Saint Ferdinand College

College of Business Education

Financial Management

Understanding Financial Statements

Financial Statement
 Are a structured representation of the financial position and financial performance of an entity.
 Provide information about the financial position, financial performance and cash flows of an entity
that is useful to a wide range of users in making economic decisions.
 Show the results of the management’s stewardship of the resources entrusted to it.

Components of a Financial Statement

1. Statement of financial position – reveals the financial condition of the organization at a particular
point in time. It tells what you own, how much your owe to vendors and lenders and what is left.

Components of a statement of financial position

Assets
 An asset is a present economic resource controlled by the entity as a result of past events. An
economic resource is a right that has the potential to produce economic benefits.

Two categories of an asset:

Current asset - An entity shall classify an asset as current when:
a) it expects to realise the asset, or intends to sell or consume it, in its normal operating
cycle;
b) it holds the asset primarily for the purpose of trading;
c) it expects to realise the asset within twelve months after the reporting period; or
d) the asset is cash or a cash equivalent unless the asset is restricted from being exchanged
or used to settle a liability for at least twelve months after the reporting period.
Noncurrent Asset – all other assets shall be classified as noncurrent assets

Liability
 A liability is a present obligation of the entity to transfer an economic resource as a result of
past events
Two categories of a liability:
Current Liability
An entity shall classify a liability as current when:
a) it expects to settle the liability in its normal operating cycle;
b) it holds the liability primarily for the purpose of trading;
c) the liability is due to be settled within twelve months after the reporting period; or
d) it does not have the right at the end of the reporting period to defer settlement of the
liability for at least twelve months after the reporting period.
Noncurrent Liability– all other liability shall be classified as noncurrent liability.

Equity – total assets after deducting total liabilities.

2. Income Statement – measures the operating performance for a specified period of time. It reveals
the revenue, expenses, and net income (or net loss) for a period of time.

Components of income statement

Revenue – is the increase in capital arising from the sale of goods or the performance of services.
When a revenue is earned, it results in an increase in either cash (money received) or accounts
receivable (amounts owed to you by customers)
 Expenses – decrease capital and result from performing activities necessary to generate revenue. The
expense is either equal to the cost of the goods sold or the expenditures necessary to conduct
operations during the period.
Net Income (Net Loss) – the amount by which revenue exceeds total expenses. The resulting profit
is added to the retained earning account (accumulated earnings of a business enterprise since its
inception less dividends). If total expenses are greater than the total revenues, a net loss results,
decreasing retained earnings.

3. Statement of Cash Flows

 A Statement of Cash Flows is an integral part of the financial statement. It summarizes the
operating, investing and financing activities of an entity. (PAS7)
 It provides information about the cash receipts and cash payments of an entity during a
period.
 Provides information about the change in an entity’s cash and cash equivalents.
 It also provides information regarding the quality of earnings of an entity.

Contents of the statement of cash flows

a. Investing activities - are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents. Involves non-operating assets
Examples:
i. cash payments to acquire property, plant and equipment, intangibles and other long-
term assets.
ii. cash receipts from sales of property, plant and equipment, intangibles and other long-
term assets;
iii. cash payments to acquire equity or debt instruments of other entities and interests in
joint ventures
iv. cash receipts from sales of equity or debt instruments of other entities and interests in
joint ventures
v. cash advances and loans made to other parties (other than advances and loans made
by a financial institution);
vi. cash receipts from the repayment of advances and loans made to other parties (other
than advances and loans of a financial institution);
vii. cash payments for futures contracts, forward contracts, option contracts and swap
contracts; and
viii. cash receipts from futures contracts, forward contracts, option contracts and swap
contracts
b. Operating activities - are the principal revenue-producing activities of the entity and other
activities that are not investing or financing activities. It is a key indicator of the extent to
which the operations of the entity have generated sufficient cash flows to repay loans,
maintain the operating capability of the entity, pay dividends and make new investments
without recourse to external sources of financing
Examples:
i. cash receipts from the sale of goods and the rendering of services;
ii. cash receipts from royalties, fees, commissions and other revenue;
iii. cash payments to suppliers for goods and services;
iv. cash payments for selling, administrative and other expenses;
v. cash payments or refunds of income taxes unless they can be specifically identified
with financing and investing activities; and
vi. cash receipts and payments from contracts held for dealing or trading purposes
vii. cash receipts and payments of an insurance enterprise for premiums and claims,
annuities and other policy benefits
c. Financing activities - are activities that result in changes in the size and composition of the
contributed equity and borrowings of the entity
Examples:
i. cash proceeds from issuing shares or other equity instruments;
 ii. cash payments to owners to acquire or redeem the entity’s shares;
iii. cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other
short-term or long-term borrowings;
iv. cash repayments of amounts borrowed; and
v. cash payments by a lessee for the reduction of the outstanding liability relating to a
lease.

Cash flow analysis

Along with the financial ratio analysis, which will be discussed later on, cash flow analysis is
a valuable tool. The cash flow statement provides information on how the business enterprise
generated and used cash; that is, why cash flow increased pr decreased.

An analysis of the statement is useful in appraising past performance, projecting the business
enterprise’s future direction, forecasting liquidity trends, and evaluating the business’ ability
to satisfy its debts at maturity. It helps answer the following questions:
1. How was the expansion in plant and equipment financed?
2. What use was made of net income?
3. Where did you obtain funds?
4. How much required capital is generated internally?
5. Is the dividend policy in balance with its operating policy?
6. How much debt was paid off?
7. How much was received from the issuance of share capital?
8. How much debt financing was taken out?
 MATIBAY NA NARRA ENTERPRISE
Comparative Statement of Financial Position
December 31, 2024 and 2023

2024 2023
Assets
Current assets
Cash P40,000 47,000
Accounts receivable 30,000 35,000
Prepaid expenses 4,000 2,000
Total current assets 74,000 84,000
Noncurrent assets
Land 50,000 35,000
Building 100,000 80,000
Accumulated depreciation (9,000) (6,000)
Equipment 50,000 42,000
Accumulated depreciation (11,000) (7,000,)
Total noncurrent assets 180,000 144,000
Total assets 254,000 228,000

Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable 20,000 16,000
Noncurrent liabilities
Long term notes payable 30,000 20,000
Ordinary share capital 100,000 100,000
Retained earnings 104,000 92,000
Total liabilities and shareholders’ equity 254,000 228,000
 MATIBAY NA NARRA ENTERPRISES
Income Statement
For the year ended December 31, 2024

Sales 500,000
Cost of goods sold (200,000)
Gross profit 300,000
General selling and administrative expenses
Operating expenses 206,000
Depreciation 7,000 (213,000)
Income from operations 87,000
Income tax expense (26,000)
Net income P61,000
 MATIBAY NA NARRA ENTERPRISES
Statement of Cash Flows
For the year ended December 31, 2024

Operating Activities
Net income P61,000
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 7,000
Changes in operating assets and liabilities:
Decrease in accounts receivable 5,000
Increase in prepaid items (2,000)
Increase in accounts payable 4,000
Cash provided by operating activities P75,000

Cash flow from investing activities

Purchase of land (15,000)
Purchase of building (20,000)
Purchase of equipment (8,000)
(P43,000)

Cash flow from financing activities

Issuance of long-term notes payable 10,000
Payment of cash dividends (49,000)
(P39,000)
Net decrease in cash (P7,000)