CHAPTER 1

UNDERSTANDIN
G FINANCIAL
STATEMENTS
DEE LAILA C. BUHIAN, MBA, CFMP
 LEARNING OBJECTIVES
1. Understand how business activities are reported
through the financial statements.
2. Enumerate the sources of information about a
business enterprise.
3. Identify the required financial statements and know
how they are interconnected.
4. Know the nature and significance of the
a. Balance Sheet Statement
b. Statement of Comprehensive Income
c. Statement of Stockholder’s Equity, and
d. Statement of Cash Flows
 PRESENTATION OUTLINE
• HOW BUSINESS ACTIVITIES ARE
Topic 1 REPORTED

• GENERAL OBJECTIVES OF
Topic 2 FINANCIAL STATEMENTS

• DEMAND FOR FINANCIAL

Topic 3 ACCOUNTING INFORMATION

SOURCES OF INFORMATION ABOUT

Topic 4 BUSINESS ENTERPRISE
 PRESENTATION OUTLINE
• BENEFITS OF DISCLOSURE
Topic 5

• COSTS OF DISCLOSURE
Topic 6

• CONSTRAINTS ON RELEVANT AND

Topic 7 RELIABLE INFORMATION

FINANCIAL STATEMENTS
Topic 8
 PRESENTATION OUTLINE
• LINKAGE OF FINANCIAL
Topic 9 STATEMENT

• STATEMENT OF FINANCIAL
Topic 10 POSITION

• INCOME STATEMENT
Topic 11

• STATEMENT OF STOCKHOLDERS’
Topic EQUITY
12

Topic • STATEMENT OF CASH FLOWS

13
 HOW BUSINESS ACTIVITIES
ARE REPORTED

 Financial statements report on a company’s

performance and financial condition and reveal
executive management’s privileged information
and insights.
 Accounting information should be used in the
business context in which the information is
created.
 GENERAL OBJECTIVES OF
FINANCIAL STATEMENTS
1. Providing Information for Economic Decisions
2. Providing Information about Financial Position
3. Providing Information about Performance of an
Enterprise
4. Providing Information about Changes in
Financial position
 DEMAND FOR FINANCIAL
ACCOUNTING INFORMATION
1. Managers and Employees
2. Investors and Analysts
3. Creditors and Suppliers
4. Shareholders and Directors
5. Regulatory and Tax Agencies
6. Customers and Potential Strategic Partners
7. Other decision makers
 SOURCES OF INFORMATION
ABOUT BUSINESS ENTERPRISE
1. The audited annual report that includes the four
financial statements
2. The unaudited quarterly or interim reports that
include summary version of the four financial
statements and limited additional disclosure
BENEFITS OF DISCLOSURE
The company’s ability to disclose reliable (audited)
accounting information about its products, processes,
and other business activities enable them to better
compete in capital, labor, input and output markets.
 COSTS OF DISCLOSURE
Disclosure of company’s activities such as product or
segment successes or failures, strategic initiatives,
technological or systems innovations could harm
their competitive advantages.
 CONSTRAINTS OF RELEVANT
AND RELIABLE INFORMATION
1. Timeliness
2. Balance Between Benefit and Cost
3. Balance Between Qualitative Characteristics
4. True Fair View of Fair Presentation
 FINANCIAL STATEMENTS
Statement of
Cash Flows

Statement of Statement of Statement of

Financial Stockholder’s Financial
Position Equity Position
(beginning of
(end of period)
period) Statement of
Comprehensive
Income

Financial Statement Links across Time

 LINKAGE OF FINANCIAL
STATEMENTS
 The four financial statements are linked with each
other and linked across time.
 The linkage is also known as articulation.
 The statement of financial position and statement
of comprehensive income are linked via retained
earnings.