LESSON 3.

REVIEW OF THE FINANCIAL STATEMENT PREPARATION, ANALYSIS,

AND INTERPRETATION

Time frame: Third Week

Performance Standard:

The learners solve exercises and problems that require financial

statement and prepare, analyze, and interpret using horizontal and
vertical analyses and various financial ratios

Specific Objectives:

At the end of the period, learners are expected to:

1. describe financial statements;
2. identify the users of financial statements;
3. discuss the basic guidelines in the preparation of financial
statements; and
4. prepare financial statements.

Business stability can be assessed not by looking at its external

appearance but by bearing in mind the financial statements.
Today, you will learn to interpret the financial statements in order
for you to decide the viability of your business.

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 LET’S TRY THIS!

Instruction:

Please answer the question below:

1. If you were the owner of a new business, what name would you
give to your company?

2. Based on your learning’s you have acquired in the previous

lesson, what financial institution will you prefer to avail a fund to
finance your business in marketing your products? Explain your
answer.
Note: (Marketing refers to activities a company
undertakes to promote the buying or selling of a product or
service. Marketing includes advertising, selling, and delivering
products to consumers or other businesses.
https://www.investopedia.com/terms/m/marketing.asp)

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 Lesson 3 reviews the preparation of financial statements. In Let’s Try
This, you determined how you will find the money to finance your
marketing campaign. As we go along in this subject, you will study the various
financial statements and work on problems which will help you to understand in
depth the preparation of financial statements.

What are Financial Statements?

Financial statements are considered the final product of the whole

accounting process. They are structured representations of financial
position, financial performance, and cash flows of the business. They also
reflect the efficiency of the management of the company in handling the
resources entrusted by the owners (Aduana, 2017).

Furthermore, the financial statements state the value of the business

in terms of its assets, the level of operating expenses, and the available
cash for payment to creditors. The financial statements, therefore, reveal
the financial image of the business.

Financial institutions make use of financial statements as an

instrument in determining the company’s capability to produce funds in
making payments. They put the creditors in a much safer position if ever
loans are granted to companies in need of additional capital (Timbang,
2018).

A complete set of financial statements consist of the following:

1. Statement of financial position

2. Statement of financial condition

3. Statement of changes in equity

4. Cash flow statements

5. Notes to the financial statements

In the abovementioned financial statements, there is no set

hierarchy of importance among the financial statements. The objectives
and preferences of the user establish which statement is required in
making economic decisions (Aduana, 2017).

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Users of financial statements:

A. external users

B. internal users

The external users are individuals or parties that are not directly
concerned in the function of the business. They comprise government
agencies such as the Securities and Exchange Commission (SEC), Bangko
Sentral ng Pilipinas (BSP), and Bureau of Internal Revenue (BIR), creditors,
suppliers, customers, and potential investors.

The internal users are individuals who have direct and active
involvement in different quantifiable transactions of the business and in
the preparation of the financial statements. The employees and the
management are taken into account as internal users.

In the Philippines, the preparation of financial statements is founded

on the guidelines and directives issued by the Financial Reporting
Standard Council (FRSC). The guidelines issued by the FRSC is called
Philippine Financial Reporting Standards (PFRSs) or referred to in
accounting and in this lesson as Standards.

Basic Guidelines in the Preparation of Financial Statements

The preparation of financial statements, including the presentation

of items or information contained therein, whether in the Philippine
context or in the global business environment, follows the general
requirements of the Frameworks and Standards (Aduana, 2017).

The Framework sets out the comprehensive concepts that bring

about the preparation and presentation of financial statements in the
lack of a definite Standard.

The Standards, mainly the Philippine Accounting Standards (PAS) 1

outlines the particular provisions and requirements in preparing and
presenting the financial statements.

It is extremely emphasized that the Framework is not a Philippine

Financial Reporting Standard (PFRS) and does not describe Standards for
any particular measurement or disclosure issued. In case of differences
involving the framework and PFRS, the conditions and requirements for

4
measurement and disclosure set by PFRS will prevail above those of the
Framework.

The fundamental requirements in the preparation and presentation

of the financial statements mentioned in the Framework and Standards
consist of the following:

Going Concern Accrual Basis

Fair Presentation
Assumption Accounting

Consistency of Materiality and Offsetting

Presentation Aggregation Principle

Disclosure of
Comparability of
Accounting
Information
Principles

Source: https://www.iasplus.com/en/standards/other/framework

A. Fair Presentation

The following are the most important features of fair

presentation requirements:

1. Fair presentation requires the faithful representation of the

effects of transactions, other events, and conditions in
accordance with the definition and recognition measures for
assets, liabilities, income, and expenses.

2. An Application of the Philippine Financial Reporting

Standard (PFRS), with additional disclosure when needed, is
supposed to result to financial statements that attain a fair
presentation.

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 3. A business whose financial statements fulfil with PFRSs must
make a clear and complete statement of such conformity in
the notes.

4. Financial statements must not be explained as complying

with PFRSs unless they meet the terms with all the
requirements of PFRSs.

B. Going Concern Assumption

Financial statements are prepared on a going concern basis

unless the management intends to liquidate the business or to
cease trading, or has no realistic alternative but to do so (Aduana,
2017).

The subsequent guidelines should be followed in the

preparation and presentation of financial statements relative to the
going concern assumption:

1. The management shall make an appraisal of the business

capacity to carry on as a going concern.

2. Material uncertainties connected to events or conditions

that may direct significant doubt upon the ability of the business to
carry on as a going concern shall be disclosed.

3. When the financial statements are not prepared on a

going concern basis, the foundation on which the financial
statements are prepared and the rationale why the business is not
observed as a going shall be disclosed.

4. The management must take into account the entire

obtainable information about the future in considering whether the
going concern assumption is proper.

5. When the business has a record of profitable operation and

there is prepared access to financial resources in times of need, it
can be concluded that the going concern basis of accounting is
proper even exclusive of thorough analysis.

6. Before it can assure itself that the going concern is proper,

in other cases, the management should consider

6
 The following broad scope of factors relating to:

a. current and expected profitability

b. debt repayment schedules

c. prospective sources of replacement financing

C. Accrual Basis of Accounting

Under the basis, the effects of transactions and other events are
recognized when they occur and not when cash is received or paid
and the transactions are recorded in the accounting records and
reported in the financial statements within the periods to which they
relate. The time of cash collection and cash payment does not
significantly influence the time of incurrence or recognition of the
transaction (Aduana, 2017).

D. Consistency of Presentation

Consistency requires that the presentation and classification of

items in the financial statements are retained from one period to
the next. Thus, presentation of items in the financial statements is
consistently applied in all reporting periods (Aduana, 2017).

E. Materiality and Aggregation

The Philippine Accounting Standards has emphasized the

following guidelines on materiality and aggregation.

1. Omission or misstatement of items is material if it, individually or

collectively, influences the economic decision of users taken on the
basis of the financial statements.

2. Materiality depends on the size and kind of the omission or

misstatement determined in the surrounding circumstances.

3. Each material class of the same items shall be presented

separately in the financial statements. Items of a dissimilar nature of
function shall be presented separately unless they are immaterial.

4. If a line item is not individually material, it is aggregated with

other items and included in the financial statements.

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 5. An item that is not sufficiently important to warrant separate
reporting in the financial statements may, nevertheless, be sufficient
to be presented separately in the notes.

6. The specific disclosure requirement in a Standard need not be

satisfied in the information is not important.

F. Offsetting Principle

Offsetting requires that assets and liabilities, income and

expenses, are reported separately. They are not offset unless
required or permitted by a Standard (Aduana, 2017).

G. Comparability of Information

The basic objective of comparability is to assist users of financial

statements in making an economic decision based on the
assessment of trends of financial information for predictive purposes
(Aduana, 2017).

H. Disclosure Of Accounting Principles

The Standards require that business disclose the accounting

policies adopted. The disclosure of accounting policies is usually
made on the notes to the financial statements (Aduana, 2017).

Accounting Policies are the specific principles, bases,

conventions, rules, and practices applied by an entity in preparing
and presenting financial statements (Aduana, 2017).

The disclosure is intended to improve the significance and

reliability of the financial statements and the comparability of those
financial statements over time with the financial statement of other
businesses.

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 A complete set of financial statements consist of the following:
 Statement of financial position
 Statement of financial condition
 Statement of changes in equity
 Cash flow statements
 Notes to the financial statements

I. Statement of Financial Position

The statement of financial position (new title for balance

sheet) is a structured financial statement that shows the assets,
liabilities, and equity of a business entity as of a given date. The
term “as of a given date” indicates that the statement of financial
position can be prepared anytime of the year and the information
is considered true and correct as of the date indicated in the
statement (Aduana, 2017).

The assets, liabilities, and equity are found in the statement of

financial position. These elements are directly related to the
measurement of financial position. (Aduana, 2017).

ASSETS LIABILITY
•are resources are present obligations EQUITY
controlled by the of the entity arising from
entity as a result of past events, the •is the residual interest
settlement of which is in the assets of the
past events and entity after deducting
expected to result in an
from which future outflow from the entity all its
economic benefits of the resources liabilities.(Aduana, N.
are expected to embodying economic 2017).
flow to the entity. . benefits. (Aduana, N.
(Aduana, N. 2017). 2017).

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 The financial position of a business entity is usually expressed
in terms of its liquidity, solvency, financial structure, and capacity for
adaptation (Aduana, 2017).

• Liquidity refers to the ability

of a business entity to settle
LIQUIDITY its currently maturing
financial obligations.
(Aduana, 2017).

SOLVENCY •Solvency is the ability of a business to

pay its long- term financial obligations
(Aduana, 2017).

Financial Structure indicates the amount of capital resources

financed by creditors and the amount provided by owners. .
(Aduana, 2017). The analysis of the financial structure of the
business focuses on the right-side of the accounting equation
(Assets = Liabilities + Capital)

Capacity for Adaptation refers to the ability of the business to invest

excess available resources or raise needed funds through borrowing
without difficulty in times of need. When a business has a very high
capacity for adaptation, it can easily find funding sources when the
need arises (Aduana, 2017).

According to Timbang (2018), in the Balance Sheet or

Statement of Financial Position, the first section shows the list of all
the assets of the firm. Thus, current assets are presented first. These
are cash and other items such as accounts receivable and
inventories that can be converted into cash within one (1) year. This
is followed by the prepaid expenses and accrued income.

10
 Once all the current assets are listed, non-current assets
followed. These include the company’s land, building, machinery,
equipment, furniture and fixture, transportation vehicles, and many
more.

This is followed by the components on the right side of the

accounting equation: liabilities and stockholder’s equity.

The liabilities part consists of current and noncurrent liabilities.

Current liabilities include accounts payable, short-term notes
payable, accrued expenses, taxes payable, interests payable, and
other obligations that are due within one (1) year.

Then, this is followed by the non-current liabilities such as the

long-term notes payable, bonds payable, and other obligations
which are due more than one (1) year.

The last portion of the balance sheet is the stockholders’

equity which shows the net word or the residual value of the
company. It is divided into par value of stock, additional paid-in
capital, and retained earnings.

The par value of stock and the additional paid-in capital are
the proceeds from the sale of stock to the public, while the retained
earnings represent the build-up of equity from profits that are
reinvested in the business.

Remember: The normal balance of all asset accounts is Debit.

Whenever an asset account is increased, it should be debited.
However, every time an asset account is decreased, it should be
credited.

On the other hand, the normal balance of all liabilities

account is Credit. When a liability account is increased, it must be
credited. When a liability account is decreased, it must be debited.

For stockholder’s equity, the normal balance is credit. The

account balances for stockholders’ equity changes in the same
manner as liabilities accounts do.

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 EXAMPLE 1: Statement of Financial Position
Line Item Presentation

STEPHANIE Merchandising
Statement of Financial Position
As of December 31, 2019

Assets

Current assets
Cash and cash equivalents (Note 1) ₱2,500,000
Trading Securities 1,000,000
Trade and other receivables (Note 2) 3,000,000
Inventories 2,600,000
Prepaid Expenses (Note 3) 50,000
Total Current assets ₱9,150,000
Non-current assets
Property, plant and equipment (Note 4) ₱12,000,000
Long-term investment (Note 5) 6,000,000
Intangible assets (Note 6) 3,000,000
Other non-current assets (Note 7) 500,000
Total non-current assets ₱21,500,000
Total assets ₱30,650,000

Liabilities and Owner’s Equity

Current liabilities
Trade and other payables (Note 8) ₱2,300,000
Short-term bank loan 1,000,000
Warranty payable 100,000
Total current liabilities ₱3,400,000
Non-current liabilities
Bonds Payable ₱5,000,000
Deferred tax liability 150,000
Total non-current liabilities ₱5,150,000
Total Liabilities ₱8,150,000
Owner’s Equity
Stephanie, Capital 22,100,000
Total Liabilities and Owner’s Equity ₱30,650,000

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In notes to the financial statements, the following disclosures are shown
below:

Note No. 1 – Cash and Cash Equivalent

Cash on hand ₱80,000

Cash in bank 2,400,000
Petty cash fund 20,000
Total cash and cash equivalent ₱2,500,000

Note No. 2 – Trade and other receivables

Accounts receivable ₱2,250,000

Allowance for doubtful accounts (100,000)
Notes receivable 800,000
Accrued interest on notes receivable 40,000
Total trade and other receivables ₱3,000,000

Note No. 3 – Prepaid Expenses

Unused office supplies ₱30,000

Prepaid rent 20,000
Total rrepaid expenses ₱50,000

Note No. 4 – Property, Plant and Equipment

Acquisition Accumulated Book

Cost Depreciation Value
Land ₱9,500,000 - ₱9,500,000
Building 8,000,000 3,200,000 4,800,000
Office equipment 1,000,000 500,000 500,000
Total ₱18,500,000 ₱6,500,000 ₱12,000,000

Note- No. 5 Long-term Investment

Sinking fund ₱2,000,000

Building expansion fund 2,500,000
Investment in bonds 1,500,000
Total long-term investment ₱6,000,000

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Note – No. 6 Intangibles

Computer software ₱1,300,000

Goodwill 1,700,000
Total intangibles ₱3,000,000

Note – No. 7 Other non-current assets

Long-term advances to officers ₱400,000
Long-term refundable deposits 100,000
Total other non-current assets ₱500,000

Note – No. 8 Trade and Other Payables

Accounts payable ₱1,200,000

Notes payable 1,000,000
Income tax payable 60,000
Accrued expenses 40,000
Total trade and other payables ₱2,300,000

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II. STATEMENT OF COMPREHENSIVE INCOME

The statement of comprehensive income (income statement

new title) is a structured financial statement that shows the financial
performance of a business entity for a given period. The term “period”
indicates that the statement covers a month, a quarter, six months or a
year (Aduana, 2017).
According to Timbang (2018), the income statement shows the
result of the operations for a certain period of time. It shows the
revenues generated during the operating period, the expenses
incurred, and the company’s net earnings.
The four broad classes of expenses are as follows (Timbang,
2018):
a. Cost of Goods Sold (COGS), is a direct cost attributable to
producing the product sold by the firm.
b. General and administrative expenses – correspond to
overhead expenses, salaries, advertising, and other
operating costs that are not directly attributable to
production.
c. Interest on the firm’s debt
d. Taxes on earnings owed to governments

Remember: All income accounts have a normal balance of

credit. If the income account increases, it must be credited. If it
decreases, it must be debited.
On the other hand, all expenses accounts have a normal
balance of debit. If the expenses account increases, it must be
debited. If it decreases, it must be credited.

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 The accounting elements comprising the statement of
comprehensive income are the following:

INCOME
Income is the summary of
increases in economic
benefits during the
accounting period in the form
of inflows or enhancement of
assets or decreases of
liabilities that result in
increases in equity other than
those relating to contributions
from equity participants. .
(Aduana, N. 2017).
PROFIT
Profit is frequently used
as a measure of
performance on the
basis of other measures
such as determination
or return on investment
(ROI) or earnings per
share (EPS). (Aduana,
N. 2017).
EXPENSES
Expenses are decreases in
economic benefits during
the accounting period in
the form of outflow or
depletion of assets or
incurrence of liabilities that
result in decreases in equity,
other than those relating to
distribution to equity
participants. . (Aduana, N.
2017).

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 The Standards mention two methods of presenting the statement of
comprehensive income, namely:

1. Nature of expense method

2. Function of expense or cost of sales method

EXAMPLE 2: Sample of Statement of Comprehensive Income – Nature of

Expense Method (Aduana, 2017)

Net sales revenue (Note 1) ₱7,500,000

Other income (Note 2) 500,000
Increase in inventory (Note 3) 400,000
Total income ₱8,400,000
Expenses:
Net purchases (Note 4) 4,400,000
Employee benefit costs (Note 5) 850,000
Doubtful accounts 50,000
Salesperson’s commission 100,000
Depreciation (Note 6) 90,000
Advertising 20,000
Supplies expense (Note 7) 25,000
Finance costs (Note 8) 20,000 5,555,000
Net income before tax 2,845,000
Income tax – 30% 853,000
Net Income ₱1,991,500

The following disclosure shall appear in the notes to the financial

statements:

Note 1 – Net Sales Revenue

Sales ₱7,800,000
Sales returns and allowances (180,000)
Sales discount (120,000)
Net sales revenue ₱7,500,000

Note 2- Other Income

Rent income ₱250,000
Dividend income 150,000
Interest income 100,000
Total ₱500,000

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Note 3 – Increase in Inventory
Merchandise Inventory, December 31 ₱1,200,000
Merchandise Inventory, January 1 800,000
Increase in Inventory ₱400,000

Note 4 – Net purchases

Purchases ₱4,500,000
Freight-in 150,000
Purchase returns and allowances (110,000)
Purchase discounts (140,000)
Net Purchases ₱4,400,000

Note 5 – Employee benefit costs

Sales salaries ₱300,000

SSS contribution – distribution 15,000
Pag–ibig contribution – distribution 5,000
Office staff and salaries 500,000
SSS contribution 18,000
Pag–ibig contribution 12,000
Total ₱850.000

Note 6 – Depreciation

Depreciation expenses – delivery vehicle ₱40,000

Depreciation – office furniture 50,000
Total ₱ 90,000

Note 7 – Supplies

Office supplies ₱10,000

Store supplies 15,000
Total ₱25,000

Note 8 – Finance Costs

Interest expense on bank loan ₱20,000

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EXAMPLE 3: Sample of Statement of Comprehensive Income Function of
Expense or Cost of Sales Method Line Item Presentation (Aduana, 2017).

STEPHANIE Merchandising
Statement of Comprehensive Income
Year Ended December 31, 2019

Net sales revenue (Note 1) ₱7,500,000

Less: cost of sales (Note 2) 4,000,000
Gross income 3,500,000
Other income (Note 3) 500,000
Total income 4,000,000
Expenses:
Distribution expense (Note 4) 495,000
Administrative expenses (Note 5) 640,000
Finance costs (Note 6) 20,000 1,155,000
Income before tax 2,845,000
Income tax 853,500
Net income ₱1,991,500

The notes to the financial statements shall disclose the following

information:

Note 1 – Net Sales revenue

Sales ₱7,800,000
Sales returns and allowances (180,000)
Sales discounts (120,000)
Net Sales revenue ₱7,500,000

Note 2 - Cost of Sales

Merchandise inventory, January 1 ₱800,000

Purchases 4,500,000
Freight-in 150,000
Total ₱5,450,000
Purchase returns and allowances 110,000
Purchase discount 140,000 250,000
Goods available for sale 5,200,000
Less: merchandise inventory, December 31 1,200,000
Cost of sales ₱4,000,000

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Note 3 – Other Income

Rent income ₱250,000

Dividend income 150,000
Interest income 100,000
Total ₱500,000

Note 4 – Distribution expenses

Sales salaries 300,000
SSS contribution ₱15,000
Pab-ibig contribution 5,000
Salesperson’s commission 100,000
Depreciation expenses – delivery vehicle 40,000
Advertising expenses 20,000
Store supplies 15,000
Total ₱495,000

Note 5 – Administrative Expenses

Office and staff salaries ₱500,000
Depreciation – office furniture 50,000
SSS contribution 18,000
Pag-ibig contribution 12,000
Doubtful accounts 50,000
Office supplies 10,000
Total ₱640,000

Note 6 – Finance Costs

Interest expense on bank loan ₱20,000

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 III. STATEMENT OF CHANGES IN EQUITY

The Statement of Changes in Equity is a financial statement

showing the following (Aduana, 2017):

A. net income or loss for the period

B. each item of income and expense for the period that is

recognized directly in equity and those item required by the
Standards

C. total income and expense for the period showing

separately the total amount attributable to equity holders of the
parent company and to minority interest in a corporation.

D. for each component of equity, the effect of changes in

accounting policies and corrections of errors.

The statement of changes in equity, stated otherwise, is a

statement that reflects all the elements that caused changes in an
entity’s equity between two dates of the statement of the financial
position (Aduana, 2017).

EXAMPLE 4: Sample of Statement of Changes in Equity Sole Proprietorship

(Aduana, 2017).

MARY TRADING
Statement of Changes in Equity
Year Ended December 31, 2019

January 1, 2018 Capital balance ₱790,000

Add: additional investment 150,000
Net income 380,000 530,000
Total 1,320,000
Less: Mary, drawing 90,000
December 31, 2018 Capital balance ₱1,230,000

In the event the operating performance during the given

period results in a loss, the amount of loss shall be deducted from
the beginning Capital balance (Aduana, 2017).

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 EXAMPLE 5 Sample of Statement of Changes in Equity Partnership
(Aduana, N. 2017).

ARLENE AND JESTER PARTNERSHIP

Statement of Changes in Equity
Year Ended December 31, 2019

60 40
Jester Arlene Total
January 1, 2018 Capital balances ₱560,000 ₱490,000 ₱1,050,000

Add: additional investment 120,000 180,000 300,000

Distribution of profit 252,000 168,000 420,000
Total 932,000 838,000 1,770,000
Less: Partner’s withdrawal 150,000 130,000 280,000
December 31, 2018 capital balances ₱782,000 ₱708,000 ₱1,490,000

The distribution of profit and loss to partners shall be based on the profit
and loss agreement of the partners.

Statement of Stockholder’s Equity is a required basic statement that

shows the movements in the elements or components of the stockholder’s
equity.

IV. STATEMENT OF CASH FLOWS

The statement of cash flows is a financial statement that provides

information about the historical change – inflows and outflows – in
cash and cash equivalents of an entity during the period from
operating, investing and financing activities (Aduana, 2017).

Cash comprises cash on hand and demand deposits. (Aduana, N. 2017).

Cash equivalents are short-term, highly liquid investments that are readily
convertible into known amounts of cash near the maturity that they present
insignificant risk of changes in value or interest rates. (Aduana, N. 2017).

Operating activities are the principal revenue-producing activities of the entity

and other activities that are neither investing nor financing. (Aduana, N. 2017).

Investing activities are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.

Financing activities are activities that result in changes in the size and composition of
the contributed equity and liabilities of the entity. (Aduana, N. 2017).

22
 The statement of cash flow, consequently, is a basic accounting of
cash flows of business entity. Cash flows are inflows and outflows of cash
and cash equivalents.
While the balance sheet and income statement are based on
accrual method, The changes in the balance sheet can be reviewed to
determine the facts, but the statement of cash flows has already
integrated all information. As a result, proficient businesspeople and
investors utilize this important financial statement (Timbang, 2018).
Sources and Uses of Cash
o Sources of Cash – is any activity that brings cash into the firm
Ex. When the firm sells goods and services or sells an old piece
of equipment that it no longer needs.
o Uses of Cash – is any activity that causes cash to leave the firm
Ex. Purchase of a new equipment or payment of taxes

EXAMPLE 6: Sample of Statement of Cash Flow (Aduana, 2017).

CATHY Merchandising
Statement of Cash Flows
Year Ended December 31, 2019
Cash Flows from operating activities
Cash inflows provided by operating activities
Cash Sales ₱4,080,000
Collection from customers 1,000,000
Rental income 400,000 6,200,000
Cash outflows used by operating activities
Salaries ₱2,700,000
Payment to suppliers 800,000
Other operating expenses 630,000 4,130,000
Net Cash provided by operating activities ₱2,070,000
Cash flows from investing activities
Cash inflows provided by investing activities
Issuance of bonds 1,400,000
Cash outflows used in investing activities
Investment in stocks 500,000
Acquisition of fixtures 300,000
Construction of building 1,800,000 2,600,000
Net Cash flows used by investing activities ( ₱1,200,000)
Cash flows from financing activities
Cash inflows provided by financing activities
Additional bank loan 2,000,000
Additional investment of the owner 3,000,000 5,000,000

23
 Cash outflows used in financing activities
Partial payment of bank loan 2,000,000
Cash flows provided by financing activities 3,000,000
Increase in cash and cash equivalents 3,870,000
Add: cash and cash equivalents, January 1, 2018 690,000
Cash and cash equivalents, December 31, 2018 ₱4,560,000

The increase in cash and cash equivalents of ₱3,870,000 is computed as

follows:

Net cash provided by operating activities ₱2,070,000

Net cash flows used by investing activities (1,200,000)
Cash flows provided by financing activities 3,000,000
Increase in cash and cash equivalents ₱3,870,000

Remember: The cash and cash equivalents should tally with the cash on
the statement of financial position or balance sheet as of that year.

24
 LET’S APPLY THIS!

A. Answer the following questions briefly.

1. What are financial statements?

2. State the complete set of financial statements and explain each.

3. Differentiate the external users from the internal users of financial

statements?

3. Explain the following concepts:

a. liquidity

b. solvency

c. financial structure

a. capacity of adaptation

25
3. Differentiate the nature of expense method from the functional method
in preparing the statement of comprehensive income.

4. Describe the type of information shown in the changes in equity.

5. Discuss the three major classifications of the statement of cash flows.

26
B. PROBLEM

1. GERALD Merchandising showed the following accounts on

December 31, 2019.

Long-term investment ₱1,125,000

Held for trading securities 675,000
Notes payable 3,000,000
Cash in bank 1,350,000
Land held for speculation 225,000
Prepaid advertising 52,500
Jenny, capital 5,087,000
Accounts receivable 1,757,000
Inventories 600,000
Office supplies 37,500
Notes receivable 750,000
Accounts payable 900,000
Petty cash fund 22,500
Property, plant and equipment 3,750,000
Accrued expenses 262,500
Allowance for doubtful accounts 187,500
Accumulated depreciation 1,125,000
Gerald, drawing 250,000
Advances to employees 150,000

Required: Prepare the statement of financial position as of

December 31, 2019 with supporting schedule.

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 2. CAROLINE Merchandising showed the following information for
the year 2019.

Depreciation – machinery ₱150,000

Inventory, December 31 1,350,000
Purchases 4,500,000
Sales returns and allowances 90,000
Purchase discounts 75,000
Income tax expense 222,750
Sales salaries 600,000
Sales 7,500,000
Inventory, January 1 1,500,000
Office supplies 112,500
Depreciation – building 375,000
Freight-in 150,000
Office salaries 450,000
Depreciation – store equipment 225,000
Sales discounts 60,000
Store supplies 75,000
Purchase returns and allowances 105,000

Required: Prepare the statement of comprehensive income for the year

2019 with the use nature of expense method with supporting notes.

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 LET’S DO THIS!

Instructions:

Below are the financial statements of publicly-listed company.

Write a written report of the following:

a. How are you going to evaluate the worth of the company based
on the financial statements?

b. Discuss the financial image of the company?

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 Vanessa Merchandising
Statement of Financial Position
As of December 31, 2019
(Amounts in Thousand Pesos)

Assets

Current assets
Cash and cash equivalents ₱ 222
Trading Securities 118
Trade and other receivables 810
Inventory 805
Prepaid Expenses 156
Total current assets ₱2,111

Non-current assets
Property, plant and equipment 2,143
Long-term investment 487
Total non-current assets 2,630
Total assets ₱4,741

Liabilities and Owner’s Equity

Current liabilities
Trade and other payables ₱639
Other current liabilities 104
Total current liabilities ₱743
Non-current liabilities
4 % bonds payable 688
Total liabilities 1,431
Owner’s equity
Jenny, capital 3,310
Total liabilities and owner’s equity ₱4,741

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 VANESSA Merchandising
Statement of Comprehensive Income
As of December 31, 2019
(Amounts in Thousand Pesos)

Sales ₱4,551
Less: cost of sales 2,983
Gross profit 1,568
Operating expenses:
Selling expenses 632
Administrative expenses 245
Total 877
Operating income 691
Interest expense 28
Income before tax 663
Income tax 199
Net income ₱464

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 LET’S REMEMBER!

These are the important points you need to remember:

 Financial Statements are the final product of the whole accounting

process and are structured representations of financial position,
financial performance, and cash flow of business.
 The users of financial statement are the external users and internal
users.
 The basic requirements in the preparation and presentation of the
financial statements mentioned in the framework and Standards are
fair presentation, going concern assumption, accrual basis of
accounting, consistency of presentation, materiality and aggregation,
comparability of information, and disclosure of accounting principles.
 The statement of financial position is a structured financial statement
that shows the assets, liabilities, and equity of a business entity as of a
given date.
 The statement of comprehensive income is a structured financial
statement that provides the financial performance of a business entity
for a given period. The term “period” indicates that the statement
covers a month, a quarter, six months or a year.
 The statement of cash flows is a financial statement that provides
information about the historical change – inflows and outflows – in cash
and cash equivalents of an entity during the period from operating,
investing and financing activities.

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 LET’S SEE WHAT YOU HAVE LEARNED

Instruction: Write in the space provided what you have learned in Lesson
3.

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References:

Aduana, N. L. (2017). Business Finance in the Philippine Setting. Quezon City : C & E Publishing,
Inc

Timbang, F. L. (2018). Business Finance for Senior High School. Quezon City :

C & E Publishing, Inc.

This module is prepared by:

STEPHANIE M. DADIVAS, Ph.D.

Faculty Member
University of San Agustin

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