Financial Accounting 3

CHAPTER 1 - Financial Statements

Definition
Statements kung saan ang mga information na pinagsamasama at pina- rocess in financial accounting
ay periodically communicated to the users.
Ang Financial statements ang end product or main output ng financial accounting process kasi
nakalagay dito yung naging takbo ng kanilang negosyo for the year. Indicated dito if they incurred profit
or loss or is there any remaining receivables and payables for the year, etc.
Ang financial statements are the structured representation ng financial position and financial
performance ng entity. Presented dito ay ang Statement of Financial Position and Income Statements
ng Entity.
General purpose financial statements
General purpose financial statements ay intended to meet the needs for information of users pero
wala sila sa position na humingi ng information na higit pa sa information na kanilang pin-rovide
since some of the information are confidential.
Ang request ng entitys management na magprepare ng financial statements ay hindi general
purpose financial statements since prepared ito according sa information na ni- request ng
management.
Components of financial statements
1. Statement of Financial Position
2. Income Statement
3. Statement of Comprehensive Income
4. Statement of Changes in Equity
5. Statement of Cash Flows
6. Notes, comprising summary of significant accounting policies and other explanatory information
Objective of financial staements

Ang objective ng general purpose financial statements is magprovide ng information about sa position and
perfomance ng entity and its cash flow to help the financial users in making economic decisions (whether to invest or
not, to provide loans or not).

Financial Position
o Comprises its assets, liabilities, and equity
o Financial position pertains to the liquidity (capability na makapag- convert kaagad ng cash),
solvency (capabilityna makapagbayad ng utang, financial structure and yung capability na
makapag-adapt ng entity.
Financial Performance
Cash Flows
o Cash na narereceive at nilalabas arising from operating, investing and, financing activities ng
entity.
o Ang cash flow information ay Malaki ang tulong sap ag a-assess at pagdetermine sa ability ng
entity na mag-generate ng csh and cash equivalents.
Financial Reporting
Ang financial reporting ay ang pagpoprovide ng financial information ng entity para sa mga external
users sa kanilang pagdedesisyon whether to invest or not, to give loans or not, etc. at sa pag-aassess
ng kung effective ba ang management ng isang entity.
Pinapakita ang financial report na ito through the annual financial statements.
Ang financial reportay hindi lamang financial statements dahil ini-indicate din dito yung mga financial
highlights, mga analysis regarding sa financial statements. Included din sa financial reports ang mga
information such as description ng products at yung list ng kanilang mga officers and directors.

Target Users of Financial Reporting

General purpose financial reporting is directed primarily to the existing and potential investors, lenders and other
primary user group.

Those primary user group have the most critical and immediate need for information in financial reporting. Why? it is
because they provide resources na kailangan ng entity for its business operations. For example:

o Investors
Kapag may investors na gustong mag- invest in a company maghahanap sila ng ibat ibang types of
information just to make sure na they will make a wise decision on where to invest their money. They will
ask how does one company compares in size and profitability with the other company or is the company
earning satisfactory income.

o Creditors

Companies are borrowing money from banks to continue for expansions and for other investments Those companies
will ask if that company will be able to pay its debts as they come due. Are they willing to loan you money or how
much interest to charge you?

Objective ng financial reporting

Ang overall objective ng financial reporting is magprovide ng information na makakatulong sa mga
users in making economic decision.
Specific objectives of financial reporting
 o Makapag-provide ng information na makakatulong sa decision ng users kung willing ba silang mag-iinvest or
magpautang sa isang entity.
o Makapag- provide ng information for assessing the prospects of future net, cash flows to the entity because
nakadepende sa returns na makukuha niya from his investment ang descision ng pagbili at pag- stay nya as
shareholder sa entity. Same as sa descision ng creditors whether to provide them loans or not depend on
return they expected.
o Makapag- provide ng information about entitys resources, claims and changes in resources and claims.
Providing theinformation with these changes ay makakatulong sa mga users para maintindihan nila kung
anong nagiging dahilan ng pagbabago ng economic resources and claims ng isang entity at mga
consequences of changes in the future financial performance of an entity.
Limitations of financial reporting
o General purpose financial reports do not and cannot provide all the information that existing and
potential investors, lenders, and other creditors need because there are some information about the
entity that is confidential and cannot be disclosed among financial users.
o General purpose financial reports are not designed na ipakita kung anong value ng isang reporting
entity but to provide them information para sila na ang mag estimate ng value ng isang reporting entity.
Bonus na ang pagpapakita na maganda ang financial report ng isang entity pero nasa financial users
parin ang estimation ng value ng entity kasi sila ang magdedecide whether to invest or not or to lend the
entity or not.
o General purpose financial reports are intended to provide common information to users and cannot
accommodate every specific request for information.
o To the large extent, financial reports are based on estimate and judgement rather than exact depiction.

Responsibility for financial statements

Ang management ang may responsibility sa paggawa at pagpe- present ng financial statements.
Ang responsibility for reviews and authorization bago i-issue ang financial statements ay hawak ng Board of
Directors then after ng authorization for issue ay to be submitted sa shareholders ng entitiy.

General Features of financial statements

1. Fair Presentation and Compliance with PFRS

o Financial statement shall present fairly the financial position, financial performance, and cash flows
of an entity in accordance with an identified financial reporting framework or PFRS.
o Ang financial statements achieved a fair presentation kung in- apply nito ang PFRS with another
disclosure when necessary because oncenanag comply ang entity with PFRS it can make a clear
and not limited statement of such compliance in the notes.

Note* An Entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies
used or by notes or explanatory information.

Depature from standard

o In the extremely rare circumstances kung saan concluded ng entity na ang pag-comply sa
requirements ng standard would cause to misleading, the entity shall dapart from the requirement
provided na ni-rerequire sya sa refgulatory Conceptual framework, or otherwise na ang pag-depart
sa standard ay hindi pinagbabawal.

In such circumstances, it is incumbent upon the entity to disclose the following:

a. The management has concluded na ang financial statements ay presented fairly.

b. Ang entity ay nag-comply sa applicable standards except that nag-depart sila sa isang
reqirement para ma-achieve nila ang fair presentation ng financial statements.
c. Dapat nilang i-disclose ang standard na ni-depart ng entity, nature ng departure
kasamaang treatment sa standard na nire-require, dahilan kung bakit misleaded yung
isang requirement sa standard and treatment na gagamitin.
d. Financial impact ng deapature ng standard for each item na ni-report sa pagcomply sa
requirement.
2. Going Concern
o Ang isang entity ay masasabing going concern if the business can stay in operation for the
foreseeable future.

o Going concern is particularly relevant when the management shall make an estimate of the
expected outcome ng future events such as recoverability ng accounts receivables and estimations
ng useful life ng isang asset.
3. Materiality and Aggregation
o Bawat material class of similar items ay pini-present ng magkahiwalay.
o Bawat items of dissimilar in nature or function ay pini-present ng magkahiwalay maliban na
lang kung ito ay immaterial.
o If a line item ay hindi individually material ay isinasama ito sa other items in the statements or
notes.
When is an item material?
o Walang strict rule in determining whether an item is material or not.
o Madalas ito ay from good judgement, professional expertise and common sense.
o General guide: Ang item ay material if nakaka-apekto ito sa desisyon ng other informed users ng
financial statements.
Materiality is a relativility
o Amg materiality ng isang item ay nakadepende sa relative size kaysasa absolute size. Kung
anuman ang material sa isang entity ay maaaring immaterial sa iba. Isang dahilan ay ang size ng
kanilang entity thats why it differs.
 Example:
Ang error na P100,000 sa financial statements ng isang multinational entity ay maaaring di
gaanong kahalaga pero napakalaking halaga na para sa isang maliit na entity.

4. Offsetting

Ang asset and liabilities, and income and expenses ay di pwedeng i- offset against each other unless it is
required or permitted by other PFRS.

Example:

Gains or losses on disposal of noncurrent assets ay nire-report by deducting mula sa proceeds ang carrying
amount ng assets at related selling price.

5. Frequency of Reporting

An entity shall present a complete set of financial statements at least annually.

Kapag ang isang entity ay magpapalit ng reporting period at magpresent ng financial statements sa period
na mas matagal or shorter than one year, ay kailangan nyang i-disclose na:

o Anong period ang covered ng financial statements nila.

o Reason sa paggamit ng longer or shorter na period
o Ang amount na nakapresent sa financial statements are not entirely comparable
6. Comparable Information
o Maliban kung permitted orrequired ng PFRS, ang entity ay magdi-disclose ng comparative
information sa previous period for all amounts na reported sa current periodsnf financial
statements.
o Ang comparative information ay kasama sa narrative at descriptive information kapag mahalaga
sya sa understanding ng financial statement sa current period.
o Magbe-benefit ang mga users mga uncertain information na nag-exist at the end of the preceding
reporting period at sa mga steps na ginawa during the current period para maresolve ang
uncertainty.

7. Consistency of Presentation
o Implicit sa presentation ng comparable information ang principle ng consistency.
o Nire-require sa principle ng consistency na dapat ang accounting method and practices ay ia-apply on a
uniform basis from period to period meaning dapat consistent.
o Example is when an entity used a FIFO method in one year, such method is followed from year to year to
meet the consistency of the presentation.
o Hindi ibig sabihin na kapag consistency ay di na maaaring magpalit ng accounting method. Kung ang
pagpapalit ng accounting method and policies ay magre-result ng faithfully representation and more relevant
sa users ng financial statements then that change should be made. Pero ang chages na mangyayari ay
dapat na ms-idisclose.

o Ang pagpapalit ng presentation at classification ng items sa financial statements ay allowed:

o Kapag required sya ng other PFRS.

o Kapag ang significant change sa operations ng entity will give a more appropriate revised presentation at
classification sa financial statements.

Note*
It is inappropriate for an entity to leave accounting policies unchanged when better and acceptable
alternative exist.

Identification of financial statements

o Ang financial statements at dapat na ma-identify ng malinaw at maihiwalay sa ibang information.
o Each component ay dapat na ma-identify ng maayos at malinaw.
o In addition the following information shall be prominently displayed:
a. Name of the reporting entity.
b. Whether the financial statement cover the financial individual entity or group of entities.
c. The end of the periods ay covered by financial statements and notes
d. Presentation currency.
e. The level of roundings used in the amounts in the financial statements.