Chapter 2 (Basic Financial Statements)

B A S I C F I N A N C I A L
STATE M E N T
Learning Outcomes:
• Identify and Describe the various elements of Basic Financial Statements;

• Recognize and Explain the Different Information provided by each financial
statements
• Describe the Importance and Relevance of Basic Financial Statements in
Business; and
• Prepare and Construct Basic Financial Statements
FINANCIAL STATEMENTS
Financial Statements are necessary sources of information for the company’s

management, employees, owners, and investors to the financial status of the
business organization , normally prepared in monthly, quarterly, semi-annually
and annually.
Financial statements are a mirror that shows a true and fair view of
the financial performance of the last financial year and overall
financial position at the end of the financial year.
TYPES OF FINANCIAL STATEMENTS
Statement of Financial Position (also known as Balance Sheet)
- It is a financial “snapshot of the business” at a given period of time. It provides information about
the financial position, condition, and structure of the company in terms of its assets, liabilities, and
the structure of the company in terms of its assets, liabilities and the difference between the two,
which is the equity or net worth
ACCOUNTING EQUATION:
ASSETS= LIABILITES+OWNER’S EQUITY
(A=L+C)
THE STATEMENT OF FINANCIAL POSITION CONTAINS THE FOLLOWING ELEMENTS:
• ASSETS
- These are items of economic benefit based on past financial transactions that are expected to
yield benefits in future periods.
a.) Current Assets b.) Fixed Assets/Non-Current

Assets
Cash Land
Accounts Receivables Building
Notes Receivables Equipment
Merchandise Inventory Furniture and Fixtures
Prepaid Expenses Transportation and Vehicles
Unused Office Supplies Allowance for Depreciation ]\
LIABILITIES
Current Liabilities Non-Current Liabilities
- are liabilities payable within one year.
- Are liabilities payable beyond one year
• Accounts Payable • Mortgage Payable

• Notes Payable • Bonds Payable
• Salaries Payable
• Interest Payable
• Taxes Payable
• Unearned Rent
INCOME STATEMENT
This is a summary of the difference between revenues and expenses of the business
which results to income or loss.
It summarizes the result of the firm’s operation at a given period of time and usually
starts at January 1 and ends on December 31, or Starts at any month except January 1
and ends other than December 31 assuming the firm operates a 12-month financial
cycle or fiscal year.
The Elements of the Income Statement are:
1.) Revenue- This is an Increase in Assets or Decrease in Liabilities caused by the
provision of services or products to customers.
2.) Expenses- This is the reduction in value of an asset as it is used to generate

revenue.
REVENUES/INCOME
Sales/Merchandise Sales
Service Income
Rent Income
Interest Income
Fees Income
EXPENSES:
Salaries Expense Advertising Expenses
Commission Expenses Interest Expenses
Traveling Expenses Depreciation Expenses
Postage and Communication Expenses Utilities Expenses
Taxes Expenses Insurance Expenses
Rent Expenses Miscellaneous Expenses
Repair and Maintenance Expenses Advertising Expenses
Moveon Din Bags
Income Statement
For the Year Ended December 32, 2015
Sales 37,000
Less: Cost of Sales Sold 20,000
Gross Profit 17,000
Less: Operating Expenses 2,000
Selling Expenses 2,500
General Administrative Expense 1,000
Total Operating Expenses 5,500
Operating Profits 11,500
Less: Interest Expense 1,500
Net Profit before Tax 10,000
Net Profit Before Tax 10,000
Less: Taxes (Rate=30%) 3,000
7,000
Net Profit After Tax 7,000

Less: Preferred Stock Dividend 200
TOTAL 6,800
STATEMENT OF CHANGES IN EQUITY
It shows all of the changes in owner’s equity for a period of time. According to the Philippine Accounting
Standard #1 (PAS 1), this statement of financial reporting is one of the five components of complete
financial statements. ( Statement of Financial Position, Income Statement, Statement of Changes in
Equity, Statement of Cash Flow and Notes to Financial Statements).
The purpose of the Statement of Changes in Equity is to provide readers with the useful
information on how the capital or fund of an entity is utilized and used.
For Example:
Markiel Catering Services, a sole proprietorship has a

beginning capital balance of Php. 73,000.00. The owner
withdraw P12,000.00 and profit earned by the catering
services amounts to P46,000.00 during the year.
In December, 2017 the owner put additional investment of

P17,000.00. Based on this situation, the statement of changes
in equity is as follows:
Markiel Catering Services
Statement of Changes in Equity
For the Year Ended December 31, 2017
Markiel, Capital, January 2017 Php 73,000

Add: Additional Investment Php 17,000
Profit 46,000 63,000
Total: 136,000
Less: Markiel Withdrawal (12,000)
Markiel, Capital, December 2017 P124,000
In a corporate type of business, we prepare instead a statement of retained earnings.
LabanLangKapatid Company
Statement of Retained Earnings
(For the Year Ended Dec. 31, 2017)
Retained Earnings, 1, 249, 476

Beginning
Add: Net Income After Tax 1, 429, 932

Total: 2, 679, 407
Less: Dividends (803,822)
Retained Earning, End 1,875,585
STATEMENT OF CASH FLOW
A cash flow statement, also known as Statement of cash flows or funds flow
statements, is a financial statement that shows how changes in statement of
financial position accounts and income affect cash and cash equivalents, and
breaks the analysis down to operating, investing, and financing activities which
also happens to be the major activities in a business operation.

THE CASH FLOW IS INTENDED TO:
• It provide information on a firm’s liquidity and solvency and its ability to change cash flows
in future circumstances.
• It provide additional information for evaluating changes in assets, liabilities, and equity.
• Improve the comparability of different firms’ operating performance by eliminating

the effects of different accounting methods
• Indicate the amount, timing and probability of future cash flows

CLASSIFICATION OF CASH FLOWS
 Operations -- cash flows related to selling goods and services; that is, the principle business of
the firm.
 Investing -- cash flows related to the acquisition or sale of noncurrent assets.
 Financing -- long term and short term cash flows related to liabilities and owners’ equity;
dividends are a financing cash outflow.

WHAT IS CASH?
Cash includes cash and cash equivalents
Cash equivalents:
treasury bills maturing in 90 days or less;
investment funds;
foreign currency on hand;
checking account and free savings account
INTERNAL USES OF CFS
Along side with cash budget CFS is used:
• To assess liquidity
Determine if short-term financing is necessary
• To determine dividend policy

Decide to distribute; or increase or decrease
• To evaluate the investment and financing decisions

CASH FLOW FROM OPERATING ACTIVITIES
• cash received from customers through sale of goods or services
performed;
• cash received from non-operating activities such as dividends from
investments, interest revenue, commissions, and fees;
• cash payments to suppliers or employees;
• cash payments for taxes and other expenses;
CASH FLOW FROM INVESTING ACTIVITIES
Examples of investing activities include:
• Cash payments to acquire property, plant, and equipment (PPE),
other tangible or intangible assets, and other long-term assets;
and sale of such assets
• Loans extended to other companies; and collection of such loans;
FORMAT OF THE CASH FLOW STATEMENT
Name of the Company
Cash Flow Statement
For the period …
Cash from operating activities A

Cash from investing activities B
Cash from financing activities C
Net Change in Cash D = (A+B+C) increase or (decrease)
+ Beginning Cash balance CB, from the beginning balance
sheet
Ending Cash balance =CB + D should equal to ending
cash
balance in the ending
balance sheet
Non-cash Investing and Financing Activities
THANK YOU PEEPZ

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B A S I C F I N A N C I A L

• Identify and Describe the various elements of Basic Financial Statements;

Financial Statements are necessary sources of information for the company’s

a.) Current Assets b.) Fixed Assets/Non-Current

• Accounts Payable • Mortgage Payable

1.) Revenue- This is an Increase in Assets or Decrease in Liabilities caused by the

provision of services or products to customers.

2.) Expenses- This is the reduction in value of an asset as it is used to generate

Net Profit After Tax 7,000

Markiel Catering Services, a sole proprietorship has a

In December, 2017 the owner put additional investment of

Markiel, Capital, January 2017 Php 73,000

Retained Earnings, 1, 249, 476

Add: Net Income After Tax 1, 429, 932

statements, is a financial statement that shows how changes in statement of

also happens to be the major activities in a business operation.

• Improve the comparability of different firms’ operating performance by eliminating

• Indicate the amount, timing and probability of future cash flows

 Investing -- cash flows related to the acquisition or sale of noncurrent assets.

dividends are a financing cash outflow.

• To determine dividend policy

• To evaluate the investment and financing decisions

Cash from operating activities A

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