FINANCIAL

STATEMENTS
BY: Lyn Monica Giduquio

ACCOUNTING
Accounting is the art of recording, classifying, and
summarizing in a significant manner and in terms of money,
transactions and events which are, in part at least, of
financial character, and interpreting the results thereof.
American Institute of Certified Public Accountants (AICPA)
Accounting is the process of identifying, measuring and
communicating economic information to permit informed
judgment and decision by users of the information.
American Accounting Association (AAA)
Accounting is a service activity. Its function is to provide
quantitative information, primarily financial in nature,
about economic entities, that is intended to be useful in
making economic decision. Accounting Standards Council
(ASC), succeeded by Financial Reporting Standards Council
(FRSC).

FINANCIAL STATEMENT
Purpose of Financial Statements
The objective of financial statements is to provide information about the
financial position, performance and changes in financial position of an
enterprise that is useful to a wide range of users in making economic
decisions.
USERS:

Owners and management assess financial position and performance

Investors ROI; future dividends

Employees future remuneration and job security

Lenders or creditors decide whether to grant a loan or not

Suppliers ascertain whether to supply goods on credit; credit terms

Customers steady supply of goods

Government correctness of tax declared

Public effects on the economy, environment and local community

STATEMENT OF FINANCIAL
POSITION
The statement of financial position is another name for the balance sheet.
It is one of the main components of financial statements and it reports an
entity's assets, liabilities, and the equity. The amounts reported on the
statement of financial position are the amounts as of the final moment of
an accounting period.
The structure of the statement of financial position is similar to the basic
accounting equation:

ASSETS = LIABILITIES + OWNERS EQUITY

Key elements of SFP:

Assets
An asset is something that an entity owns or controls in order to derive
economic benefits from its use.

Current or non-current

Tangible or intangible

Liabilities
A liability is an obligation that a business owes to someone and its
settlement involves the transfer of cash or other resources.

Current or non-current

Equity
Equity is what the business owes to its owners. Equity is derived by
deducting total liabilities from the total assets. It therefore represents
the residual interest in the business that belongs to the owners.

Share capital

Retained Earnings

Revaluation Reserve

WHY THE BALANCE SHEET ALWAYS BALANCES?

Purpose and Importance of SFP:

Assess financial health of an entity

Assist in identifying underlying trends in the
financial position of an entity (potential
problems or areas for further improvement)
Determines the entitys liquidity risk, financial
risk, credit risk, and business risk
Helps in predicting the amount, timing and
volatility of entitys future earnings

STATEMENT OF COMPREHENSIVE
INCOME
Statement of Comprehensive Income is also known as Income Statement.
It is a report of income, expenses and the resulting profit or loss earned
during an accounting period.
Income statement is prepared on the accruals basis of accounting.

Income is recognized regardless of when it is actually earned

Expenses are recognized regardless of when incurred

Income statement does not report transactions with the owners of an entity.

Key elements of SCI:

Sales/Revenue
Sales includes income earned from the principal activities of an entity.
Cost of Sales
Cost of sales represents the cost of goods sold or services rendered during an
accounting period.
Inventory, Beg

xx

Net Purchases

xx

Total Goods Available for Sale

xx

Inventory, End (xx)

COS

xx

Other Income
Other income consists of income earned from activities that are not related to
the entity's main business.
Distribution Cost
Distribution cost includes expenses incurred in delivering goods from the
business premises to customers.
Administrative Expenses
Administrative expenses generally comprise of costs relating to the management
and support functions within an organization that are not directly involved in
the production and supply of goods and services offered by the entity.

Purpose & Use of SCI:

Provides the basis for measuring performance of an entity

over the course of an accounting period.

Assess the performance of the entity

a.

Change in sales revenue

b.

Change in gross profit margin

Forms the basis of important financial evaluation of an

entity in conjunction with information contained in other
financial statements, such as:

a.

Change in earnings per share

b.

Analysis of working capital in comparison to similar

income statement elements

c.

Analysis of interest cover and dividend cover ratios

STATEMENT OF CHANGES IN
EQUITY
Often referred to as Statement of Retained Earnings in U.S. GAAP.
Details the change in owners' equity over an accounting period by presenting
the movement in reserves comprising the shareholders' equity.

Net profit or loss

Increase or decrease in share capital reserves

Dividend payments to shareholders

Gains and losses recognized directly in equity

Effect of changes in accounting policies

Effect of correction of prior period error