UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES
Chapter 8 – PAS 1: STATEMENT OF FINANCIAL STATEMENTS
FINANCIAL ACCOUNTING
=============================================================================
I. STATEMENT OF FINANCIAL POSITIONS
A. Definition
Financial Statements - are the means by which
the information accumulated and processed in
financial accounting is periodically communicated
to the users.
Characteristics of financial statements:
1) Structured financial representation of the
financial position of and the transactions
undertaken by an enterprise
2) Show the results of management’s
stewardship of the resources entrusted to it
3) End product of the accounting process
4) The means by which the information
accumulated and processes in financial
accounting is periodically communicated to
those who use it
B. General-Purpose Financial Statements
PAS 1 prescribed the basis for the preparation of
“general purpose” financial statements to ensure
comparability both with the entity’s financial
statements of previous periods and with the
financial statement of other entities. An entity
shall prepare and present general purpose
financial statements in accordance with the
International Financial Reporting Standards.
a) General purposes financial statements are
those intended to meet the needs of user who
are not in a position to demand reports
tailored to meet their specific information
needs. In other words, general purposes
financial statements are directed to all
common users and to specific users.
b) Include those that are presented separately or
within another public document such as an
annual report or a prospectus
C. Responsibility for financial Statements
 The management of an enterprise is
responsible for the preparation and
presentation of its financial statements
 The board of Directors reviews and approves
financial statements before these are
submitted to the stockholders of the
enterprise
D. Objective of Financial Statements
 To provide information about the financial
position, financial performance and cash flows
of an entity that is useful to a wide range of
users in making economic decisions.
 Financial statements also show the results of
the management’s stewardship of the
resources entrusted to it. To meet the
objective, financial statements provide
information about the following:
 Assets
 Liabilities
 Equity
 Income and expenses, including gains and
losses
============================================================================================
EDMUND E. HILARIO, CPA, MBA
1St SEMESTER 2019 – 2020
 Contributions by and distributions to
owners in their capacity as owners
 Cash flows
E. Component of Financial Statements
1) Statement of financial positions
2) Income statement
3) Statement of comprehensive income
4) Statement of changes in equity
5) Statements of cash flows
6) Notes, comprising a summary of significant
accounting policies and other explanatory
notes
F. Frequency of reporting
Financial statements shall be presented at least
annually. When an entity’s end of reporting
period changes and financial statements are
presented for a period longer or shorter than one
year, an entity shall disclose:
a) The period covered by the financial
statements
b) The reason for using a longer or shorter
period
c) The fact that amounts presented in the
financial statements are not entirely
comparable
G. Statement of financial position
A statement of financial position is a formal
statement showing the 3 elements comprising
financial position, namely assets, liabilities and
equity at a particular time.
Investors, creditors and other statement users
analyze the statement of financial position to
evaluate such factors as to the economic
resources, liquidity, solvency, financial structure
and capacity for adaptation of an entity. This
information is pictured in the balance sheet.
 Economic resources are useful in predicting
the ability of the entity to generate cash and
cash equivalent in the future.
 Liquidity is the availability of cash in the near
future to cover currently maturing obligations.
 Solvency is the availability of cash over a long
term to meet financial commitments when
they fall due.
 Financial structure is the source of financing
for the assets of the entity.
 Capacity for adaptation is the ability of the
entity to use its available cash for unexpected
requirements and investment opportunities.
H. Definition of assets
An assets - are defined as “economic resources
controlled by the entity as a result of past transactions
and events”. An economic resources is a right that
has the potential to produce economic benefits. The
essential characteristics of an asset are:
 The asset is controlled by the entity.
 The asset is the result of a past
transaction or event.
Page 1 of 8
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES
Chapter 8 – PAS 1: STATEMENT OF FINANCIAL STATEMENTS
FINANCIAL ACCOUNTING
=============================================================================
 The asset provides future economic
benefits.
 The cost of the asset can be measured
reliably.
Classification of assets
Assets are classified into two, namely current assets
and noncurrent assets. When an entity supplies goods
or services within a clearly identifiable operating cycle,
the separate classification of current and noncurrent
assets is a useful information by distinguishing
between net assets that are continuously circulating as
working capital from the net assets used in long-term
operations. The operating cycle of an entity is the time
between the acquisition of assets for processing and
their realization in cash or cash equivalents. When the
entity’s normal operating cycle is not clearly
identifiable, the duration is assumed to be 12 months:
 Current asset - PAS 1 provides that an entity shall
classify an asset as current when:
a) The asset is cash or cash equivalent
unless the asset is restricted from being
exchanged or used to settle a liability for at
least 12 months after the reporting period
b) The entity holds the asset primarily
for the purpose of trading
c) The entity expects to realize the
asset within 12 months after the reporting
period
d) The entity expects to realize the
asset or intend to sell or consume it within the
entity’s normal operating cycle.
Presentation of current assets
Current assets are usually listed in the order of
liquidity. PAS 1, paragraph 54, provides that as a
minimum, the line items under current assets are:
1. Cash and cash equivalent
2. Financial assets at fair value such as trading
securities and other investments in quoted
instruments
3. Trade and other receivables
4. Inventories
5. Prepaid expenses
 Noncurrent assets – is a residual definition. PAS
1, paragraph 66, simply states that “an entity
shall classify all other assets not classified as
current as non-current”. In other words, what is
not included in the definition of current asset is
deemed excluded. All others are classified as
noncurrent assets. Accordingly, non-current assets
include the following:
a) Property, plant & equipment
PAS 16, paragraph 6, defines PPE as “tangible
assets which are held by an entity for use in
production or supply of goods and services,
for rental to others, or for administrative
purposes, and are expected to be used during
more than one period”.
b) Long-term investment
============================================================================================
EDMUND E. HILARIO, CPA, MBA
1St SEMESTER 2019 – 2020
The international Accounting Standards
Committee defines investment as “an asset
held by entity for the accretion of wealth
through capital distribution, such as interest,
royalties, dividends and rentals, for capital
appreciation or for other benefits to the
investing entity such as those obtained
through trading relationships”.
c) Intangible asses
An intangible assets is simply defined as an
identifiable nonmonetary asset without
physical substance.
d) Other non-current assets
Other noncurrent asset are those assets that
do not fit into the definition of previously
mentioned noncurrent assets. Examples:
long-term advances to officers, directors,
shareholders and employees, or abandoned
property and long-term refundable deposit.
e) Deferred tax assets
I. Liabilities
A. Liabilities – are defined in the conceptual
framework as “present obligation of an entity
to transfer an economic resources as a result
of past performance. An obligation is a duty or
responsibility that an entity has no practical
ability to avoid. An obligation can either be
legal or constructive. A liability is classified as
current and noncurrent.
Ü Current liabilities.
PAS 1 paragraph 69, provides that a
entity shall classify a liability as current
when:
a) When it is expected to be settled in
the entity’s normal operating cycle.
b) When it is held primarily for the
purpose of being traded
c) When it is due to be settled within 12
months after the balance sheet date.
d) When the entity does not have an
unconditional right to defer
settlement of the liability for at least
12 months after the balance sheet
date.
Presentation of current liabilities
PAS 1, paragraph 54, provides that as a
minimum, the face of the balance sheet shall
include the following line items for current
liabilities, namely:
(1) Trade and other payables,
(2) Current provisions,
(3) Short-term borrowing,
(4) Current portion of long-term debt,
(5) Current tax liability.
The term “trade and other payable” is a line
item for accounts payable, notes payable,
accrued interest on notes payable, dividends
payable and accrued expenses. No objections
Page 2 of 8
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES
Chapter 8 – PAS 1: STATEMENT OF FINANCIAL STATEMENTS
FINANCIAL ACCOUNTING
=============================================================================
can be raised if the trade accounts and notes
payable are separately presented.
Ü Noncurrent liabilities
The term “noncurrent liabilities” is also a
residual definition. PAS 1, paragraph 69,
provides that all liabilities non classified
as current are classified as noncurrent.
a) Non-current portion of long-term debt
b) Finance lease liability
c) Deferred tax liability
d) Long-term obligations to company
officers
e) Long-term deferred revenues
Ü Currently maturing long-term debt
A liability which is due to be settled within
12 months after the balance sheet date is
classified as current even if
a) The original term was for a period
longer than 12 months, and
b) An agreement to refinance or to
reschedule payment on a long-term
basis is completed after the balance
sheet date and before the financial
statements are authorized for issue,
provided that the entity has no
discretion to refinance or roll over.
Ü Covenants. Covenants are often attached
to borrowing agreement, which represents
undertaking, by the borrower. These
covenants are actually restrictions on the
borrower as to undertaking further
borrowings, paying dividends, maintaining
specified level of working capital and so
forth. If said covenants are breach said
liability will be treated as current liability.
Ü Non-adjusting events. With respect to
loans classified as current liabilities, the
following events occurring between the
balance sheet date and the date the
financial statements are authorized for
issue shall qualify for disclosure as non-
adjusting events, meaning the loans
remain as current liabilities: (a)
refinancing on a long-term basis, (2)
Rectification of a breach of a long-term
loan agreement, and (3) the receipt from
the lender of a grace period ending at
least 12 months after the balance sheet
date.
Ü Estimated liabilities. Estimated liabilities
are obligations which exist on balance
sheet date although the amounts is not
definite nor the exact payee can be
identified, nor when is due and payable.
But in spite of these circumstances, the
existence of the estimated liabilities is
valid and unquestionable. Technically,
estimated liabilities may be considered as
============================================================================================
EDMUND E. HILARIO, CPA, MBA
1St SEMESTER 2019 – 2020
a “provision” which is both probable and
measurable.
a) Contingent liability. PAS 37 defines a
contingent liability in two ways:
1. A contingent liability is a possible
obligation that arises from past events
and whose existence will be confirmed
only by the occurrence or non-occurrence
of one or more uncertain future events
not wholly within the control of the
entity.
2. A contingent liability is a present
obligation that arises from past event
but is not recognized because it is not
probable that an outflow of resources
embodying economic benefits will be
required to settle the obligation or the
amount of the obligation cannot be
measured reliably.
A range of outcomes can express the
uncertainty relating to future events. The
range of outcomes maybe described as
follows:
1. Probable, meaning the future event is
likely to occur.
2. Reasonably possible, meaning the future
event is less likely to occur.
3. Remote, meaning the future event is
least likely to occur or the change of
the future event occurring is very slight.
Treatment of contingent liability
1. If the present obligation is probable and the
amount can be measured reliably, the
obligation is not treated as a contingent
liability but rather as an estimated liability,
hence it should be recognized as a provision,
meaning, am expense and an estimated
liability should be recorded.
2. If a contingent liability is either probable or
measurable, it should be disclosed as a note
in the financial statements.
3. If the contingent liability is remote, no
disclosure is necessary.
Thus, a contingent liability is never recognized in
the financial statements.
J. Stockholders’ equity
Definition of terms
Ü Equity - is the residual interest in the assets
of the entity after deducting all of its
liabilities. Simply stated, equity means “net
assets” or total assets minus liabilities. The
terms used in reporting the equity of an entity
depends on the form of the business
organization such as:
1) Owner’s equity in case of a proprietorship
2) Partners’ equity in case of a partnership,
and
Page 3 of 8
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES
Chapter 8 – PAS 1: STATEMENT OF FINANCIAL STATEMENTS EDMUND E. HILARIO, CPA, MBA
FINANCIAL ACCOUNTING
=============================================================================
3) Stockholders’ equity or shareholders’
equity in case of a corporation.
Ü Share capital – is the portion of the paid in
capital representing the total par or stated
value of the shares issued
Ü Subscribed share capital – is the portion of
the authorized share capital that has been
subscribed but not yet fully paid and therefore
still unissued
Ü Subscriptions receivable – shall preferably be
reflected as a deduction from the related
subscribed share capital.
Ü Share premium – is the capital contributed by
the shareholders in excess of the par or stated
value of the shares subscribed and issued
Ü Shareholders’ Equity – is the residual interest
of owners in the net assets of a corporation
measured by the excess of assets over
liabilities. Generally, the element constituting
shareholders’ equity with their equivalent IAS
terms are:
Philippine terms IAS term
Capital stock Share capital
Subscribed capital stock Subscribed share capital
Preferred stock Preference share capital
Common stock Ordinary share capital
Additional paid-in capital Share premium
Retained earnings (deficit) Accumulated profits
RE appropriated Appropriation reserve
Revaluation surplus Revaluation reserve
Treasury stock Treasury share
K. Notes to Financial Statements
Definition of terms:
Ü Notes to financial statements - is a narrative
description or disaggregation of items
presented in the financial statements and
information about items that do not qualify for
recognition. Notes to financial statements are
simply notes used to report information that
does not fit into the body of statements in
order to enhance the understability of the
statements. The purposes of which is to
provide the necessary disclosures required by
Philippine Financial Reporting Standards.
Ü Purpose of notes to financial statements
The purpose of notes to financial statement is
to “provide the necessary disclosures required
by Philippine Financial Reporting Standards
(PFRS). Specifically, the notes to financial
statements, shall
a) Present information about the basis of
preparation of the financial statements
and the specific accounting policies used
b) Disclosed the information required by
PFRS that is not presented in the financial
statements
c) Provide additional information which is
not presented in the financial statements
but is relevant to an understanding of the
financial statements
============================================================================================
1St SEMESTER 2019 – 2020
Ü Proper presentation of the notes
 Statement of compliance with PFRS
An entity whose financial statements comply with
PFRS shall make an explicit and unreserved
statement of such compliance. However, an entity
shall not described financial statement as
compliance with PFRS unless comply with all the
requirement of each applicable PFRS.
 Summary of significant accounting policies used
Accounting policies are defined as “the specific
principles, methods, practice, rules, bases and
conventions adopted by an entity in preparing and
presenting financial statements”. An entity’s
summary of significant accounting policy shall
disclose the following:
 The measurement basis used in
preparing the financial statements. This
is important consideration to inform the users
of financial statement because it will
significantly affect the user’s analysis. The
measurement bases include historical cost,
current cost, realizable value and present
value. The most common measurement basis
is historical cost.
 The accounting policies used that are relevant
to an understanding of the financial
statements
 Supporting information or computation for line
items presented in the financial statement
 Other disclosures, such as contingent liabilities,
unrecognized contractual commitments and non-
financial disclosures. An entity shall disclose the
following:
 The domicile and legal form of the entity, its
country of incorporation and the address of
the registered office or principal place of
business
 A description of the nature of the entity’s
operations and the principal activities
 The name of the parent and the ultimate
parent of the group if any
 The amount of dividends proposed or declared
before the financial statements were
authorized for issue but not recognized as
distribution during the period and the related
amount per share
 The amount of any cumulative preference
dividends not recognized
II. STATEMENT OF COMPREHENSIVE INCOME
Definition of terms
 Income statement – is a formal statement
showing the financial performance of an entity for
a given period of time. The financial performance
of an entity is primarily measured in terms of
income earned by the entity through the effective
and efficient utilization of its resources. It is also
known as the results of operations of the entity.
The transactions approach is the traditional
preparation of the income statements in
Page 4 of 8
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES
Chapter 8 – PAS 1: STATEMENT OF FINANCIAL STATEMENTS EDMUND E. HILARIO, CPA, MBA
FINANCIAL ACCOUNTING
=============================================================================
conformity with accounting standards. The
income statements for a period presents the
income, expenses, gain, losses and net income or
loss recognized during the period. Information
about financial performance is useful in predicting
future performance and ability to generate future
cash flows.
 Comprehensive income is the change in equity
during a period resulting from transactions and
other events, other than changes in resulting from
transactions with owners in their capacity as
owners. Accordingly, comprehensive income
includes:
 Components of profit and loss
Profit or loss – the term profit or loss is the
total of income less expenses excluding the
components of other comprehensive income.
In other words, this is the “bottom line” in the
traditional income statement. An entity may
use “net income” or “net loss” to describe
profit or loss.
 Components of other comprehensive income
The term other comprehensive income
comprises items of income and expenses
including reclassification adjustments that are
not recognized in profit or loss as required or
permitted by Philippine Financial Reporting
Standards. This includes the following:
1) Unrealized gain or loss on available for
sale investment
2) Gain or loss from translation of the
financial statements of a foreign operation
3) Changes in revaluation surplus
4) Unrealized gain or loss from derivative
contracts designated as cash flow hedge
5) Actuarial gain or loss on defined benefit
plan accounted for using the “ full
recognition” approach
A. Presentation of other comprehensive income
PAS 1, paragraph 82A, provides that the
statement of comprehensive income shall present
line items for amounts of other comprehensive
income during the period classified by nature. The
line items for amounts of OCI shall be grouped as
follows:
 OCI that will be reclassified subsequently to
profit or loss when specific conditions are met
Ü Unrealized gain or loss on debt
investment measured at fair value
through other comprehensive income
Ü Gain or loss from translating financial
statement of a foreign operation
Ü Unrealized gain or loss on derivatives
contracts designated as cash flow hedge
 OCI that will not be reclassified subsequently
to profit or loss but to retained earnings.
Ü Unrealized gain or loss on equity
investment measured at fair value
through other comprehensive income.
The application guidance of PFRS 9,
============================================================================================
1St SEMESTER 2019 – 2020
paragraph B5.7.1 provides that such
unrealized gain or loss is reclassified to
retained earnings upon disposal of the
investment
Ü Revaluation surplus during the year
The realization of the revaluation surplus
is through retained earnings
Ü Re-measurements of defined benefit plan,
including actuarial gain or loss
The re-measurements are not reclassified
subsequently but are permanently
excluded from profit or loss. However,
the re-measurements may be transferred
within equity as retained earnings.
Ü Changes in fair value attributable to credit
risk of a financial liability designated at
fair value through profit or loss.
Such gain or loss from changes in fair
value attributable to credit risk of a
financial liability may be transferred
within the equity or retained earnings.
B. Presentation of comprehensive income
An entity has 2 options of presenting
comprehensive income, namely:
1. Two statements
 An income statement showing the
components of profit & loss
 A statement of comprehensive income
beginning with profit or loss as shown in the
income statement plus or minus the
components of other comprehensive income
2. Single statements of comprehensive income
This is the combined statement showing the
components of profit or loss and components
of other comprehensive income in a single
statement. The revised Conceptual
Framework calls the single statement as
“statement of financial performance”.
C. Sources of Income
1) Sales of merchandise.
The income from sales should include all sales
to customers during the period. However,
sales returns, allowances and discounts
should be deducted from gross sales to arrive
at net sales.
2) Rendering of services.
Income from rendering services includes
professional fees, media advertising
commission, insurance agency commissions,
and admission fees for artistic performance
and tuition fees.
3) Use of entity resources.
This income includes interest, rent, royalty
and dividend income.
4) Disposal of resources other than the products.
This income includes gain on sale of
investments, gain on sale of property, plant
and equipment and gain on sale of intangible
assets.
Page 5 of 8
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES

Chapter 8 – PAS 1: STATEMENT OF FINANCIAL STATEMENTS EDMUND E. HILARIO, CPA, MBA

FINANCIAL ACCOUNTING 1St SEMESTER 2019 – 2020
=============================================================================
D. Component of Expense: 5) Extraordinary Items
1) Cost of sales. The computation of cost of PAS 1 specifically mandates that “an entity
sales will depend whether the company is shall not present any items of income and
engaged in a merchandising or expenses as extraordinary items either on the
manufacturing. face of the income or in the notes”.
a) Merchandising concern: Accordingly, any casualty loss from
Beg. Inventory xx earthquake, typhoon, hurricane, tsunami,
Add: Net purchase flood, fire and other natural disaster is now
Gross purchase xx treated as other expense, same manner; any
Add: Freight in xx
gain from expropriation is treated as other
Total xx
Less: Purchase return & allow xx xx income.
Goods available for sale
Less: Ending inventory xx E. Line Items
Cost of sales xx PAS 1, paragraph 82, provides that as a minimum,
the income statement and statement of
b) Manufacturing concern comprehensive income shall include the following
Raw materials, beg. xx
line items
Add: Net purchases xx
Raw Materials available for use xx 1. Revenue
Less: Ending Raw Materials xx 2. Gain and loss from Derecognition of financial
Raw Materials use xx asset measured at amortization cost is
Add: Direct labor xx required by PFRS 9
Factory overhead xx xx 3. Finance cost
Total manufacturing costs xx 4. Share in income or loss of associate and joint
Add: Goods in process, beg. xx
venture accounted for using the equity
Total cost of goods in processxx
Less: Goods in process, ending xx
method
Cost of goods manufactured xx 5. Gain or loss on the reclassification of financial
Add: Finished goods xx assets from amortized to fair value through
Total Goods available for sales xx profit or loss
Less: Finished goods, ending xx 6. Gain or loss on the reclassification of financial
Cost of goods sold xx asset from fair value through comprehensive
income to fair value through profit or loss
2) Distribution costs or selling expenses. Selling
expenses constitutes costs which are directly related
7. Income tax expenses
to selling, advertising, and delivery of goods to 8. A single amount comprising discontinued
customers. This includes the followings: operations
a) Salesmen’s salaries 9. Profit of loss for the period
b) Salesmen’s commissions 10. Comprehensive income for the period being
c) Traveling and marketing expenses the total of profit or loss and other
d) Advertising and publicity comprehensive income
e) Freight out
f) Depreciation of delivery equipment and store
equipments The following items shall be disclosed on the face
of the income statement and statement of
3) Administrative expenses. This expense constitutes comprehensive income.
cost of administering the business. It include all 1) Profit or loss for the period attributable to
operating expenses not related to selling and cost of noncontrolling interest and owners of the
goods sold. Examples: parent
a) Doubtful accounts
2) Total comprehensive income for the period
b) Office salaries
c) Expenses of general executives attributable to noncontrolling interest and
d) Expenses of general accounting & credit owners of the parent.
department
e) Offices supplies used F. Forms of income statement
f) Taxes PAS 1, paragraph 99, provides that an entity shall
g) Contributions present on the face of the income statement an
h) Professional fees
analysis of expenses using a classification based
i) Depreciation of office buildings and office
equipment
on either the function of expenses or their nature
j) Amortization of intangibles. within the entity, whichever provides information
that is reliable and more relevant. PAS 1 does not
4) Other expenses. Those expenses which are not prescribed any format. The standard simply state,
directly related to the selling and administrative “Because each method of presentation has merit
functions. Example: for different types of entities, management is
a) Loss on sale of trading securities required to select the most relevant and reliable
b) Loss on sale of PPE
information”. Accordingly it may be presented in
c) Loss on sale of long-term investment
d) Casualty loss – flood, earthquake, fire . two ways, namely:

============================================================================================
Page 6 of 8
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES

Chapter 8 – PAS 1: STATEMENT OF FINANCIAL STATEMENTS EDMUND E. HILARIO, CPA, MBA

FINANCIAL ACCOUNTING 1St SEMESTER 2019 – 2020
=============================================================================
1) Functional presentation. The functional
presentation is the traditional and common
form of income statement. It is also known
as the cost of sales method. This form
classifies expenses according to their
function as part of cost of sales, selling,
administrative and other activities.
2) Natural presentation. This presentation
is referred to as the nature of expense
method. Under this form, expenses are
aggregated according to their nature and
not allocated among the various functions
within the entity.
PRESENTATION AND DISCLUSURE
The presentation and disclosure can be effective
communication tools about the information in financial
statements. A reporting entity communicates about
its assets, liabilities, equity, income and expenses by
presenting and disclosing information in the financial
statements.
Effective communication of information in
financial statements makes the information more
relevant and contributes to a faithful representation of
an entity’s assets, liabilities, equity, income and
expenses. Effective communication of information in
financial statements also enhances the
understandability and comparability of information in
the financial statements. Effective communication in
financial statement is supported by not duplicating
information in different parts of the financial
statements.
Duplication is usually unnecessary and can make
financial statements less understandable.
Classification
Classification is the sorting of assets, liabilities,
equity, income and expenses on the basis of shared or
similar characteristics. Classifying dissimilar assets,
liabilities, equity, income and expenses can obscure
relevant information, reduce understandability and
comparability and may not provide a faithful
representation of financial information. For example:
it is appropriate to classify an asset or a liability into
current or noncurrent. It may be necessary to classify
components of equity separately if such components
are subject to legal, regulatory and other
requirements. Thus ordinary share capital, preference
share capital, share premium and retained earnings
should be disclosed separately.
Classification of income and expense
Income and expenses are classified as component
of profit/loss and components of other comprehensive
income. The revised conceptual framework has
introduced the terms statement of financial
============================================================================================
performance to refer to the statement of profit or loss
together with he statement presenting other
comprehensive income. The statement of profit or
loss is the primary source of information about an
entity’s financial performance for the reporting period.
As a default, all income and expenses should be
appropriately classified and included in the statement
of profit or loss. However, there are certain items of
income and expenses that are presented outside of
profit or loss but included in other comprehensive
income. The components of other comprehensive
income are subsequently recycled or reclassified to
profit or loss or retained earnings.
Aggregation
Aggregation is the adding together of assets,
liabilities, equity, income and expenses that have
similar or shared characteristics and are included in
the same classification. Aggregation makes
information more useful by summarizing a large
volume of detail.
However, aggregation may conceal some of the
detail. Hence, a balance should be made so that
relevant information is not obscured either by a large
amount of insignificant detail or be excessive
aggregation.
Typically, the statement of financial position and
the statement of financial performance provide
summarized or condensed information. More detailed
information is provided in the notes to financial
statements.
CAPITAL MAINTENANCE
The financial performance of an entity is
determined using 2 approaches, namely transaction
approach and capital maintenance approach.
The transaction approach is the traditional
preparation of income statement. The capital
maintenance approach means that the net income
occurs only after the capital used from the beginning
of the period is maintained. In other words, net
income is the amount an entity can distribute to its
owners and be as “well-off” at the end of the year as
at the beginning.
The distinction between return of capital and
return on capital is important to the understanding of
net income. Shareholders invest in entity to earn a
return on capital or an amount in excess of their
original investment.
Return of capital is an erosion of the capital
invested in the entity. The conceptual framework
considered 2 concepts of capital maintenance or well-
offness namely, financial capital and physical capital.
Financial capital
Page 7 of 8
 UNIVERSITY OF PERPETUAL HELP SYSTEM DALTA
CALAMBA CAMPUS, BRGY. PACIANO RIZAL
CALAMBA CITY, LAGUNA, PHILIPPINES

Chapter 8 – PAS 1: STATEMENT OF FINANCIAL STATEMENTS EDMUND E. HILARIO, CPA, MBA

FINANCIAL ACCOUNTING 1St SEMESTER 2019 – 2020
=============================================================================
Under a financial capital concept, such as The physical concept of capital should be adopted
invested money or invested purchasing power, capital if the main concern of users is the operating capability
is synonymous with net asset or equity of the entity. of the entity, meaning, the resource or fund needed to
Financial capital is the monetary amount of the net achieve that operating capability or capacity.
assets contributed by shareholders and the amount of Under this concept, net income occurs, “when the
the increase in net assets resulting from earnings physical productive capital of the entity at the end of
retained by the entity. Financial capital is the the year exceeds the physical productive capital at the
traditional concept based on historical cost and beginning of the period, also after excluding
adopted by most entities. distributions to and contributions from owners during
the period. Illustration:
Net income under financial capital
Under the financial capital concept, net income Assume in the previously given illustration, the net
occurs “when the nominal amounts of the net assets assets of P500,000 in January 1 had a current cost of
at the end of the year exceed the nominal amount of P800,000 by reason of inflationary conditions.
the net asset at the beginning of the period, after
excluding distributions to and contributions by owners Computation of Net Income
during the period. Illustration: Net assets @ current cost – P800,000
Jan 1
The following assets, liabilities and other financial data Add Additional P400,000
pertain to the current year investments
Net income (squeeze 400,000 800,000
figure)
January 1 December Total P1,600,000
31
Less Dividend paid 300,000
Total assets P1,500,000 P2,500,000
Net assets – Dec 31 P1,300,000
Total liabilities 1,000,000 1,200,000
Additional investments 400,000
during the year
Dividends paid during the 300,000
year

Computation of Net Income

Net assets – Jan 1 P500,000
Add Additional P400,000
investments
Net income (squeeze 700,000 1,100,000
figure)
Total P1,600,000
Less Dividend paid 300,000
Net assets – Dec 31 P1,300,000

Physical capital
Physical capital is the quantitative measure of the
physical procedure capacity to produce goods and
services. The physical productive capacity may be
based on: for example, units of output per day or
physical capacity of productive assets to produce
goods and services. This concept requires that
productive assets be measured at current cost, rather
than historical cost.
Productive assets include inventories, and
property, plant and equipment. The current costs for
these productive assets must be maintained in order
that physical capital is also maintained. Accordingly,
physical capital is equal to the net assets of the entity
expressed in terms of current cost.

============================================================================================
Page 8 of 8