QUARTER 3
Financial Statements
Financial statements are the reports submitted to the owner of the
business at the end of the accounting period. It is considered as the end
product of the accounting process.
COST OF GOODS SOLD
Cost of Goods Sold or Cost of Sales – cost of goods sold consists of
the cost of merchandise on hand at the beginning of the accounting
period, net cost of merchandise purchased including cost of
transporting the goods bought during the period, and cost of unsold
merchandise at the end of the accounting period. Purchasing activities
refer to transactions of buying goods for sale. If the purchased goods
are sold, they are to be reported as cost of sales; if unsold, they are to
be reported as merchandise inventory.
The cost of sales using periodic inventory system is computed as follows:
G. Baes Trading
Cost of Goods Sold
For the Period Ended, December 31, 2017
Merchandise Inventory Beginning
Purchases P700,000-
Freight In 3,000-
Purchase Returns and Allowances (10,000-)
Purchase Discount (3,400-)
Total Goods Available for Sale P689,600-
Merchandise Inventory End, Dec. 31 (271,400-)
Cost of Goods Sold P418,200-
Like service concern, merchandising businesses maintain accounting
records and prepare financial reports. The journals and ledgers are the same
basic accounting records maintained under merchandising businesses and
from these records are prepared the two financial reports: balance sheet and
income statement.
STATEMENT OF PERFOMANCE
a.) Income Statement (also known as Statement of Performance)-is
a financial statement showing the details of the revenue, expenses, net
income or net loss of operations in a given period. Accounting values shown
in the income statement are called “nominal accounts.” These accounts
represent used, consumed, or expired values, and earned revenues. They
are income and expenses accounts. However, some accounts under
merchandising businesses are entirely different from those used under
service concerns.
Parts of the Income Statement of Statement of Performance:
Heading: WHO:(name of the business or owner)
WHAT: (name of the report)
WHEN: (date of the report)
G. Baes Trading
Statement of Performance
For the Period Ended, December 31, 2017
Sales P670,000-
Less: Sales Returns and Allowances P12,000-
Sales Discount 1,800- 13,800-
Net Sales P656,200-
Less: Cost of Goods Sold 418,200-
Gross Profit P238,000-
Less: Operating Expenses:
Freight Out 200-
Rent Expense 4,000-
Utilities Expense 12,000-
Salaries Expense 20,000-
Advertising Expense 4,000- 40,200-
Net Profit P197,800-
Note: You can find out the profit of the business by subtracting the total expenses from the total income (Total Income –
Total Expenses = Profit). Take note, if the income is more than the expenses, NET INCOMEorNET PROFIT results.
On the contrary, if the total expense is more than the total income, NET LOSS will be the declaration.
Merchandising companies prepare the Statement of Financial Position
or Balance Sheet, the Statement of Changes in Equity, and the Statement of
Cash Flows, with practically the same contents and format as the financial
statements of service companies. The difference lies in the preparations of
the Income Statement. The principal operation in merchandising businesses
is the selling of goods; the Income Statement (Statement of Performance)
then, aims to show whether these selling operations are profitable or
otherwise. Income statements for merchandising businesses are somewhat
more complicated than such statements for a service enterprise. There are
two forms by which income statement is prepared. The “multiple-step” for
which has numerous sub-sections and intermediate summary figures, and
the “single-step” form which the total of all expired costs is deducted as a
single figure from the total of all revenues.
STATEMENT OF OWNER’S EQUITY
b.) Statement of Owner’s Equity alternatively called “Capital
Statement”- is a summary of the transactions affecting the capital account
balance. It starts with the beginning capital followed by the possible
changes in the owner’s equity.
Increases: Decreases:
a.) Net Income a.) Net Loss for the period
and/or
b.) Additional Investment b.) Withdrawals
Sample G. Baes Trading Illustration:
Statement of Equity
For the Period Ended, December 31, 2017
G. Baes, Capital Beginning, Dec. 1 P600,000-
Add: Net Profit 197,800-
Total P797,800-
Less: G. Baes, Drawing 6,000-
G. Baes, Capital End, Dec. 31 P791,800-
G. Baes Trading
Statement of Equity
For the Period Ended, December 31, 2017
G. Baes, Capital Beginning, Dec. 1 P600,000 -
Add: Net Profit P197,800 -
Less: G. Baes, Drawing 6,000 -
Increase in Capital 191,800 -
G. Baes, Capital End, Dec. 31 P791,800 -
STATEMENT OF FINANCIAL POSITION
Balance Sheet (also known as Statement of Financial Position) is a
financial statement that shows the assets, liabilities and owner’s equity as
of a given date. It shows the financial condition of the business.
Accounting values shown in the balance sheet are called “real
account.” These accounts represent remaining unused or unconsumed
values. Examples are assets, liabilities and [Link] balance sheet
structures of a service and merchandising concerns are basically similar in
terms of terminology employed, extent to which details are presented,
and the forms. The difference lies on the asset side of the merchandising
concern which contains Merchandise Inventory account. Since service
concerns are engaged in providing services to clients or customers, their
balance sheets do not contain accounts which reflect cost of merchandise
intended for sale.
Two Forms of the Balance Sheet:
1. Account Form- presents assets on the left side of the statement and
the liabilities and capital on the right side of the statement.
G. Baes Trading
Statement of Financial Position
December 31, 2017
ASSETS LIABILITIES AND OWNER’S EQUITY
Current Assets: Current Liabilities:
Cash P534,400- Accounts Payable-L. Dacanay P 22,000-
Accounts Receivable-Leo A. 138,000- Accounts Payable-Poopsie Blues 240,000-
Accounts Receivable-Kin Salonga 30,000- Total Current Liabilities
P262,000-
Accounts Receivable-AJ Bro 40,000-
Merchandise Inventory 271,400- Owner's Equity:
Total Current Assets G. Baes, Capital End, Dec. 31
P1,013,800-
791,800-
Non-Current Assets: Total Liabilities and Equity
P1,053,800-
Equipment 40,000-
Total Assets P1,053,800-
2. Report Form-presents assets first, followed by liabilities and the
capital below the liabilities.
G. Baes Trading
Statement of Financial Position
December 31, 2017
ASSETS
Current Assets:
Cash P534,400-
Accounts Receivable-Leo A. 138,000-
Accounts Receivable-Kin Salonga 30,000-
Accounts Receivable-AJ Bro 40,000-
Merchandise Inventory 271,400-
Total Current Assets P1,013,800-
Non-Current Assets:
Equipment 40,000-
Total Assets P1,053,800-
LIABILITIES AND OWNER'S EQUITY
Current Liabilities:
Accounts Payable-L. Dacanay 22,000-
Accounts Payable-Poopsie Blues 240,000-
Total Current Liabilities P262,000-
Owner's Equity:
G. Baes, Capital End, Dec. 31 791,800-
Total Liabilities and Equity P1,053,800-
STATEMENT OF CASH FLOWS
Statement of Cash Flows – identifies the sources and uses of cash,
classified into operating, investing and financing activities. The statement
explains the details of the change, increase or decrease in the cash
balance during the year. The same considerations that guide the
preparation of this statement for service companies are applied in
preparing the Statement of Cash Flows for merchandising companies.
Operating Activities-creates revenues and expenses in the business
Increase in Cash:
Cash receipts from: sale of goods or services, sale of trading
securities, interest income, dividend income
Decrease in Cash:
Cash payments for: purchase of inventory, operating expenses, taxes,
interest expense (short-term), purchase of trading securities
Investing Activities-purchase or sale of fixed assets such as
equipment, land, building, machines, or delivery truck.
Increase in Cash:
Cash receipts from: sale of plant assets, sale of non-trading securities
Decrease in Cash:
Cash payments for: purchase of plant assets, purchase of non-trading
securities
Financing Activities-obtain funds from investors and creditors such
as borrowing of money.
Increase in Cash:
Cash receipts from: owner’s investments, borrowings
Decrease in Cash:
Cash payments for: owner’s drawings, payment of borrowings
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Sample Illustration: G. Baes Trading
Account: Cash Account No.: 101
Balance
Date Item PR Debit Credit Debit Credit
2017 1 Initial investment GJ1 P600,000- P600,000-
Dec. 1 Paid rent GJ1 P4,000- 596,000-
3 Purchases on cash GJ1 200,000- 396,000-
6 Cash sales GJ1 110,000- 506,000-
7 Paid freight on goods bought GJ1 3,000- 503,000-
9 Paid freight on goods sold GJ1 200- 502,800-
10 Paid utilities GJ1 9,000- 493,800-
12 Cash sales GJ2 120,000- 613,800-
13 Withdrawal GJ2 6,000- 607,800-
13 Payment with discount GJ2 88,200- 519,600-
14 Collection on account GJ2 58,200- 577,800-
15 Paid salaries GJ2 10,000- 567,800-
16 Cash sales GJ2 40,000- 607,800-
16 Paid advertising GJ2 4,000- 603,800-
22 Paid account GJ3 18,000- 585,800-
22 Cash sales GJ3 80,000- 665,800-
25 Paid utilities GJ3 3,000- 662,800-
27 Paid account with discount GJ3 158,400- 504,400-
31 Paid salaries GJ3 10,000- 494,400-
31 Cash sales GJ3 40,000- P534,400-
P1,048,200- P513,800-
G. Baes Trading
Statement of Cash Flows
For the Period-Ended, December 31, 2017
Cash Flow from Operating Activities:
Cash Received from:
Sales P390,000-
Receivables Collection 58,200-
Refund from purchases
Payment for:
Supplies
Freight on good sold (200-)
Purchases (464,600-)
Operating Expenses (40,000-)
Refund to customer
Freight on purchases (3,000-)
Net Cash Flow from Operating Activities (P59,600-)
Cash Flow from Investing Activities:
Cash Flow from Financing Activities:
Initial investment 600,000-
Borrowings
Drawings (6,000-)
Net Cash Flow from Financing Activities P594,000-
Increase in Cash and Cash Equivalents P534,400-
Cash and Cash Equivalents, Dec. 31, 2017 P534,400-
Closing Entries - are entries prepared in the general journal at the end
of the accounting period (after the financial statements are completed) to
close or zero the balance of all the nominal or temporary accounts
(revenues, expenses and drawing) preparatory to formally closing the
books. This is done by reversing the position of the accounts, i.e.
accounts with credit balances are debited and accounts with debit
balances are credited. After properly recording the closing entries for the
nominal accounts, the Income Summary and the drawing account in the
General Journal, these closing entries are then posted to the General
Ledger. In posting the closing entries, the year-end date is indicated in
the Date column; “Closing Entry” is written under the Particulars
column; and the balance closed is written accordingly. The final effect of
closing the nominal accounts is either net increase (net income) or a net
decrease (net loss) in the owner’s capital accounts. The procedure in
closing the nominal accounts of a service concern also applies to a
merchandising concern.
Closing Entries are like service companies except for some unique
nominal accounts that arise from merchandising activities. These
accounts include Purchases, Freight In, Purchase Returns and Allowances,
Purchase Discount, Sales, Sales Returns and Allowances and Freight Out.
(See Posting)
General Journal Page 4
Date Particulars PR Debit Credit
2017 31 Sales 401 P 6 7 0 0 0 0 -
Dec. Income Summary 701 P 6 5 6 2 0 0 -
Sales Returns and Allowances 402 1 2 0 0 0 -
Sales Discount 403 1 8 0 0 -
To close sales to income summary.
31 Merchandise Inventory, End 106 2 7 1 4 0 0 -
Purchase Returns and Allowances 502 1 0 0 0 0 -
Purchase Discount 503 3 4 0 0 -
Income Summary 701 4 1 8 2 0 0 -
Purchases 501 7 0 0 0 0 0 -
Freight In 504 3 0 0 0 -
To close purchases to income summary.
31 Income Summary 701 4 0 2 0 0 -
Freight Out 505 2 0 0 -
Rent Expense 601 4 0 0 0 -
Utilities Expense 602 1 2 0 0 0 -
Salaries Expense 603 2 0 0 0 0 -
Advertising Expense 604 4 0 0 0 -
To close expenses to income summary.
31 Income Summary 701 1 9 7 8 0 0 -
G. Baes, Capital 301 1 9 7 8 0 0 -
To close net income to capital.
31 G. Baes, Capital 301 6 0 0 0 -
G. Baes, Drawing 302 6 0 0 0 -
Income Summary (Income & Expense Summary) is the clearing
account used in the closing
process. It is a temporary account used at the end of the accounting
period to close income
and expense accounts. The balance of this account shows the net income
or net loss for the
period before it is closed to the capital account.