Lesson 1.

Review of Financial
Statement Preparation,
Analysis, Interpretation
MEMORY VERSE:
Delight yourself in the LORD, and he will give you the desires of your heart.
Psalm 37:4

MEET YOUR TARGETS

At the end of this lesson, you will be able to:

 Prepare financial statements

 Define the measurement levels, namely, liquidity, solvency, stability, and profitability

VENTURE with Me

If you were the owner of a startup

business that needed more funds to
finance its marketing endeavors, what
would you do?

Most financial decisions are made based on the information provided by financial statements.
For example, a business owner relies on financial statements to determine how much funds to
borrow from the bank for the proposed business expansion. Similarly, financial statements
assist the bank manager in determining how much loans to extend to the borrower based on his
or her capacity to pay and the bank’s cash flow.

Financial statements are considered the final product of the whole accounting process. They
are structured representations of the financial position, financial performance, and cash flow of
the business. They also reflect the efficiency of the management of the company in handling the
resources entrusted by the owners.

All the important quantitative data about the business are accumulated and shown in the
financial statements. The profitability of the operating activities, the ability of the business to pay
its creditors, and its capacity to pay dividends to investors are only a few pieces of information
presented in the financial statement.

A complete set of financial statements is composed of the following:

1. Statement of financial position
2. Statement of financial condition
3. Statement of changes in equity
4. Cash flow statement
5. Notes to the financial statements

There is no hierarchy of importance among financial statements. The objectives and

preferences of the user determine which statement is necessary in making an economic
decision.

CHAT WITH THE EXPERT

Statement of Financial Position

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.

The assets, liabilities, and equity are the three accounting elements found in the statement of
financial position. These elements are directly related to the measurement of financial position.

Assets are resources controlled by the entity as a result of the past events and from which
future economic benefits are expected to flow to the entity.

Liabilities are present obligations of the entity arising from past events, the settlement of which
is expected to result in an outflow from the entity of resources embodying economics benefits.

Equity is the residual interest in the assets of the entity after deducting all its liabilities.
The financial position of a business entity is usually expressed in terms of its liquidity solvency,
financial structure, and capacity for adaption.

Liquidity refers to the ability of a business entity to settle is currently maturing financial
obligations. Obligations are currently maturing if they become due within one year from the date
of the statement of financial position notwithstanding the normal operating cycle of a business.
Solvency is the ability of a business to pay its long-term financial obligations. Financial
obligations are classified long-term if they mature beyond one year from the date of the
statement of financial position.

Financial structure indicates the amount of capital or resources financed by creditors and the
amount provided by owners. 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 a business to invest excess available resources
or raise needed funds through borrowings without difficulty in times of need. When the business
has a very high capacity for adaptation, it can easily find funding sources when the need arises.

Problem:

Please prepare Statement of Financial Position

Jenny Merchandising Dec. 31,2018

Property, plant, and equipment P 12,000,000

Long-term investment 6,000,000
Intangible assets 3,000,000
Other non-current assets 500,000

Cash and cash equivalents P 2,000,000

Trading securities 1,000,000
Trade and other receivables 3,000,000
Inventories 2,600,000
Prepaid expenses 50,000

Trade and other payables P 2,300,000

Short-term bank loan 1,000,000
Warranty payable 100,000

Bonds payable P 5,000,000

Deferred tax liability 150,000

Owner’s equity
Jenny, Capital 22,100,000