I.

INTRODUCTION TO F/S
a. Simple definition: A declaration of what is believed to be true about an enterprise,
communicated in terms of a monetary unit (dollar, peso, etc.)
b. Statement of financial position (balance sheet): a snapshot of the business at a
point in time
c. Income statement: Explains the different revenues and expenses during a period
of time (1 yr, 1 month, etc.)
d. Statement of cash flows: explains the changes in the cash balance during a period
in time
i. Important: CASH only
ii. So if you make a sale on credit, NOT CASH
II. Statement of Financial Position
a. Indicates where the company stands in financial terms at a specific date
b. Highlights the most important accounting equation: A = L + E. ALWAYS
c. Heading: Name of company, name of F/S, For the period
d. Body: Assets, Liabilities, Equity
i. Important: itemize major categories
ii. For equity
1. Share capital: amount paid by the owners to become owners;
represented by Shares (total amount is total number of shares x
assigned value)
2. Retained Earnings: accumulated earnings that remain with the
entity
3. Difference: R/E is equity earned through operation of the business
throughout the years but S/C is equity contributed by owners
e. Note the concept of business entity: an economic unit that engages in identifiable
business activities. For accounting purposes, the business entity is separate from
the personal activities of its owners.
f. ELABORATION OF THE BODY OF THE SFP:
i. Assets
1. Controlled by the business
2. Company will derive future economic benefits from it through the
conversion of it to cash or through use.
3. Can be tangible or intangible
4. PRINCIPLES IN UNDERSTANDING HOW TO VALUE
ASSETS
a. Cost principle: Most assets are reported in the SFP as their
HISTORICAL COST aka the cost the company acquired
the asset for (different from how much you can acquire the
asset today)
i. Exceptions
1. liquid assets: readily realizable to cash
2. NRV: Amount that is expected to be
recovered from asset when it is
collected/sold (usually hindi mo naman
 makukuha yung buong amt pag nagpautang
ka, also i.e. store discounts)
b. Going concern principle: Assume business will continue
operations and will continue recording assets at historical
cost
i. This principle will affect how assets are measured
ii. Requires professional judgement to determine
iii. Otherwise use FV to measure asset values because
you will sell them soon if company is not a going
concern; for liquidation
c. Objectivity principle: it is necessary to provide a definitive,
factual basis for valuation
i. Hindi nakakalito; sure ka
ii. Yung verifiable by independent parties
1. Independent para hindi BIAS
d. Stable dollar assumption: value of money is not always
stable so information becomes less relevant if not adjusted.
SO prepare F/S with the assumption that the dollar (or
money in general) is a stable unit of measurement
i. Inflation: bumababa halaga ng pera, tumataas
presyo ng bilihin
1. You can buy less with your money
2. If you buy land for 1M, you cant buy a
similar piece of land for 1M anymore after a
period of time
ii. Deflation: opposite
ii. Liabilities
1. Financial obligations or debts
2. They represent negative future cash flows
3. 2 common liabilities: on account (UTANG)
a. Accounts payable
i. No written promises
ii. Usually involves ordinary business transactions
b. Notes payable
i. Written formal promise
ii. With interest
4. Listed in the order in which they are to be paid and similar
liabilities can also be combined
a. i.e. accrued expenses
5. liabilities are claims of 3rd parties against the companys assets:
you use assets to pay off your liabilities
iii. Equity
1. Owners (investors, shareholders) claims on the assets of the
business
2. Since claims of 3rd parties have priority over claims of owners,
Eqity is a residual amount.
 3. So that means EQUITY = ASSETS LIABILITIES
4. Equity does not represent a specific asset, but an overall financial
interest in a company
5. Increases in equity:
a. Investment of cash or other assets by owners
b. Earnings from profitable operation of the business
6. Decreases in equity
a. Payments of cash or transfers of other assets to owners
(dividends)
b. Business losses
g. The accounting equation
1. Total assets always equal to total liabilities plus owners equity
2. Always equal because they represent different views of the same
business
3. Later we will discuss the double entry system
a. Inc. in assets = dec. in other assets or inc. in Liab or Equity
(play with this)
h. Illustration of effects of business transactions
i. SPF of each company is unique because of the unique nature, timing, and
peso amounts of each companys business transactions
ii. Use example in book (p. 47)

Date Cash A/R Land Building Tools and N/P A/P Share R/E
equipment capital

iii. Steps:
1. The companys first transaction
2. Purchase of an asset for cash
3. Purchase of an asset and financing part of the cost
4. Purchase of an asset on account
5. Sale of an asset
6. Collection of an account receivable
7. Payment of a liability
8. Earning of a revenue
9. Payment of expenses
III. Income statement
a. Summarization of the companys revenue and expense transactions for a period of
time.
b. Rev Exp = profit (or loss) = most important thing a company needs to survive =
ultimate purpose of any business is to earn a profit
c. Rev: increases in the companys assets from its profit-directed activities, which
results in positive cash flows
d. Exp: decreases in the companys assets from its profit-directed activities, which
result in negative cash flows
e. A period in time rather than a point in time (vs. SFP)
f. Is R/E always equal to the profit? NO. Simple illustrations only
IV. Statement of cash flows
 a. Explains movement of cash for a period in time
b. Separated into different activities
i. Operating: cash effects of revenue and expense transactions that are
included in the I/S; pertains to profit generating activities of the company
ii. Investing: cash effects of purchasing and selling assets
iii. Financing: cash effects of the owners investing in the company and
creditors loaning money to the company and the repayment of either or
both (i.e. buying or selling shares, nag-uutang)
iv. Operating + investing + financing = total change in cash
V. Relationships among financial statements
a. Based on the same transactions but present different views of the company
b. Use exhibit 2-15 to explain
i. SFP start and ending balance
ii. SCF and IS explain what happens in between
c. In summary
i. SFP: represents expansion of the accounting equation
ii. IS: explains the changes in financial position that result from profit-
generating activities
iii. SCF: explains the increases and decreases in cash during the period in
terms of the operating, investing and financing activities
iv. There are also non-financial terms that are equally as important
(mentioned in the NOTES to the financial statements)
v. F/S: a lens from which you can view your business: you can focus on
different perspective using the F/S
VI. Forms of business organization
a. Sole proprietorship
i. Owned by one person
ii. Usually for small businesses and is most common form in ecomony
iii. Accounting viewpoint: financial activities are separate from its owners
iv. Legal viewpoint: owner and business are one and the same; owner is
personally liable for the businesses liabilities (unlimited liability)
b. Partnerships
i. Involves 2 or more persons
ii. Usually for small businesses and for professionals (CPAs, Lawyers)
iii. Partners also have unlimited liability
iv. Can generate greater amounts of capital because there are more owners
c. Corporations
i. Under the law: owners (investors) are separate from the corporation
ii. Maximum loss of owner: the amount he invested (represented by his
shares): Limited Liability
iii. Ownership is transferrable (through shares)
1. Share certificate: issued to shareholders showing number of shares
that he owns
iv. Can generate even greater amounts of capital
v. Corp: most dominant form in terms of peso volume
 vi. F/S are most required in a corp because there are stricter government
regulations for it and owners would also want copies to determine corps
performance
vii. Ownership equity
1. Sole prop and partnerships: NO R/E
2. Corp: has R/E
VII. Use of financial statements by external parties
a. For them to make better financial decisions
b. Important things to note:
i. Liquidity: ability to pay debts when they come due
1. If not liquid, can be forced into bankruptcy and to sell assets to pay
for creditors claims (utang)
2. Make sure na wag iipit yung assets mo in long term stuff para
makabayad ka (i.e. buildings, machines, etc.): BALANCE LANG
ii. Profitability
1. Profit: the end goal in any business
2. Profitable operations increase the value of the equity in the
business
c. Short run vs long run
i. SR: liquidity and profitability not as dependent on each other
ii. But in the LR: more dependent to each other for survival
d. Always important is Adequate disclosure: all relevant information
i. Enclosed in the NOTES
ii. Events after the date of the financial statements that can affect decisions
(i.e. subsequent events)
iii. Make sure you know what to and what not to disclose (not necessary)
VIII. Managements interest in financial statements
a. Strong F/S
i. SFP: relatively little debt and large amounts of liquid assets relative to the
liabilities due in the near future (LIQUID)
ii. IS: revenues greater than eexpenses
iii. SCF: cash is being generated by operating activities
b. There are a lot of incentives for management to make F/S look good i.e. bonuses,
investor interest
i. Thus WINDOW-DRESSING: making F/S look good sometimes through
fraudulent means
ii. Window dressing can be combated by interim statements (harder for
managers to window dress because you frequently submit F/S)