PRESENTATION OF

FINANCIAL
STATEMENTS
STATEMENT OF
FINANCIAL POSITION
An Introduction
PAS 1
CHAPTER 8
 SPECIFIC OBJECTIVES
• At the end of the lesson, the student
will be able to:
• Identify the components of financial
statements
• Understand the objective of financial
statements
• Know the preparation of a Statement
of Financial Position
 SPECIFIC OBJECTIVES
• At the end of the lesson, the student
will be able to:
• Understand the current and
noncurrent classification of assets
and liabilities
• Know the forms of presenting the
statement of financial position
 Definition
• the means by which the information
accumulated and processed in
financial accounting is periodically
communicated to the users
• the end product or main output of
the financial accounting process
– a structured financial representation of
the financial position and financial
performance of an entity
 Definition
General Purpose Financial Statement
-In accordance with IFRS
-Are those intended to meet the needs
of users who are not in a position to
require an entity to prepare reports
tailored to their particular information
needs
-Are directed to all common users and
not to specific users
 Components of financial
statement
1. Statement of financial
position/Balance sheet
2. Income statement
3. Statement of comprehensive
income
4. Statement of changes in equity
5. Statement of cash flows
6. Notes to financial statement
 Objective of financial
statement
• To provide information about the:
a. Financial position
b. Financial performance and
c. Cash flows of an entity
Useful to a wide range of users in
making economic decisions
• Show the result of management’s
stewardship of its resources
 Objective of financial
statement
• Financial statements provide information
about the entity’s:
a. assets
b. liabilities
c. equity
d. income and expenses including gains and
losses
e. contribution by and distributions to
owners in their capacity as owners
f. cash flows
Frequency of reporting
• Presented at least annually
Disclosures needed when reporting period
changes to longer or shorter than one
year:
– the period covered by financial statements
– the reason for using a longer or shorter period
– the fact that amounts presented in the
financial statements are not entirely
comparable
STATEMENT OF FINANCIAL
POSITION
• a formal statement showing
the three elements
comprising financial position:
• assets,
• liabilities and
• equity
 STATEMENT OF FINANCIAL
POSITION
Used by investors, creditors and other
statement users to analyze such
factors as:
• liquidity,
• solvency, and
• The need of the entity for additional
financing
 Assets

An economic resource controlled by an

entity as result of past event
Economic Resource
-a right that has the potential to
produce economic benefits
 Classification of assets
1. Current assets
2. Noncurrent assets
Operating cycle
- When identifiable = separate
classification of current and noncurrent
assets is a useful information
- Useful to distinguish between:
- Net asset that are continuously
circulating as working capital from
- Net assets used in long term operations
 Classification of assets
Operating cycle
– the time between the acquisition
of assets for processing and their
realization to cash and cash
equivalents
-When not clearly identifiable =
duration is assumed to be twelve
months
 Current assets: PAS1 p.66
a. Cash and cash equivalents
1. not restricted for exchange or
2. used to settle a liability for at least
twelve months after reporting date
b. Held for trading purposes
c. Realizable within twelve months
after the reporting period
d. Realizable, sold or consumed
within the entity’s normal
operating cycle
 Noncurrent assets
• Residual definition
• PAS1 p. 66 an entity classify all
other assets not classified as
current
• What is not included in the
definition of current assets is
deemed excluded
 Noncurrent assets
• all other assets not classified as
current
• include the following:
a. property, plant and equipment
b. long-term investments
c. intangible assets
d. Deferred tax assets
e. other noncurrent assets
Property, plant and equipment
• Definition in PAS 16 p.6
• tangible assets
• held by the entity:
– for use in production
– supply of goods or services
– for rental to others
– for administrative purposes
• expected to be used during more than one period
• Examples:
land, building, machinery, equipment, furniture,
fixtures, patterns, molds, dies and tools
• are presented at cost less accumulated
depreciation except land
 Long term investments
• Definition: (IASC)
• assets held by entity for the
following purposes:
1.
accretion of wealth through capital
distribution
Example: Interest, royalties, dividends and
rentals
2. for capital appreciation
3. for other benefits – Ex. obtained
through trading relationships
 Intangible assets
• identifiable nonmonetary asset
without physical substance
Examples of identifiable intangible
assets:
Patent, franchise, copyright, lease
rights, trademark and computer
software
Example of unidentifiable intangible
asset:
Goodwill
 Other noncurrent assets
• assets that do not fit into the
definition of the noncurrent assets
previously mentioned
• Examples:
long-term advances to officers,
directors, shareholders and
employees, abandoned property,
long-term refundable deposit
 Liabilities
Essential characteristics:
a. the present obligation of a
particular entity
b. the liability arises from past
transaction or event
c. settlement requires a transfer of
economic resources
Classification:
Current and Noncurrent
Current Liabilities:PAS1 p.69
1. Expects to be settled within the
entity’s normal operating cycle
2. held for trading purposes
3. due to be settled within twelve
months after the reporting period
4. does not have the right to defer
settlement for at least twelve months
after the reporting period
 Noncurrent liabilities
- Residual definition: PAS1 p. 69
-all liabilities not classified as current
Examples:
a. Noncurrent portion of long-term
debt
b. Finance lease liability
c. Deferred tax liability
d. Long-term obligations to company
officers
e. long-term deferred revenue
 Equity
- the residual interest in the assets of the
entity after deducting all of the liabilities
- net assets = total assets - total liabilities
Terms used depend on the form of business
organization:
a. Owner’s equity = proprietorship
b. Partners’ equity = partnership
c. Stockholders’ or shareholders’ equity =
corporation
• Equity – may simply be used for all
business entities
• Owners – holders of instruments
classified as equity (PAS1 p.7)
 CURRENTLY MATURING
LONG-TERM DEBT
• Liability due to be settled within 12
months after the reporting period
=classified as current even if:
• A. Original term was for a period
longer than 12 months
• B. An agreement to refinance or to
reschedule payment on a long-term
basis is completed after the reporting
period and before financial statements
as authorized for issue
 CURRENTLY MATURING
LONG-TERM DEBT
• Exception:
• If refinancing on a long-term basis is
completed on or before the end of
the reporting period = obligation is
classified as noncurrent liability
 COVENANTS
• Often attached to borrowing agreements
which represent undertakings by the
borrower
• Are actually restrictions on the borrower
as to:
• A. Undertaking further borrowings
• B. Paying dividends
• C. Maintaining specified level of working
capital, etc
 COVENANTS
• Liability becomes payable on demand=if
certain conditions relating to the
borrower’s financial situation are
breached
• IASB amendment requirement for
classification of noncurrent liabilities
with covenants:
• Only covenants that an entity must
comply on or before the end of the
reporting period will affect the
classification as current or noncurrent
 COVENANTS
• Liability is:
• Noncurrent = if the entity has already
complied with the covenants at the
reporting date
• Current = if covenant is not complied with
at the reporting date
• No effect on classification at the end of the
reporting period = covenants that must be
complied with after the end of the reporting
period
• Note: Disclosure needed about noncurrent
liabilities subject to future covenants
 Shareholders’ equity
• - residual interest of the owners in
the net assets of a corporation
measured by:
= the excess of assets over liabilities
• Elements constituting shareholders’
equity with their equivalent IAS
term: (p. 145)
 Notes to financial statements
• - narrative description or disaggregation of:
a. items presented in the financial statements
and
b. information about items that do not qualify
for recognition
• - contain information in addition to that
presented in the financial statements
• - are used to report information that does
not fit into the body of the financial
statements in order to enhance the
understandability of the statements
Purpose:
To provide the necessary disclosure required by
PFRS
 Two Forms of statement of
financial position
a. Report form
- sets forth the three major sections in a
downward sequence of assets, liabilities
and equity
b. Account form
- the presentation follows that of an account
- assets are shown on the left side and
liabilities and equity of the right side of the
statement
Illustration of the two forms of statement of
financial position (p. 146 – 149)
 Line items in the statement
of financial position
Face of Statement of financial position include as a
minimum 18 line items- PAS1 par. 54. (p.150)
Philippines’ common practice:
Present current asset before noncurrent asset
Current liabilities before noncurrent liabilities and
Liabilities before equity or equity after liabilities
Preface to PAS 1 par. 7:
- Other formats may be equally appropriate
provided the distinction is clear (p. 150)
 Line items in the statement
of financial position
Standard: does not prescribe the order or format
Format illustrated in the appendix to IAS 1:
Presents noncurrent assets before current, equity
before liabilities and noncurrent liabilities before
current (practiced in other jurisdiction, ex. UK)
 INCOME
STATEMENT
An introduction
PAS 1

CHAPTER 9
 SPECIFIC OBJECTIVES
• At the end of the lesson, the student
will be able to:
• Define an income statement
• Know the natural and functional
presentation of the income
statement
• Understand the concept of
comprehensive income, profit or loss
and other comprehensive income
 SPECIFIC OBJECTIVES
• At the end of the lesson, the student
will be able to:
• Identify the components of other
comprehensive income
 Income statement
= formal statement showing the financial
performance of an entity for a given
period of time
Financial performance
= primarily measured in terms of level of
income earned through the effective
and efficient utilization of its resources
=also known as the results of operations
of the entity
 Income statement
Transaction approach = the traditional
preparation of the income statement in
conformity with accounting standards
= presents the income, expenses, gains
and losses and net income or loss
recognized during the period
Note: Information about financial
performance is useful in predicting
future performance and ability to
generate future cash flows
 Sources of Income:
a. Sale of merchandise to customers
= include all sales to customer during the period
Net sales = gross sales – sales returns and
allowances – sales discounts
b. Rendering of services
= includes professional fees, media advertising
commissions, insurance agency commission,
admission fees for artistic performances and
tuition fees
c. Use of entity resources
= includes interest, rent, royalty and dividend
income
d. Disposal of resources other than products
= include gain on sale of noncurrent assets
 Components of expense
a. Cost of sales or cost of goods sold
b. Distribution cost or selling
expenses
c. Administrative expenses
d. Other expenses
e. Income tax expense
 a. Cost of good sold:
1. Merchandising concern:
Beginning Inventory xxx
Net purchases xxx
Goods available for sale xxx
Less: Ending Inventory xxx
Cost of sales xxx
===
Net purchases:
Gross Purchases xxx
Freight in xxx
Total xxx
Less: Purchase returns, allowances & discounts xxx
Net purchases xxx
===
 a. Cost of good sold:
2. Manufacturing concern:
Beginning raw materials xxx
Net purchases xxx
Raw materials available for use xxx
Less: Ending raw materials xxx
Raw materials used xxx
Direct labor xxx
Factory overhead xxx
Total manufacturing cost xxx
Beginning goods in process xxx
Total cost of goods in process xxx
Less: Ending goods in process xxx
Cost of goods manufactured xxx
Beginning finished goods xxx
Goods available for sale xxx
Less: Ending finished goods xxx
Cost of goods sold xxx
===
• Example:
• Increase in raw Materials inventory
• Decrease in good in process
• Increase in finished goods inventory
Solution:
Net purchases
Less: Inc in rm inventory
Raw materials used
Direct labor
Factory overhead
Total Manufacturing cost
Add decrease in goods in process
Cost of goods manufactured
Less Inc in finished goods
Cost of good sold
 b. Distribution costs
• = costs which are directly related to
selling, advertising and delivery of goods
to customer
• = includes salesmen’s salaries, sales
commissions, traveling and marketing
expenses, advertising and publicity
expenses, freight out, depreciation of
delivery equipment and store equipment,
other expenses related to selling function
c. Administrative expenses
• = cost of administering the business
• = include all operating expenses not
related to selling and cost of goods sold
• Doubtful accounts, office salaries and
expenses of general executives and of the
general accounting and credit department,
office supplies used, certain taxes,
contributions, professional fees,
depreciation of office building and office
equipment and amortization of intangibles
 d. Other expenses
• = expenses which are not directly
related to the selling and
administrative function
• = include charges to income for:
• loss on sale of trading investments
• Loss on disposal of PPE
• Loss on sale of noncurrent investment
• Casualty loss – flood, earthquake, fire
 • Line items included in the income
statement and statement of
comprehensive income PAS1 p.82 (p. 167)
• Items disclosed on the face of the income
statement and statement of
comprehensive income:
a. Net income or net loss attributable to
noncontrolling interest and owners of the
parent
b. Total comprehensive income attributable
to noncontrolling interest and owners of
the parent
Forms of income statement
Note: select the presentation that is
reliable and more relevant PAS1 p. 99
a. Functional presentation
• =classifies expenses according to their
function as part of cost of sales,
distribution costs, administrative
activities and other activities
• = also known as cost of goods sold
method. Example: pp. 169-170
• Note: need to disclose additional
information on the nature of expense
Forms of income statement
b. Natural presentation
• = nature of expense method
• =expenses are aggregated according to
their nature and not allocated among the
various functions within the entity
• = expenses which are of the same nature
are grouped or aggregated and presented
in one item. Examples: depreciation,
purchases of raw materials, transport
costs, employee benefit costs and
advertising costs
• Example: pp.171-173
 Which form for income
statement?
PAS 1 does not prescribe any format
Par 105 : Because each method of
presentation has merit for different
types of entities, management is
required to select the presentation
that is reliable and more relevant
 Comprehensive Income
• change in equity during a period
resulting from transactions and other
events, other than changes resulting
from transactions with owners in their
capacity as owners
• includes
1. components of profit or loss or income
and expense affecting net income
2. components of other comprehensive
income
 Profit or loss
• = total income less expenses
excluding component of other
comprehensive income
• = the bottom line of traditional
income statement
• = also known as net income or net
loss
 Other comprehensive income
a. items of income and expenses
including reclassification
adjustment not recognized in
profit or loss
b. but recognized directly in equity
– required or permitted by the
PFRS
Includes the ff: p. 174
 Statement of comprehensive
income
- to show the total comprehensive income
- starts with the net income or loss plus or
minus the components of other
comprehensive income
Purpose:
• To provide a more comprehensive
information on financial performance
measured more broadly than the income
as traditionally computed
• Example p. 175-
 Statement of retained
earnings
1. shows the changes affecting
directly the retained earnings and
2. relates income statement to
statement of financial position
Example p.196
 Important data affecting the
retained earnings.
a. profit (+) or loss (-) for the period
b. prior period errors (+/-)
c. dividends declared and paid to
shareholders (-)
d. effect of change in accounting
policy (+/-)
e. appropriation of retained earnings
= increase (-) / decrease (+) in
appropriation
 Statement of changes in
equity
• - a basic financial statement that
shows the movements in the
elements or components of the
shareholders’ equity
• - includes as its part the statement
of retained earnings = no longer a
required basic statement
 Statement of changes in
equity
Shows the following:
1. comprehensive income for the period
2. effects of changes in accounting policies
and correction of errors for each
component of equity
3. reconciliation between the carrying
amount at the beginning and end of the
period for each component of equity