MODULE THREE:

INTRODUCTION
TO FINANCIAL
STATEMENTS
FINANCIAL STATEMENTS
to report a variety of seemingly
complex information such that end
users will be able to assess the
financial well-being of the
organization and make informed
decisions
FINANCIAL STATEMENTS
enable the users to read,
understand, interpret, and analyze
economic transactions translated into
financial records
FINANCIAL STATEMENTS

Statement of Financial Position

Statement of Comprehensive Income

Statement of Cash Flow

  contains information as of the
Statement date of its preparation about the
firm’s assets, liabilities, and
of shareholder’s equity
 also called balance sheet
Financial
 provides a picture of a firm’s
Position financial position within a
specific period
 shows a firm’s assets and how
FINANCIAL STATEMENTS these assets are financed
Statement of Financial Position
 A firm has two ways to pay for the asset acquired
o Borrow money from a financial
intermediaries and sell bonds (debt
instruments)
o Use capital
• Capital from investors
• Capital from the sale of shares of
stock (Publicly Traded Firms)
FINANCIAL STATEMENTS
 ABC Company
Statement of Financial Position
31 December 2023
 Current Assets Current Liabilities
Cash and Cash Equivalent Accrued Wages and Taxes
Accounts Receivable Accounts Payable
Inventory Notes Payable

Long-term debt
Fixed Assets
Plant, Property, and Shareholder’s Equity
Equipment Common Stock + Retained Earnings

Total Assets Total Liabilities and Equity

Current
Assets
Current Assets
assets that can be sold or converted into cash easily
usable within one year or less
vital to the operations of a business
used to fund daily operations
to pay short-term liabilities
Current Assets
It includes the following:
Cash and Cash Equivalent
Short-term Investments
Marketable Securities
Accounts Receivables
Inventory
Current Assets Cash and Cash Equivalent
Short-term Investments
Marketable Securities
Accounts Receivables
Inventory
Current Assets
Cash and Cash Equivalent
• Cash is actual money.
• Cash equivalent are current assets there are
easily convertible into cash.
• If used by the firm, it is critical for the firm
to replenish them right away.
CURRENT ASSETS Cash and Cash Equivalent
Short-term Investments
Marketable Securities
Accounts Receivables
Inventory
CURRENT ASSETS
Short-term Investments
• Too much idle cash could mean inefficient
use of money
• Companies invest extra cash in short-term
investments
• Eliminates the possibility that such cash will
be used for something else other than its
intended purpose
CURRENT ASSETS Cash and Cash Equivalent
Short-term Investments
Marketable Securities
Accounts Receivables
Inventory
CURRENT ASSETS
Marketable Securities
• Very liquid short-term investments
• Good substitute to cash
• Easily bought and sold on market
CURRENT ASSETS
Marketable Securities
• Yield is much lower compared to other
financial instruments
• Some larger firms have them and find
them beneficial
• Finance the seasonal and cyclical
requirements of the firm
CURRENT ASSETS Cash and Cash Equivalent
Short-term Investments
Marketable Securities
Accounts Receivables
Inventory
CURRENT ASSETS
Accounts Receivables
• Represent products and services sold by the
firm to customers on credit
• Provide the customers with attractive credit
terms
• Credit should be collected within a
reasonable amount of time to ensure the firm
has enough cash to support its operations
and pay its short-term obligations
CURRENT ASSETS
Accounts Receivables
• Postdated Checks
• Checks that can only be encashed or
deposited at a later date
• Preauthorized debit
• A payment system that works well
when a firm collects repetitive or
routine payments form customers
CURRENT ASSETS Cash and Cash Equivalent
Short-term Investments
Marketable Securities
Accounts Receivables
Inventory
CURRENT ASSETS
Inventory
• Includes raw materials, work in process, and
products that are ready to be sold
• Not having enough inventory will result in
lost sales and dissatisfied customers
• Too much inventory is counterproductive as
surplus inventory
• Akin to money sitting idly
• Could be used on others
CURRENT ASSETS
Inventory
• Excess inventory also exposes the firm to
the risk of
• Pilferage
• Obsolescence
CURRENT ASSETS Cash and Cash Equivalent
Short-term Investments
Marketable Securities
Accounts Receivables
Inventory
Fixed
Assets
Fixed Assets
asset that the firm does not expect to sell or
otherwise convert to cash within a year or th
current period

cannot be easily converted into cash

use to support operation

to generate income
Fixed Assets Tangible Assets

Intangible Assets
Fixed Assets Tangible Assets
• assets which can be physically seen or
touched by those who use them
• Depreciate in value
• DEPRECIATION is a reduction in
the value of a fixed asset
• DEPRECIATION is a noncash
outlay but is deducted as an expense
in the income statement
Fixed Assets Tangible Assets

Intangible Assets
Fixed Assets Intangible Assets
• assets which cannot be physically seen or
touched by those who use them
• helps the company generate more income
 Current
Liabilities
Current Liabilities
a financial obligation of a firm that is due
within one year or less

A company that has

It is best to always review
enough current assets to
the amount of the firm’s
cover its current
current liabilities against
obligation is said to be
its current asset.
“liquid”
Long-term
Liabilities
Long-term Liabilities
a financial obligation of a firm that is
due more than a year

also referred to as noncurrent liabilities

typically incur to finance the acquisition

of fixed assets
Long-term Liabilities
The payment term is longer than one year and
can last up to 10 to 15 years.

The interest paid by the firm is labeled in SCI as

Interest Expense.
 Firm has a Lower
good interest rate
Access to
reputation of
= better =
being a More flexible
financing
responsible payment
borrower schedules
Shareholder’s
Equity
Shareholder’s Equity
maybe defined as the difference of the
value of all assets and the value of all
liabilities

the portion also called

that is owned by owner’s equity
shareholders
Shareholder’s Equity
Consist of shares of stocks and retained earnings

Shares of Stocks are Retained Earnings

what the investors refer to the portion of
contributed to the the net income that
business. were retained after
payment of dividends
to shareholders
 Comfy Inc,.
Statement of Financial Position
As of 31 December 2019
(in thousands)
 ASSET LIABILITIES AND SHAREHOLDER’S EQUITY
Current Asset Current Liabilities
Cash and Cash Equivalent ₱6 500 Accounts Payable ₱350
Accounts Receivable 750 Notes Payable 1 300
Inventories 800 Total Current Liabilities 1 650
Total Current Assets 8 050 Noncurrent Liabilities
Net Fixed Assets Long-term Debt 800
Plant and Equipment
9 600 Total Liabilities 2 450
(Net of Depreciation)
Shareholder’s Equity
Common Stocks
4 000
(500 000 share)
Additional Paid-in Capital 3 500
Retained Earnings 7 700
Total Shareholder’s Equity 15 200
Total Assets ₱17 650 Total Liabilities And Shareholder’s Equity ₱17 650
FINANCIAL STATEMENTS

Statement of Financial Position

Statement of Comprehensive Income

Statement of Cash Flow

Statement of
Comprehensive Income
also called income statement
summarizes a firm’s sales or revenues, expenses
incurred, and results of operation
Prepared either quarterly or annually
FINANCIAL STATEMENTS
Statement of Comprehensive Income
Industry analysts and finance managers often make
a distinction between nonoperating income and
operating income.
Operating Income- also known as Earning
before Interest and Taxes or EBIT- is income
derived from operations.

FINANCIAL STATEMENTS
Statement of Comprehensive Income
Many users of financial statements consider EBIT
as the true measure of profitability and operational
efficiency.

When the figure or amount also excludes

depreciation and amortization, it is called EBITDA, or
Earnings before Interest, Taxes, Depreciation, and
Amortization.

FINANCIAL STATEMENTS
Statement of Comprehensive Income
provides insights on whether a company is earning
or losing money
also sometimes referred to as statement of
profit and loss (P&L)
reflects the company’s revenue and operating and
nonoperating expenses
referred to as revenue and expense statement

FINANCIAL STATEMENTS
Statement of Comprehensive Income

The formula for computing EBITDA is:

Operating Income or EBITDA =

𝑺𝒂𝒍𝒆𝒔 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 − 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔
(excluding depreciation and amortization)

FINANCIAL STATEMENTS
 Comfy Inc,.
Statement of Comprehensive Income for 2019
(in thousands)
Revenue ₱18 750

Less: Operating Costs except depreciation and amortization 5 200

Depreciation and Amortization 3 150

Total Operating Income 8 350

Operating Income or Earnings before Interest and Taxes
10 400
(EBIT)
Less: Interest 1 050

Earnings before Taxes 9 350

Less: Taxes (30%) 2 805

Net Income ₱6 545

FINANCIAL STATEMENTS

Statement of Financial Position

Statement of Comprehensive Income

Statement of Cash Flow

Statement of Cash Flows
is the financial statement prepared by a
company which includes all details on the sources
and uses of funds
prepared at least once in a quarter

FINANCIAL STATEMENTS
Statement of Cash Flows
publicly listed companies are required by
government regulatory bodies to prepare a statement
of cash flow that shows how operating activities,
investing activities , and financing activities affect a
firm’s cash flow
nonlisted companies are not required but still
prepare statement of cash flows to keep track of
sources of funds and payments
FINANCIAL STATEMENTS
Statement of Cash Flows

Cash Flow from operating activities

refers to money generated from the regular
activities of the firm such as production, selling of
goods, or provision of services to customers
includes changes in working capital
Working Capital = Current Assets – Currents Liabilities
Changes in inventory, short-term debts, accounts
receivable, and accounts payable
FINANCIAL STATEMENTS
Statement of Cash Flows

Cash Flow from investing activities

refers to change in a firm’s cash position
resulting from investment made, including money
spent in plant and equipment

FINANCIAL STATEMENTS
Statement of Cash Flows

Cash Flow from financing activities

refers to changes in the company’s cash position
due to the activities of the firm such as raising capital
or repayment of debt-adding loans, debt
restructuring, deferment of payments, and issuance of
new stock

FINANCIAL STATEMENTS
Statement of Cash Flows

Finance managers and

other industries experts
review the statement of
cash flow by part and as a
whole.

FINANCIAL STATEMENTS
Statement of Cash Flows

The given comparative statement of financial

position and statement of comprehensive income of
White Goat, Inc. will best illustrate how a statement
of cash flows is prepared by analyzing the firms as
reflected in the two financial statements.

FINANCIAL STATEMENTS
 White Goat, Inc.
Statement of Financial Position
(in thousands)
 ASSET 2019 2018
Current Asset
Cash and Cash Equivalent ₱7 160 ₱4 100
Accounts Receivable 690 1 200
Inventories 800 1 000
Total Current Assets 8 650 6 300
Noncurrent Assets
Net Property, Plant, and
7 400 9 800
Equipment
Total Assets ₱16 050 ₱16 100
 LIABILITIES AND SHAREHOLDER’S EQUITY 2019 2018
Current Liabilities
Accounts Payable ₱430 ₱450
Notes Payable 1 200 900
Total Current Liabilities 1 630 1350
Noncurrent Liabilities
Long-term Debt 800 950
Shareholder’s Equity
Common Stocks 7 000 7 000
Additional Paid-in Capital 1 000 1 000
Retained Earnings 5620 5 800
Total Shareholder’s Equity 13 620 13 800
Total Liabilities And Shareholder’s Equity ₱16 050 ₱16010
 White Goat, Inc.
Statement of Comprehensive Income
(in thousands)
 2019 2018

Revenue ₱6 120 ₱9 600

Less: Operating Costs except depreciation and amortization 3 000 2 600

Depreciation and Amortization 2 400 2 200

Total Operating Income 5 400 4 800

Operating Income or Earnings before Interest and Taxes
720 4 800
(EBIT)
Less: Interest 900 800

Earnings before Taxes (180) 4 000

Less: Taxes (30%) 0 1 200

 White Goat, Inc.
Statement of Cash Flow 2019
(in thousands)
a. Cash Flow from Operating Activities
b. Net Income (Loss) (₱180)
c. Depreciation and Amortization 2 400
d. Decrease in Inventories 200
e. Decrease in Accounts Receivable 510
f. Decrease in Accounts Payable (20)
g. Net Cash Flow from Operating Activities 2 910
h. Cash Flow from Investing Activities
i. Increase in Property, Pant, Equipment 0
j. Net Cash Flow from Investing Activities 0
k. Cash Flow from Financing Activities
l. Increase in Notes Payable 300
m. Payment of Dividends to Stockholders 0
n. Decrease in Long-term Debts (150)
o. Net Cash Flow from Financing Activities 150
p. Net Change in Cash (g + j + o) 3 060
q. Cash and Cash Equivalents, beginning ₱4 100
r. Cash and Cash Equivalents, ending ₱7 160