Ia3 - Chapter 1

Chapter 1- Financial Statements
Financial Statements
-are the means by which the information accumulated and processed in financial
accounting is periodically communicated to the users.
-are a structured financial representation of the financial position and financial

performance of an entity
General Purpose Financial Statements – are those statements 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.
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 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 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, including gains and losses
e. Contributions by and distributions to owners in their capacity as owners
f. Cash Flows
Financial Position
-comprises the assets, liabilities and equity of an entity at a particular moment in

time
-specifically it pertains to the liquidity, solvency and the need of the entity for
additional financing
- STATEMENT OF FINANCIAL POSITION
Financial Performance
- Comprises the revenue, expenses and net income or loss of an entity for a
period of time
- Performance is the level of income earned by the entity through the efficient
and effective use of its resources
- Results of operations
- INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME
Cash Flows
- Are the cash receipts and cash payments arising from the operating investing
and financing activities of the entity
- Cash flow information is useful in assessing the ability of the entity to generate
cash and cash equivalents
- STATEMENT OF CASH FLOW
Financial Reporting
• Financial reporting is 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.
• The principal way of providing financial information to external users is through
the annual financial statements.
• Financial reporting encompasses not only financial statements but also other
means of communicating information that relates directly or indirectly to the
financial accounting process.
• Financial reports include not only financial statements but also other information
such as financial highlights, summary of important financial figures, analysis of
financial statements and 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.
Target users of Financial Reporting
1. Existing and potential investors

2. Lenders
3. Other creditors
Specific Objectives of Financial Reporting
1. To provide information useful in making investing and credit decisions about

providing resources to the entity.
2. To provide information useful in assessing the prospects of future net cash flows
to the entity.
3. To provide information about entity resources, claims and changes in resources
and claims.
Limitations of Financial Reporting
a. Do not and cannot provide all of the information that existing and potential
investors, lenders and other creditors need.
b. Not designed to show the value of a reporting entity but these reports provide
information to help the primary users estimate the value of the entity.
c. General purpose financial reports are intended to provide common information to
users and cannot accommodate every specific request for information.
d. Financial reports are based on estimate and judgment rather than exact
depiction.
Responsibility for Financial Statements
Management of an entity has the primary responsibility for the preparation and
presentation of financial statements. They are accountable also for the safekeeping of
the resources and their proper, efficient and profitable use.
Board of Directors in discharging its responsibilities reviews and authorizes the financial
statements for issue before these are submitted to the shareholders of the entity.
General Features of Financial Statements
1. Fair Presentation and compliance with PFRS

2. Going concern
3. Accrual basis
4. Materiality and aggregation
5. Offsetting
6. Frequency of reporting
7. Comparative information
Fair Presentation
It is achieved if the financial statements are prepared in accordance with the PFRS
which represent the GAAP in the Philippines.
It is defined as faithful representation of the effects of transactions and other events in

accordance with the definitions and recognition criteria for assets, liabilities, income and
expenses laid down in Conceptual Framework.
Fair presentation requires and entity:
a. To select and apply accounting policies in accordance with PFRS

b. To present information including accounting policies in a manner that provides
relevant and faithfully represented financial information.
c. To provide additional disclosures necessary for the users to understand the
entity’s financial statements.
Departure from standard
An entity is permitted to depart from a standard:
1. Extremely rare circumstances

2. When management concludes that compliance with the standard would be
misleading.
3. Necessary to achieve fair presentation
4. The regulatory Conceptual Framework requires or otherwise does not prohibit
such a departure.
In such circumstances, it is incumbent upon the entity to disclose the following:
1. Management concluded that financial statements are fairly presented

2. The entity has complied with applicable standards except that it has departed
from a particular requirement to achieve a fair presentation.
3. The title of the standard from which the entity has departed, the nature of the
departure, including the treatment that the standard would require, the reason
why that treatment would be so misleading and the treatment adopted.
4. Financial impact of the departure on each item in the financial statements that
would have been reported in complying with the requirement.
Going Concern
- Means that the accounting entity is viewed as continuing in operation

indefinitely in the absence of evidence to the contrary
- Also known as continuity assumption
Accrual Basis
- Effects of transactions and other events are recognized when they occur and
not as cash or cash equivalent is received or paid and they are recorded and
reported in the financial statements of the periods to which they relate.
Materiality and Aggregation
• An entity shall present separately each material class of similar items.

• An entity shall present separately items of dissimilar nature or function unless
they are immaterial
When is an item material?
An item is material if knowledge it would affect the decision of the informed users of the
financial statements.
• Materiality of an item depends on relative size rather than absolute size. What is
material for one entity may be immaterial for another.
Factors of Materiality
a. Relative size of the item in relation to the total of the group to which the item
belongs
b. Nature of the item – inherently material because by its very nature it affects
economic decisions.
Offsetting
General Rule: Assets and liabilities and incomes and expenses when material shall not
be offset against each other
Exception: May be done when it is required or permitted by another PFRS.
Examples of offsetting:
• Gains and losses on disposal of noncurrent assets are reported by deducting

from the proceeds the carrying amount of the assets and related selling
expenses
• Expenditure related to a provision and reimbursed under a contractual
arrangement with a third party may be netted against the related reimbursement.
• Foreign exchange gains and losses or gains and losses arising from trading
securities are netted against the other.
Frequency of Reporting
An entity shall present a complete set of financial statements at least annually.
When an entity changes the end of the reporting period and presents financial
statements for a period longer or shorter than one year, the entity shall disclose:
a. Period covered
b. Reasons for using a longer or shorter period
c. The fact that amounts presented are not entirely comparable
Comparable information
Except when permitted or required otherwise by PFRS, an entity shall disclose

comparative information in respect of the previous period for all amounts in the
current period’s financial statement.
Third statement of Financial Position
It is required when an entity:
a. Applies an accounting policy retrospectively

b. Makes retrospective restatement of items in the financial statements
c. Reclassifies items in the financial statements
Under these circumstances, an entity shall present three statements of financial

position:
1. End of the current period

2. End of the previous period
3. Beginning of the earliest comparative period
Consistency of Presentation
The principle of consistency requires that accounting methods and practices shall be
applied on a uniform basis from period to period.
Consistency is desirable and essential to achieve comparability of financial statements.
Note: Consistency does not mean that no change in accounting can be made.
A change in the presentation and classification of items in the financial statements is

allowed:
a. Required by another PFRS

b. A significant change in the nature of the operations of the entity will demonstrate
a more appropriate revised presentation and classification
Identification of Financial Statements
Financial Statements shall be clearly identified and distinguished from other information
in the same published document. Each component of the financial statements shall be
clearly identified.
The following information shall be prominently displayed:
a. Name of the reporting entity

b. Whether the financial statements cover the individual entity or a group of entities
c. End of the reporting period or the period covered by the financial statements or
notes
d. Presentation currency
e. Level of rounding used in the financial statements

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Chapter 1- Financial Statements

-are a structured financial representation of the financial position and financial

Components of Financial Statements

1. Statement of Financial Position

Objective of Financial Statements

-comprises the assets, liabilities and equity of an entity at a particular moment in

- STATEMENT OF FINANCIAL POSITION

• Financial reporting is the provision of financial information about an entity to

Objective of Financial Reporting

Target users of Financial Reporting

1. Existing and potential investors

Specific Objectives of Financial Reporting

1. To provide information useful in making investing and credit decisions about

Limitations of Financial Reporting

General Features of Financial Statements

1. Fair Presentation and compliance with PFRS

It is defined as faithful representation of the effects of transactions and other events in

Fair presentation requires and entity:

a. To select and apply accounting policies in accordance with PFRS

Departure from standard

An entity is permitted to depart from a standard:

1. Extremely rare circumstances

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

1. Management concluded that financial statements are fairly presented

- Means that the accounting entity is viewed as continuing in operation

Materiality and Aggregation

• An entity shall present separately each material class of similar items.

Exception: May be done when it is required or permitted by another PFRS.

• Gains and losses on disposal of noncurrent assets are reported by deducting

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

Except when permitted or required otherwise by PFRS, an entity shall disclose

Third statement of Financial Position

It is required when an entity:

a. Applies an accounting policy retrospectively

Under these circumstances, an entity shall present three statements of financial

1. End of the current period

Consistency is desirable and essential to achieve comparability of financial statements.

A change in the presentation and classification of items in the financial statements is

a. Required by another PFRS

The following information shall be prominently displayed:

a. Name of the reporting entity

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