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Financial

Statements

Definition of Financial
Statements
O Financial statements are the means

by which the information


accumulated and processed in
financial accounting is periodically
communicated to the users.
O end product or the main output of the

financial accounting process.

Components of Financial
Statements
O Statements of financial position
O Income Statement
O Statement of comprehensive income
O Statement of changes in equity
O Statement of cash flows
O Notes, comprising a summary of

significant accounting policies and


other explanatory notes

Objective of Financial
Reporting
O The objective of financial reporting is to provide

information about the financial position,


financial performance and cash flows of an
entity that is useful to a wide range of users in
making economic decisions.
a) Assets
b) Liabilities

Equity
d) Income and Expense including gains and losses
e) Contributions by and distributions to owners in
their capacity as owners
f) Cash Flows
c)

Frequency of Reporting
O Shall be presented at least annually.
O If the entitys end of reporting period

changes and financial statements are


presented for a period longer or shorter
that one year, an entity shall disclose.
a) The period covered by the FS
b) The reason for using a longer or shorter

period
c) The fact that amounts presented in the
financial statements are not entirely
comparable

Statement of Financial
Position
O Statement of Financial Position
a) Assets
b) Liabilities
c) Equity

O It is analyzed by investors, creditors

and other statement users to


evaluate such factors as liquidity,
solvency and the need of the entity
for additional financing.

Statement of Financial
Position
O Liquidity - is the ability of the

entity to meet currently maturing


obligations
O Solvency is the availability of

cash over the longer term to


maturing obligations

Statement of Financial Position


Current and Non-current Distinction
O Assets and Liabilities shall be presented in

the order of liquidity when such


presentation provides information that is
faithfully represented and more relevant.
O For some entities, such a financial
institutions, a presentation of assets and
liabilities in increasing or decreasing
liquidity provides information that is
faithfully represented and more relevant
that a current and noncurrent presentation.

Statement of Financial
Position Assets
O Assets are defined as 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.
O The essential characteristics of an asset are:
a) The asset is controlled by the entity
b) The asset is the result of a past transaction

or event
c) The asset provides future economic benefits.
d) The cost of the asset can be measured
reliably.

Statement of Financial
Position Current Assets
An entity shall classify an asset as current when:

a)The asset is cash or cash equivalent unless the

asset is restricted from being exchanged or used to


settle a liability for at least twelve months after the
reporting period
b)The entity holds the asset primarily for the purpose
of trading.
c)The entity expects to realize the asset within twelve
months after the reporting period.
d)The entity expects to realize the asset or intends to
sell or consume it within the entitys normal
operating cycle.

Statement of Financial
Position Current Assets
O Cash and Cash Equivalents -

short-term, highly liquid investments


that are readily convertible into
known amount of cash and which are
subject to an insignificant risk of
changes in value
O Shall be unrestricted in use
O Has short maturity of three (3) months

or less from the date of acquisition.

Statement of Financial
Position Current Assets
O Held for Trading
O Acquired principally for the purpose of selling it

in the near term.


O On initial recognition, it is part of a portfolio of
identified financial instruments that are
managed together and for which there is
evidence of a recent actual pattern of shortterm profit taking.
O It is a derivative, except for a derivative that is
a financial guarantee contract or a designated
and an effective hedging instrument.

Statement of Financial
Position Current Assets
O Expected to be realized

within twelve months


O Short-term non-trade

receivables
O Collectible within one year from
the end of reporting period, the
length of the operating cycle
notwithstanding.

Statement of Financial
Position Current Assets
O Operating Cycle
O The time between the acquisition

of assets for processing and their


realization in cash or cash
equivalents.
O When normal operating cycle is
not clearly identifiable, its duration
is assumed to be twelve
months.

Statement of Financial
Position Presentation of Current Assets
O Presented in Order of Liquidity
a)
b)

c)
d)
e)

Cash and cash equivalents


Financial assets at fair value such as
trading securities and other investments
in quoted equity instruments
Trade and other receivables
Inventories
Prepaid expenses

Statement of Financial
Position N0ncurrent Assets
O Noncurrent assets is a residual definition.
O An entity shall classify all other assets not

classified as current as noncurrent.


O It includes:
a) Property, plant and equipment
b) Long-term investments
c) Intangible assets
d) Other noncurrent assets

O Deferred tax assets shall not be presented as

current.

Statement of Financial
Position N0ncurrent Assets
O Property, plant and equipment

tangible assets which are held by an


entity for use in production or supply of
goods and services, for rental to others, or
for administrative purposes, and are
expected to be used during more than one
period.
O Long-term investments an asset
held by an entity for the accretion of
wealth through capital distribution, such
as interest, royalties, dividends and
rentals, for capital appreciation or for
other benefits to the investing entity such
as those obtained through trading

Statement of Financial
Position N0ncurrent Assets
O Intangible assets - an

identifiable nonmonetary asset


without physical substance.
O Other noncurrent Assets those that do not fit into the
definition of the previously
mentioned noncurrent assets.

Statement of Financial
Position Liabilities
O 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.
O The essential characteristics of a liability are:
O The liability is the present obligation of a

particular entity.
O The liability arises from past transaction or event.
O The settlement of the liability requires an outflow
of resources embodying economic benefits.

Statement of Financial
Position Current Liabilities
O A liability is current when:
a) The entity expects to settle the liability

within the entitys normal operating


cycle
b) The entity holds the liability for the
purpose of trading.
c) The liability us due to be settled
within twelve months after the
reporting period.
d) The entity does not have an
unconditional right to defer
settlement of the liability for at least
twelve months after the reporting
period

Statement of Financial Position


Presentation of Current Liabilities
O As a minimum, it should include the

following:
a) Trade and other payables
b) Current provisions
c) Short-term borrowing
d) Current portion of long-term debt
e) Current tax liability

Statement of Financial
Position Noncurrent Liabilities
O Noncurrent Liabilities - Residual

definition
O Examples are:
O Noncurrent portion of long-term
debt
O Finance lease liability
O Deferred tax liability
O Long-term obligations to company
officers
O Long-term deferred revenue

Statement of Financial
Position Equity
O The term equity is the

residual interest in the assets of


the entity after deducting all of
its liabilities.
ONet assets
OOwners equity, Partners
equity and stockholders
equity

Forms of Statement of
Financial Position
O Report Form
O Three major sections in a

downward form
O Account Form
O Assets are shown on the left
O Liabilities and equity are on the

right

Comprehensive Income
O Comprehensive income is the change

in equity during a period resulting from


transactions and other events, other
than changes resulting from transactions
with owners in their capacity as owners.
O It includes:
O Component of Profit and Loss
O Components of other
Comprehensive income

Comprehensive Income
O Profit or Loss
O Is the total of income less expenses

excluding the components of other


comprehensive income.
O Other Comprehensive Income
O Comprises items of income and expenses
including reclassification adjustments
that are not recognized in profit or loss as
required or permitted by the Philippine
Financial Reporting Standards.

Comprehensive Income
Components of Other Comprehensive Income
1. Unrealized gain or loss on investment in

2.

3.
4.
5.

equity instrument measured at fair value


through other comprehensive income
Gain or Loss from translation adjustment of
the financial statements of a foreign
operation
Changes in revaluation surplus
Unrealized gain or loss from derivative
contracts designated as cash flow hedge
Actuarial gain or loss on defined benefit plan
fully recognized through OCI

Comprehensive Income
Income Statement
O An income statement is a formal

statement showing the financial


performance of an entity for a given
period of time.
O Sources of Income:
O Sales of merchandise to customers
O Rendering of services
O Use of entity resources
O Disposal of resources other than

products

Comprehensive Income
Income Statement
O Components of expense
O Cost of Sales
O Distribution costs or selling

expenses
O Administrative expenses
O Other expenses
O Income tax expense

Comprehensive Income
Presentation

O Two options in presenting

comprehensive income:
1. Two Statements
An income statement showing the
components of profit or loss
2. A statement of comprehensive
income beginning with profit or loss
as shown in the income statement
plus or minus the components of
other comprehensive income.
1.

2. Single Statement

Comprehensive Income
Presentation and Disclosure
O An entity shall not present any items of

income and expense as extraordinary


items, either on the face of the income
statement or statement of
comprehensive income or in the notes.
O Required Disclosures:
O Profit or Loss for the period
attributable to non-controlling
interest and owners of the parent
O Total comprehensive income for
the period attributable to noncontrolling interest and owners of
the parent.

Comprehensive Income
Forms of Income Statement
O Functional Presentation
O This form classifies expenses

according to their function as part of


cost of sales, distribution costs,
administrative activities and other
activities.
O Cost of sales method
O Natural Presentation
O Nature of expense method
O Expenses are aggregated according

to their nature and not allocated


among the various functions within
the entity.

Statement of Retained
Earnings
O The statement of Retained Earnings

shows the changes affecting directly


the retained earnings of an entity
and relates the income statement to
the statement of financial position.
a)
b)
c)
d)
e)

Profit or Loss for the Period


Prior Period Errors
Dividends Declared and Paid to
Shareholders
Effect of change in accounting policy
Appropriation of retained earnings

Statement of Changes in
Equity
O Is a basic statement that shows the

movements in the elements or


components of the shareholders
equity.
O Includes the Statement of R/E.

Statement of Cash Flows


O Is a basic component of the financial

statements which summarizes the


operating, investing and financing
activities of an entity.
O Provide information about the cash
receipt and disbursements

End of Discussion