CHAPTER 8: PRESENTATION OF FINANCIAL STATEMENT PREPAID EXPENSES

FINANCIAL STATEMENT – which the information accumulated and  Office supplies unused
processed, it is also the end product or main output of financial  Prepaid insurance
accounting process. Also, it is the structured financial PROPERTY, PLANT AND EQUIPMENT
representation of the financial position and financial performance.  Land
General Purpose: intended to meet the needs of users who are  Building
not in a position to require an entity to prepare reports or basically  Machinery and equipment
means directed to all common users and not to specific.  Furniture and fixtures
 Patterns, molds, dies and tools
COMPONENTS OF FINANCIAL STATEMENT LONG TERM INVESTMENTS
1. Statement of financial position  Plant expansion fund
2. Income statement  Investment in bonds
3. Statement of comprehensive income  Cash surrender value
4. Statement of changes in equity INTANGIBLE ASSETS
5. Statement of cash flow  Patent
6. Notes and other explanatory notes  Franchise
OTHER NON-CURRENT ASSETS
OBJECTIVES OF FINANCIAL STATEMENT  Long term refundable deposits
Provide information that is useful to a wide range users
 Long term advances to officers
in making economic position. Also, it shows the management’s
TRADE AND OTHER PAYABLES
stewardship of the resources entrusted.
 Accounts payable
 Notes payable
STATEMENT OF FINANCIAL POSITION – formal statement showing
 Accrued interest on notes payable
the three elements.
 Income tax payable
ASSETS – an economic resource controlled by an entity as result of
 Accrued expenses
past events.
 Dividends expenses
ECONOMIC RESOURCE – has potential to produce economic
RESERVES
benefits.
 Share premium
PROPERTY, PLANTS AND EQUIPMENT – tangible assets by which
are held by an entity for use of production or supply of goods.  Retained earnings
INTANGIBLE ASSETS – identifiable non-monetary assets without
physical substance. CHAPTER 9
LIABILITY – obligation of an entity to transfer economic resource as INCOME STATEMENT – showing financial performance of the
a result of past events, it is a duty that has no ability to avoid. business.
COVENANTS – borrowing agreement which represent undertaking, FINANCIAL PERFORMANCE - ability of a company or organization
it is also restrictions on the borrower as to undertaking. to generate earnings and profits over a certain period of time. Also
EQUITY -residual interest in the assets of the entity after deducting known as the result of business operations.
all liabilities. TRANSACTION APPROACH - a method used in accounting to
NOTES OF FINANCIAL STATEMENT – disaggregation of items record and report financial transactions. It involves identifying,
presented to the financial statement. Also, it is used to report measuring, and reporting financial events that occur during an
information that does not fit in body of financial statement. accounting period. The approach is based on the idea that
transactions can be divided into two main categories: (1) revenues
FORMS OF STATEMENT OF FINANCIAL POSITION and gains, and (2) expenses and losses.
1. REPORT FORM – three major sections in downward COMPREHENSIVE INCOME - use it to measure the changes in their
sequence. equity over a certain period, and it includes net and unrealized
2. ACCOUNT FORM – assets shown in the left while equity income to provide a more comprehensive understanding of a
and liabilities are in the right side. company's value.
1. Components of profit or loss: This component
CASH AND CASH EQUIVALENTS includes the traditional elements of net income,
 Cash on hand such as revenues, expenses, gains, and losses.
These are the items that flow through the income
 Cash in bank
statement and directly impact the company’s
 Petty cash fund
profitability. Examples of items included in this
 BSP treasury bills (3 months)
category are sales revenue, cost of goods sold,
TRADE AND OTHER RECEIVABLES
operating expenses, interest expense, and taxes.
 Accounts receivable
 Allowance for doubtful accounts
2. Components of other comprehensive income: This
 Notes receivables
component comprises items that do not flow
 Accrued interest on notes receivable
through the income statement but are instead
 Advances to employees
recognized directly in equity. These items are not
INVENTORIES
included in net income but are important because
 Finished goods they reflect certain gains and losses that have not
 Goods in process yet been realized.
 Raw materials
 Manufacturing supplies
OTHER COMPREHENSIVE INCOME INCLUDES:  Options contracts give the buyer the right, but
1. Unrealized gain or loss on equity investment - When a not the obligation, to buy or sell an asset at a
company holds equity investments, such as stocks or predetermined price within a specific period.
other ownership interests in other companies, the There are two types of options: call options
changes in the fair value of these investments are (the right to buy) and put options (the right to
recorded in OCI. If the value of the equity investment sell). Options are used for speculation and
increases, it results in an unrealized gain, while a hedging.
decrease leads to an unrealized loss. These unrealized  Swaps involve the exchange of cash flows or
gains or losses are recognized in OCI until the investment other financial instruments between two
is sold, at which point they are included in the income parties. Common types of swaps include
statement. interest rate swaps, currency swaps, and
2. Unrealized gain or loss on debt investment - Similar to commodity swaps. Swaps are often used to
equity investments, changes in the fair value of debt manage risk exposure or to take advantage of
investments, such as bonds or other fixed-income comparative advantages.
securities, result in unrealized gains or losses that are  Hedging is an advanced risk management
reported in OCI. These unrealized gains or losses reflect strategy that involves buying or selling an
fluctuations in market interest rates and credit spreads investment to potentially help reduce the risk
that impact the value of debt investments held by the of loss of an existing position.
company.  Business fluctuations are increases and
3. Foreign currency translation adjustments - Companies decreases in economic activity, as measured by
operating internationally may have subsidiaries or increases and decreases in real GDP.
operations in foreign countries, leading to transactions 6. Remeasurement of defined benefit plan- Companies
and financial statements denominated in foreign with defined benefit pension plans or other post-
currencies. employment benefit plans must account for actuarial
4. Revaluation surplus during the year - Revaluation gains and losses that arise from changes in assumptions
surplus arises when certain assets, such as property, or experience adjustments. These remeasurements
plant, and equipment, are revalued to their fair market impact the funded status of the plans and are recognized
value. Any increase in the value of these assets beyond in OCI rather than immediately impacting net income.
their historical cost is recorded as a revaluation surplus 7. Change in fair market value attributable to credit risk
in OCI. This reflects changes in the fair value of assets of a financial liability designated at fair value through
and impacts the balance sheet without affecting net profit and loss - The change in fair market value
income. attributable to credit risk of a financial liability
5. Unrealized gain or loss from derivative contracts designated at fair value through profit and loss is an
designated as cash flow hedge - Derivative contracts, important concept in accounting and finance. It is
such as futures, options, and swaps, can be used by particularly relevant for entities that hold financial
companies to hedge against fluctuations in interest instruments such as bonds, loans, or other debt
rates, foreign exchange rates, or commodity prices. securities. The credit risk associated with these financial
When these derivative contracts qualify as cash flow liabilities can have a significant impact on their fair
hedges, any unrealized gains or losses from changes in value, and understanding how this impact is reflected in
their fair value are reported in OCI until the hedged financial statements is crucial for investors, analysts, and
transaction affects net income. other stakeholders.
 Derivative contracts are financial instruments
whose value is derived from the value of an PRESENTATION OF OTHER COMPREHENSIVE INCOME
underlying asset, index, or reference rate. Comprehensive income shall present line items for
These contracts are used for hedging, amounts of other comprehensive income during the period
speculation, and arbitrage in financial markets. classified by nature. The classification by nature refers to grouping
Derivatives can be traded on organized these items based on their characteristics, such as foreign
exchanges or over-the-counter (OTC). There currency translation adjustments, unrealized gains or losses on
are several types of derivative contracts, available-for-sale securities, pension adjustments, and cash flow
including futures, forwards, options, and hedges.
swaps.
The line items for amounts of OCI shall be group as follows:
 Futures contracts obligate the buyer to
purchase an asset or the seller to sell an asset a. OCI shall be reclassified subsequently to profit or loss
at a predetermined future date and price. when specific condition are met. - These items are
These contracts are standardized and traded initially recognized in OCI but are later reclassified to the
on exchanges. They are often used for hedging income statement when specific conditions are met,
against price fluctuations. such as the sale of an available-for-sale security.
 Forward contracts are similar to futures b. OCI that will not be reclassified subsequently to profit
contracts but are customized agreements or loss but to retained earnings. - This category includes
between two parties to buy or sell an asset at items that will not be reclassified to the income
a specified future time and price. They are statement but will instead be transferred directly to
traded over-the-counter and are not retained earnings. Examples of these items include
standardized. revaluation surplus on property, plant, and equipment
 under IFRS and certain gains and losses related to cash from licensing intellectual property rights, and dividend
flow hedges. income from investments in shares of other companies.
D. Disposal of resources other than products
OCI THAT WILL BE RECLASSIFIED TO PROFIT OR LOSS Examples include gain on sale of investments, gain on
a. Unrealized gain or loss on debt investment measured sale of property, plant and equipment and gain on sale
at fair value through OCI. of intangible assets.
b. Gain or loss from translating financial statement of a
foreign operation.
c. Unrealized gain or loss on derivative contacts
designated to cash flow. COMPONENTS OF EXPENSES

OCI THAT WILL BE CLASSIFIED AS RETRAINED EARNINGS a. Cost of goods sold or cost of sales - This refers to the
direct costs associated with producing goods or services
a. Unrealized gain or loss on equity investment measured that a company sells. It includes the cost of materials,
at fair value through other comprehensive income. labor, and overhead directly related to production.
The Application Guidance of PFRS 9, paragraph B5.7.1, b. Distribution costs or selling expenses - These are the
provides that such unrealized gain or loss is reclassified expenses incurred in getting the finished product to the
to retained earnings upon disposal of the investment. customer. This may include transportation costs,
b. Revaluation surplus during the year packaging, advertising, sales commissions, and other
The realization of the revaluation surplus is through costs directly related to selling the product.
retained earnings. c. Administrative expenses - These are the expenses
c. Remeasurements of defined benefit plan, including related to the management and support functions of a
actuarial gain or loss. business. They include salaries of non-production
The remeasurements are not reclassified subsequently employees, office supplies, rent for administrative
but are permanently excluded from profit or loss. offices, and other general operating expenses.
However, the remeasurements may be transferred d. Other expenses - This category encompasses various
within equity or retained earnings. other expenses that do not fall into the above
d. Change in fair value attributable to credit risk of a categories. It may include research and development
financial liability designated at fair value through costs, restructuring charges, impairment losses, and
profit or loss. other non-operating expenses.
Such gain or loss from change in fair value attributable to e. Income tax expense - This represents the amount of tax
credit risk of a financial liability may be transferred a company is required to pay based on its taxable
within equity or retained earnings. income.
PRESENTATION OF COMPREHENSIVE INCOME CLASSIFICATION OF EXPENSES
1. Two statements: Distribution costs constitute costs which are directly related to
a. An income statement showing the components of selling, advertising and delivery of goods to customers.
profit or loss. Distribution costs are a crucial component of a company’s financial
b. A statement of comprehensive income beginning with structure, encompassing expenses directly associated with the
profit or loss as shown in the income statement plus or selling, advertising, and delivery of goods to customers. These
minus the components of other comprehensive income. costs are essential for businesses to effectively reach and serve
2. Single statement of comprehensive income their target market.
This is the combined statement showing the 1. Salesmen’s salaries - This expense covers the
components of profit or loss and components of other remuneration paid to sales personnel for their efforts in
comprehensive income in a single statement. promoting and selling the company’s products or
The Revised Conceptual Framework calls this single services.
statement as statement of financial performance. 2. Salesmen’s commissions - In addition to fixed salaries,
SOURCE OF INCOME salesmen often receive commissions based on their sales
A. Sales of merchandise to customers performance. These commissions serve as an incentive
The income from sales shall include all sales to for the sales force to achieve higher levels of
customers during the period. Sales returns, allowances productivity and contribute to the company’s revenue
and discounts shall be deducted from gross sales to generation.
arrive at net sales. 3. Traveling and marketing expenses - costs associated
B. Rendering of services with travel for sales purposes, as well as marketing
Income from rendering of services, among others, activities aimed at promoting the company’s offerings. It
includes professional fees, media advertising includes expenses such as transportation,
commissions, insurance agency commissions, admission accommodation, meals, and other related costs incurred
fees for artistic performance and tuition fees. during business trips.
C. Use of entity resources 4. Advertising and publicity - Expenditure on advertising
This income category includes interest, rent, royalty and and publicity campaigns is a significant component of
dividend income. distribution costs. These expenses cover promotional
This category includes income generated from the use of activities aimed at creating awareness and generating
entity resources such as interest income from demand for the company’s products or services.
investments or bank deposits, rental income from 5. Freight out - Freight out refers to the shipping costs
leasing out properties or equipment, royalty income incurred when delivering goods to customers. It includes
 expenses related to transporting products from the NO MORE EXTRAORDINARY ASSETS
company’s facilities to various customer locations. PAS 1, paragraph 87 , specifically mandates that an entity
6. Depreciation of delivery equipment - This expense should not present any items of income and expense as
pertains to the allocation of the cost of delivery extraordinary either on the face of the income statement or
equipment over its useful life. statement of comprehensive income or in the notes. In simple
Administrative expenses constitute cost of administering the terms, PAS 1, paragraph 87 states that companies or entities
business. Administrative expenses ordinarily include all operating should not label any items of income and expense as
expenses not related to selling and cost of goods sold. “extraordinary” on their financial statements. This means that they
1. Doubtful accounts - This refers to the provision made for should not highlight certain income or expenses as exceptional or
accounts receivable that may not be collected due to unusual in a way that could mislead the readers of the financial
customers’ inability or unwillingness to pay. statements.
2. Office salaries - The compensation paid to employees
working in administrative roles, such as office managers, LINE ITEMS
administrative assistants, and other support staff. PAS 1 , paragraph 82 , provides that as a minimum, the
3. Expenses of general executives - These are the costs income statement and statement of comprehensive income shall
associated with the salaries, benefits, and other include the following line items:
expenses related to top-level executives and a. Revenue: This represents the total amount of income generated
management personnel who oversee the administrative from the primary activities of the entity, such as sales of goods,
functions of the business. rendering of services, or other operating activities.
4. Expenses of general accounting and credit department b. Gain and Loss from the Derecognition of Financial Assets
- This includes the costs incurred in maintaining the Measured at Amortized Cost: This line item is in accordance with
accounting records, managing credit and collections, and the requirements of PFRS 9 (Philippine Financial Reporting
ensuring compliance with financial regulations. Standards). It captures any gains or losses arising from the
5. Office supplies used - The expenses related to derecognition of financial assets measured at amortized cost.
consumable office supplies such as stationery, printer c. Finance Cost: This includes interest expense on borrowings,
cartridges, and other materials essential for finance lease liabilities, and other similar costs.
administrative operations. d. Share in Income or Loss of Associate and Joint Venture
6. Certain taxes- This encompasses various taxes that are Accounted for Using the Equity Method: This pertains to the
not directly related to the production or sale of goods, entity’s share of the income or loss from investments in associates
such as property taxes on office buildings and other and joint ventures accounted for using the equity method.
administrative facilities. e. Gain or Loss on the Reclassification of Financial Assets from
7. Contribution - This may include contributions made by Amortized Cost to Fair Value through Profit or Loss: Any gains or
the company towards employee welfare programs, losses resulting from the reclassification of financial assets from
charitable organizations, or community initiatives. amortized cost to fair value through profit or loss are captured
8. Professional fees - Costs associated with hiring external under this line item.
professionals such as lawyers, consultants, or auditors f. Gain or Loss on the Reclassification of Financial Assets from
for specialized services required by the administrative Fair Value Other Comprehensive Income to Fair Value through
functions of the business. Profit or Loss: Similar to the previous item, this line item accounts
for gains or losses arising from the reclassification of financial
9. Depreciation of office building and office equipment -
assets from fair value through other comprehensive income to fair
The allocation of the cost of office buildings and value through profit or loss
equipment over their useful lives as an expense on the g. Income Tax Expense: This represents the total tax payable by
income statement. the entity based on its taxable income for the period, including
10. Amortization of intangible assets - This refers to the current and deferred tax.
systematic write-off of intangible assets such as patents, h. Discontinued Operations: This is presented as a single amount
trademarks, and copyrights over their useful lives. and comprises the results of operations of a component of an
entity that has been disposed of or is classified as held for sale.
Other expenses are those expenses which are not directly related i. Profit or Loss for the Period: This line item reflects the net result
to the selling and administrative function. of all revenues, expenses, gains, and losses during the reporting
1. Loss on sale of trading investments - Loss on sale of period.
trading investments refers to the loss incurred when an j. Total Other Comprehensive Income: It encompasses items that
investment is sold for less than its original cost. will not be reclassified to profit or loss in subsequent periods, such
2. Loss on disposal of property, plant and equipment - as revaluation surplus on property, plant, and equipment.
Loss on disposal of property, plant, and equipment refers k. Comprehensive Income for the Period: This represents the total
to the loss incurred when an asset is sold or disposed of of profit or loss and other comprehensive income, providing a
for less than its carrying value. holistic view of an entity’s financial performance over a specific
3. Loss on sale of noncurrent investment - Loss on sale of period.
noncurrent investment refers to the loss incurred when
a noncurrent investment is sold for less than its carrying The following items shall be disclosed on the face of the
value. income statement and statement of comprehensive income:
4. Casualty loss - flood, earthquake, fire - Casualty loss a. Profit or loss for the period attributable to noncontrolling
refers to the loss incurred as a result of a sudden and interest and owners of the parent - Noncontrolling interest, also
unexpected event, such as a flood, earthquake, or fire, known as minority interest, represents the portion of a
that damages or destroys assets. subsidiary’s profit or loss that is not attributable to the parent
company. It is essential to disclose this information separately on
the face of the income statement to provide transparency breakdown of expenses to assess cost structures and
regarding the allocation of profits or losses between different trends over time.
stakeholders
b. Total comprehensive income for the period attributable to Which form of income statement?
noncontrolling interest and owners of the parent. - total Paragraph 105 simply states that because each method of
comprehensive income includes not only the profit or loss but also presentation has merit for different types of entities, management
other comprehensive income items such as unrealized gains or is required to select the presentation that is reliable and more
losses on available-for-sale securities, foreign currency translation relevant.
adjustments, and actuarial gains or losses on defined benefit Statement of comprehensive income
plans. As stated earlier, in addition to the income statement, a
statement of comprehensive income is also prepared in order to
FORMS OF INCOME STATEMENT show the total comprehensive income.
PAS 1, paragraph 99, provides that an entity shall The statement of comprehensive income starts with the
present an analysis of expenses recognized in profit or loss using a profit or loss as shown in the income statement plus or minus the
classification based on either the function of expenses or their components of other comprehensive
nature within the entity, whichever provides information that is The purpose of this statement is to provide a more
reliable and more relevant. comprehensive information on financial performance measured
Accordingly, the income statement may be presented in more broadly than the income as traditionally computed.
two ways, namely functional and natural.
 Functional Income Statement: A functional income COST OF GOODS SOLD OF MERCHANDISING CONCERN
statement presents expenses based on their function Beginning Inventory 500,000
within the organization. This means that expenses are Net purchases 2,000,000
categorized according to the activities or functions for Goods available for sale 2,500,000
which they are incurred. Common classifications in a Less: Ending inventory (300,000)
functional income statement include cost of goods sold, Cost of Goods sold 2,200,000
selling and marketing expenses, general and
administrative expenses, research and development Gross Purchases 1,900,000
expenses, and other operating expenses. This format Freight in 150,000
provides insights into how resources are allocated within Total 2,050,000
the organization and helps in evaluating the efficiency of Less: Purch. Ret. Allow. And Discounts (50,000)
different business functions. Net purchases 2,000,000
 Natural Income Statement: On the other hand, a natural
income statement presents expenses based on their COST OF GOODS SOLD OF MANUFACTURING CONCERN
nature or type. In this format, expenses are classified Beginning raw materials 500,000
according to their intrinsic characteristics, such as Net purchases 2,000,000
depreciation, salaries and wages, utilities, rent, supplies, Raw materials avail for use 2,500,000
and so on. The natural classification provides a detailed Less: ending raw materials (300,000)
breakdown of the types of expenses incurred by the Raw materials used 2,200,000
organization, offering transparency regarding the specific Direct labor 3,000,000
costs involved in running the business. Factory overhead 1,300,000
 Choice of Presentation: The International Financial Total manufacturing cost 6,500,000
Reporting Standards (IFRS), specifically in the Beginning goods in process 900,000
International Accounting Standard (IAS) 1 - Presentation Total cost of goods in process 7,400,000
of Financial Statements, allows entities to choose Less: ending goods inventory (1,000,000)
between functional and natural classification for Cost of goods manufactured 6,400,000
presenting their income statements. According to IAS 1 Beginning finished goods 1,600,000
paragraph 99, an entity should present an analysis of Goods available for sale 8,000,000
expenses recognized in profit or loss using a Less: ending finished goods (1,500,000)
classification based on either the function of expenses or Cost of goods sold 6,500,000
their nature within the entity, whichever provides
information that is reliable and more relevant. This FUNCTIONAL INCOME STATEMENT
means that entities have the flexibility to choose the Net sales 9,000,000
format that best reflects the nature of their business Less: cost of goods sold (5,400,000)
operations and provides users with relevant information Gross income 3,400,000
for decision-making. Other income 900,000
 Significance: The choice between functional and natural Investment income 500,000
presentation of the income statement has implications Total income 5,000,000
for financial analysis and decision-making. The functional Less: Expenses
format may be more useful for internal management Distribution cost 1,350,000
purposes as it aligns with how costs are managed within Advertising Exp. 1,000,000
different departments or activities. On the other hand, Other Expenses 320,000
the natural format may be more informative for external Finance cost 200,000 2,870,000
users such as investors and creditors who seek a detailed Income before tax 2,130,000
Income tax expense 580,000
Net income 1,550,000
 Xxx xxx
Note 1: Net sales Income before tax xxx
Gross sales 9,300,000 Income tax expense xxx
Less: sales ret. And allowances (100,000) Net income xxx
Sales discount (200,000)
Net sales 9,000,000

Note 2: Cost of goods sold

Inventory, beginning 1,500,000
Purchases 600,000
Freight in 300,000
Total 6,300,000
Less: PRAA (150,000)
Purchase discounts (250,000) 5,900,000
Goods available for sale 7,400,000
Less: Inventory, ending (2,000,000)
Cost of sales 5,400,000

Note 3: Other income

Interest revenue 180,000
Dividend revenue 120,000
Rent revenue 100,000
Gain from expropriation 500,000
Total 900,000

Note 4: Investment Income

Share in net of associate 25% 500,000

Note 5: Distribution cost

Sales salaries 600,000
SSS- sales 20,000
Sales commission 180,000
Advertising 100,000
Store supplies expense 50,000
Delivering expense 250,000
Depreciation 150,000
Total distribution cost 1,350,000

Note 6: Administrative expense

Offices salaries 650,000
SSS- office 30,000
Bonuses 100,000
Office supplies expense 70,000
Taxes 20,000
Doubtful accounts 40,000
Total administrative expense 1,000,000

Note 7: Other expenses

Loss on sale of investment 30,000
Loss on sale of property 120,000
Casualty loss from earthquake 170,000
320,000

Note 8: Finance Cost

Interest expense 50,000
Interest expense on bond 150,000
Total finance cost 200,000

NATURAL INCOME STATEMENT

Net sales xxx
Other income xxx
Investment income xxx
Total income xxx
Less: Expenses xxx
Xxx