BASIC FINANCE IC113

Week 6: MIDTERM
FINANCIAL STATEMENTS

MARITES D. PAQUIBULAN
Part-time Instructor
INTRODUCTORY REMARKS ABOUT FINANCIAL STATEMENTS
Financial Statements “ are structured financial Financial Statements must
representation of the financial policies of the possessed the characteristics of:
transactions undertaken by an enterprise and
• Timeliness (timely submitted in order
show the results of management’s stewardship of not to defeat the purpose-used for
the resources invested to it”. These are the means decision making)
by which the information accumulated and • Prepared in neutral way (must be fairly
processed in financial accounting are periodically presented and free from bias – it is not
communicated to its various users. They are good to give a favor to one party in
designed to serve the needs of variety of users, detriment to the other)
particularly owners and creditors. FS that is intentionally prepared to
The objective of financial statements is to mislead the readers or user is
provide information about the financial position called fraudulent financial
and cash flows of and enterprise that is vital in reporting. These are achieved through
making sound economic decisions. manipulation of financial records and
falsification of transactions to attain
better picture of financial reports
specially to obtain loans from banks.
FINANCIAL STATEMENTS consist of the following:

1. Statement of Financial Position or Balance Sheet

2. Statement of Comprehensive Income or Income Statement
3. Statement of Changes in Owner’s Equity
4. Statement of Cash Flows

Remember, financial statements are the responsibility of the

management. The management is answerable as to how the
reports are being prepared

10/7/2021
 STATEMENT OF
FINANCIAL POSITION
LEARNING OUTCOMES:

At the end of the lesson, the students are able to:

1. Identify the elements of the Statement of Financial Position
and describe each one of them;
2. Classify the elements of the Financial Position into Current
and Non-Current items;
3. Prepare the Statement of Financial Position of a single
proprietorship; and
4. Prepare the Statement of Financial Position using the Report
Form and Account Form with proper classification of items as
Current and Non-Current
12-5
 STATEMENT OF FINANCIAL POSITION

Statement of Financial Position is a “ statement that shows the financial

condition of the business as of a particular date”. Example (As of October 9, 2021)
It presents the three (3) accounting elements which are Assets, Liabilities and Owner’s Equity.
These are considered “permanent” accounts. This statement was previously known as
“Balance Sheet”
LIABILITIES
ASSETS
Owner’s Equity

STATEMENT OF FINANCIAL POSITION (Asset = Liabilities + Owner’s Equity) 12-6

 ELEMENTS OF FINANCIAL POSITION
ASSETS LIABILITIES OWNER’S EQUITY
Current Assets Current Liabilities (capital account by the owner)
- Cash - Accounts Payable - Owner’s Capital
- Cash Equivalents - Notes payable (short-term)
- Petty Cash Fund
- Owner’s Withdrawal
- Accrued Expenses
- Notes Receivable - Unearned Income
- Accounts Receivable
- Estimated Uncollectible Accounts Non-Current Liabilities
- Advances to Employees
- Notes Payable (long-term)
- Inventories (Unused Supplies)
- Mortgage Payable
- Prepared Expenses
Non-Current Assets (Property and Equipment)
- Land
- Building
- Furniture and Fixtures
- Accumulated Depreciation (contra asset account)

12-7
 ASSET (1st Element)
• ASSETS are defines as “resources
controlled by the enterprise as a
result of past transactions and
events and from which economic
benefits flow to the enterprise”.
• In layman’s language, assets are
defined as “things of value that
are owned and used by the
business in its operations”.

12-8
12-9
 LIABILITIES
(2nd Element)
• Liabilities are “financial
obligations of the
business to its
creditors”.
• It represents the claim
of the creditors over
the assets of the
business.

12-10
OWNER’S EQUITY (3rd Element)

12-11
 FORMS OF STATEMENT OF FINANCIAL
POSITION
• Report Form – in this form of Statement of Financial
Position, the assets are listed first, followed by liabilities
and Owner’s Equity. This is the Statement in a “vertical”
position. This report form of a Statement of Financial
Position is used when there are few accounts involved.
• Account Form – this patterned after the basic accounting
equation, Assets = Liabilities + Owner’s Equity wherein the
assets are shown at left-hand side while the liabilities and
owner’s equity at the right-hand side. This account form is
used when there are plenty of accounts involved. 12-12
12-13
12-14
ILLUSTRATION

12-15
ILLUSTRATION

12-16
ILLUSTRATION

12-17
ILLUSTRATION

12-18
Complete Statement of Financial Position

12-19
 STATEMENT OF
COMPHENSIVE INCOME
LEARNING OUTCOMES:

At the end of the lesson, the students are able to:

1. Identify the elements of the Statement of Comprehensive
Income and describe each items for the service business and
merchandising business;
2. Prepare a Statement of Comprehensive Income for a service
business using the simple-step approach
3. Prepare a statement of Comprehensive Income for a
Merchandising business using the multiple-step approach

12-21
 STATEMENT OF COMPREHENSIVE INCOME

Statement of Comprehensive Income is a financial statement that shows the

“results of operation” of the business for a given period of time.
• It presents the two (2) temporary accounts of owner’s equity which are
Revenue or Income and Expenses
• Revenue or Income, Costs and Expenses are the three (3) elements of the
Statement of Comprehensive Income. This statement was previously
known as “Income Statement”.

Revenue or Income P xx
Less: Cost and Expenses xx
Equals: Profit/ (Loss) P xx

12-22
 ELEMENTS OF COMPREHENSIVE INCOME
REVENUE OR INCOME COSTS OF SALES OR EXPENSES
Service Income COST OF GOODS SOLD Supplies Expense
Professional Income Purchases P xx Rent Expense
Rental Income less: Repairs and Maintenance
Interest Income Purchase Returns and Allowances xx
Purchase Discounts xx
Salaries Expenses
Miscellaneous Income Freight-in xx Uncollectible accounts
Equals: Cost of Sales or CGS P xx Depreciation Expense
Taxes and Licenses
Insurance Expense
Utilities Expenses
Interest Expense
Miscellaneous Expense
Gas and Oil

12-23
Revenue or Income (1st Element)

12-24
COSTS OF SALES OR COST OF GOODS SOLD
(2nd Element)
- refers to cost of manufacturing or selling the merchandise. It
includes the cost of Purchases less Purchase Returns and
Allowances and Purchase Discounts which are both reduction from
Purchases.
Purchase Returns and Allowances is deducted from Purchases account representing the
returns of merchandise due to damages or not conforming with the order while Purchase
Discounts refer to incentives given to supplier for early payment of their accounts within
discount period. Forming part of the cost of sales is Freight-in which refers to
transportation cost in bringing the merchandise within the premise of the business to
become ready for sale

12-25
EXPENSES (3rd Element)

12-26
12-27
12-28
12-29
12-30
 TAKE AWAYS:

• Statement of Financial Position (Balance Sheet) – is the

measurement of financial condition (Assets, Liabilities and
Owner’s Equity)
Asset = Liabilities + Owner’s Equity

• Statement of Comprehensive Income (Income Statement) –

is the measurement of performance (Revenue or Income,
Cost and Expenses)
Revenue or Income – Cost/Expenses = Profit/(Loss)
12-31
You can be a future
accountant since you have
enough knowledge in this
lesson.
Congratulations you
just completed Statement of
Financial Position and
Statement of
Comprehensive Income