Module 2.

Lesson 1
Review of Basic Financial
Statements
Introduction to Financial
Management
MGMT124
 Introduction
• Financial statements provide a snapshot
of a business firm’s financial health,
performance, and cash flow.
• Financial statements are important since
they provide information about a business
firm’s revenue, expenses, profitability, and
debt.
Importance and Uses of Financial Statements

• To Financial managers - financial statements

assist the management in understanding the
progress, prospects, and position of business firms.
• To creditors – help make credit decisions
• To investors – help make investment decisions
• To stock traders – provide knowledge of
business firms helpful in adjusting stock prices.
• To the government - help in making taxation and
regulation policies.
 Three Basic Financial Statements
1. Balance Sheet
2. Income Statement
3. Statement of Changes in Financial Position
The Income Statement
Is a statement that shows the results of the
financial operations of a business enterprise
for a given period of time. Revenue less
expenses is equal to net income. When the
resulting figure is negative, it is called net loss.
An income statement illustrates how the
revenues are transformed into the net income
or net profit.
Income Statement
• It is a flow report because it covers a period of
time.
• This can be prepared for a month, a quarter or
a year.

The Income Statement Equation:

Revenue – Expenses = Net Income (Net Loss)
Income Statement Accounts
Revenues – are gross increases in assets or gross
decreases in liabilities recognized and measured
in conformity with Generally Accepted
Accounting Principles (GAAP) that result from
those types of profit-directed activities of an
enterprise that can change owners’ equity.
Expenses – represent the use of resources to
support the revenue-generating activities of a
company.
Single-Step and Multi-Step Income Statement
• Single-step – Called single-step because all revenues are listed down in one
section while all expenses are listed in another. Net income is computed
using a “single-step” which is Total Revenues minus Total Expenses.
(Haddock, Price, & Farina, 2012)

• Multi-step – Called multi-step because there are several steps needed in

order to arrive at the company’s net income. (Haddock, Price, & Farina,
2012)

a. The two are only formats and will yield the same amount of net
income/loss
b. The single-step SCI is more commonly used by service companies
while multi-step format is more commonly used by merchandising
companies
The Structure of a Single-Step Income Statement
(Merchandising Company)
The Structure of a Multi-Step Income Statement
(Merchandising Company)
The Structure of a Multi-Step Income Statement
(Merchandising Company)
The Structure of a Multi-Step Income Statement
(Merchandising Company)
The Structure of a Multi-Step Income Statement
(Merchandising Company)
The Structure of a Multi-Step Income Statement
(Merchandising Company)
The Balance Sheet
Is a statement that shows the financial status or
condition of a business for a given point in time.

Financial Position – comprising an enterprise’s

assets, liabilities and owner’s equity and the
relationship among them, plus those
contingencies, commitment and other financial
matters that pertain to the enterprise at that
time.
The Balance Sheet Equation

Accounting Equation:

Assets = Liabilities + Owners’ Equity

 Components of Balance Sheet
1. Assets
2. Liabilities
3. Equity
Assets
Assets – are properties that provide future economic
benefits to a business.
Economic benefits include: the purchasing
power of cash, conversion of inventory and
receivables to cash, the protection provided by
insurance, the use of fixed assets in the production of
goods, and income from investment. Assets maybe:
a) tangible or intangible, b) financial or physical, c)
fixed or current, or d) used in operations or held as
investment
The Asset Section of the Balance Sheet

Assets are Classified into current, sundry and

fixed.

Current Assets – are assets that are convertible

to cash or consumed within the operating
cycle. Are arranged according to liquidity.
Current Assets. . .
• Cash
• Marketable Securities
• Notes Receivable
• Account Receivable
• Inventory
• Prepaids
• Supplies
Sundry Assets
Are assets held for future use.

1. Land held for future use

2. Long-term investments
Fixed Assets

Assets with long-term life and are used to

generate revenue. These are recorded at
acquisition cost. Include:
Land
Building
Machineries and equipment
Furniture and fixtures
Vehicles
Liabilities and Stockholders’ Equity
Liabilities – financial obligations of a business to
suppliers, banks, the public, other companies,
the government and company employees and
officers. They are classified as either current or
long-term.
Current liabilities – are obligations that are
expected to be paid during the operating
period or one year from the balance sheet
date.
Liabilities and Stockholders . . .
Current liabilities include:
1. Accounts payable – are suppliers claim on the
company
2. Notes payable – secured claim on the business
2. Bank loans – are credits provided by banks
3. Accruals – are liabilities to a) the government
for taxes, b) for employees for salaries, c)
customers that need to be paid off within the
current period.
Liabilities and Stockholders . . .
Long-term liabilities are obligations which shall
become due more than one year or beyond
the balance sheet date. Include:

Bank loan
Mortgage note payable
Stockholders’ Equity
Represents claims of owners in the business. In
the balance sheet, stockholders’ equity is
represented s a residual claim because
creditors are given priority in the event of
liquidation of the business. The stockholders’
equity section is composed of the capital and
the retained earnings sections.
Stockholders’ Equity
The capital section shows: a) the amount, type
and number of shares issued and the value
paid by the shareholders; b) the number of
shares used and the value paid by the
shareholders; c) the breakdown of the value in
terms of par value and excess over par; and, d)
other capital accounts.
Stockholders’ Equity
The retained earnings section represents
accumulated earnings of the business.
computed using the formula:
Retained Earnings, beginning balance
add: Net Income
less: Dividends paid
equals:
Retained Earnings, ending balance
Structure of a Balance Sheet
Name of the Business
Name of Statement
Date
Assets Liabilities & Stockholders’ Equity
Current Assets Liabilities
Cash Pxxxxx Current liabilities
Marketable securities xxxx Account payable Pxxxx
Accounts receivable xxxx Accrued accounts payable xxx
Inventory xxxxx Total Current Liabilities Pxxxx
Prepaid expenses xxxx
Supplies xxxx Long-term liabilities
Total Current Assets Pxxxxx Bank loan Pxxxx
====== Mortgage payable xxx
Total Long Term Liabilities Pxxxx
Total Liabilities Pxxxx
Sundry Assets Stockholders’ equity
Land held for future use Pxxxx Capital stock
Long-term investment xxx Preferred stock Pxxx
Total Sundry Assets xxx Common stock xxx Pxxxx

Fixed Assets Paid-In Capital in Excess of par

Land Pxxxx From p/s issuances Pxxx
Building Pxxxx From c/s issuances xxx Pxxxx
less: acc. Depcn xxx xxxx Total capital stock Pxxxx
Machineries & eqpt Pxxx Retained earnings Pxxxx
less: acc. Depcn xxx xxxx less: Treasury stocks Pxxxx
Furniture & fixtures Pxxx Total Stockholders’ Equity Pxxxx
less: acc. Depcn xxx xxxx TOTAL LIABILITIE &
STOCKHOLDERS’ EQUITY Pxxxx
Total Fixed Assets Pxxxx =====
TOTAL ASSETS Pxxxx
=====
 Stockholders’ Equity, illustrated
Capital Stock:
9% preferred stock, P100 par value, authorized &
issued 1,000 shares P100,000
Common stock, no par, stated value P5/share,
authorized 100,000 shares, issued 60,000
shares, of which 1,000 are held in treasury 300,000 P400,000
Additional Paid-In Capital:
From stock dividends P 50,000
From common stock issuances 290,000 P340,000
Total Paid-In Capital P740,000
Retained earnings 162,000
P902,000
less: Treasury stocks 12,000
Total Stockholders’ Equity P890,000
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