MODULE 11

FINANCIAL STATEMENT PRESENTATION,

General Purpose Financial Statements

The Income Statement – provides information regarding the financial performance of the
business or its profitability which is important as this will enhance the resources of the business and its
capacity to generate cash and cash equivalents. A high profitability is marked by a high ROE ( net income
divide by owner’s equity).

The Statement of Changes in Equity – shows the changes in the interest of the owner(s) whether
a sole –proprietor, a partner or a shareholder is.

The Statement of Financial Position – lists down the economic resources being controlled by the
firm, and from which liquidity and solvency are determined. It shows how much of the assets being
funded by the creditors and by the investors (solvency). It helps predict ability of the firm to withstand
pressure and demand to pay for its obligations. It shows ability of the firm to pay promptly its short term
obligations (liquidity).

The Income Statement

Multi-Step Form
ALONZO SHOE STORE
INCOME STATEMENT
For the year ended December 31, 2023
Gross Sales 1 750
000
Less Sales Returns & Allowances 7 500
Sales Discount 20 000 27 500
Net Sales 1 722
500
Less Cost of Sales
Merchandise Inventory, January 1 30 000
Add Net Cost of Purchases
Purchases 950
000
Add Freight In 5 000
Total Cost of Goods Delivered 955
000
Less Purchase Returns & 3
Allowances 000
Purchase Discount 7 10 000 945 000
000
Total Goods Available For Sale 975 000
Less Merchandise Inventory, Dec. 31 40 000 935 000
Gross Income 787 500
Less : Operating Expenses
Selling
Sales Salaries 54 000
Advertising 50 000
Rent - Warehouse 20 000
Freight Out 5 000
Store Supplies Expense 3 000 132 000
Administrative
Office Salaries 30 000
Rent - Office 20 000
Bad Debts 7 500
Depreciation – Office Equipment 5 500
Office Supplies Expense 3 600 66 600 198 600
Operating Income 588 900
Add Other Revenues and Gains
Commission Income 4 500
Interest Income 2 500 7 000
Total Income 595 900
Less Other Expenses and Losses
Interest Expense 2 000
NET INCOME 593 900
CURRENT AND NON-CURRENT CLASSIFICATION

Assets are classified into current assets and non-current assets.

Current Assets include cash and cash equivalents which are not restricted in use,
as well as other assets expected to be realized into cash, or sold or consumed
within the normal operating cycle of the business or one year, whichever is
longer. The following are the current assets:

1. Cash – includes currencies or coins or negotiable instruments such as a

bank check or a postal money order used as a medium of exchange. Two
account titles could be used: Cash on Hand for cash items in the custody
of the officer-in-charge or the owner, and Cash in Bank for cash
deposited in the bank under a current or savings account. Cash
equivalents are short term, highly liquid investment such as a three-
month time deposit or a three-month government treasury bill.
2. Marketable securities – these are highly traded securities such as the
stocks and bonds purchased by the enterprise that are to be held for a
short duration. Like the cash equivalents, they are usually purchased
when the enterprise has temporary idle or excess cash.
 3. Receivables – these are collectibles from customers, clients and other
persons for the goods, services or money give by the business. The
account title to be used is Accounts Receivable if only an oral or an
implied promise is received from the client or customer. Notes
Receivable is evidenced by a promissory note issued by the debtor.
4. Other Receivables are Interest Receivable when interest is collectible on
promissory notes received from clients and customers or Rent
Receivable for rent collectible from tenants. Dividends Receivable is a
dividend collectible by a shareholder from a corporation.
5. Merchandise Inventory is an account title used to represent the stock of
goods available for sale by the business. This is applicable only for a
merchandising business.
6. Prepaid Expenses- these represent advance payments made for benefits
or services to be received by the business in the future. Examples of
these are Supplies, Prepaid Insurance, and Prepaid Rent.
7. Deductions from surrent assets are called contra asset accounts. An
example of this is the Allowance for Bad Debts which represents
customers accounts doubtful of collection. This is deducted from
accounts receivable to arrive at its net realizable value.

Non-current assets are those assets not included in the current assets such as
property, plant and equipment or fixed assets which are needed to support the
operation of the business over a long period of time and are not intended for sale.
The following are examples of property, plant, and equipment:

1. Land - lot or real estate owned and used by the business on which a
building could be constructed.
2. Building – structure used to house the office, store, or factory.
3. Equipment – typewriter, air conditioner, calculator, filing cabinet,
computer, electric fan, trucks, car used in the business. Specific titles
used such as Office Equipment, Store Equipment, and Delivery
Equipment.
4. Furniture and Fixtures – tables, chairs, curtains, lighting fixtures and
wall decors. Specific titles may be used such as Office Furniture and
Fixtures and Store Furniture and Fixtures.
5. Leasehold or Lease Right – for a fee, a lessee is given the right to use the
property for a long period of time.
6. Accumulated Depreciation - contra asset or off-set account
representing expired cost of the plant, property, or equipment as a
result of usage and passage of time. This is a deduction from the
property, plant snd equipment account.
Liabilities are classified into current and non-current

Current Liabilities are those debts or obligations reasonably expected to be

liquidated in the normal course of the enterprise’s operating cycle or paid within
a period of one year by the use of current assets or the creation of other current
liabilities. The following are examples of current liabilities:

1. Accounts Payable to trade creditors for purchase of goods or services

on credit supported by the oral of implied promise of the business.
Notes payable is a liability by a promissory note issued by the business
to the creditor.
2. Loan Payable - is a liability to pay a bank or a financing institution for
amount of money borrowed by the business.
3. Utilities Payable – is a liability to pay utility companies like PLDT,
Meralco, and Manila Water for telephone, electricity and water services
rendered from them.
4. Other payable include Interest Payable which represents additional
charge and obligation to pay for interest-bearing promissory note issued
by the business and Salaries Payable which represents obligations to
pay employees for services received from them and Taxes Payable
which are obligations due to the government for sales, earnings, gains
and value of property owned / sold by the business.

Non-current liabilities are long term liabilities or obligations which are payable
longer than one year such as:

1. Note Payable which is issued to the creditor and evidenced by a promissory

note.
2. Mortgage Payable - which is an obligation secured by the real property of
the business.
3. Bond Payable - which is a long term promise usually from five to ten ot
twenty years supported by a formal contract containing the face value of
the bond, the interest rate, the interest payment date and the maturity
date.

ADEQUATE DISCLOSURES

This principle requires the inclusion of significant information that will help
enhance the firm’s financial statements. It also means that the users are informed
of additional facts that will aid them in properly interpreting the financial
statements.