Financial Statements Based

on Philippine Accounting Standards (PAS) #1

Chapter Prologue

Every now and then, accounting is coined as the language of finance. The reason for this is its
inherent nature of providing financial information through the formal reports prepared by accountants.
These formal reports are called financial statements. These statements present the consequences of
business events or tranactions, split and classified according to its financial nature.

According to PAS#1, an accomplished collection of financial statements would include the

following:

 Statement of Financial position (Balance Sheet)

 Income Statement
 Statement of Comprehensive Income
 Statement of Change in Equity
 Statement of Cash Flow
 Notes to Financial Statements

The same PAS made changes in the titles of financial statements in order to mirror their specific
functions. The income statements presents the report on income and expenses, the statement of cash
flows presents the movement of cash to and from the company. The balance sheet’s name is changed to
statement of financial position because, the word balance sheet does not reflect what is found in the
statement. A balance of what, hence the change of the name. The statement of financial position is a
better name since it tells the user what can be found in the report.
The financial statements’ foremost objective is to provide information concerning the financial
position, performance and cash flows of a company needed by various users in making sound economic
decisions.
 In these chapter we shall have a closer look of cash of these statements because these are the
source reports we shall be using for the next chapter – Financial Statements Analysis. Look at it as a
review, or for some, a preview of your basic accounting subject.

STATEMENT OF FINANCIAL POSITION (SFP)

As the name connotes, these financial position present the company`s financial position at a
given period. It consists of the three elements making up the financial position – assets, liabilities and
equity.
Users of this statement, current as wellas potential investors, current as well as potential
creditors and the firms management, utilize it in evaluating the company`s liquidity, solvency financial
structure and capacity for adaptation.

Assets and their classification

The definitions of assets includes its essential features. The underlined word(s) pertain to their
essential characteristics. Assets are “resources controlled by the entity as a result of a past transactions
and events form which future economic benifits are expected to flow in the entity”. For assets to be
recognized for recording, the cost of the asset should be measured reliably.
The PAS #1 classifies assets as current and non-current. Assets are considred to be current (1)
when it is cash or cash equivalent, (2) when the company intends to hold the asset for the purpose of
trading it, (3) when the company expects to realize the asset within 12 months, and (4) when the
company expects to realize the asset or intends to sell or use it within the entity`s normal operating
cycle. The current assets are typically arranged in the order of liquidity. The line items in the current
assets can be seen in the sample SFP in this chapter.
The non-current takes the residual definition. This means that if the asset does not fall under
current asset then it must be non-current. Items inluded in non-current assets are seen in the sample
SFP in this chapter.

Liabilities and their Classification

The firm`s liabilities are the present obligations of the firm form past transactions or events, the
payment of which is expected to result in an outflow of economic resources or assets.
 The PAS#1, par. 69 classifies liabilities as current and non-current. One of the criteria for one to
classify liabilities as current is when the firm is expected to pay the liability within its normal operating
cycle. Another criteria is when the firm holds the liability primarily for the purpose of trading, also when
the liability can be paid within twelve months.
The non-current liabilities also take the residual definition. Liabilities not classified not as current
are non-current. The presentation of the current and non-current liabilities is also found in the same
SFP.

Shareholders Equity (SHE) and its Components

The shareholders equity or simply in its raw meaning is the excess of the firms assets over the
firms liabilities. The shareholders equity of a corporation has three basic components, namely the share
capital, reserves and retained earnings.
Share capital component consists of issuance of the companys own share above par/stated
value or additional paid in capital or sometimes called premium on share capital. The other reserve
component may consist of various comprehensive income, revaluation surplus, and appropriated
retained earnings.
The last component of the SHE is the retained earnings. This component consists of, among
other things, the accumulated earnings of the company, prior period adjustment for errors, dividends
declared/paid, effect of changes in accounting policy and appropriated retained earnings. The
components of the SHE are presented in the statement of changes in equity.
Before going to the next sub-topic, the Income statement, please take a look at the sample
statement of financial position. Observe the presentation closely. Observe the heading, the
classification, the items found in each classification and how they are arranged. Familiarize yourself with
them.

INCOME STATEMENT AND ITS FORMS

This statement presents the result of the firms operation or performance for a given time.
Elements found in the statement consist of revenue and expenses. In the provisions of PAS#1, it
mentioned that a business shall present thqe income statement by using either the functional approach
(cost of sales method) or natural approach.
The functional presentation follows the function of expenses, while the natural approach
considers the nature of expense. Under the functional approach the expenses are classified in
accordance with their function namely, cost of sales, selling expenses, administrative expenses and
other expenses. This is the typical income statement format used by most companies.
The expenses under the natural approach are clustered according to their nature. All revenue
items are clusterd and totaled. All expenses are clustered and totaled. The sum of the expenses are
deducted from the sum of revenues to get the income before tax.

STATEMENT OF COMPREHENSIVE INCOME

What is comprehensive income? This could be better understood by knowing its components.
Generally, commprehensive income consists of recognized gains and losses hat are not included in the
income statement but are found in the equity section of the SFP or more clearly at the statement of
changes in equity.
You might ask, if these are gains or losses why then are they not found in the income
statement? Why are they found in the equity section of the SFP?
The statement of comprehensive income can be presented seperately or can be presented sa an
extension of the income statement. When the comprehensive income is included in the income
statement, the income statement heading is no longer used. Instead the income statement shall be
called statement of comprehensive income. See the presented example of this statement.

STATEMENT OF RETAINED EARNINGS

The results of the current years operation bring about changes in the companys retained
earnings. These change are disclosed in the statement of retained earnings. This statement link the
income statement results to the SFP.
It is however important to note that this statement is no long required to be prepared
seperately. This is because the statement of changes in equity includes the components of the
statement of retained earnings.

STATEMENT OF CHANGES IN EQUITY

The developments or changes that occur in the shareholders equity are presented in the
statement of changes in equity. The following are presented in this statement:
1. the total or net comprehensive income.
2. Effects brought about by the changes in accounting policies or correction of errors.
3. Investment trancsactions of owners and dividends paid to owners.
4. The beginning balance of each component in the statement of changes in equity and the
movements under them that brought about the ending balances.
 These concepts are made clear by observing the statement of changes in equity sample.

STATEMENT OF CASH FLOW (Based on PAS 7)

The summary of the operating, investing and financing activitied of the firm is presented in the
statement of cash flows. This statement reconciles the beginning and ending balances of cash and cash
equivalents in the SFP. The ending balance of the statement of cash flows is the same as the cah balance
presented in the balance sheet. In other words, this statement show the movements (reciepts and
disbursement) of cash for one whole period, generally one year.

Cash flows and its classification

Cash flows to the movement of cash. It cwould either be an inflow of cash which
pertains to reciepts of cash or an outflow which means disbursement of cash.
In presenting the cash flow for the period, the movement of cash shall be categorized a
cash flows from:
Operating activities. These are activities related in the generation of the principal
revenue of the firm. Principal revenue means the source of revenue of income for the company. For
instance, selling activities are the principal source of revenue of merchandising firms. Therefore, cash
sales is a source of operating activities. Among the other examples of cash flows from operating
activities may include:
Investing Activities. These are cash flows from purchasing or selling long-term assets and other
long-term investments. Basically these are cash flows from sale or purchase transaction non-operating
assets (assets other than inventory) are involved. Examples of cash flows from activities would be;
Cash disbursement used to buy buildings, plants, equipment, furniture, and other fixed
assets.
Cash receipts or payments from derivative transaction like future or forward contracts,
swap contracts and option contracts.
Cash receipts or payments from selling or buying of equity securities or shares or debt
instrument like bonds of other companies for short-term and long-term purposes.

Financing activities. These are the company's cash inflows or outflows involving its owners
(equity financing) and creditors (debt financing). The borrowings included under this category are non-
trade payables. Non-trade payables are those we get from borrowings from bank or other financial
institutions. These are not from purchases of inventory or company office or store supplies. Examples of
these activities include:
 Cash receipts from issuance of the company's ordinary shares, and preferred shares.
Cash disbursements used to pay acquisition of treasury shares or redeemable preferred
shares.
Cash receipts from issuing the company's bonds or notes.
Cash receipts from short-term or long-term loan payable, bank payables, mortgage
payables
Cash disbursement used to pay bank loan and other form of borrowings.

Illustrative Example of Financial Statements

The consolidated financial statements provide here, is industry-based. It is taken from a
world-renowned corporation belonging to the fuel industry. The accounts are industry-based, however
the amounts are assumed figures. It is important to remember that financial statements may vary from
one industry to another. Consolidated financial statements, as the name connotes, is a consolidation of
financial statements made by a firm with subsidiaries. Subsidiaries are independent corporations that
exist independently from their parent corporation. The parent corporation that holds controlling
ownership over its subsidiaries.

Note

Assets

Current Assets
 Cash and Cash Equivalents 4 P9,732

Trading Securities 5 229

Available-for-sale investment (due in one year or less) 6 164

Trade and other Receivables-net 7 17,869

Inventories-net 8 30,271

Other current assets 11 10,315

Non-current Assets P68,580

Available-for –sale investment (Due after one year to five 6 468

years)

Property, Plant and Equipment-net 9 34,128

Investment Properties-net 10 202

Deferred tax assets-net 22 885

Other non-current assets 11 211

Total Non-current Assets 35,894

Total Assets P104,474

ADA Corporation and Subsidiaries

Consolidated Statement of Financial Position
December 31,2007
(Amount in Million Pesos)

Liabilities and Equity

Current Liabilities

Short-term loans 12 P33,784

Liabilities for crude oil and petroleum importation 23 12,873

Trade and other payables 13 4,544

Income tax payable 523

Bank loan – Current portion - net 14 1,604

Total Current Liabilities P53,328

Non-current Liabilities

Bank loan payables-net of current portion 14 11,176

Deferred tax liabilities – net 1,268

Other non-current liabilities 914

Total Liabilities 13,358

Equity Attributable to Equity Holders of the Patent Company 66,686

Share Capital 16 9,375

Retained Earnings 16 28,692

Other reserves (412)

Total Equity Attributable to Equity Holders of the Parent 37,655

Minority Interest 133

Total Equity P37,788

Total Liabilities and Equity P104,474

ADA Corporation and Subsidiaries

Consolidated Income Statement
For the Year Ended December 31, 2007
(Amount in MillionPesos, Except Per Share Amounts)
(Amount in Million Pesos)

Note
Sales 26 P210,520

Less: Cost of Goods Sold 17 198,287

Gross Profit P15,233

Less: Expenses

Selling and Administrative Expenses 18 5,325

Interest Expense 21 1,814

Interest Income 21 (344)

Others – net 21 (912)

Total Expenses 5,883

Net Loss before tax P9,350

Less: Tax Expense (Benefit) 23/32

Current 3,165

Deferred (210) 2,955

NET INCOME P6,395

Earnings (loss) per share 27 P.68

ADA Corporation and Subsidiaries

Consolidated Statement of Comprehensive Income
For the Year Ended December 31,2007
 Note

Net Income for the year P6,395

Other Comprehensive Income

Actuarial Gain on defined pension plan 25 88

Unrealized fair value gain (loss) on available – for-sale 6 (9)

investments (net of tax effects of P5)

Exchange difference in translating foreign operations (1)

Total Other Comprehensive (loss) , net of tax 78

TOTAL COMPREHENSIVE INCOME P6,473

ADA Corporation and Subsidiaries

Consolidated Statement of Changes in Equity
For the Year Ended December 31,2007
 Retained Earnings

Share
Notes Capital Approp. Unapprop Others Total

Balance at January 1,
2007 16 P9,375 P17,021 P6,232 P(490) P32,138

Total comprehensive 6,377 78 6,455

income for the year

Appropriations for
capital projects 16 4,151 (4,151)

Cash Dividends – P.10

per share 16 (938)

Balance at December 31,

2007 P9,375 P21,172 P7,520 P(412) P37,655

ADA Corporation and Subsidiaries

Consolidated Statement of Cash Flows
For the Year Ended December 31, 2007

Note
CASH FLOWS FROM OPERATING ACTIVITIES

Income before tax P9,350

Adjustment for:

Depreciation and amortization 20 2,516

Interest Expense 21 1,814

Unrealized Foreign exchange gain – net (520)

Interest Income 21 (344)

Others (81) 3,385

Other income before working capital changes P12,735

Changes in operating asset and Liabilities 28 (2,637)

Interest paid (1,680)

Income taxes paid (3,098)

Interest received 343

Net Cash Provided by Operating Activities P5,663

CASH FLOWS FROM INVESTING ACTIVITIES

Disposal of (Additions to) :

Property, Plant and Equipment 9 P(11,477)

Investment Properties 10 6

Decrease (increase) in :
 Other receivables 7 (956)

Other non- current assets 5

Reductions from (Additions to) :

Available –for- sale investment (9)

Net Cash Used in Investing Activities P(12,431)

CASH FLOW FROM FINANCING ACTIVITIES

Proceeds from availment of loans 69,625

Payments of :

Loans (63,789)

Cash Dividends (927)

Others (134)

Net Cash Provided by Financing Activities P4,775

Effects of Exchange Rate Changes on Cash and Cash (10)

Equivalents

NOTES TO THE FIANCIAL STATEMENTS

There are bits or sets of information that cannot be disclosed on the face of the financial
statements. This information may either be quantitative or qualitative in nature and may have a bearing
on how the financial statements may be interpreted. Since they are not found on the face of the
financial statements and have a bearing in interpreting the financial statements, they are placed to the
notes to the financial statement section of auditor's report.

The notes may include (indicated as a subheading) the following:

 • Corporate/ Company Information. This may include the nature of the business, the
associates or subsidiaries of the company, and the principal activities of the company.

• Basis of Preparing the Financial Statements and the Statement of Compliance (when
segregated from the Summary of Significant Accounting Policies). The basis in preparing the financial
statements could be at historical cost or at fair value. The preparation of the financial statements should
be in compliance with the Philippine Financial Reporting Standards (PFRS).

• Summary of Significant Accounting Policies. The significant accounting policies used by the
company in carrying out their operations and preparing their financial statements. The changes in
accounting policies may also be included here or placed in a segregate heading. The breakdown of the
line items in the financial statements is also included under this subheading. For example the Trade and
Other Receivables in the face of SFP is broke down in detail and the total is the one shown in the SFP.

The main objective for preparing the notes is to supply the users of the financial statements the
necessary disclosures as required by the Philippine Financial Reporting Standards (PFRS).

Presented below are selected portions of the notes to the financial statement. This should give you
an idea on what the notes contain. It is advisable you review the concept discussion on the notes to
financial statements in this chapter.

Excerpts from the Notes to Financial Statements (ADA Corporation)

Corporate/ Company Information:

The firm was incorporated under the laws of the Republic of the Philippines and registered with
the Philippine Securities and Exchange Commission (SEC) on July 22, 1966. ADA is considered the
largest oil refining and marketing company in the Philippines. It supplies more than1/3 of the
nation's fuel requirements.

Basis of Preparing the Financial Statements

The accompanying financial statements of ADA Corporation and subsidiaries were prepared on a
historical cost basis, except for the financial assets, available-for-sale (AFS) investments and derivative
financial instruments, which are measured at fair value. The consolidated financial statements are
presented in Philippine peso, which is the firm's functional and presentation currency. All amounts are
rounded to the nearest millions, except when otherwise indicated.

Statement of Compliance
 The consolidated financial statements of the firm were prepared in compliance with Philippine
Financial Reporting Standards (PFRS).

Summary of Significant Accounting Policies(page 21 – 24 )

• Trade and Other Receivables
Trade P12,779
Government 4,440
Others 1,374
Total P18,593
Less: Allowance for Impairment loss 724

Net Realizable value P17,869

• Inventories

At Cost
Petroleum P12,358
Crude Oil and Others 17,332
At net realize value 581
Inventories - net P30,271

• Trade and Other Payables

Accounts Payable P2,653

Accrued Expenses 957
Specific Taxes and other taxes payable 443
Others 491
Total P4,544
• Other Non-current Liabilities

Asset retirement obligation P461

Cylinder Deposit 243

Cash bonds 173
Others 37
Total P914
•Equity

Number of shares
Authorized- P 1.00 par value 10,000,000 P10,000
Issued and Outstanding 9,375,104,497 P9,375

• Cost of Goods Sold

Inventories P191,613
Depreciation & Amortization (see Note 20) 1,538

• Employee costsand Administrative Expenses

Selling 463

Others – net 1,673

Total P195,287

Employee costs P1,481

Purchased services and utilities 994

Depreciation & Amortization 978

Maintenance and repairs 530

Advertising 495

Rent 395

Materials and office supplies 188

Taxes and Licenses 120

Impairment loss on trade and other receivables 50

Expenses related to oil incident 15

Total P5,325

Earnings Per share

Net Income attributable to shareholders of the parent P6,377
company
Weighted average number of shares 9,375,104,497
Basic and dilutes EPS P0.68