BASIC FINANCIAL STATEMENTS

STATEMENT OF FINANCIAL POSITION OR BALANCE SHEET

 This financial report provides information regarding the liquidity position and capital structure of a company as
of a given date.
*LIQUIDITY refers to the ability of a company to pay maturing obligations.
*CAPITAL STRUCTURE provides information regarding the amount of assets financed by debts or liabilities and
equity.

STATEMENT OF PROFIT OR LOSS OR INCOME STATEMENT

 This financial report provides information regarding the revenues or sales, expenses, and net income of a
company over a given accounting period.

STATEMENT OF CASH FLOWS

 This financial report provides an explanation regarding the change in cash balance from one accounting period
to another.
*Three (3) main categories of this statement:
a. Cash Flows from Operating Activities – it provides information regarding the quality of
earnings of a company.
b. Cash Flows from Investing Activities – it provides information regarding the future direction of
a the company.
c. Cash Flows from Financing Activities – it provides information whether there is a proper
matching of investing and financing activities.

STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY

 This financial statement provides information that explains the changes in the stockholder’s equity account from
one accounting period to another.

REVIEW OF THE FINANCIAL STATEMENT PREPARATION

1. Analyzing business transactions – transaction is analyzed to find out if it affects the company and if it needs to
be recorded.
2. Recording in the journals – once a transaction is identified and analyzed, the next step is the preparation of the
journal entry. Transactions are recorded in the special and general journal.
*Special journals include sales journal, purchases journal, cash receipts journals and cash disbursements
journals.
*Source documents – serve as the basis for recording. Example: sales invoice and delivery receipt must be
attached in the sales journal while official receipts must be attached in the cash receipts journal.
3. Posting to ledger accounts – ledgers provide chronological details as to how transactions affect individual
accounts. General ledger and subsidiary ledger are the two types of ledgers.
*General ledger – is a summary of the different subsidiary ledgers and can serve as a control account.
*Posting in the subsidiary ledgers can be done anytime and the balances are summarized at the end of an
accounting period while posting in the general ledger is done at the end of an accounting period.
4. Preparing the unadjusted trial balance – at the end of each accounting period, unadjusted trial balance is
prepared from the financial statement balances found in the general ledgers.

5. Making the adjusting entries –

*Accruals – these include unpaid salaries for the accounting period, unpaid interest expense, or unpaid utility
expense.
*Prepayments – prepaid expenses must be established at the end of each accounting period to reflect their
correct balances.
*Depreciation and Amortization expenses – depreciation for property, plant and equipment & amortization for
intangible assets
*Allowance for uncollectible accounts – bad debt expense from accounts receivable

6. Preparing the adjusted trial balance – ensure that the total debit balances equal the credit balances.
7. Preparing the financial statements – based on the adjusted trial balance
8. Making the closing entries – income statement accounts such as revenues or expenses are closed to retained
earnings to prepare the system for the next accounting period.
9. Post-closing trial balance – is prepared to test if the debit balances equal the credit balances after closing entries
are considered.
FINANCIAL STATEMENT ANALYSIS
 used by managers, equity investors, creditors, regulators, labor unions, employees, the public, and the potential
investors and creditors.
 Four (4) basic financial ratios:
1. * Profitability ratios -
1.1 Return on Equity (ROE) ROE = (Net Income ÷ Stockholder’s Equity) X 100%
 Is measures the amount of net income earned in relation to stockholder’s equity
1.2 Return on Assets (ROA) ROA = (Operating Income ÷ Total Assets) X 100%
 measures the ability of a company to generate income out of its resources.
1.3 Gross Profit Margin Gross Profit Margin = (Gross Profit ÷ Sales) X 100%
 measures the ability of a company to cover its cost of goods sold from its sales
1.4 Operating Profit Margin Operating Profit Margin = (Operating Profit ÷ Sales) X 100%
 measures the amount of income generated from the core business of a company
1.5 Net Profit Margin Net Profit Margin = (Net Profit ÷ Sales) X 100%
 measures how much net profit a company generates for every peso of sales or revenues that it
generates

2. Liquidity ratios – measure the ability of a company to pay maturing obligations from its
current assets.
2.1 Current Ratio Current Ratio = Current Assets ÷ Current Liabilities
2.2 Acid-Test Ratio or Quick Asset Ratio Quick Asset Ratio = (Cash + Current Accounts
Receivable + Short-term Marketable Securities)
÷ Current Liabilities

3. Efficiency ratios or Turn-over ratios – measure the management efficiency in utilizing the
assets of the company.
3.1 Asset Turnover ratio Sales ÷ Total Assets
 measures the company’s ability to generate revenues for every peso of asset invested.
3.2 Fixed Asset Turnover ratio Sales ÷ Property, Plant & Equipment
 measures how efficient the company manage its property, plant, and equipment
3.3 Accounts Receivable Turnover ratio Sales ÷ Accounts Receivable
 measure the efficiency by which account receivable are managed.
3.4 Inventory Turnover ratio Cost of Sales ÷ Inventories
 measures the company’s efficiency in managing its inventories.
3.5 Accounts Payable Turnover ratio Cost of Sales ÷ Trade Accounts Payable
 provides information regarding the rate by which trade receivables are paid.

4. Leverage ratios – show the capital structure of a company. The capital structure of a company is influenced
by the following factors:
a. Nature of Business – if it needs a conservative financing or aggressive financing
b. Stage of business development –
c. Macroeconomic conditions –
d. Prospect of the industry and expected growth rates –
e. Bond and stock market conditions –

f. Regulatory environment –
g. Taxes –
h. Management Style -
4.1 Debt ratio Total Liabilities ÷ Total Assets
 measures how much of the total assets are financed by liabilities.
4.2 Debt to equity ratio Total Liabilities ÷ Total Stockholder’s Equity
 a ratio of more than one means that a company has more liabilities as compared to
stockholder’s equity.
4.3 Interest coverage ratio EBIT ÷ Interest Expense
 provides information if a company has enough operating income to cover interest expense.
EBIT* means Earnings before interest and taxes

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