COLLEGE OF BUSINESS AND ACCOUNTANCY

TOPIC:
FINANCIAL STATEMENTS

There are four major financial statements used to communicate information to external users (creditors, investors,
suppliers, etc.)
1. Statement of Financial Position or Balance Sheet (assets, liabilities, and Shareholder’s equity)
2. Statement of Comprehensive Income or Income Statement (revenues and expenses)
3. Statement of Changes in Shareholder’s Equity (contributed capital and retained earnings)
Statement of Retained Earnings
4. Statement of Cash Flows

1. Statement of Financial Position/Balance Sheet

- Financial statement that presents the financial position of the company on a particular date.
- Summarized by the accounting equation which must always be in balance (Assets=Liabilities +
Shareholder’s Equity)
- Three categories of accounts:
a. Assets
Three Characteristics of Assets
o It has probable future benefit that involves a capacity to contribute directly or indirectly to
future net cash flows
o A particular entity can obtain the benefit and control other’s access to the asset
o The transaction that resulted in the entity’s right to the benefit of the asset has already
occurred

According to PAS#1:
Assets are considered to be current when:
1. It is cash or cash equivalent
2. The company intends to hold the asset for the purpose of trading it
3. The company expects to realize the assets within 12 months
4. The company expects to realize the asset or intends to sell or use it within the entity's normal operating
cycle.

Examples: Cash, Accounts Receivable, Land, Equipment, Construction in Progress, Patents, Copyrights,
Goodwill, etc.

b. Liabilities
- Amounts that company owes to its creditors.

Liabilities are considered to be current when:

1. The firm is expected to pay the liability within its normal operating cycle.
2. The firm holds the liability primarily for the purpose of trading.
3. The liability can be paid within 12 months.

Examples: Notes Payable, Accounts Payable, Unearned Revenue, etc.

 c. Owner’s Equity (Stockholder’s Equity or Shareholder’s Equity)
- The owner’s claims to the assets of the company
- Includes both retained earnings and capital stock (common stock, preferred stock)
- Three basic components:
A. Share capital - represents contributions from stockholders gathered through the issuance of stock
Ordinary share capital - It represents ownership in a corporation. Common stockholders are
given rights to receive dividends and voting rights in electing a board of directors.
Preference share capital - Preferred stockholders enjoy fixed dividend rates and are paid first
before the common stockholders.
B. Reserves - include unrealized gains and losses, appropriations, and additional paid -in capital.
C. Retained earnings - represents the accumulated earnings of the business from the time it first
started.

 Ordinary shareholders receive their share of capital after the preference shareholders are paid. However,
preference shareholders do not have voting rights on preference shares.
 Treasury Stocks are shares issued by the company and were later re-acquired. The cost of treasury stocks
is deducted from stockholders' equity.

Stockholders' Equity (SHE) = Capital Stock + Reserves + Retained Earnings - Treasury Stock

✔ Most companies prepare a classified balance sheet which is the same as a regular balance sheet except
assets and liabilities are categorized as current and non-current.

Current—will be used or paid for within the next year

Examples:
Current Assets: Cash, Accounts Receivable, Inventory
Current Liabilities: Accounts Payable, Unearned Revenue

Non-current—will not be used or paid for within the next year

Examples:
Non-Current Assets: Land, Notes Receivable, Equipment
Non-Current Liabilities: Notes Payable, Bonds Payable

2. Statement of Comprehensive Income/Income Statement

- Financial statement that reports the company’s revenues and expenses over an interval of time (usually
one accounting period)
- Shows whether the company was able to generate enough revenue to cover the expenses of running the
business
o Revenue - Expenses = Net Income or Net Loss
o Revenues equal the selling price of a good or service
o Expenses are costs incurred to earn revenue
o Example: Tom sells Jane a t-shirt for P120. It cost Tom P115. Tom’s revenue is P120, his cost of goods sold
(expense) is P115, and his net income is P5.
 - Multiple Step Income Statement

Sales xx
Less: Cost of goods sold xx
Gross Profit xx
Less: Operating Expenses xx
Operating Income xx
Add: Other Income xx
Less: Other Expenses xx
Net Income before taxes xx
Less: Income Tax Expenses xx
Net Income xx

Cost of goods sold is computed as follows:

For merchandising:
Merchandise inventory, beg. xx
Add: Net Purchases
Purchases xx
Freight In xx
Less: Purchase returns and xx
allowances
Purchase discounts xx xx
Cost of goods available for sale xx
Less: Merchandise Inventory, end. xx
Cost of goods sold xx

For manufacturing:
Direct materials (raw materials) xx
Direct labor xx
Factory overhead xx
Manufacturing cost xx
Add: Work in process, beg. xx
Less: Work in process, end. xx
Cost of goods manufactured xx
Add: Finished goods, beg. xx
Less: Finished goods, end. xx
Cost of goods sold xx
3. Statement of Changes in Shareholder’s Equity
- Contributed Capital and retained earnings
- Retained Earnings:
Beginning Retained Earnings xx
Less: Dividends xx
Less: Appropriations xx
Add: Net Income or Minus Net Loss xx
Ending Retained Earnings xx

4. Statement of Cash Flows

- Financial statement that measures activities involving cash receipts and cash payments over an interval
of time (usually one accounting period).
- Cash flows can be classified into one of three categories:
1. Operating Activities - day-to-day general activities to run the business
Examples: Purchasing inventory for cash, selling inventory for cash, paying cash for a business
license, paying cash for utilities, etc.
2. Investing Activities - purchase and sale of assets that last longer than one year
Examples: Purchasing land for cash, selling property for cash, etc.
3. Financing Activities - cash transactions involving a company’s long-term creditors or owners
Examples: Receiving cash from a bank loan, receiving cash from the issue of common stock,
receiving cash from the sale of bonds, paying cash for dividends, paying cash for principal on a loan
Preparing Financial Statements
Example 1:
The following items were taken from the accounting records of CBA Incorporated. The income statement account
balances are for the year ending December 31, 2012. The balance sheet account balances are the balances at
December 31, 2012 except for the retained earnings balance which is the balance at 1/1/2012:

Accounts Payable 61,000 Accounts Receivable 11,000

Equipment 132,000 Advertising Expense 26,200
Cash 54,500 Common Stock 5,000
Administrative Expense 12,300 Dividends 2,200
Insurance Expense 3,000 Notes Payable (long-term) 70,000
Prepaid Insurance 6,550 Rent Expense 17,000
Retained Earnings (beg) 16,310 Salaries Expense 32,000
Service Revenue 117,700 Office Supplies 4,000
Supplies Expense 6,000 Salaries Payable 3,100
Accumulated Depreciation 20,000 Additional Paid in Capital 20,000
Income tax rate 30%

Instructions: Prepare an income statement, a statement of retained earnings, and a classified balance sheet for CBA
Incorporated for the year 2012.