COLLEGE OF ACCOUNTANCY

C-AE13: Financial Accounting and Reporting

First Semester | AY 2020-2021

Module 10

A. Course Code – Title : C-AE13: Financial Accounting and Reporting

B. Module No – Title : M10 – The Financial Statements
C. Time Frame : 1/2 week (Week 10 ) – 3 hrs
D. Materials : Course Syllabus

1. Overview
This learning material provides a comprehensive discussion and illustration of the
four financial statements namely, the Income Statement, the Statement of Changes in
Owner’s Equity, the Balance Sheet or Statement of Financial Position, and the Statement
of Cash Flows.
You should read clearly and understand well the topics explained herein. It is also
expected that you answer the assigned problems and exercises. Please finish reading
Chapter 5 of your textbook.

2. Desired Learning Outcomes

At the end of the learning session, I can:
a) Describe the four financial statements and cite the importance of each; and,
b) Prepare, in good form, properly classified financial statements.

3. Content/Discussion

Lesson 1 – The Income Statement

The financial statements serve as the means by which the financial information
accumulated, recorded, and processed in accounting is periodically communicated to the
various stakeholders, so that they can use the information contained in these statements
in order to arrive at sound economic decisions. These are general-purpose statements,
because they are intended to meet the needs of all users or stakeholders, and not the
particular needs of a specific user.
Note: The illustrative financial statements given in this module were prepared from the
worksheet completed in Module 9. Every financial statement has a heading that is written
above at the middle or center. It is composed of three items: the name of the business, the
title or name of the financial statement, and the specific date of the Balance Sheet or the
period covered in the case of the other three statements.
The Income Statement is the statement that is usually prepared first to determine the profit
earned/ loss incurred, because this amount is needed to prepare the capital statement or
the Statement of Changes in Owner’s Equity.

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 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

The Income Statement shows the results of operation or the performance of an entity by
presenting the income earned and the expenses incurred for a given period of time,
usually a month, quarter, semester or year.
The income may be subdivided into the (a) regular or operating income which arise from
the normal course of business and (b) other income which may be earned from activities
other than its normal operating activities.
There are two presentation forms for cost and expenses: (a) nature of expense and (b)
function of expense.
The nature of expense form also known as the single step form is normally used for simple
businesses such as those which render services. It may have two sections, one for
revenues and another for expenses. This form makes a single step of deducting expenses
from the revenues to determine the result of operations, which may either be a profit or
a loss. This form also presents expenses according to their nature, such as: depreciation,
advertising, rent, utilities, employee benefits.
The function of expense form also known as the multi-step form presents expenses according
to use or function, like cost of goods sold, administrative expenses, distribution costs.
This will be discussed in a subsequent module on the accounting for merchandising
activities.

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 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

Illustrative income statement prepared from the worksheet is given below

Our Car Wash

Income Statement
For the year ended December 31, 2020

Revenues:
Cleaning Fees Income P 970,000
Expenses:
Taxes and Licenses P 15,000
Salaries Expense 130,000
Repairs and Maintenance 28,000
Rent Expense 120,000
Utilities Expense 66,000
Advertising Expense 12,000
Bad Debts Expense 3,150
Supplies Expense 60,000
Insurance Expense 32,000
Depreciation Expense-Furniture & Fixtures 4,500
Depreciation Expense-Office Equipment 16,000
Depreciation Expense-Car Wash Equipment 36,000 ( 522,650)
Profit before Financial Cost P 447,350
Interest Expense ( 90,000)
Profit for the year P 357,350

In preparing the income statement, please be guided by the following:

a) Below the heading are the other main parts: revenue/income earned, expenses
incurred and the profit for the period.
b) Always present first the main source of revenue or income earned from the principal
line of operations, followed by other income, if any. Expenses may be presented in a
descending order, from the highest to the lowest amount, or alphabetically. Interest
Expense being a financial cost is always presented as the last expense.
c) Margin on the left side – The extreme margin is used to describe the major sections:
revenue, expenses and profit. The inner margin is for the accounts contained or
under the main section.
d) Money columns on the right side – The extreme money column is used for the
amounts of the total revenue/income, total expenses and the profit, while the inner
money column is for the individual amounts of the accounts in the main sections.

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 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

e) Single rule the last amount added or deducted, and always double rule the final
amount.

Lesson 2 – The Statement of Changes in Owner’s Equity or Capital Statement

This statement is also known as the capital statement, which summarizes and explains
what happened to or the changes that occurred in the capital or claim of the owner
during a period of time, that is, the accounting period.

Illustrative Statement of Changes in Equity

Our Car Wash

Statement of Changes in Equity
For the year ended December 31, 2020

Corona Capital, January 1, 2020 P 653,000

Add; Profit for the year 357,350
Total P1,010,350
Less: Withdrawals 36,000
Corona, Capital, December 31, 2020 P 974,350

Note: The profit shown in the income statement is presented as an addition to or an

increase in the beginning capital balance in the statement of changes in equity. On the
other hand, if the result of operations is a net loss, this is deducted from the beginning
capital balance. This is the reason why the income statement is prepared first, followed
by the capital statement.

Lesson 3 – The Statement of Financial Position or Balance Sheet

This statement shows the financial position of the entity by presenting in detail the assets,
liabilities, and the residual interest or claim of the owner as of a given date.
There are two acceptable forms of this statement: (a) the account form which follows the
account and the accounting equation, wherein the assets are presented on the left or debit
side, and the liabilities and owner’s equity are on the right or credit side; (b) the report
form which shows the assets followed by the liabilities and owner’s equity in one straight
column or in a vertical manner.

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 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

Illustrative Statements of Financial Position:

Our Car Wash

Statement of Financial Position
December 31, 2020

ASSETS
Current Assets:
Cash P850,000
Accounts Receivable P 63,000
Less: Allowance for Bad Debts (3,150) 59,850
Unused Supplies 10,000
Prepaid Insurance 16,000
Prepaid Rent 30,000
Total current assets P 965,850

Non-current Assets:
Furniture and Fixtures P 65,000
Less: Accumulated Depreciation ( 4,500) P 60,500
Office Equipment P250,000
Less: Accumulated Depreciation ( 16,000) 234,000
Car Wash Equipment P950,000
Less: Accumulated Depreciation ( 36,000) 914,000
Total non-current assets 1,208,500
Total Assets P2,174,350

LIABILITIES and OWNER’S EQUITY

Current Liabilities:
Accounts Payable P 100,000
Interest Payable 90,000
Loans Payable 1,000,000
Unearned Cleaning Fees 10,000
Total Current Liabilities P1,200,000

Owner’s Equity:
Corona, Capital _ 974,350
Total Liabilities and Owner’s Equity P2,174,350

Statement of Financial Position in the Report Form

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 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

Our Car Wash

Statement of Financial Position
December 31, 2020

Assets Liabilities and Owner's Equity

Current Assets: Current Liabilities:
Cash P 850,000 Accounts Payable P 100,000
Accounts Receivable P 63,000 Interest Payable 90,000
Allowance for Bad Debts 3,150 59,850 Loans Payable 1,000,000
Unused Supplies 10,000 Unearned Cleaning Fees 10,000
Prepaid Insurance 16,000 Total current liabilities P 1,200,000
Prepaid Rent 30,000
Total current assets P 965,850 Owner's Equity:
Non-current Assets: Corona, Capital 974,350
Furniture and Fixtures P 65,000
Accum. Depreciation 4,500 P 60,500
Office Equipment 250,000
Accum. Depreciation 16,000 234,000
Car Wash Equipment 950,000
Accum. Depreciation 36,000 914,000
Total non-current assets 1,208,500 __________
Total Assets P 2,174,350 Total Liabilities and Owner's Equity P 2,174,350

Statement of Financial Position in the Account Form

Note: The capital balance in the statement of changes in owner’s equity should be the capital
balance that will appear in the owner’s equity in the balance sheet.

In preparing the statement of financial position or the balance sheet, please be guided by
the following:
a) Prepare a properly classified balance sheet by presenting the current assets, non-
current assets, current liabilities and non-current liabilities.
b) There is no particular order prescribed in presenting the items in the balance sheet.
An entity may present assets and liabilities in the order of liquidity if such
presentation based on liquidity will make the accounting information more
meaningful, and therefore, more useful to the users or stakeholders. In this case, the
assets are presented in a decreasing order of liquidity, cash being the most liquid to
be presented first. Liabilities which are currently due are shown first.
c) The extreme left margin is used for describing the major classifications such as
Current Assets, Non-current Assets, and Current Liabilities, while the inner margin
is used for the accounts under each classification, like Cash, Supplies, Office
Equipment, Accounts Payable.
d) The placement of the amounts in the money columns on the right side follows the
margin on the left side: extreme right money column for the total amounts of the

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 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

major classifications, and the inner money columns for the amounts of the individual
accounts under each classification.
e) In the extreme right money column, put a peso sign on the first and last amounts per
accounting value, and in the inner money column, put a peso sign on the first
amount of every column of figures.
f) Single rule the last amount to be added or deducted, and double rule the final
amount or figure.

Lesson 4 – The Statement of Cash Flows

This statement presents information regarding the entity’s cash receipts (cash inflows) as
well as its cash payments (cash outflows) during a certain period. It further classifies this
cash information into operating, investing and financing activities, and shows the net
increase or decrease in cash during the specified period, that will be added to (if an
increase) or deducted from (if a decrease) the beginning cash balance to arrive at the
ending cash balance, which should be the same as the balance of the Cash account in the
Balance Sheet or Statement of Financial Position.
Operating activities relate to income from the sale of goods or services and expenses
incurred in producing and delivering these goods or services. Cash flows from operating
activities are usually the effects of transactions that are reflected in the income statement,
that is, those that are taken into consideration in the determination of the profit or loss.
This cash flow may be presented using either the direct or indirect method. The direct
method will be discussed and illustrated in this module. The other method will be taken
up comprehensively in a higher course.
In the direct method, the entity’s net cash provided by or used in operating activities is
obtained by adding the operating cash inflows or receipts and deducting therefrom the
itemized operating cash outflows or payments. If the cash inflows exceed the cash
outflows, the net effect is the net cash provided by operating activities; on the other hand,
if it is the cash outflows that exceed the cash inflows, the net effect is the net cash used in
operating activities.
Investing activities include cash inflows from the sale of property and equipment as well
as investments in securities, and cash outflows that arise from the acquisition or purchase
of plant, property and equipment as well as securities or investments.
Financing activities generally include cash inflows arising from contributions of owner/s
as well as loans from creditors, while cash outflows arise from cash withdrawals of or
distributions to owner/s and payments of loans.

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 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

Below is an illustration of a Statement of Cash Flows.

Our Car Wash

Statement of Cash Flows
For the year ended December 31, 2020

Cash flows from operating activities:

Collections from customers (Sched 1) P 917,000
Payments for:
Supplies (Sched 2) P 70,000
Insurance (Sched 3) 48,000
Taxes and Licenses 15,000
Salaries Expense 130,000
Repairs and Maintenance 28,000
Rent (Sched 4) 150,000
Utilities Expense 66,000
Advertising Expense 12,000 (519,000)
Net cash provided by (used in) operating activities P 398,000
Cash flows from investing activities:
Payments for the purchase of:
Furniture and Fixtures P ( 65,000)
Office Equipment ( 250,000)
Car Wash Equipment (Sched 5) (850,000)
Net cash provided by (used in) investing activities (1,165,000)
Cash flows from financing activities:
Cash investment of the owner P 653,000
Proceeds of loan 1,000,000
Cash withdrawal of the owner ( 36,000)
Net cash provided by (used in) financing activities 1,617,000
Net increase (decrease) in cash P 850,000
Cash balance at the beginning of the period (Jan 1, 2020) -
Cash balance at the end of the period (Dec 31, 2020) P 850,000

Note: The cash balance at the end of the period should be the same as the cash balance
in the Balance Sheet at the end of the same period.

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 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

Sched 1: Cleaning fees income P970,000

Add: Unearned cleaning fees 10,000
Less: Accounts Receivable, end ( 63,000)
Cash received from customers P917,000

Sched 2: Supplies used P 60,000

Add: Supplies unused 10,000
Cash paid for supplies P 70,000

Sched 3: Insurance expense P 32,000

Add:Prepaid insurance 16,000
Cash paid for insurance premiums P 48,000

Sched 4: Rent expense P120,000

Add: Prepaid rent 30,000
Cash paid for rent P150,000

Sched 5: Cost of car wash equipment P950,000

Less: Accounts payable (100,000)
Cash paid for car wash equipment P850,000

4. Progress Check
a) Which are the four financial statements?
b) Briefly describe each.
c) What is the purpose of each statement?
d) Why are they called general purpose statements?

5. Assignment (Optional)
Answer end-of- Chapter 5 prob 4 (Prepare the income statement, statement of
changes in equity, and the statement of financial position), prob 5 (only reqmt #4),
probs 7, 13 & 15.

6. Assessment
Atty. Dina Bale began business on January 1, 2020.
Following is the unadjusted trial balance at the end of the first year of operations, Dec
31, 2020.

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 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

Dina Bale Law Office

Unadjusted Trial Balance
December 31, 2020
Account Titles Debit Credit
Cash P 191,000
Accounts Receivable 30,000
Notes Receivable 60,000
Office Supplies 39,000
Furniture and Fixtures 65,000
Office Equipment 280,000
Accounts Payable P 8,000
Unearned Legal Fees 17,000
Atty. Bale, Capital 175,000
Atty. Bale, Drawing 16,000
Legal Fees Revenue 658,000
Rent Expense 93,000
Taxes and Licenses 15,000
Utilities Expense ___69,000 _________
Total P858,000 P858,000

The following are the adjustment data:

a) The note receivable is dated December 16, 2020, bears interest of 18% per year, and
is due to be paid by the customer on February 14, 2021.
b) A count of the Office Supplies showed P11,000 still unused.
c) Bad debts should be provided at 4% of accounts receivable.
d) The furniture and fixtures, acquired on Feb 1 of the year, have a scrap value of
P5,000 and an estimated useful life of 10 years.
e) The office equipment acquired on Feb 28 of the year, have a scrap value of P40,000.
They are estimated to be useful for 20 years.
f) Of the Unearned Legal Fees, P10,000 has already been earned.
g) Unpaid taxes amounted to P19,500.
h) Included in Rent Expense is P9,000 which is applicable to January 2021.
i) Utility bills for December received but not yet paid, P7,000.

Required: Prepare in good form the financial statements of Dina Bale Law Office

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 COLLEGE OF ACCOUNTANCY
C-AE13: Financial Accounting and Reporting
First Semester | AY 2020-2021

7. References

Manuel, Zenaida Vera-Cruz (2018) 21st Century Accounting Process, Basic Concepts and
Procedures, Manila, Philippines: Zenaida Vera-Cruz Manuel.

Ballada, Win. (2020) Basic Financial Accounting and Reporting, Cavite, Philippines:
Dom Dane Publishers & Made Easy Books.

Cabrera, Ma. Elenita B. & Cabrera, Gilbert Anthony B. (2018) Financial Accounting and
Reporting,Manila, Philippines: GIC Enterprises & Co., Inc.

Ferrer, Rodiel C. & Millan, Zeus Vernon B. (2017) Fundamentals of Accountancy,

Business and Management, Part 1, Baguio City, Philippines: Bandolin Enterprise.

Warren, Carl S., Reeve, James M., & Duchac, Jonathan E. ((2015) Accounting 25th
Edition, Pasig City, Philippines: Cengage Learning Asia Pte Ltd (Philippine Branch).

Gilbertson, Claudia B., Lehman, Mark W., & Gentene, Debra H. (2017) Century 21
Accounting Multi-column Journal 10th Edition, Boston, MA 02210 USA: Cengage
Learning.

Wild, John; Kwok, Winston; Venkatesh, Sundar; Shaw, Ken W. & Chiappetta,
Barbara. (2016) Fundamental Accounting Principles 2nd Edition, 2 Penn Plaza, New York:
McGraw-Hill Education.

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