BusFin: CHAPTER3-PREPARATION OF FINANCIAL

STATEMENTS
Review of Financial Statement Preparation, Analysis, and business.
Interpretation 1. Employees
Basic Financial Statements: 2. management
• Ca- currrent assets
• Nca- non-current assets
• Cl- current liabilities 4 Basic Guideline in the preparation of Financial Statement:
1. fair presentation
• Ncl –non-current liabilities
2. going concern assumption
• Equity 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.

• Assets- resources controlled by the entity as a result of

past events and from which future benefits are expected
to flow in the entity.
Financial statement- are considered the final product of the whole • Liabilities- are present obligation of the entity arising
accounting process. from past events, the settlement of which is expected to
result in an outflow from the entity.
Complete set of Financial Statements • Equity is the residual interest in the assets of the entity
1.Statement of financial position after deducting all its liabilities.
2. Statement of financial condition Financial position of a business entity is usually expressed in
3. Statement of changes in equity terms of its:
4.Cash flow statement
5. Notes to the financial statement Liquidity-refers to the ability of a business entity to settle its
currently maturing financial obligations.
FRSC ( FINANCIAL REPORTING STANDARD COUNCIL )-in Solvency- is the ability of a business to pay its long term financial
the philippines the preparation of the financial statement is based obligations.
on the guidelines issued by FRSC.
(note: Obligations are currently maturing if they become due with
 The guidelines issued by the FRSC is called Philippine in one year.)
Financial Reporting Standards (PFRSs), or referred to,
inshort as STANDARDS. Financial structure- indicates the amount of capital resources
financed by creditors and amount provided by the owners.
Capacity for adaptation- refers to the ability of a business to
invest excess available resources or raise needed funds through
The 2 users of financial statement are broadly classified as borrowings without difficulty in times of need.
follows:
1. External users
2. Internal Users
1. EXTERNAL USERS- are individuals or parties that are not
directly involved in the operation of the business.
 SEC suppliers
 BSP customers
 BIR prospective investors
 CREDITORS

2. INTERNAL USERS- are individuals who have direct and

active participations in various quantifiable transactions of the
 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.

 Statement of comprehensive income (income statement) –

is a structured financial statement that shows the financial
performance of a business entity for a given period.
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.
 The standards mention two methods of presenting the
statement of comprehensive income
Additional infos about SFP: 1. Nature of expense method
• Statement of Financial Position is previously referred to as 2. Function of expense method
Balance Sheet. It was renamed as such since 2009 to better
reflect the kind of information found in the financial report. The choice between these two methods depends on historical cost
• To expound on the second point, cite this example: If a company and industrial factors and nature of entity.
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
Basic Financial Statements:
cash may have been received from sales or interest income or some cash The Statement of Profit or Loss
may have been spent for operating expenses on January 1, 2015. What are the important concepts we need to know about the
• As of a given date indicates that the statement of sfp can be STATEMENT OF PROFIT OR LOSS?
prepared anytime of the year and the information is considered  In analyzing Statement of Profit or Loss, it is important
true and correct as of the date indicated in the statement. to identify how much of the income comes from core
business (the main business of the company) and how
Reviewer by: SADSAD & SOBREVEGA
 much comes from the non-core business.  Investing activities are purchases or sales of assets (land,
 There are two options in presenting the Statement of building, equipment, marketable securities, etc.), loans made
Profit or Loss: to suppliers or received from customers, and payments
 The first option is to present it as a separate related to mergers and acquisitions.
financial statement; and  Financing activities include the inflow of cash from
 The second option is to present it together with investors, such as banks and shareholders, and the outflow of
other comprehensive income (OCI), which cash to shareholders as dividends as the company generates
represents transactions that are not reported in income.
the profit or loss statement but affects the
stockholders’ equity. 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.

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

Basic Financial Statements:

The Statement of Cash Flows
What are the important concepts we need to know about the
STATEMENT OF CASH FLOWS?
 The Statement of Cash Flows provides an explanation
regarding the change in cash balance from one
accounting period to another. \
 The Cash Flows are classified into three main
categories:
1. Operating;
2. Investing; and INVESTING ACTIVITIES
3. Financing.

The Cash Flows are classified into three main categories:

1. Operating.
 In the cash flows from operating activities, the income
reported from the statement of profit or loss which is
based on accrual principle is converted to cash.
 the principal revenue producing activities of the entity
and other activities that are neither investing nor
financing
2. Investing.
 The cash flows from investing activities provide
information regarding the future direction of the
company; it shows how much investment the company
is making over a given accounting period.
 Are the acquisition of long term assets and other
investments not included in cash equivalents.
3. Financing
 The cash flows from financing activities provide
information whether there is a proper matching of
FINANCING ACTIVITIES
investing and financing activities.

 Operating activities include the production, sales, and

delivery of the company’s product as well as collecting
payments from its customers.
Reviewer by: SADSAD & SOBREVEGA
 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.

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?

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:
Reviewer by: SADSAD & SOBREVEGA