BusFin: CHAPTER3-PREPARATION OF FINANCIAL STATEMENTS

Review of Financial Statement Preparation, Analysis, and 2. INTERNAL USERS- are individuals who have direct and
Interpretation active participations in various quantifiable
Basic Financial Statements: transactions of the business.
• Ca- currrent assets 1. Employees
• Nca- non-current assets 2. management
• Cl- current liabilities
• Ncl –non-current liabilities
4 Basic Guideline in the preparation of Financial
• Equity Statement:
1. fair presentation
2. going concern assumption
3. accrual basis of accounting
4. consistency of presentation

Basic Financial Statements:

The Statement of Financial Position
➢ The Statement of Financial Position provides
information regarding the liquidity position and
capital structure of a company as of a given date.
➢ It must be noted that the pieces of information
found in this report are only true 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 debt or liabilities and
equity.

➢ New title for balance sheet

➢ Is a structured financial statement that shows the
assets, liabilities and equity of a business entity as of
a given date.
Financial statement- are considered the final product
of the whole accounting process.

Complete set of Financial Statements • Assets- resources controlled by the entity as a

1.Statement of financial position result of past events and from which future
2. Statement of financial condition benefits are expected to flow in the entity.
3. Statement of changes in equity • Liabilities- are present obligation of the entity
4.Cash flow statement arising from past events, the settlement of
5. Notes to the financial statement which is expected to result in an outflow from
the entity.
FRSC ( FINANCIAL REPORTING STANDARD COUNCIL )-in • Equity is the residual interest in the assets of the
the philippines the preparation of the financial entity after deducting all its liabilities.
statement is based on the guidelines issued by FRSC. Financial position of a business entity is usually
expressed in terms of its:
→ The guidelines issued by the FRSC is called Philippine
Financial Reporting Standards (PFRSs), or referred to, Liquidity-refers to the ability of a business entity to settle
inshort as STANDARDS. its currently maturing financial obligations.
Solvency- is the ability of a business to pay its long term
financial obligations.

(note: Obligations are currently maturing if they

The 2 users of financial statement are broadly classified become due with in one year.)
as follows:
1. External users Financial structure- indicates the amount of capital
2. Internal Users resources financed by creditors and amount provided
1. EXTERNAL USERS- are individuals or parties that are by the owners.
not directly involved in the operation of the business. Capacity for adaptation- refers to the ability of a
➢ SEC suppliers business to invest excess available resources or raise
➢ BSP customers needed funds through borrowings without difficulty in
➢ BIR prospective investors times of need.
➢ CREDITORS
Additional infos about SFP:
• Statement of Financial Position is previously referred
to as Balance Sheet. It was renamed as such since
2009 to better reflect the kind of information found in
the financial report.
• To expound on the second point, cite this example: If a
company reported a cash of ₱1,500,000 as of December
31, 2014, this cash balance is only true as of the end of
December 31, 2014. By January 1, 2015, that cash balance
may no longer be the same because additional cash may
have been received from sales or interest income or some
cash may have been spent for operating expenses on
January 1, 2015.
• As of a given date indicates that the statement of
sfp can be prepared anytime of the year and the
information is considered true and correct as of the
date indicated in the statement.

Basic Financial Statements:

The Statement of Profit or Loss
➢ The Statement of Profit or Loss provides information
regarding the revenues or sales, expenses, and net
income of a company over a given accounting
period, a period which may be for a month, a
quarter, or a year.
➢ In analyzing earnings performance, a comparison
with the previous periods and with other
companies, especially those coming from the same
industry, is a must. Such comparison will not be
made possible without knowing the accounting
periods covered in the statement of profit or loss.

Note:
• Statement of Profit or Loss is also known as Income
Statement.
• the income reported by a company is not that useful
if the accounting period is not stated.
Statement of comprehensive income (income
statement)
• is a structured financial statement that shows
the financial performance of a business entity
for a given period.

2 accounting element of SCI:

Income- is the summary of increase in economic
benefits during the accounting period in the form of
inflows or enhancement of assets or decrease in
liabilities that result in increase in equity other than
those relating to contributions from equity participants.
Expenses- are decrease in economic benefit during
the accounting period in the form of outflows or
depletion of assets or incurrences of liabilities that result
in decrease in equity, other than those relating to
distribution to equity participants.
(NOTE: Period indicates- covers a month, a quarter six
months or a year.)

The standards mention two methods of presenting the

statement of comprehensive income
1. Nature of expense method
2. Function of expense method
The choice between these two methods depends on
historical cost and industrial factors and nature of
entity.

Reviewer by: SADSAD & SOBREVEGA

➢ Statement of comprehensive income (income What are the important concepts we need to know
statement) –is a structured financial statement that about the STATEMENT OF CASH FLOWS?
shows the financial performance of a business ➢ The Statement of Cash Flows provides an
entity for a given period. explanation regarding the change in cash
Income- is the summary of increase in economic balance from one accounting period to
benefits during the accounting period in the form of another.
inflows or enhancement of assets or decrease in ➢ The Cash Flows are classified into three main
liabilities that result in increase in equity other than categories:
those relating to contributions from equity participants. 1. Operating;
Expenses- are decrease in economic benefit during 2. Investing; and
the accounting period in the form of outflows or 3. Financing.
depletion of assets or incurrences of liabilities that result
in decrease in equity, other than those relating to The Cash Flows are classified into three main
distribution to equity participants. categories:
➢ The standards mention two methods of presenting 1. Operating.
the statement of comprehensive income → In the cash flows from operating activities, the
1. Nature of expense method income reported from the statement of profit
2. Function of expense method or loss which is based on accrual principle is
converted to cash.
The choice between these two methods depends on → the principal revenue producing activities of
historical cost and industrial factors and nature of the entity and other activities that are neither
entity. investing nor financing
2. Investing.
Basic Financial Statements: → The cash flows from investing activities provide
The Statement of Profit or Loss information regarding the future direction of
What are the important concepts we need to know the company; it shows how much investment
about the STATEMENT OF PROFIT OR LOSS? the company is making over a given
➢ In analyzing Statement of Profit or Loss, it is accounting period.
important to identify how much of the income → Are the acquisition of long term assets and
comes from core business (the main business other investments not included in cash
of the company) and how much comes from equivalents.
the non-core business. 3. Financing
➢ There are two options in presenting the → The cash flows from financing activities provide
Statement of Profit or Loss: information whether there is a proper
❑ The first option is to present it as a separate matching of investing and financing activities.
financial statement; and
❑ The second option is to present it together ❖ Operating activities include the production, sales,
with other comprehensive income (OCI), and delivery of the company’s product as well as
which represents transactions that are not collecting payments from its customers.
reported in the profit or loss statement but ❖ Investing activities are purchases or sales of assets
affects the stockholders’ equity. (land, building, equipment, marketable securities,
etc.), loans made to suppliers or received from
customers, and payments related to mergers and
acquisitions.
❖ Financing activities include the inflow of cash from
investors, such as banks and shareholders, and the
outflow of cash to shareholders as dividends as the
company generates income.

Non-cash investing and financing activities are

disclosed in footnotes in the financial statements.
Financing Activities
→ One of the three main components of the
cash flow statement is cash flow from
financing. In this context, financing concerns
the borrowing, repaying, or raising of money.
This could be from the issuance of shares,
buying back shares, paying dividends, or
borrowing cash. Financing activities can be
seen in changes in non-current liabilities and in
changes in equity in the change-in-equity
statement.
Basic Financial Statements:
The Statement of Cash Flows

Reviewer by: SADSAD & SOBREVEGA

 Key Terms
non-cash financing activities:
→ Non-cash financing activities may include
leasing to purchase an asset, converting debt
to equity, exchanging non-cash assets or
liabilities for other non-cash assets or liabilities,
and issuing shares in exchange for assets.

OPERATING ACTIVITIES

INVESTING ACTIVITIES

FINANCING ACTIVITIES

Basic Financial Statements:

The Statement of Changes in Stockholders’ Equity
What are the important concepts we need to know
about the STATEMENT OF CHANGES IN STOCKHOLDERS’
EQUITY?
➢ The Statement of Changes in Stockholders’ Equity
provides information that explains the changes in
the stockholders’ equity account from one
accounting period to another.
➢ The changes may be due to the following:
1. Profit or loss for the accounting period;
2. Cash dividend declaration;
3. Issuance of new shares of stocks; and
4. Other transactions that affect the
stockholders’ equity such as other
comprehensive income, treasury stocks,
and revaluation of assets.

Reviewer by: SADSAD & SOBREVEGA

Notes to Financial Statements
What are the additional pieces of information that the
NOTES TO FINANCIAL STATEMENTS provide?
1. Brief Description of the Company
→ Information may include the nature of business
of the company and the owners behind the
company.

2. Summary of Significant Accounting Policies

→ This is very important because the existing
generally accepted accounting principles
provide alternative accounting policies to
companies. It is therefore important to find out
what specific accounting policies are used by
the company.

3. Breakdown of Amounts Found in the Financial

Statements
→ The company’s property, plant, and
equipment (PPE) account may have too many
components. Putting all the details on the face
of the balance sheet may make the balance
sheet too long. An alternative presentation is
to provide a single amount on the face of the
balance sheet for PPE but the breakdown of
PPE can be presented in the notes to financial
statements.

Self-Test Question

How can you identify and describe the financial

information that can be found in the following financial
statements:
a. Statement of Financial Position;
b. Statement of Profit or Loss;
c. Statement of Cash Flows; and
d. Statement of Changes in Stockholders’ Equity?

Reviewer by: SADSAD & SOBREVEGA