Understanding Financial Statements

CHAPTER 5
Introduction
This chapter provides a framework and several
tools to help us analyze companies and value
their securities. This focused perspective will
enhance one’s learning process and makes it
relevant.

2
HOW BUSINESS ACTIVITIES ARE REPORTED?
- This could be accomplished through Financial Statements

FINANCIAL STATEMENT

• Serve the needs of different users (external or internal)

• Provides crucial input for strategic planning, as well as information

about the relative success of those plans which can be used to
corrective action and make new operating, investing and financing
decisions.

3
GENERAL
OBJECTIVES

Providing information for economic

decisions.

Providing information about financial

position.

4
GENERAL
OBJECTIVES

Providing information about the

performance of the enterprise.

Providing information about changes in

financial position.

5
Demand for Financial Accounting Information

• Managers and
Employees • Regulatory and tax
agencies

INDUSTRY OUTLOOK
• Investor and analysts
• Customers and
• Creditors and potential strategic
suppliers partners

• Shareholders and • Other decision makers

directors

6
 SOURCES OF INFORMATION ABOUT BUSINESS
ENTERPRISE

The quantity and quality of accounting information that companies supply are determined by manager's
assessment of the benefits and costs of disclosure. In the Philippines, publicly listed companies must
file financial accounting information with the Securities and Exchange Commission (SEC).

These are:
• The audited annual report that includes the four financial statements with explanatory notes
and the management's discussion and analysis of financial results.

• The unaudited quarterly or interim reports that include summary version of the four financial
statements and limited additional disclosure.

7
 BENEFITS OF DISCLOSURE

• The advantages of supplying accounting information extend to a company's capital,

labor, input and output markets.

• Companies compete in these markets.

• Debt and Equity financing are sourced from capital markets and the better a
company's prospects, the lower will be its cost of capital as reflected in higher stock
prices or lower interest rate. •

• A company's recruitment efforts in labor markets and its ability to establish and
maintain superior supplier- customer relations in the input and output markets. 8
 COSTS OF DISCLOSURE

• Companies are apprehensive that disclosures of their activities such as product or

segment successes or failures, strategic initiatives, technological of systems
innovations could harm their competitive advantages.

• Companies also face possible lawsuits when disclosures create expectations that
eventually are not met.

• Disclosure costs including political costs are high for highly visible companies such
as large telecommunication conglomerates (e,g PLDT and Digitel), oil companies
and
9
CONSTRAINTS ON RELEVANT AND
RELIABLE INFORMATION

Timeliness – If there is undue delay in the reporting information, it

may lose its relevance. Management may need to balance the
relative merits of timely reporting and the provision of reliable
information.

Balance Between the Benefit and Cost – The balance between

benefit and cost is a pervasive constraint rather than qualitative
characteristics. The benefits derived from information should exceed
the cost of providing it. “Judgmental process”.
10
CONSTRAINTS ON RELEVANT AND
RELIABLE INFORMATION

Balance between qualitative characteristics – In practice a

balancing or trade-off between qualitative characteristics is often
necessary.

True Fair View or Fair Presentation – Financial statements are

frequently described as showing a true and fair view of the financial
position, performance, and changes in the financial position of an
enterprise.

11
 Linkage of Financial Statements
Financial Statements - product of accounting

 Statement of Financial Position, Statement of Financial Performance,

Statement of Changes in Equity, Statement of Cash Flow

Articulation - matching of presented information within the four

financial statements

12
 Order of Creation

1. Statement of Financial Performance

2. Statement of Financial Position

3. Statement of Changes in Equity

4. Statement of Cash Flow

13
2. Financial Position or Balance Sheet

 reports company's resources,

what company owns and
sources of asset financing

 Asset = Liabilities + Owners

Equity

14
2. Financial Position or Balance Sheet

 Two ways a company can finance its assets:

1. Owner Financing

2. Non-owner Financing

15
3. Statement of Changes in Equity

 reports on changes in key types of equity over period of time

Note: In absence of transactions to shareholders (ex: dividends issuance) change in equities equal to income or 16
loss for the period.
4. Statement of Cash Flow

 reports the change (either an increase or decrease) in company's

cash balance over a period of time reports cash inflows (receipt)
and cash outflow (disbursement) from:

1. Operating Activities
• Cash inflows and outflows from normal course of business

2. Investing Activities
• Cash inflows and outflows for any investing activities
• Includes buying and selling fixed assets

17
4. Statement of Cash Flow

3. Financing Activities

• Cash inflows and

Outflows from owner
financing and non-
owner financing of
the business

18
THANK YOU!

MAGAT, KATHERINE
MALLARI, JERAIN
MORALES, EURIE
QUIAMBAO, LOVELY MAE
SANGALANG, ANJELY CZAR