FINANCIAL

ACCOUNTING &
Reporting
(Financial Statements)

SY 2022 – 2023-1

Teacher: Rogelio C. Conel ,Jr., CPA MBA

Financial Statements
The four (4) mandatory financial statements
must at least be presented annually, be consistent
with prior years, include comparative prior-year
information, and include all material items.
These FS’s are:
1. Profit & Loss ( Statement of Income)
2. Balance Sheet (Statement of financial
position)
3. Statement of Changes in Equity;
4. Statement of Cash Flows; and accompanying
5. Notes to the financial statements.
 PROFIT & LOSS
STATEMENT

Summarizes business activities for a

given period and reports the net
income or loss.
 Contents of the P&L
1. Income
a. Revenue/ Sales (from normal
operations)
b. Other income
1) interest income from deposits
2) gain from sale of assets (ex.
Marketable securities, unuseable
assets
3) proceeds from law suit, insurance
4) gain from appraisal or revaluation
of fixed assets
TIMING OF REVENUE RECOGNITION

1. General Rule:
Upon delivery of goods to customers;
when services are completed (at POS)
2. Alternative Methods:
a. Point of completed production (for
manufacturing concerns)
b. Point of actual cash collection (for
cash basis of accounting)
c. Percentage of completion (for
projects/ jobs > 1 accounting period)
2. Expenses
a. Cost of Goods Sold - COGS
(inventory)
b. Operating expenses
c. Selling and administrative
expenses
d. Other expenses
e. Income tax for the period
Gain

Loss
Two Approaches to Income (profit or loss)
measurement or determination
1. Transaction Approach

Income is measured by matching the

amount of revenue earned by an entity
during a given period with the amount of
expenses applicable to the revenue. This is
called the conventional or traditional
approach or thru the preparation of the
P&L.
2. Net Asset Approach
2. Net Asset Approach
Net income or loss is determined by
comparing the beginning net asset
balance vs. the ending net asset
balance, less any withdrawals and
additional investments.

The difference Is either net income (if

the assets increased) or net loss (if the
assets increased).
Steps to measure

Step 1 Calculate Net asset

beginning balance
Step 2 Calculate Net Asset
ending balance
Step 3 Deduct Net Asset ending balance
from the beginning balance

Illustration using 3-year ABC, Inc.

net assets for 2021, 2020, 2019
example
ABC Inc.
BALANCE SHEET DATA
(in $millions)
2019 2020 2021
(ending vs. (ending
ELEMENT (beginning)
2019) vs. 2020)
TOTAL ASSETS 338,516 323,888 372,471

TOTAL LIABILITIES 248,028 258,549 289,575

NET ASSETS 90,488 65,339 82,896

Net profit/(loss) (25,149) 17,557
Classes/Examples of Expenses
1. Cost of goods or assets used to
generate sales (inventories)
2. Operating expenses (Opex)
3. Selling, general & administrative
expenses (SGA)
3. Losses on disposal of assets
other than merchandise
4. Costs incurred in unsuccessful
efforts/projects (losses)
5. Losses due to decline in market
prices of inventories, marketable
securities, foreign exchange
market)
6. Expenses from financing or
borrowings (DST, interest,
penalties)
7. Legal and regulatory (permits,
licenses, fee, taxes, surcharges,
penalties)
▪ Examples of OPEX
Salaries and wages of workers
Power and water
Fuel
Repairs and maintenance
▪ Examples of SGA
Rent and utilities.
Professional and legal fees.
Taxes and licenses
Travel and entertainment.
Interest expenses.
Research and development (R&D)
Expense Recognition

Based on the matching concept,

expenses must be recognized in
the period when the corresponding
Income is recognized.
Bases of Expense Recognition :
1. Associating cause and
effect (increase or decrease in
assets)
ex. 1) If fixed assets increase,
depreciation expense increases,
correspondingly,
2) If production increases, wages,
fuel, direct costs increases
correspondingly).
2. Systematic and rational
allocation (for common costs)
ex. Electricity has many user
departments or units within the entity.
A cost allocation method is used to
distribute this cost and similar
common costs to each department or
unit) such as 1) area occupied, 2)
head count, 3) volume of units
produced.
3. Immediate recognition (based
accounting documents available
to the accountant, the expense is
immediately recorded and posted
in the books of account.

Ex. Salaries and wages,

professional fees, permits, etc.
are immediately recorded.
*
 The two Types of
Inventory Systems
That affect the
Income Statement
2. Perpetual Inventory System

Requires the maintenance of

records that provide a
continuous summary of inventory
inflow and outflow.
1. Periodic Inventory

Calls for physical counting of

goods on hand at the end of the
accounting period to determine
inventory balances.
Characteristics of periodic
inventory system:
1. The ending inventory is
determined at the end of the
period by a physical count;
2. Cost of goods sold is derived
by subtracting the inventory
count from the total goods
available for sale (TGAS).
3. The inventory counts recurs at
regular intervals (every month,
quarter);
4. The inventory account is
updated only when a physical
count is performed;
5. The inventory balance and cost
of goods sold are determined
only after a physical count.
6. All increases and decreases in
inventory such as:
✓ purchases,
✓ freight-in,
✓ purchase returns,
✓ purchase discounts,
✓ cost of goods sold, and
✓ sales returns
are recorded as separate and
distinct accounts.
Periodic inventory system is usually
used by companies that buy and sell a
wide variety of inexpensive products.

A disadvantage of periodic inventory

system is that overages and shortages
of inventory are buried in cost of goods
sold because no accounting record is
available against which to compare
physical count of inventory.
PERIODIC INVENTORY SYSTEM
Calculation of Cost of Goods Sold

Beginning Inventory xx
add: Net Purchases xx
Total goods available for sale xx
less: Ending inventory (xx)
Cost of goods sold xx

Cost of goods sold = Beginning inventory plus

purchases minus ending inventory
Gross Profit = Net sales minus Cost of goods sold
Pro-forma journal entries in a periodic
inventory system:
(1). When goods are purchased from supplier:

(2) When expenses are incurred to obtain goods

for sale – freight-in, insurance etc:
3). When goods are returned to supplier:

(4). When payment is made to supplier:

(5). When goods are sold to customers:

(6). When goods are returned by customers:

(7). When cash is collected from customers:

(8). At the end of the period:

Illustrative problem 1.

The following information belongs to John

company, a retailer of high-end fashion
products:

Inventory balance, 1/1/20- 600,000

Purchases made during the year: 1,200,000
Inventory balance, 12/31/20: 500,000

Required:
Compute cost of goods sold for 2020 assuming
the company uses a periodic inventory system.
 Solution:

Cost of goods sold (COGS) beg.

= inventory + purchases e- nd. inventory

Total cost of goods available for sale600,000

= + 1,200,000 = 1,800,000

COGS = 1,800,000 - 500,000

COGS = 1,300,000
Illustrative 2:
The following information belongs to
Paradise Hardware Store:
Beginning inventory: 200 units at $12 =
$2,400
Purchases made: 1800 units at $12 =
$21,600
Sales on account: 1200 units at $24 =
$28,800
Ending inventory: 800 units at $12 =
$9,600
Required: Make journal entries under a
periodic inventory system.
Calculation of Cost of goods sold

COGS = beg. inventory + purch. –

end. Inventory

COGS = (21,600 + 2,400) – 9,600

COGS = 14,400
2) Perpetual Inventory
▪ “continuing forever”
▪ is a continuous accounting
practice that records inventory
changes in real-time, without the
need for physical count, so the
book inventory accurately shows
the real stock.
▪ records called stock cards and
stock ledgers are maintained
from which on hand and sold
quantities are determined.
▪ It is commonly used for
specifically identifiable and
relatively high valued items such
as cars, machineries, furniture,
heavy equipment
▪ All increases and decreases in
inventory such as
✓ purchases,
✓ freight-in,
✓ purchase returns,
✓ purchase discounts,
✓ cost of goods sold, and
✓ sales returns
are recorded under inventory
account.
The real value of perpetual system
is its real-time inventory information
vital for the financial and accounting
teams.

Inventory can make up a large part of

assets and integrating inventory
management with financial systems
helps to ensure accurate tax and
regulatory reporting.
To calculate the ending inventory:

Ending Inventory = Beginning

inventory + Receipts -
Shipments
 BALANCE SHEET
Reports the financial position of
an entity at a given date: how
much is the assets, liabilities and
capital or ownership.

It also shows:
1. Liquidity
2. Solvency
3. Stability
Contents of the Balance Sheet
1. Assets are economic resources which
are owned and controlled by a business
and are expected have future benefits
from it. Examples:
• Cash
• Land and buildings
• inventories
• machineries and equipment
• Prepaid assets, etc.
2. Liabilities are debts or obligations
of an entity that have risen from
past transactions. The claims of
creditors against assets of a
business. Examples:
• payables to vendors and suppliers,
• bank loans,
• payables to professionals,
• payables to government (ex. taxes,
licenses, customs duties, etc.)
• Payroll and benefits of employees
3. Equity is the excess of assets
over liabilities. The amount of
an owners’ net investment
plus profits from operations
which have been retained or
accumulated in a business
from the start of its operations.
The main categories of assets are in
order of liquidity. Assets will typically be
classified into:

1. Current assets are those which can

be converted to cash or used to pay
current liabilities within 12 months.
Ex. include cash and cash equivalents,
short-term investments, accounts
receivable, inventories and the portion
of long-term liabilities due within 12
months.
2. Non-current (long-term) assets
cannot be easily converted into
cash. Included are:
• property, plant and equipment
• investment property,
• intangible assets,
• long-term financial assets (bonds),
• biological assets
• other assets (ex.deferred tax assets,
advances to officers, prepaid pension costs,
and long-term prepayments).
Examples of Intangible Assets
Items that are considered intangible assets are
listed below:
· Brand equity
· Customer lists
(recognition) · Films
· Domain names
· Company · Licenses
· Employment
reputation · Computer
contracts
· Goodwill Software
· Lease agreements
· Copyrights · Permits
· Client
· Trademarks · Import Quotas
relationships
· Patents · Franchises
· Trade secrets
· Intellectual
property
Limitations of the Balance
Sheet

1. Balance sheets do not show THE

true value of assets. Historical
cost is criticized for its inaccuracy
since it may not reflect current
market valuation (ex. land).
2. Some of the current assets are valued
on an estimated basis, so the
balance sheet is not in a position to
reflect the true financial position of the
business. Ex. Intangible assets

3. The balance sheet can not reflect

those assets which cannot be
expressed in monetary terms, such as
skill, intelligence, honesty, and loyalty
of workers.
END OF SESSION