THE BASIC FINANCIAL STATEMENTS

Financial Statements are the formal reports prepared by accountants. These statements show the
financial effects of transactions and other events that grouped into broad classes according to their
economic characteristics. These broad classes are called elements of financial statements.

Financial Statements are the following:

1. Statement of Financial Position – also known as the Balance Sheet shows the financial
condition of the business entity at any given time. This statement conveys information about the
business entity’s liquidity, solvency, stability, capital structure, and financial flexibility. The
accounting elements of the financial position are ASSETS, LIABILITIES, AND EQUITY.
2. Statement of Comprehensive Income – is also known as the Income Statement. This accounting
report shows the operating performance of the business entity for a given period. The
accounting elements of this report are REVENUES AND EXPENSES.
3. Statement of Changes in Equity – shows the movements in the various elements of the owner’s
equity or capital for a certain period. The following are the basic components of this statement:
a. Owner’s investments to the business.
b. Profit or loss for the period.
c. Owner’s personal withdrawals, and
d. Prior period adjustments.
4. Cash Flow Statement – The financial report explains the changes of cash and cash equivalents
during an accounting period.
A cash equivalent is a short-term, highly liquid investment that is easily convertible to cash.
The components of a cash flow statement are classified into the following activities:
a. Operating – the inflows and outflows of cash from the normal operating activities of the
business.
b. Investing – the inflow and outflow of cash from the sale or purchase of assets other than
inventory.
c. Financing – the inflows and outflows of cash from the owners and creditors of the enterprise.
The components of the cash flow statement merely explain the sources and uses of cash. CASH is
one of the components of the current assets in the Statement of Financial Position.
5. Notes to the Financial Statements – The parenthetical disclosures and notes to the financial
statements are considered part of the basic financial statements to achieve proper
understanding of the financial reports.
ELEMENTS of FINANCIAL STATEMENTS (FS)
1. Assets – These are resources owned or controlled by an entity resulting from past events and
from them, future economic benefits are expected to flow to the entity.
2. Liabilities – These are existing obligations of the entity arising from past events; their
settlements are expected to result in an outflow of assets from the entity.
3. Equity – The residual interest in the assets of the entity after deducting all its liabilities.

Note: The above elements are directly used to the measurement of financial position.

4. Revenues – These are increases in assets or decreases in liabilities arising from business
operation during an accounting period that result to increase in owners’ equity. These increases
in assets are not contributions of owners and creditors.
5. Expenses – These are decreases in assets or increases in liabilities arising from the business
operations during an accounting period that result to the decrease in owner’s equity. These
decreases in assets are not withdrawals or owners or payments of existing liabilities.

Note: The above elements are used to measure operating performance or also called as Income
Statement accounts.