component of equity, the effects of changes in accounting policies
and correction of correction of errors
3. For each component of equity, a reconciliation between the carrying amount
at the beginning and end of the period, separately disclosing changes from:
a. Profit or loss
b. Each item of other comprehensive income
c. Transactions with owners in their capacity as owners showing separate
contributions by and distributions to owners.
Management Accounting

3. Equity Items for Corporation

A. Share Capital - portion of authorized shares capital that has
been fully paid
B. Share Premium - it is the excess when shares of stocks are
sold above par value.
C. Treasury shares – shares of stock which have been issued and
fully paid for, but subsequently reacquired by the issuing
corporation
D. Retained Earnings – accumulated profits/losses less dividends
D.1 Appropriated - set apart or reserved for specific purpose
D.2 Unappropriated – free or unrestricted
Conceptual Framework and Accounting Standards 1

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