INTRODUCTION TO FINANCIAL STATEMENTS

FINANCIAL STATEMENTS are the means by which the information accumulated and processed in financial accounting is periodically communicated to the users. Statement of Financial Position A formal statement showing the financial condition of an entity as of a particular date by summarizing its assets, liabilities and owners equity. ASSETS Resources controlled by the entity as a result of past transactions and events and from which future economic benefits are expected to flow to the entity.

Classification of assets Current assets Noncurrent assets

An asset shall be classified as current when it satisfies any of the following criteria: it is cash It is held primarily for the purpose of being traded It is expected to be realized within twelve month after date of statement of financial position It is expected to be realized or intended for sale or consumed within the entitys normal operating cycle The caption non current assets is a residual definition. All other assets not classified as current should be classified as non current. Liabilities are defined as present obligations of an entity arising from past transactions or events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits Classification of liabilities: Current liabilities Noncurrent liabilities

A liability shall be classified as current when it satisfies any of the following criteria: It is expected to be settled in the entitys operating cycle It is held primarily for the purpose of being traded It is due to be settled within twelve months after the date of the statement of financial position

The term noncurrent liabilities is also a residual definition. All liabilities not classified as current are classified as noncurrent liabilities.

Equity The term equity is the residual interest in the assets of the entity after deducting all its liabilities. Simply stated, equity means net assets or total assets minus total liabilities. The terms used in reporting the equity of an entity depend on the form of business organization: Owners equity single proprietorship

Partners equity - partnership Stockholders equity or shareholders equity - corporation

INCOME STATEMENT Income Statement A formal statement showing the performance of the entity for a given period of time. The performance of the entity is primarily measured in terms of the level of income earned by the entity through the effective and efficient use of its resources. This is used to be known as the results of operations of the entity. 2 Forms of Income Statement Natural Presentation this is referred to as the nature of expense method. Under this form, expenses are aggregated according to their nature and not allocated among the various functions within the entity. Functional Presentation is known as the cost of sales method. This form classified expenses according to their function as cost of sales, selling activities, administrative activities and other activities. Income Increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that results in increase in equity rather than contribution from owners. Sources of Income The definition of income encompasses both revenue and gains. Technically, revenue arises in the course of the ordinary regular activities of an entity and is referred to by a variety of different names including sales, interest, dividend, royalties and rent. Gains represent other items that meet the definition of income and do not arise in the course of ordinary regular activities of an entity. The sales of merchandise to customers and the revenue from rendering of services are the principal income of the entity. The income from use of entity resources and disposal of other resources is known as other income. Expense Sale of merchandise to customers Rendering of services Use of entity resources Disposal of resources other than products

Decrease in economic benefit during the accounting period in the form of outflow or decrease in asset or increase in liability that results in decrease in equity, other than withdrawals by the owner.

Specifically, expenses include the following: Cost of sales Distribution costs or selling expenses Administrative expenses Other expenses Finance Cost

STATEMENT OF OWNERS EQUITY A formal statement which shows the changes in equity during the period. Equity is increased by revenue and contributions by owners. Similarly equity is decreased by expenses and drawings by owners