AC 101 Prof.

Nova Grace Latina

Financial Accounting

CHAPTER 5: WORKSHEET AND FINANCIAL STATEMENTS

THE WORKSHEET

Accountants often use a worksheet to help transfer data from the unadjusted trial
balance to the financial statements. This multi-column document provides an efficient
way to summarize the data for financial statements. The accountant generally prepares
a worksheet when it is time to adjust the accounts and prepare financial statements.
Note, however, that it is possible to prepare financial statements directly from the
adjusted trial balance at the end of the accounting period if the business has relatively
few accounts.

The worksheet simplifies the adjusting and closing process. It can also reveal errors. The
worksheet is not part of the ledger or the journal, nor is it a financial statement. It is a
summary device used by the accountant for his convenience.

PREPARING THE WORKSHEET (Step 5)

The steps in the preparation of a worksheet:

1. Enter the account balances in the unadjusted trial balance columns and total the
amounts.

The numbers, titles and balances of the accounts are lifted directly from the ledger
before the adjusting entries are prepared. The accounts are listed in the worksheet in the
order they appear in the ledger. Total debits must equal total credits. Accounts with zero
balances (e.g., salaries payable, interest payable, etc.) are also presented. Listing all the
accounts with their balances helps identify the accounts that need adjustments. This
practice will help ensure the achievement of completeness and accuracy in the
adjustment process.

2. Enter the adjusting entries in the adjustments columns and total the amounts.

When a worksheet is used, all adjustments are first entered in the worksheet.

3. Compute each account's adjusted balance by combining the unadjusted trial

balance and the adjustment figures. Enter the adjusted amounts in the adjusted trial
balance columns.

The adjusted trial balance prepared by combining horizontally, line by line, the
amount of each account in the unadjusted trial balance columns with the corresponding
amounts in the adjustment columns. This procedure is called cross-footing. This process Is
followed through all the accounts. The adjusted trial balance columns are then totaled
to check the accuracy of the cross-footing.

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Financial Accounting

4. Extend the asset, liability and owner's equity amounts from the adjusted trial balance
columns to the balance sheet columns. Extend the income and expense amounts to the
income statement columns. Total the statement columns.

Every account is either a balance sheet account or an income statement

account. Asset, liability, capital and withdrawal accounts are extended to the balance
sheet. Income and expense accounts are moved to the income me statement columns.
Debits in the adjusted trial balance remain as debits in the statement columns while
credits as credits.

5. Compute profit or loss as the difference between total revenues and total expenses in
the income statement. Enter profit or loss as a balancing amount in the income
statement and in the balance sheet, and compute the final column totals.

Profit or loss is equal to the difference between the debit and credit columns of the
income statement.

Revenues (Income Statement credit column total) P71,700

Expenses (Income Statement debit column total) 36,700

Profit P35,000

The profit or loss should always be the amount by which the debit and credit columns for
income statement, and the debit and credit columns for balance sheet differ. The profit
figure of P35,000 is entered in the debit column of the income statement and the credit
column of the balance sheet. After completion, total debits and total credits in the
income statement and balance sheet columns must equal.

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AC 101 Prof. Nova Grace Latina
Financial Accounting

ESSENCE OF FINANCIAL STATEMENTS

There are questions that the owner of a business periodically asks—How much did the
business entity earn? What is the financial condition of the business? How much is the
owner's interest in the entity today? What happened to the cash receipts? Where did
cash go? Investors, creditors, taxing authorities and other users have their own questions
about the business which need to be answered.

The financial statements are the means by which the Information accumulated and
processed in financial accounting is periodically communicated to the users. Without
accounting information embodied in the financial statements, users may not be able to
arrive at sound economic decisions.

Per revised Philippine Accounting Standards (PAS) No. 1, the objective 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. An entity shall present with equal prominence all of the financial statements in
a complete set of financial statements.

COMPLETE SET OF FINANCIAL STATEMENTS

Per revised PAS No. 1, a complete set of financial statements comprises:

1. A statement of financial position as at the end of the period;

2. A statement of comprehensive income for the period;

3. A statement of changes in equity for the period;

4. A statement of cash flows for the period,

5. Notes, comprising a summary of significant accounting policies and other explanatory

information; and

6. A statement of financial position as at the beginning of the earliest comparative period

when an entity applies an accounting policy retrospectively or makes a retrospective
restatement of items in its financial statements or when it reclassifies items in its financial
statements.

In a nutshell, the statement of financial position (or balance sheet) lists all the assets,
liabilities and equity of an entity as at a specific date. The income statement presents a
summary of the revenues and expenses of an entity for a specific period. The statement
of changes in equity presents a summary of the changes in capital such as investments,

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AC 101 Prof. Nova Grace Latina
Financial Accounting

profit or loss, and withdrawals during a specific period. The statement of cash flows
reports the amount of cash received and disbursed during the period. Accounting
policies are the specific principles, bases, conventions, rules and practices adopted by
an enterprise in preparing and presenting financial statements. Notes to financial
statements provide narrative descriptions or disaggregation of items presented in the
statements and information about items that do not qualify for recognition in the
statements.

PREPARING THE FINANCIAL STATEMENTS (Step 6)

Once the worksheet is completed, it is easy to prepare the financial statements for the
account balances have been extended to the appropriate income statement and
balance sheet columns. Most of the information needed to prepare the income
statement, statement of changes in equity and balance sheet are available from the
worksheet.

Statement of Comprehensive Income

An entity shall present all items of income and expense recognized in a period:

a) In a single statement of comprehensive income, or

b) In two statements: a statement displaying components of profit or loss (separate

income statement) and a second statement beginning with profit or loss and displaying
components of other comprehensive income (statement of comprehensive income).

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AC 101 Prof. Nova Grace Latina
Financial Accounting

The income statement is a statement showing the performance of the enterprise for a
given period of time. It summarizes the revenues earned and expenses incurred for that
period of time.

Weddings "R" Us

Income Statement

For the Month Ended May 31, 2020

Revenues

Consulting Revenues P67,700

Referral Revenues 4,000

Total P71,700

Expenses

Salaries Expense P15,600

Utilities Expense 4,400

Rent Expense 4,000

Depreciation Expense-Service Vehicle 4,000

Interest Expense 3,500

Supplies Expense 3,000

Insurance Expense 1,200

Depreciation Expense-Office Equipment 1,000

Total 36,700

Profit P 35,000

Information about the performance of an enterprise, in particular its profitability, is

required in order to assess potential changes in the economic resources that it is likely to
control in the future. It is also useful in predicting the capacity of the enterprise to
generate cash flows from its existing resource base.

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AC 101 Prof. Nova Grace Latina
Financial Accounting

Statement of Changes In Equity

The statement of changes in equity summarizes the changes that occurred in owner's
equity. This statement is now a required statement (per revised Philippine Accounting
Standards (PM) No. 1). Changes in an enterprise's equity between two balance sheet
dates reflect the Increase or decrease in its net assets during the period.

In the case of sole proprietorships, increases in owner's equity arise from additional
investments by the owner and profit during the period. Decreases result from withdrawals
by the owner and from loss for the period. The beginning balance and additional
investments are taken from the owner's capital account in the general ledger. The profit
or loss figure comes directly from the income statement while the withdrawals from the
balance sheet columns in the worksheet.

Weddings "R" Us

Statement of Changes In Equity

For the Month Ended May 31, 2020

Gevera, Owner's Equity, 5/1/2020 P250,000

Add: Additional Investments by Gevera P 0

Profit 35,000 35,000

Total P285,000

Less: Withdrawals 14,000

Gevera, Owner's Equity, 5/31/2020 P271,000

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AC 101 Prof. Nova Grace Latina
Financial Accounting

Statement of Financial Position

The statement of financial position Is a statement that shows the financial position or
condition of an entity by listing the assets, liabilities and owner's equity as at a specific
date. The information needed for this statement are the net balances at the end of the
period, rather than the total for the period as in the income statement. This statement is
also called the balance sheet.

Users of financial statements analyze the balance sheet to evaluate an entity's liquidity,
its financial flexibility, and its ability to generate profits, and its solvency. Liquidity refers to
the availability of cash in the near future after taking account of the financial
commitments over this period. Financial flexibility is the ability to take effective actions
to alter the amounts and timings of cash flows so that it can respond to unexpected
needs and opportunities. This includes the ability to raise new capital or tap into unused
lines of credit. Solvency refers to the availability of cash over the longer term to meet
financial commitments as they fall due.

In preparing the balance sheet, it may not be necessary to make any further analysis of
the data. The needed data—that is, the balances of the asset, liability, and owner's
equity accounts—are already available from the balance sheet columns of the
worksheet. However, the interim balance for owner's equity must be revised to include
profit or loss and owner's withdrawals for the accounting period. The adjusted amount for
ending owner's equity is shown in the statement of changes in equity.

Format

The balance sheet can be presented in either the report format or the account format.
The report format simply lists the assets, followed by the liabilities then by the owner's
equity in vertical sequence. The account format lists the assets on the left and the
liabilities and owner's equity on the right. Either balance sheet format is acceptable.

Classification

The revised PAS No. 1 does not prescribe the order or format in which an entity presents
items in the statement of financial position; what is required is the current and non-current
distinction for assets and liabilities. Assets can be presented current then non-current, or
vice versa. Liabilities and equity can be presented current liabilities then non-current
liabilities then equity, or vice versa.

It is proper to present a classified balance sheet; that is, the assets and liabilities are
separated into various categories. Assets are sub-classified as current assets and non-
current assets; while liabilities as current liabilities and non-current liabilities.

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AC 101 Prof. Nova Grace Latina
Financial Accounting

When presentation based on liquidity provides accounting information that is reliable

and more relevant to decision-makers then an entity shall present all assets and liabilities
in order of liquidity.

Weddings "R" Us
Balance Sheet
May 31, 2020
Assets
Current Assets
Cash P22,200
Accounts Receivable 17,300
Supplies 15,000
Prepaid Rent 4,000
Prepaid Insurance 13,200
Total Current Assets P 71,700
Property and Equipment (Net)
Service vehicles P420,000
Less: Accumulated Depreciation 4,000 P416,000
Office Equipment P60,000
Less: Accumulated Depreciation 1,000 59,000 475,000
Total Assets P546,700

Liabilities
Current liabilities
Notes Payable P210,000
Accounts Payable 53,000
Salaries Payable 1,800
Utilities Payable 1,400
Interest Payable 3,500
Unearned Referral Revenues 6,000
Total Current Liabilities P275,700

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AC 101 Prof. Nova Grace Latina
Financial Accounting

Owner's Equity
Gevera, Capital, 5/31/2020 271,000
Total Liabilities and Owner's Equity P546,700
Statement of Cash Flows
The statement of cash flows provides information about the cash receipts and cash
payments of an entity during a period. It is a formal statement that classifies cash receipts
(inflows) and cash payments (outflows) into operating, investing and financing activities.
This statement shows the net increase or decrease in cash during the period and the cash
balance at the end of the period; it also helps project the future net cash flows of the
entity. The discussion below gives an overview of some important concepts involved in
the preparation of the cash flow statement.

Cash flows from Operating Activities

Operating activities generally involve providing services and producing and delivering
goods. Cash flows from operating activities are generally the cash effects of transactions
and other events that enter into the determination of profit or loss. This cash fllow can be
presented using either the direct or the indirect method
Using the direct method, the entity's net cash provided by (used in) operating activities
Obtained by adding the individual operating cash inflows and then subtracting the
individual operating cash outflows.
The indirect method derives the net cash provided by (used in) operating activities by
adjusting profit for income and expense items not resulting from cash transactions. The
adjustment begins with profit followed by the addition of expenses and charges (e.g.
depreciation) that did not entail cash payments. Then, increases in current assets and
decreases in current liabilities involved in the determination of profit but which did not
actually increase or decrease cash, are subtracted from profit. Finally, decreases in
current assets and increases in current liabilities are added to profit to obtain net cash
provided by (used in) operating activities.
Profit P xxx
Adjustments for:
Non-Cash Expenses (e.g. Depreciation) xx
Increases In Current Asset Accounts (xx)
Decreases In Current Liability Accounts (xx)
Decreases in Current Asset Accounts xx
Increases In Current liability Accounts xx
Cash Flows from Operating Activities P xxx

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AC 101 Prof. Nova Grace Latina
Financial Accounting

Per Philippine Accounting Standards (PAS) No. 7, enterprises are encouraged to report
cash flows from operating activities using the direct method but the indirect method is
acceptable. Only the direct method is illustrated here. The following are the major classes
of operating cash flows using the direct method:
Cash Inflows
• Receipts from sale of goods and performance of services
• Receipts from royalties, fees, commissions and other revenues

Cash Outflows
• payments to suppliers of goods and services
• payments to employees
• payments for taxes
• payments for interest expense
• payments for other operating expenses

Cash Flows from Investing Activities

Investing activities include making and collecting loans; acquiring and disposing of
investments in debt or equity securities; and obtaining and selling of property and
equipment and other productive assets.

Cash Inflows
• receipts from sale of property and equipment
• receipts from sale of investments in debt or equity securities
• receipts from collections on notes receivable

Cash Outflows
• payments to acquire property and equipment
• payments to acquire debt or equity securities
• payments to make loans to others generally in the form of notes receivable

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AC 101 Prof. Nova Grace Latina
Financial Accounting

Cash Flows from Financing Activities

Financing activities include obtaining resources from owners and creditors.
Cash Inflows
• receipts from investments by owners -
• receipts from issuance of notes payable
Cash Outflows
• payments to owners in the form of withdrawals
• payments to settle notes payable

RELATIONSHIPS AMONG THE FINANCIAL STATEMENTS

The financial statements are based on the same underlying data and are fundamentally
related. The following shows the basic interrelationships among the financial statements:

1. The income statement reports all income and expenses during the period. The profit or
loss is the final figure in this statement.

2. The statement of changes in equity considers the profit or loss figure from the income
statement as one of the determining factors that explains the change in owner's equity.

3. The statement of financial position reports the ending owner's equity, taken directly
from the statement of changes in equity.

4. The statement of cash flows reports the net increase or decrease in cash during the
period and ends with the cash balance reported in the balance sheet. This statement is
prepared based on information from the income statement and the balance sheet.

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AC 101 Prof. Nova Grace Latina
Financial Accounting

CHAPTER 6: COMPLETING THE ACCOUNTING CYCLE

ADJUSTMENTS ARE JOURNALIZED AND POSTED (Step 7)

The adjustment process is a key element of accrual basis accounting. The worksheet
helps in the identification of the accounts that need adjustments. The adjusting entries
are directly entered in the worksheet. Most accountants prepare the financial statements
immediately after completing the worksheet. The adjustments are journalized and posted
as the closing entries are made. This step in the accounting cycle brings the ledger into
agreement with the data reported in the financial statements.

CLOSING ENTRIES ARE JOURNALIZED AND POSTED (Step 8)

Income, expense and withdrawal accounts are temporary accounts that accumulate
information related to a specific accounting period. These temporary accounts facilitate
income statement preparation. At the end of each year, the balances of these
temporary accounts are transferred to the capital account. Thus, the balance of the
owner's capital account represents the cumulative net result of income, expense, and
withdrawal transactions. This phase of the cycle is called the closing procedure.

A temporary account is said to be closed when an entry is made such that its balance
becomes zero. Closing simply transfers the balance of one account to another account.
In this case, the balances of the temporary accounts are transferred to the capital
account. A summary account-Income Summary is used to close the income and
expense accounts.

1. Close the income accounts

Income accounts have credit balances before the closing entries are posted. For this
reason, an entry debiting each revenue account in the amount of its balance is needed
to close the account. The credit is made to the income summary account.

2. Close the expense accounts

Expense accounts have debit balances before the closing entries are posted. For this
reason, a compound entry is needed crediting each expense account for its balance
and debiting the Income summary for the total. These data can be found in the debit
side of the income statement columns of the worksheet.

The effect of posting the closing entry is to reduce the expense account balances to zero
and to transfer the total of the account balances to the debit side of the income
summary account.

3. Close the income summary account

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AC 101 Prof. Nova Grace Latina
Financial Accounting

After posting the closing entries involving the income and expense accounts, the
balance of the income summary account will be equal to the profit or loss for the period.
A profit is indicated by a credit balance and a loss by a debit balance. The income
summary account, regardless of the nature of its balance, must be closed to the capital
account.

4. Close the withdrawal account

The withdrawal account shows the amount by which capital is reduced during the period
by withdrawals of cash or other assets of the business by the owner for personal use. For
this reason, the debit balance of the withdrawal account must be closed to the capital
account.

PREPARATION OF A POST-CLOSING TRIAL BALANCE (Step 9)

It is possible to commit an error in posting the adjustments' and closing entries to the
ledger accounts; thus, it is necessary to test the equality of the accounts by preparing a
new trial balance. This final trial balance is called a post-closing trial balance.

o The post-closing trial balance verifies that all the debits equal the credits in the trial
balance.

o The trial balance contains only balance sheet items Such as assets, liabilities, and
ending capital because all income and expense accounts, as well as the withdrawal
account, have zero balances.

REVERSING ENTRIES (Step 10)

Preparing the post-closing trial balance may not be the last step in the accounting cycle.
Some entitles elect to reverse certain end-of-period adjustments on the first day of the
new period. A reversing entry is a journal entry which is the exact opposite of a related
adjusting entry made at the end of the period. It Is basically a bookkeeping technique
made to simplify the recording of regular transactions in the next accounting period.

It should be emphasized that reversing entries are optional. Also, the act of reversing a
Previously recorded adjusting entry should not lead us to the conclusion that the entries
reversed are unnecessary or inaccurate.

Even when an entity follows the policy of making reversing entries, not all adjusting entries
should be reversed. Generally, a reversing entry should be made for any adjusting entry
that increased an asset or a liability account, Therefore, all accruals are reversed but only
deferrals initially recorded in income statement—income or expense—accounts are
reversed.

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AC 101 Prof. Nova Grace Latina
Financial Accounting

After analyzing the rest of the adjusting entries, the adjustments that can be reversed are
as follows: prepaid expenses (expense method), unearned revenues (income method),
accrued expenses and accrued revenues.

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