FINANCIAL STATEMENT

Purpose and Users of Financial Statements

The financial statements are the financial reports of the business entity in order to
provide information that is useful for the decision-making of its users.
The users of the financial statements include the following:
 Owners, investors and prospective investors
 Lenders and suppliers and prospective creditors
 Employees, customers
 Government agencies
 The general public

As different groups of users will use the financial statements, it should be useful and
understandable to someone who has a reasonable understanding of accounting and
business and who is willing to study and analyze the information presented. The
financial statements must be relevant, reliable and comparable. Most of all, it must
follow the applicable Philippine Financial Reporting Standards.
The financial statements are prepared at least once a year and can be presented as
frequent as monthly or quarterly. A complete set of Financial Statements comprises
the following:
1. Income Statement or Statement of Financial Performance
2. Statement of Changes in Equity
3. Balance Sheet or Statement of Financial Position
4. Statement of Cash Flows
5. Notes to the Financial Statements

Income Statement
The Income Statement, also called Statement of Financial Performance, presents
the financial results of a business for a given period of time. The statement presents
the amount of revenue generated and expenses incurred by the business during a
reporting period, as well as the resulting net income or net loss.
Revenues are increases in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decreases of liabilities (or a
combination of both) from the delivery or production of goods, rendering of
services, or other activities that constitute the entity’s ongoing major or central
operations.
Examples of revenues are as follows:
 Sales
 Professional fees earned
 Service revenues
 Interest revenue
 Dividend revenue
 Rent income
 Subscription revenue

Expenses are decreases in economic benefits during the accounting period in the
form of outflows or using up of assets or incurrences of liabilities (or a combination
of both) from the delivery or production of goods, rendering of services, or other
activities that constitute the entity’s ongoing major or central operations.

Examples of expenses are as follows:

 Cost of sales
  Depreciation expense
 Salaries and wages
 Utility costs
 Insurance expense
 Permits, taxes and licenses
 Repair and maintenance
 Representation expenses
 Losses

Statement of Changes in Equity

The statement of changes in equity presents a reconciliation of the beginning and

ending balances in a company’s equity during a reporting period. The statement
starts with the beginning equity balance, and then adds or subtracts such items as
profits, capital investments or reductions, and dividend payments to arrive at the
ending balance.

Changes in equity over an accounting period include the following elements:

 Net income or loss during the accounting period
 Increase or decrease in capital
 Capital withdrawals or dividend payments to shareholders

Balance Sheet

A Balance Sheet, also referred to as Statement of Financial Position, presents

a company’s financial position as of a given date. It shows the assets, liabilities and
equity of the business entity.

An asset is a resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity (IASB
Framework). Examples of assets include the following:

 Cash – includes coins, currencies, checks, bank deposits and other cash
items ready for use in the operations of the business.

 Accounts Receivable – amounts collectible from customers for goods

provided and services rendered on credit.

 Merchandise Inventory – unsold goods for sale to customers.

 Prepaid Expenses – expenses paid but not yet used.

 Investments – assets for the accretion of wealth through capital returns or

capital appreciation or for other benefits to the business.

 Property, Plant and Equipment – tangible assets used in the production or

supply of goods and services, or for business administration purposes.

 Intangible Assets – includes identifiable, non-monetary properties without

physical substance, like licenses, copyrights, patents, trademarks and others.

A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits (IASB Framework). Examples of liabilities
include the following

 Accounts Payable – obligations due to suppliers of goods and services

purchased on credit.

 Notes Payable - obligations due to suppliers of goods and services

evidenced by a promissory note.
  Loans Payable - obligations due to lenders as a result of borrowing of funds.

 Lease Payable – obligations due to lessors for property and equipment used
for business operations.

 Utilities Payable - obligations due to utility companies for services

rendered.

 Accrued liabilities - obligations due to others for expenses already incurred

but not yet paid.

 Unearned Revenues - obligations due to customers for goods and services

paid but not yet delivered.

Equity is the residual interest in the assets of the entity after deducting all the
liabilities (IASB Framework). It represents the capital investments, net of the capital
withdrawals of the owner in the entity, and the net income or loss in the operation
of the business. Equity accounts include the following:

 Capital account –the equity investment of the owner (in a single

proprietorship) or for each partner (in a partnership), and the cumulative
effect of the withdrawals of capital and business net profits and losses.

 Drawing – the equity withdrawals of the owner or for each partner.

 Common Stock, Preferred Stock – the equity of the owners of a

corporation

 Retained Earnings – the cumulative balance of the net income or losses of

the corporation, investments of the owners, less the distribution to the
owners.

Statement of Cash Flows

The Statement of Cash Flows shows the cash receipts and cash payments from the
business activities of the enterprise during the period. The business activities are
classified into operating, investing and financing activities.

Activities of Business Organizations

Operating activities are the principal activities of the enterprise. They are the
transactions and events that enter into the determination of profit or loss. Operating
Activities include the following:

 Cash receipts from sales of goods and rendering of services.

 Cash receipts from interests, royalties, commissions, fess and other sources.
 Cash payments to suppliers of goods and services.
 Cash payments to employees for salaries and other employee expenses.
 Cash payments for operating expenses such as advertising, supplies, utilities,
taxes, and others.

Investing activities include the acquisition and disposal of non-current assets of

the business. Examples of investing activities are

 Cash payments in purchasing land, constructing a building, buying furniture

and equipment, acquiring intangible and other long-term assets.
 Cash receipts in selling property and equipment, intangible and other long-
term assets.
 Cash payments in investing in equity and debt instruments of other
companies.
  Cash receipts from selling investments in equity and debt instruments of
other companies.

Financing activities include equity transaction of the business and the owners, as
well as borrowing of funds from financial institutions. Examples are

 Investment and withdrawal of capital of the owners

 Cash proceeds from bank loans and repayment of the loans.

Exercise 1 (Income Statement)

PACIOLI GENERAL SERVICES

INCOME STATEMENT
 For the month ended January 31, 2021

Service Revenue 50 000

Less: Operating Expenses
Salaries 12 000
Supplies Expense 1 000
Utility Expense 2 500
Depreciation 500 (16 000)
NET INCOME 34 000

Exercise 2 (Statement of Changes in Equity)

PACIOLI GENERAL SERVICES

STATEMENT OF CHANGES IN EQUITY
For the month ended January 31, 2021

Pacioli, Capital Jan 01 0

Add: Capital Investment 100 000
Net income for the Period 34 000 134 000
Less: Capital Withdrawal (10 000)
Pacioli, Capital Jan 31 124 000

Exercise 3 (Balance Statement)

PACIOLI GENERAL SERVICES

STATEMENT OF CHANGES IN EQUITY
As of January 31, 2021
ASSET
Current Asset
Cash 76 000
Accounts Receivable 22 000
Supplies 7 000
Total Current Asset 105 000
Non-Current Asset
Equipment 30 000
Less: AD – Equipment (500)
Total NCA 29 500
TOTAL ASSET 134 500

LIABILITY AND EQUITY

Liabilities
Account Payable 8 000
Accrued Expenses Payable 2 500
Total Liabilities 10 500
Equity
Pacioli, Capital 124 000
TOTAL LIABILITY AND EQUITY 134 500

Exercise 4 (Cash Flow)

PACIOLI GENERAL SERVICES

STATEMENT OF CASH FLOWS
As of January 31, 2021

Direct Method
Operating Activities (CA & CL, Rev &
Expenses)
Net Income 34 000
Add: Non-Cash Expense
Depreciation Expense 500
(22 000)
Changes in CA: Increase in AR (7 000)
Increase in Supplies

Changes in CL: Increase in Accrued Expenses 2 500

Payable 8 000
Cash Provided by Operating Expense
Investing Activities (NCA)
Cash Outflows: Purchase of equipment (22 000)
Cash used by Investing Expense (22 000)

Financing Activities (NC Liab & Equity)

Cash Inflow: Capital Investment 100 000
Cash Outflow: Capital Withdrawal (10 000)
Cash provided by Financing Activities 90 000
Net Change in Cash 76 000
Cash, Jan 01 -
Cash, Jan 31 76 000