Understanding Financial Statements
Understanding Financial Statements
Understanding Financial Statements
(Financial Management 1)
3rd Trimester, AY 2020-2021
Understanding Financial Statements
Learning Outcomes:
1. Understand how business activities are reported through the
financial statements
2. Appreciate the general objectives of financial statements
3. Enumerate and identify the needs of various users that demand
financial accounting information
4. Enumerate the sources of information about a business enterprise
5. Understand the benefits and costs of supplying accounting
information
6. Identify the required financial statements and know how they are
interconnected .
7. Know the nature and significance of the
• Statement of Financial Position or Balance Sheet Statement
• Statement of Comprehensive Income
• Statement of Stockholder’s Equity, and
• Statement of Cash Flows
Understanding Financial Statements
How Business Activities are Reported - through financial
statements
Financial statements
• reports on a company’s performance and financial
condition
• serves the needs of different users
• provide crucial input for strategic planning
General Objectives of Financial Statements
1. Providing Information for Economic Decisions
Users of financial statements help them evaluate a
business’ ability to generate cash and cash equivalents, its ability
to pay its employees and suppliers, meet interest payments,
repay loans and make distributions to its owners.
2. Providing Information About Financial Position
The financial position of an enterprise is affected by the
economic resources such as:
- Information about the economic resources controlled by
the enterprise
- Information about financial structure is useful in predicting
future funding needs
- Information is useful in predicting success of the business
- Information about liquidity and solvency
General Objectives of Financial Statements
3. Providing Information About Performance of an
Enterprise
In particular its profitability which is required to assess
potential changes in the economic resources that are likely to
control the future.
4. Providing Information About Changes in Financial
Position
This is useful to assess it investing, financing and
operating activities during the reporting period – cashflows.
Demand for Financial
Accounting Information
The broad classes of users that demand financial accounting
information include the following:
1. Managers and Employees –for their own well being and
prospective earnings.
2. Investors and Analysts – to decide whether to buy or sell
equity shares.
3. Creditors and Suppliers – for lenders, to determine credit
to extend the company, and for suppliers to determine their
long term commitment to supply-chain relations.
4. Shareholders and Directors – to assess it profitability and
risks, evaluate managerial performance and to help to make
leadership decisions.
Demand for Financial
Accounting Information
5. Regulatory and Tax Agencies – SEC, BIR, BSP and other
legal institutions to monitor compliance.
6. Customers and Potential Strategic Partners – to
evaluate a company’s ability to provide products and
services as agreed.
7. Other decision makers – for varied purposes like
assessing damages for environmental abuses & making
policy decisions involving economic, social, taxation and
other initiatives.
Sources of Information
In the Philippines, publicly listed companies must file
financial accounting information with the Securities and
Exchange Commission (SEC) as follows:
1. The audited Annual Report that includes four (4)
financial statements – balance sheet, income
statement, statement of stockholders’ equity and
statement of cash flow.
2. The unaudited quarterly or interim reports that
include summary versions of the 4 financial statements
as mentioned above and limited additional disclosure.
All other registered corporations and partnerships are
likewise required to file annually audited financial
statements with notes to SEC.
Benefits of Disclosure
Statement of Statement of
Financial Comprehensive
Position Income
linked via
Retained Earnings
Linkage of Financial Statements
There is an order of financial statement preparation.
• First statement prepared is the Statement of
Comprehensive Income – net income figure and dividend
information is used to update the retained earnings account.
• Second, it prepares the Statement of Financial Position
using the updated retained earnings account along with the
remaining statement of financial position accounts from the
Trial Balance.
• Third, it prepares the Statement of Stockholders Equity
• Fourth, it prepares the Statement of Cash Flows using
information from the cash accounts and other sources.
ARTICULATION OF FINANCIAL STATEMENTS
Statement of Financial Position
Reports a company’s financial position at a point in time, the
company’s resources (assets), what the company owns and also the
sources of asset financing.
Two (2) Ways to Finance Company Assets
1. Owner Financing – it can raise money from shareholders
2. Non-owner Financing – it can also raise money from banks or
other creditors or suppliers.
This means that both owners and non-owners hold claims on
company assets. Owners claim on assets are referred to as Equity,
while Non-owners claims are referred to a Liabilities (Debt).
Since all financing must be invested in something, hence:
Investing = Financing
This equality is called the accounting equation:
Assets = Liabilities + Owner’s Equity
Statement of Financial Position
Statement of Financial Position
Investing Activities – are represented by the company’s
assets which can be financed by a combination of equity and
liabilities.
Financing Activities – assets must be paid or and funding is
provided by a combination of owner and non-owner financing.
Working Capital – current assets are often called working
capital because these assets “turn over” - they are used and
replaced throughout the year.
Net Working Capital – is the difference between current
assets and current liabilities.
Net Operating Working Capital – is the difference between
current assets and non-interest bearing current liabilities.
Statement of Comprehensive Income
This reports on a company’s performance over a period of time and
Lists amounts for revenues (also called sales), expenses and other
comprehensive income.
Revenues less expenses yield the bottom line net income amount.
Statement of Comprehensive Income
• Manufacturing and merchandising companies typically include an
additional expense account, called Cost of Goods Sold (or Cost of
Sales), in the statement of comprehensive income following
revenues.
• It is also common to report a subtotal called Gross Profit (or Gross
Margin), which is revenues less cost of goods sold. The company’s
remaining expenses are then reported below gross profit. This
income statemen layout follows:
Statement of Comprehensive Income
Operating Activities – use company resources to produce,
promote and sell its products and services.
– These activities extend from input markets involving
suppliers of materials and labor to a company’s output
markets involving customers of products and services.
– Input markets generate most expenses (or costs) such as
inventory, salaries, materials and logistics.
– Output markets generate revenues (or sales) to
customers.
– Output markets also generate some expenses such as
marketing and distributing products and services to
customers.
– Net income arises when revenues exceed expenses.
•QUESTIONS????
•REACTIONS!!!!!
END OF PRESENTATION