MODULE 4: FINANCIAL STATEMENTS
Introduction
Topic Outline:
1. Purpose and users of financial statements
2. Income Statement
3. Statement of Changes in Equity
4. Balance Sheet
5. Statement of Cash Flows
Purpose and Users of Financial Statements
The financial statements are the financial reports of the business entity in order to
provide information that is useful for the decision-making of its users.
The users of the financial statements include the following:
Owners, investors and prospective investors
Lenders and suppliers and prospective creditors
Employees, customers
Government agencies
The general public
As different groups of users will use the financial statements, it should be useful and
understandable to someone who has a reasonable understanding of accounting and
business and who is willing to study and analyze the information presented. The
financial statements must be relevant, reliable and comparable. Most of all, it must
follow the applicable Philippine Financial Reporting Standards.
The financial statements are prepared at least once a year and can be presented as
frequent as monthly or quarterly. A complete set of Financial Statements comprises the
following:
1. Income Statement or Statement of Financial Performance
2. Statement of Changes in Equity
3. Balance Sheet or Statement of Financial Position
4. Statement of Cash Flows
5. Notes to the Financial Statements
Income Statement
The Income Statement, also called Statement of Financial Performance, presents the
financial results of a business for a given period of time. The statement presents the
amount of revenue generated and expenses incurred by the business during a reporting
period, as well as the resulting net income or net loss.
Revenues are increases in economic benefits during the accounting period in the form
of inflows or enhancements of assets or decreases of liabilities (or a combination of
both) from the delivery or production of goods, rendering of services, or other activities
that constitute the entity’s ongoing major or central operations.
Examples of revenues are as follows:
• Sales
• Professional fees earned
• Service revenues
• Interest revenue
• Dividend revenue
• Rent income
• Subscription revenue
Expenses are decreases in economic benefits during the accounting period in the form
of outflows or using up of assets or incurrences of liabilities (or a combination of both)
from the delivery or production of goods, rendering of services, or other activities that
constitute the entity’s ongoing major or central operations.
Examples of expenses are as follows:
• Cost of sales
• Depreciation expense
• Salaries and wages
• Utility costs
• Insurance expense
• Permits, taxes and licenses
• Repair and maintenance
• Representation expenses
• Losses
Exercise 1:
Prepare the Income Statement based on the following information:
PACIOLI GENERAL SERVICES
Adjusted Trial Balance
As of January 31, 2021
Cod
Account Title Debit Credit
e
101 Cash P76,000
111 Accounts Receivable 22,000
121 Supplies 7,000
151 Equipment 30,000
152 Accumulated Depreciation - Equipment P500
201 Accounts Payable 10,500
301 Pacioli, Capital 100,000
311 Pacioli, Drawing 10,000
401 Service Revenue 50,000
601 Salaries 12,000
602 Depreciation 500
603 Supplies Expense 1,000
604 Utility Expense 2,500
TOTAL P161,000 P161,000
Statement of Changes in Equity
The statement of changes in equity presents a reconciliation of the beginning and
ending balances in a company’s equity during a reporting period. The statement starts
with the beginning equity balance, and then adds or subtracts such items as profits,
capital investments or reductions, and dividend payments to arrive at the ending
balance.
Changes in equity over an accounting period include the following elements:
Net income or loss during the accounting period
Increase or decrease in capital
Capital withdrawals or dividend payments to shareholders
Exercise 2:
Prepare the Statement of Changes in Equity of Pacioli General Services (Exercise 1).
Balance Sheet
A Balance Sheet, also referred to as Statement of Financial Position, presents a
company’s financial position as of a given date. It shows the assets, liabilities and equity
of the business entity.
An asset is a resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity (IASB Framework). Examples
of assets include the following:
Cash – includes coins, currencies, checks, bank deposits and other cash items
ready for use in the operations of the business.
Accounts Receivable – amounts collectible from customers for goods provided
and services rendered on credit.
Merchandise Inventory – unsold goods for sale to customers.
Prepaid Expenses – expenses paid but not yet used.
Investments – assets for the accretion of wealth through capital returns or
capital appreciation or for other benefits to the business.
Property, Plant and Equipment – tangible assets used in the production or
supply of goods and services, or for business administration purposes.
Intangible Assets – includes identifiable, non-monetary properties without
physical substance, like licenses, copyrights, patents, trademarks and others.
A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits (IASB Framework). Examples of liabilities include the
following
Accounts Payable – obligations due to suppliers of goods and services
purchased on credit.
Notes Payable - obligations due to suppliers of goods and services evidenced by
a promissory note.
Loans Payable - obligations due to lenders as a result of borrowing of funds.
Lease Payable – obligations due to lessors for property and equipment used for
business operations.
Utilities Payable - obligations due to utility companies for services rendered.
Accrued liabilities - obligations due to others for expenses already incurred but
not yet paid.
Unearned Revenues - obligations due to customers for goods and services paid
but not yet delivered.
Equity is the residual interest in the assets of the entity after deducting all the liabilities
(IASB Framework). It represents the capital investments, net of the capital withdrawals of
the owner in the entity, and the net income or loss in the operation of the business.
Equity accounts include the following:
Capital account –the equity investment of the owner (in a single proprietorship)
or for each partner (in a partnership), and the cumulative effect of the
withdrawals of capital and business net profits and losses.
Drawing – the equity withdrawals of the owner or for each partner.
Common Stock, Preferred Stock – the equity of the owners of a corporation
Retained Earnings – the cumulative balance of the net income or losses of the
corporation, investments of the owners, less the distribution to the owners.
Exercise 3:
Prepare the Balance Sheet of Pacioli General Services (Exercise 1).
Statement of Cash Flows
The Statement of Cash Flows shows the cash receipts and cash payments from the business
activities of the enterprise during the period. The business activities are classified into operating,
investing and financing activities.
Activities of Business Organizations
Operating activities are the principal activities of the enterprise. They are the transactions and
events that enter into the determination of profit or loss. Operating Activities include the
following:
Cash receipts from sales of goods and rendering of services.
Cash receipts from interests, royalties, commissions, fess and other sources.
Cash payments to suppliers of goods and services.
Cash payments to employees for salaries and other employee expenses.
Cash payments for operating expenses such as advertising, supplies, utilities, taxes, and
others.
Investing activities include the acquisition and disposal of non-current assets of the business.
Examples of investing activities are
Cash payments in purchasing land, constructing a building, buying furniture and
equipment, acquiring intangible and other long-term assets.
Cash receipts in selling property and equipment, intangible and other long-term assets.
Cash payments in investing in equity and debt instruments of other companies.
Cash receipts from selling investments in equity and debt instruments of other
companies.
Financing activities include equity transaction of the business and the owners, as well as
borrowing of funds from financial institutions. Examples are
Investment and withdrawal of capital of the owners
Cash proceeds from bank loans and repayment of the loans.
Exercise 4.
Prepare the Statement of Cash Flows of Pacioli General Services (Exercise 1).
Assignment. Financial Statements
PACIOLI GENERAL SERVICES
Adjusted Trial Balance
As of January 31, 2021
Cod
Account Title Debit Credit
e
101 Cash P76,000
111 Accounts Receivable 22,000
121 Supplies 7,000
151 Equipment 30,000
152 Accumulated Depreciation - Equipment P500
201 Accounts Payable 8,000
202 Accrued Expenses Payable 2,500
301 Pacioli, Capital 100,000
311 Pacioli, Drawing 10,000
401 Service Revenue 50,000
601 Salaries 12,000
602 Depreciation 500
603 Supplies Expense 1,000
604 Utility Expense 2,500
TOTAL P161,000 P161,000
Based on the foregoing data, prepare and submit the following:
1. Income Statement
2. Statement of Changes in Equity
3. Balance Sheet
4. Statement of Cash Flows
