LESSON 1- FINANCIAL STATEMENT

Financial statements (or financial report)

is a formal record of the financial activities and position of a business, person, or

other entity. (http://accounting-simplified.com)

The means by which information accumulated and processed in financial

accounting is periodically communicated to the users .(Valix, 2016)
Are the end product or main output of financial statements.(Valix, 2016)

Components of financial statements (Complete set of financial statements)

1. Statement of Financial Position or Balance Sheet
2. Statement of Comprehensive Income or Income statement.
3. Statement of Changes in Equity.
4. Statement of Cash Flows.
5. Notes, comprising a summary of significant accounting policies and other
explanatory information

Objective of Financial Statements

- To provide information about the financial position, financial performance and
cash flows of an entity that is useful to a wide range for users in making
economic decisions

Financial Reporting
- If the provision of financial information about an entity to external users that is
useful to them in making economic decisions and for assessing the effectiveness
of the entity’s management
- Encompasses not only financial statements but also other means of
communicating information that relates directly or indirectly to the financial
accounting process
- Include not only financial statements but also other information such as financial
highlights, summary of important financial figures, analysis of financial
statements an significant ratios

Objective of Financial Reporting

- To provide financial information about the reporting entity that is useful to existing
and potential investors, lenders and other creditors in making decisions about
providing resources to the entity

4 major components of financial statements

1. Statement of Financial Position or Balance Sheet

 - Is a report showing the financial position of a company on a particular date. The
three elements are assets, liabilities and equity. (Abitang et al, 2014)

2. Statement of Comprehensive Income or Income statement.

- This is a report showing the financial performance of an enterprise for a given
period time it shows the income results and the expenses incurred during the
operation of the business. (Abitang et al, 2014)
3. Statement of Changes in Equity.
- Is report that summarizes the changes to equity in a given period time. The
accounts that affect owner’s equity are the following: changes to equity, income/
losses, drawing account. (Abitang et al, 2014)
4. Statement of Cash Flows.
- Is the report that shows the cash inflow and cash outflow which resulted from
three business activities; operating, investing and financial activities during the
period. (Abitang et al, 2014)

STATEMENT OF FINANCIAL POSITION /BALANCE SHEET CATEGORIES

https://www.business-case-analysis.com/balance-sheet.html#detailed-balance-sheet-
example
A. Assets Categories

Major categories on the Assets side of the Balance sheet may include the following:
1. Current assets
These are assets that, in principle, the firm could turn into cash in the near term.
"Near term" generally means one year or less. Example:
a. Cash and cash equivalent
Petty cash fund, Cash in bank, Cash on hand, Money order
b. Financial Assets (short term investment)
Marketable securities/ Financial asset at fair value thru profit or loss

c. Trade and other receivables

Accounts receivable, Notes receivable, Accrued interest receivable
d. Short-term investment
Marketable securities (Investment in bonds and stocks), or other term – Financial
Asset at Fair value thru Profit or loss
e. Inventories
Raw materials inventory, Work in process inventory, Finished goods inventory
and Manufacturing Supplies inventory
f. Prepaid expenses
Prepaid insurance, Prepaid interest, Prepaid rent
2. Non-Current assets
Example
a. Property, plant & equipment
These are the company's major physical assets, such as buildings, factory
machines, vehicles, and large computer systems. Firms normally charge the cost
of these assets against income as depreciation expense across the life of the
 asset. Note that each year of the asset's depreciable life, the expense contributes
to Accumulated depreciation. As a result, total assets "book value" decreases.
Example
Land, Building, Equipment, Motor vehicle, office equipment, furniture and
fixtures, etc

b. Long term investments and funds

These are assets that do not convert to cash quickly. These may include stocks
and bonds from other companies or other long term investments.
Example:
Investment in associate, Investment in bonds, Financial Asset at Fair value thru
other comprehensive income
c. Intangible assets
Intangible assets contrast with physical assets. Intangibles cannot be seen or
touched, but they are still assets because:
a. Firms acquire intangible assets at a cost.
b. The firm has exclusive rights to them.
c. They contribute to the firm's ability to earn.

Examples include copyrights and patents, trademarks, brand image, and

goodwill.

B. Liabilities and Owners equities categories

On the Liabilities and Owners Equities side, the major categories usually include:
a. Current liabilities
The firm must meet these obligations in the near term (one year or less).
Example:
a. Trade and other payable
Accounts payable, notes payable (trade), accrued expenses
b. Short term portion of long term liabilities (due within one year)
Bonds payable or notes payable (non-trade) due within one year

b. Non-current liabilities
These are obligations due for a period longer than one year. Long term liabilities
may include bank notes, bonds , or long term financing arrangements for
purchases.
Example:
Bonds payable, Notes payable (due more than one year), Mortgage payable,
Bank loan payable.
 c. Owner’s Equity (Sole Proprietorship) /Shareholders’ Equity ( Corporation)

Sole Proprietorship and Partnership

Owner’s Equity
- It is the account that represents the equity or claims of the owner on the
assets of business. It is the residual interest in the assets of the business
it is the difference of total assets and total liabilities
Owner’s Drawing
- Account charge to the owner’s drawing are cash or other assets
withdrawn or taken by the owner form the business for personal use.

Corporation Stockholder’s Equity:

a. Share Capital
1. Ordinary shares
2. Preference shares
b. Share premium
c. Retained Earnings

Statement of Financial Position

The minimum line items that should be included are:
1. Cash and cash equivalents
2. Financial assets –Trading Securities
3. Trade and other receivables
4. Inventories
5. Property, plant, and equipment
6. Investments accounted for using the equity method
7. Intangible assets
8. Investment property
9. Biological assets
10. Total of assets classified as held for sales and assets included in disposal
as held for sales
11. Trade and other payables
12. Current tax assets and liability
13. Deferred tax asset and deferred tax liability
14. Provisions
15. Financial liabilities –Bonds Payable
16. Liabilities and assets for current tax
17. Noncontrolling interest
18. Share capital and reserves
Forms of Statement of Financial Position
1. Report Form
The report form of the balance sheet provides information in a vertical format --
essentially one column that goes the full width of the page. The report form starts
with assets, providing a total value at the end of the assets section. It then lists
liabilities and finishes with equity, with the final line of the report providing the
total combined value of liabilities and equity.

2. Account Form
The account form of the balance sheet provides information in an essentially
horizontal format. The account form has two columns, set side by side. The left
column lists the company's assets. The final line on the left side of the sheet
provides the total value of all assets. The column on the right lists both liabilities
and equity, with liabilities coming first. The final line on the right provides the total
combined value of liabilities and equity.

A. Report Form
B. Account Form
 FORMAT ACCORDING TO PHILIPPINE FINANCIAL REPORTING STANDARDS

Jon Trading Company

Statement of Financial Position
December 31, 2018

Current Assets Note

Cash and Cash Equivalent 1 P 3,050,000

Trading securities 90,000

Trade and other receivable 2 260,000

Inventories 100,000

Prepaid Expenses 3 155,000

Total Current Assets 3,655,000

Non-current Assets

Property Plant and Equipment 4 3,060,000

Investment in associate 250,000

Total Noncurrent Assets 3,310,000

TOTAL ASSETS P 6,965,000

Current Liabilities

Trade and other payable 5 545,000

Notes payable-debt due March 2017 100,000

Total Current Liabilities 645,000

Noncurrent liabilities

Long term liabilities 6 5,000,000

Total Liabilities 6,645,000

Owner's Equity

Jon, Capital 1,500,000

Jon, drawings 180,000 1,320,000

TOTAL LIABILITIES AND OWNER'S EQUITY P 6,965,000

Note 1- Cash and Equivalent

Petty Cash Fund 50,000

Cash on Hand 300,000

Cash in Bank- BPI 1,200,000

Cash in Bank- BDO 1,500,000

3,050,000

Note 2-Trade and Other receivable

Accounts Receivable 120,000

Allowance for Doubtful Accounts 45,000

Notes Receivable – Trade 50,000

Accrued Interest Income 45,000

260,000

Note 3- Prepaid Expenses

Unused Office Supplies P 50,000

Unexpired Insurance 60,000

Prepaid Rent 20,000

Prepaid Interest 25,000

155,000

Note 4-Property, Plant and Equipment

Land 2,000,000

Office Equipment 120,000

Furniture and Fixtures 300,000

Motor Vehicle 900,000

3,320,000

Accumulated Depreciation

Office Equipment (50,000)

Furniture and Fixtures (80,000)

Motor Vehicle (130,000)

3,060,000

Note 5- Trade and Other Payables

Accounts Payable 200,000

Notes Payable Trade 85,000

Advances from Customer 105,000

Salary Payable 60,000

Interest Payable 45,000

Utilities Payable 50,000

545,000

Note 6-Long Term Liabilities

Mortgage Payable 2,000,000

Notes Payable - Debt Due April 18 3,000,000

5,000,000

Republic Central Colleges

 Angeles City

Activity # 1 – Matching accounts

Name_______________________________________________
Score______________________

A. Match the statements below with the accounting terms in the table. Write your
answers in CAPITAL letters.

A Cash F Office Furniture

B Accounts receivable G Office equipment

C Investment in Trading Securities H Transportation equipment

D Office supplies I Land

E Prepaid Insurance J Buildings

_______ 1. Insurance premium acquire and paid in advance

_______ 2. Real estate owned by the business and used in business operations.
This asset increases in value with the passage of time
_______ 3. Coins, currencies and other similar cash items that are readily available
for use in business operations
_______ 4. Amounts to be collected in the future from clients or customers

_______ 5. Any immovable structure constructed or acquired for business use

_______ 6. Items on hand like paper, pens and folders that are ready for use in
business operations
_______ 7. Short-term stocks and bonds of other companies acquired by a firm for
resale within the current period
_______ 8. Includes trucks, cars, jeeps, motorcycles, bicycles and other vehicles
used for transportation purposes by the business
_______ 9. Includes tables, chairs, counters, cabinets and similar items that are
used in the office
 _______ 10. Includes computers, cash registers, calculators, adding machines,
photocopying, machines, facsimile machines, air-conditioning units and
other similar items that are used in the office

B. Match the statements below with the accounting terms in the table. Write your
answers in CAPITAL letters.

A Accounts payable

B Notes payable (short term)

C Interest payable

D Unearned service income

E Taxes payable

F Mortgage payable

G Bonds payable

H Salaries payable

I Utilities payable

J Accrued payable

_____ 1. Refers to long-term obligations which are supported by collateral on real

property
_____ 2. Interest due on a promissory note

_____ 3. Debts or obligations with trade creditors arising from the acquisition of
goods or services in ordinary trade transactions
_____ 4. Obligation of a business to pay for services rendered by its employees

_____ 5. Promissory notes issued by a business that will become due and
payable within one year
______ 6. Refers to long-term obligations which are evidenced by bonds issued to
investors
______ 7. Obligation of a business to pay for taxes

______ 8. Advance payments from clients for services to be rendered in the futures

______ 9. Obligation of a business to pay for utilities

______ 10. Obligation of a business to pay for expenses that remain unpaid at the
end of a period

Reference: Workbook in Introductory Accounting for Service Business, Bernardo H et

al (2015)

Republic Central Colleges

Angeles City

Activity # 2 Exercises in SFP

Classify the accounts bellow according to Philippine Financial
Reporting Standards as Current assets, non current assets, CL,
NCL, OE. Includes classification by item by item
1. Taxes payable 16. Rent payable 31. Allowance for bad
debts
2. goodwill 17. Prepaid 32. Bonds payable
insurance
3. Unearned revenues 18. Bonds payable 33. Unused supplies
4. Sales 19. Taxes payable 34. Withdrawal
5. Accounts 20. Copyrights 35. Cash in bank
receivables
6. Interest payable 21. Notes payable – 36. Marketable
trade securities
7. Interest payables 22. Notes payable- 37. Accounts payable
non-trade- 6 years
8. unexpired insurance 23. Notes payable- 38. Patents
non trade due 5
months
9. Loans payables 24. Mortgage 39. Salaries payable
payable
10. Delivery 25. Dividend 40. Equipment
equipment payable
11. Raw material 26. Accumulated 41. Work in process
inventory depreciation
12. Petty cash fund 27. Retained 42. Financial asset
earnings at fair value thru
profit /loss
13. Unearned Service 28. Motor vehicle 43. Building
income
14. Accrued interest 29. trademarks 44. BSP treasury bill
receivable 3 months
15. Bank loan 30. Investment in 45. Rent payable
payable bonds

Current Non-current Current Non-current Owner’s

assets (CA) assets (NCA) liabilities liabilities(NCL) equity
(CL)
(OE)