Chapter 3

Understanding
Financial
Statements
 Business recorded in:
Transactions /
Activities

Financial
 Measurable = Statements
Monetary Value
 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

CONCEPTUAL FRAMEWORK
FOR THE PREPARATION AND
PRESENTATION OF
FINANCIAL STATEMENTS

 Accountants prepare
financial statements by
applying a set of standards or
rules referred to as financial
reporting standards.
 USERS OF FINANCIAL ACCOUNTING
INFORMATION

Managers and Employees

 For their own well-being and
prospective earnings, managers and
employees need accounting
information on the financial condition
and profitability of their companies.
 USERS OF FINANCIAL ACCOUNTING
INFORMATION

Investors and Analysts

 Financial statements are used by these
parties to decide whether to buy or
sell equity shares. Investment analysts
are interested in predicting
companies’ future performance.
 USERS OF FINANCIAL ACCOUNTING
INFORMATION

Creditors and Suppliers

 Banks and other lenders need
financial accounting information to
help determine loan terms, loan
amounts, interest rates and required
collateral.
 USERS OF FINANCIAL ACCOUNTING
INFORMATION

Shareholders and Directors

 Financial accounting information are
needed by the owners and directors of
the company to assess its profitability
and risks, to evaluate managerial
performance and to help make
leadership decisions.
 USERS OF FINANCIAL ACCOUNTING
INFORMATION

Regulatory and Tax Agencies

 The SEC, BIR, BSP and other legal
institutions demand financial
accounting information to monitor the
business firms’ compliance with laws,
for public protection, price setting,
and for tax purposes.
 USERS OF FINANCIAL ACCOUNTING
INFORMATION
Customers and Potential Strategic
Partners
 Customers, both current and potential,
need accounting information to evaluate a
company’s ability to provide products and
services as agreed. Potential strategic
partners would like to estimate the firm’s
profitability to assess the fairness of
returns on mutual transactions.
 THE 4 BASIC FINANCIAL STATEMENTS

1 Statement of Financial Position (Balance Sheet)

2 Statement of Financial Performance (Income Statement)

3 Statement of Cash Flows

4 Statement of Changes in Equity

Statement of
Financial
Performance (Income
Statement)

 Presents the results of

the operations for the
accounting period –
revenues, expenses,
net profit or loss.
 Multi-Step
Income Statement
Statement of
Financial Position
(Balance Sheet)

 Shows the assets,

liabilities, and owner’s
equity of the firm on a
particular date such as
the end of a quarter or
a year.
Statement of Cash
Flows

 Provides information
about the cash inflows
and cash outflows
from operating,
financing, and
investing activities
during an accounting
period.
Statement of Changes in Equity
 Summarizes the changes in a company’s equity for a period of time,
generally one year.

    
A Statement of Financial Position
reports at a point in time; whereas the
Income Statement, Cash Flow, and
Changes in Equity report over a period
of time.
EXERCISES
Classify the following statement of financial position
items as CURRENT or NONCURRENT

ACCOUNTS PAYABLE
Current
Classify the following statement of financial position
items as CURRENT or NONCURRENT

PREPAID EXPENSES
Current
Classify the following statement of financial position
items as CURRENT or NONCURRENT

PLANT AND EQUIPMENT

Noncurrent
Classify the following statement of financial position
items as CURRENT or NONCURRENT

INVENTORY
Current
Classify the following statement of financial position
items as CURRENT or NONCURRENT

BONDS PAYABLE
Noncurrent
Classify the following statement of financial position
items as CURRENT or NONCURRENT

ACCOUNTS RECEIVABLE
Current
 ARRANGE the following income statement items so they are in the proper
order of an Income Statement.
SALES
Gross profit - COST OF GOODS SOLD
Earnings before taxes GROSS PROFIT
Cost of goods sold
- SELLING & ADMIN. EXPENSES
Operating profit
Taxes - DEPRECIATION EXPENSE
Interest expense OPERATING PROFIT
Depreciation expense
- INTEREST EXPENSE
Selling and administrative expense
Sales
EARNINGS BEFORE TAXES
Earnings after taxes - TAXES
EARNINGS AFTER TAXES
Fill in the blank spaces with categories A & B below:
Category A
Income Statement IS
Balance Sheet BS

Category B
RETAINED EARNINGS
Revenue
Expense
R
E
BS
Current Asset CA
Noncurrent Asset
Current Liability
NCA
CL E
Noncurrent Liability NCL
Equity E
Fill in the blank spaces with categories A & B below:
Category A
Income Statement IS
Balance Sheet BS

Category B
INCOME TAX EXPENSE
Revenue
Expense
R
E
IS
Current Asset CA
Noncurrent Asset
Current Liability
NCA
CL E
Noncurrent Liability NCL
Equity E
Fill in the blank spaces with categories A & B below:
Category A
Income Statement IS
Balance Sheet BS

Category B
SHARE CAPITAL
Revenue
Expense
R
E
BS
Current Asset CA
Noncurrent Asset
Current Liability
NCA
CL E
Noncurrent Liability NCL
Equity E
Fill in the blank spaces with categories A & B below:
Category A
Income Statement IS
Balance Sheet BS

Category B
LOANS PAYABLE
Revenue
Expense
R
E
BS
Current Asset CA
Noncurrent Asset
Current Liability
NCA
CL NCL
Noncurrent Liability NCL
Equity E
Fill in the blank spaces with categories A & B below:
Category A
Income Statement IS
Balance Sheet BS

Category B
NET INCOME
Revenue
Expense
R
E
IS
Current Asset CA
Noncurrent Asset
Current Liability
NCA
CL R
Noncurrent Liability NCL
Equity E
Fill in the blank spaces with categories A & B below:
Category A
Income Statement IS
Balance Sheet BS

Category B
INVENTORIES
Revenue
Expense
R
E
BS
Current Asset CA
Noncurrent Asset
Current Liability
NCA
CL CA
Noncurrent Liability NCL
Equity E
Fill in the blank spaces with categories A & B below:
Category A
Income Statement IS
Balance Sheet BS
INCOME TAX PAYABLE
Category B
Revenue
Expense
R
E
BS
Current Asset CA
Noncurrent Asset
Current Liability
NCA
CL CL
Noncurrent Liability NCL
Equity E
Fill in the blank spaces with categories A & B below:
Category A
Income Statement IS
Balance Sheet BS
PLANT AND EQUIPMENT
Category B
Revenue
Expense
R
E
BS
Current Asset CA
Noncurrent Asset
Current Liability
NCA
CL NCA
Noncurrent Liability NCL
Equity E
Fill in the blank spaces with categories A & B below:
Category A
Income Statement IS
Balance Sheet BS

Category B
SALES
Revenue
Expense
R
E
IS
Current Asset CA
Noncurrent Asset
Current Liability
NCA
CL R
Noncurrent Liability NCL
Equity E
Fill in the blank spaces with categories A & B below:
Category A
Income Statement IS
Balance Sheet BS

Category B
CASH
Revenue
Expense
R
E
BS
Current Asset CA
Noncurrent Asset
Current Liability
NCA
CL CA
Noncurrent Liability NCL
Equity E
Fill in the blank spaces with categories A & B below:
Category A
Income Statement IS
Balance Sheet BS
MARKETABLE SECURITIES
Category B
Revenue
Expense
R
E
BS
Current Asset CA
Noncurrent Asset
Current Liability
NCA
CL CA
Noncurrent Liability NCL
Equity E
Fill in the blank spaces with categories A & B below:
Category A
Income Statement IS
Balance Sheet BS
OPERATING EXPENSES
Category B
Revenue
Expense
R
E
IS
Current Asset CA
Noncurrent Asset
Current Liability
NCA
CL E
Noncurrent Liability NCL
Equity E
End of Chapter 3

THANK YOU !