FABM 2 SECOND QUARTER PREPARATION OF STATEMENT OF

FINANCIAL POSITION
NOTES
Account Form – follows the general ledger T-Account
format. Assets on the left and liabilities and equity on
1 | STATEMENT OF FINANCIAL the right.
POSITION
Report Form – simple listing—assets are listed first,
Elements of Statement of Financial Position followed by liabilities, and finally the equity.
- Assets
- Liabilities ASSETS:
- Owner’s Equity
Current Assets – readily convertible into cash
Asset Ex. Cash, Cash Equivalents, Notes Receivables,
– these are the resources that are owned by the Accounts Receivables, Inventory, Prepaid Expenses
company and are acquired or generated with equity
fund or outside borrowings Noncurrent Assets – assets that cannot be realized
Ex. Property, Plant and Equipment, Accumulated
Liabilities Depreciation, Intangible Assets
– the amounts owed by the company towards outside
parties (i.e. amounts owed to parties other than LIABILITIES:
shareholders in their capacity as a shareholder.)
Current Liabilities – liabilities that fall due to within
Equity one year from reporting date
– represents the amount belonging to the Ex. Accounts Payable, Notes Payable, Accrued
shareholders of the company Expense, Unearned Income, Current Portion of
Long-term Debt
Statement of Financial Position (SFP)
- previously referred to as Balance Sheet Noncurrent Liabilities – liabilities that do not fall due
- reports the resources available for the company within one year from reporting date
to use, obligations that the company is required to Ex. Loans payable, Mortgage payable, Bonds Payable
settle, and the equity that

A set of financial statements is presented annually to 2 | STATEMENT OF COMPREHENSIVE

the investors to provide them with information about INCOME
the company’s financial results and financial position.
- short term for “Statement of Profit or Loss and
PURPOSE OF STATEMENT OF FINANCIAL Other Comprehensive Income”
POSITION - the 2nd component of a complete set of financial
statement
- to present true information about the company’s - it shows information on an entity’s financial
assets, liabilities, and equity performance during the period
- it helps to reveal the financial position of the
it shows the following:
ADVANTAGES OF STATEMENT OF FINANCIAL - Profit or loss;
POSITION - Other comprehensive income; and
- Comprehensive income
1. It provides information about the financial position of
Income Statement - Statement of Profit or Loss
the company.
- shows only the profit or loss
2. It helps you in ratio analysis.
Statement of Profit and Loss and Other
3. The statement of a current period can be compared
Comprehensive Income
with the last year’s statement to track the company’s
- Shows profit or loss and “other comprehensive
performance.
income”
4. Investors get information about the company’s
financial health, and based on this statement, they can
make their investment decisions.

5. It also helps determine the company’s liquidity by

providing data about the current assets available with
the company for settling its current liabilities.
Standard Requirements
- Presenting an income statement alone without
other comprehensive income is prohibited
 - However, the “two-statement presentation” is
an exception for the presentation of an income - If income is greater than expenses, the
statement together with the statement of difference is profit,
comprehensive income - If income is less than expenses, the
difference is loss
SINGLE-STATEMENT PRESENTATION:

TWO-STATEMENT PRESENTATION:

PRESENTATION OF EXPENSES

1. Nature of Expense Method

- Expenses are presented according to their
nature (for example, depreciation, purchases
of materials, transport costs, employee
benefits, advertising costs, etc.)
- Single-step Approach

2. Function of Expense Method (Cost of Sales

Elements of Statement of Comprehensive
Method)
Income
- Expenses are classified and presented
according to their function as part of cost of
1. INCOME
sales or, for example, the cost of distribution or
- increases in economic benefits during the period in
administrative activities
the form of increases in assets, or decreases in
- Multi-step Approach
liabilities, that result in increases in equity

CATEGORIES OF EXPENSE UNDER

a. Revenue - arises in the course of the ordinary
activities of a business, e.g., sales and service FUNCTION OF EXPENSE METHOD
fees.
> Service fees - revenue earned by a service 1. Cost of Sales (or Cost of Goods Sold)
business from rendering services 2. Distribution Costs (or Selling Expenses)
> Sales revenue or Sales - revenue earned by 3. Administrative Expenses (or General and
a merchandising business from selling goods Administrative Expenses)
4. Interest Expenses (or Finance Cost)
b. Gains - represent other items that meet the 5. Income Tax Expense
definition of income and may or may not arise
in the course of the ordinary activities of an Distribution Costs - costs attributable to selling
entity. activities.

2. EXPENSES ● freight-out or delivery expenses

- Decreases in economic benefits during the ● sales commissions
period in the form of decreases in assets, or ● Advertising
increases in liabilities, that result in decreases ● Salaries of Sales Personnel
in equity ● Depreciation on Delivery Equipment
● Rent pertaining to space occupied by the sales
a. Expenses - arise in the course of the ordinary department
activities of a business
b. Losses - represents other items that meet the Administrative Expenses - residual category of
definition of expenses and may or may not expenses, meaning an expense that does not quality
arise in the course of the ordinary activities of for classification under the other categories
the entity (i.e., numbers 1, 2 and 4 to 6) are included in this
category.
 ● Insurance Treatments for Net Purchases and Change in
● Taxes and Licenses (except income tax) Inventory are necessary so that Cost of Goods Sold
● Salaries of Non-Sales Personnel is properly reflected on the single-step statement of
● Depreciation of Assets not used by the Sales comprehensive income.
Department
● Rent Pertaining to Office Space SINGLE-STEP APPROACH:

Other Expenses - includes losses, like casualty

losses and losses on sale of properties.

Income Tax Expense - includes taxes on income.

Other taxes are presented in the administrative
expenses category under the “taxes and licenses”
account.

MULTI-STEP APPROACH:

(1) Cost of Sales, (2) Other Income, (3) Distribution

Bad Debts Expense - classified as administrative Costs, (4) Administrative Expenses, (5) Other
expenses. This is because credit granting is an Expenses
administrative function and normally results from poor
credit policies or decisions. However, if material, the
amount of bad debts shall be presented separately 3 | STATEMENT OF CHANGES IN
and not included in the categories of expenses. EQUITY
Cost of goods sold - presented separately.
Equity
- Value of assets after deducting the total of
Loss on Sales of Equipment - presented under the
liabilities from the total assets
“Other expenses” category. However, material
- Interest of the owner from the business
amounts of losses shall be presented separately.
- Contributions of the owner to the business
either in cash or non-cash
Interest Expense - presented separately

Statement of Changes in Equity

- Statement of Retained Earnings or;
SCI OF A MERCHANDISING BUSINESS
- Statement of Owner’s Equity
- provides information on the changes or
movement in “Owner’s equity” during the
period.

IMPORTANCE AND ADVANTAGES

1. It helps the shareholders and investors make

more informed decisions about their
investments and strengthen investor trust in
the business.
2. It allows the analysts and other readers of the
financial statements to understand what factors
- An increase in Inventory is a deduction
resulted in the change in the equity capital.
- A decrease in Inventory is an addition
3. It tells the status of the owner’s wealth during
the period
TRANSACTION THAT CAUSE CHANGES IN
OWNER’S EQUITY

● Additional investment or contributions made by

the owner
● Withdrawals or drawings from the business by
the owner in form of cash
● Earning of profit by the business
● Incurrence of loss by the business

4 | STATEMENT OF CASH FLOWS

Statement of Cash Flows

Parts of Statement of Changes in Equity
- Cash Flow Statement
- Heading
- provides information on the sources and
- Increases to Equity > Additional investment
utilization of cash during the period.
- Decreases to Equity > Withdrawals
- provides information on cash inflows and cash
outflows during the period.

FORMS OF BUSINESS ORGANIZATION PRESENTATION OF STATEMENT OF CASH

FLOWS
Sole Proprietorship
- Single Proprietorship 1. Operating Activities
- A business structure owned by an individual 2. Investing Activities
who generally has full control and authority 3. Financing Activities
over the business
OPERATING ACTIVITIES
- Cash flows from operating activities result
primarily from transactions that affect
income and expenses.
a) Cash receipts from the sale of goods and the
rendering of services.
b) Cash receipts from interest income.
Partnership c) Cash payments for purchases of inventory.
- 2 or more people find themselves to contribute d) Cash payments for expenses.
money, property, or industry to a common fund
with the intention of dividing the profits among INVESTING ACTIVITIES
themselves. - Cash flows from investing activities result
primarily from the acquisition and disposal
of long-term assets and other investments,
like property, plant and equipment.
a) Cash payments for the acquisition of property,
plant and equipment.
b) Cash receipts from sales of property, plant and
equipment.

FINANCING ACTIVITIES
- Cash flows from financing activities result
primarily from transactions with the owner
and from borrowings.
a) Cash receipts from investments of the owner to
the business.
Corporation
b) Cash payments on drawings by the owner.
- This form of business organization is larger
c) Cash receipts on loans.
than the partnership.
d) Cash payments on settlement of loans.
- It is an artificial being created by operation of
law, having the right to succession and the
REMEMBER!!!
powers, attributes and properties expressly
authorized by law.
Operating Activities > Affect INCOME and EXPENSES
- It is run by the Board of Directors who are
Investing Activities > Acquisition and disposal of PPE
appointed or elected by the shareholders
Financing Activities > Investment and Drawings by
OWNER and LOAN transactions
 6. Decreases in operating current liabilities
NOTE! Only those transactions that affect cash are ● (e.g., accounts payable, trade notes payable,
included in the statement of cash flows. Transactions accrued expenses, and unearned income)
that do not affect cash are excluded from the ● deducted to accrual basis profit
statement of cash flows.
Under the Indirect Method, the net cash flows from
REPORTING OF CASH FLOWS FROM operating activities is computed by adjusting the
OPERATING ACTIVITIES accrual basis profit or loss as follows:

1. DIRECT METHOD - shows each major class 1. Non-cash expenses - added

of gross cash receipts and gross cash 2. Non-cash income - deducted
payments 3. Increases in operating current assets - deducted
(inverse relationship)
4. Increases in operating current liabilities – added
(direct relationship)

REPORTING CASH FLOWS FROM INVESTING

AND FINANCING ACTIVITIES
2. INDIRECT METHOD - adjusts accrual basis
profit or loss for the effects of changes in Cash inflows and outflows from Investing activities and
operating assets and liabilities and effects of Financing activities are reported on the basis of major
non-cash items classes of gross cash receipts and gross cash
payments (similar to the direct method of presenting
cash flows from operating activities).

GUIDELINES: INDIRECT METHOD

1. Non-cash Expenses
● Depreciation expense is added to accrual DIRECT METHOD SOLUTION:
basis profit because depreciation decreases
accrual basis profit but does not affect cash.
● Losses on sale of property, plant, and
equipment are added accrual basis profit
because losses on sale of PPE decrease
accrual basis profit but they pertain to
investing activities.

2. Non-cash Income
● Gains on sale of property, plant, and
equipment are deducted from accrual basis NOTES! The “Changes in operating assets &
profit because gains on sale of PPE increase liabilities” in the statement of cash flows are computed
accrual basis profit but they pertain to as follows:
investing activities.

3. Increases in operating current assets

● except cash, (e.g., accounts receivable, trade
notes receivable, inventory, and prepayments)
● deducted from accrual basis profit.

4. Decreases in operating current assets - Increases in operating current assets are

● except cash, (e.g., accounts receivable, trade deducted, while decreases are added
notes receivable, inventory, and prepayments) (inverse relationship)
● deducted from accrual basis profit. - Increases in operating current liabilities are
added, while decreases are deducted (direct
5. Increases in operating current liabilities relationship)
● (e.g., accounts payable, trade notes payable,
accrued expenses, and unearned income)
● added to accrual basis profit
NOTE! Cash and cash equivalents, ending” in the 2. Divide the change by the amount in the
SCF tallies with the amount shown in the SFP. If these baseline year.
amounts do not tally, there is an error.
Baseline year: Earlier year

VERTICAL ANALYSIS
- involves the analysis of the financial
statements of one reporting period. It is a
proportional analysis whereby each amount in
the financial statements is shown as a
percentage of another item.
- For example, each amount in the balance
sheet is stated as a percentage of total
assets; each amount in the income statement
is stated as a percentage of gross sales.
5 | ANALYSIS AND INTERPRETATION Financial statements stated in this manner are
OF FINANCIAL STATEMENTS also called “common-size financial
statements”
Financial Statement Analysis
- A process of evaluating and interpreting an
entity’s financial statements to assess its
financial health for the purpose of making
better economic decisions

1. Industry and economic trend

- external sources such as published industry,
averages, current events, statistical data,
research papers, financial data from key
players in the industry, and the like.

2. Solvency and Capital structure

- Solvency > refers to the ability of the business
to pay its debts and remain as a going concern
- Liquidity > short-term
- Solvency > long-term
- Capital Structure - refers to how a business
efficiently finances its operations using different
sources of funds, such as debt or equity.

3. Operational efficiency NOTE! A variation can be made such that liability

- refers to how well a business is managing its accounts are stated as percentages of total liabilities,
resources to maximize earnings. and equity accounts (e.g., for a corporation) are stated
as percentages of total equity.
4. Profitability
- refers to the ability of the business to generate FINANCIAL RATIO ANALYSIS
profit - involves the computation of percentages,
fractions or proportions using certain formulas.
METHODS OF FINANCIAL STATEMENT - designed to emphasize the meaningful
ANALYSIS relationships between financial data.

1. Horizontal and Vertical Analysis Financial Ratios are broadly classified into the
2. Financial Ratio Analysis following:
1. Liquidity ratio
HORIZONTAL ANALYSIS 2. Activity ratio (asset management ratio)
- is the comparison of financial information over 3. Leverage ratio (debt management ratio)
two or more reporting periods. 4. Profitability ratio
- the purpose is to analyze changes in amounts
that are unusually high or low, which may entail Liquidity ratios - provide a measure of the ability of a
investigation of the reason for the unusual business to pay its liabilities
change.
a. Current ratio - most commonly used ratio in
Steps in Horizontal Analysis: measuring the ability of a business to pay its
1. Compute for the change in the amounts in a short-term debts
baseline year (earlier period) and a later b. Quick ratio (Acid test ratio) - much stricter
period. ratio used to measure the ability of a business
to pay its short-term debts.
 c. Working capital - similar to current ratio but FINANCIAL RATIO ANALYSIS:
measures the ability of a business to pay its
short-term debts by the excess or deficiency of ● Current ratio
current assets over current liabilities. Current Assets ፥ Current liabilities

Activity ratios - provide a measure of how efficient a ● Quick ratio

Cash + Marketable securities + Accounts receivable, net
business is utilizing its resources.
Current liabilities

a. Inventory turnover - measure of the number

● Working capital
of times inventory is sold and replenished
Current Assets - Current Liabilities
during a period.
b. Days of inventory (Average sale period) - of
● Inventory Turnover
the number of days inventory is held before it
Cost of goods sold ፥ Average Inventory
is sold.
c. Accounts receivable turnover - measure of
○ Average inventory
the number of times accounts receivable have
Inventory, beg. + Inventory, end
been collected during a period.
2
d. Days of receivable (Average collection
period) - of the average time to collect a
● Days of Inventory
receivable.
365 days in a year ፥ Inventory Turnover
Leverage Ratios - provide a measure of the extent a
● Accounts receivable turnover
business uses debt financing or “leverage”
Credit sales ፥ Average accounts receivable
a. Debt ratio - measures the proportion of assets
○ Average accounts receivable
financed through debt.
Accounts receivable, beg. + Accounts receivable, end
b. Equity ratio - measures the proportion of
2
assets financed through equity.
c. Debt-to-equity ratio - indicates how much
● Days of Receivable (Average Collection
debt is used to finance the assets relative to
Period)
the amount pertaining to the owner(s).
365 days in a year ፥ Receivable turnover
Profitability ratios - provide a measure of the
● Debt ratio
performance of a business in terms of its ability to
Total Liabilities ፥ Total Assets
generate profit from its resources.
● Equity Ratio
a. Gross profit ratio - shows the relationship
Total Equity ፥ Total Assets
between sales and cost of goods sold.
b. Net profit ratio - profitability after considering
● Debt-to-equity ratio
all income and expenses.
Total liabilities ፥ Total Equity
c. Return on assets - measures the profit
generated in relation to the total resources
● Gross profit ratio
available to the business.
Gross profit ፥ Net sales
d. Return on equity (net assets) - measures the
profit generated in relation to the resources
● Average accounts receivable
invested by (or attributable to) the owner(s) of
Profit for the year
the business.
Net Sales

● Return on assets
FABM FORMULAS: Profit for the year
Total Assets
HORIZONTAL ANALYSIS:

● Increase/Decrease ● Return on equity

New year - Baseline year Profit for the year
Total Equity
● Percent
Increase/Decrease ፥ Baseline year

VERTICAL ANALYSIS:

● Percent
Amount ፥ Total Assets