Financial Reports

Accounting Cycle for Service Business

1. Analyzing
2. Journalizing
3. Ledgering
4. Prepare Trial Balance
5. Prepare a Worksheet
6. Adjusting Entries
7. Prepare Financial Statements
A. Income Statement (P&L)
B. Balance Sheet
C. Statement of Changes in Equity
D. Statement of Cash Flow
8. Journalize and Post closing Entries
9. Prepare a Post-Closing trial Balance
 Statement of Changes in
(Shareholders/Owners) Equity
• Main Characteristics
• It is a comparison of the equity balances at the beginning and end of a
reporting period.
• It is not seen as an important part of the monthly financial statements, so it is
the one that is most likely to not be sent out.
• Shareholders' equity is the amount of money a company could give back to its
shareholders if all its assets were turned into cash and all of its debts were
paid off.
• Outstanding shares, additional paid-in capital, retained earnings, and treasury
stock are the four parts of the shareholders' equity that are considered in the
calculation.
• If shareholders' equity is positive, a company has enough assets to pay its
liabilities; if it's negative, a company's liabilities surpass its assets.
• Shareholders' equity is a financial metric that helps investors evaluate the
worth of a company and its long-term sustainability.
Statement of Changes in Equity
• Main Characteristics
• The statement starts with the equity balance at the beginning and then
adds or subtracts things like profits and dividend payments to get the
balance at the end.
• The general calculation structure of the statement is as follows:

• Beginning equity + Net income – Dividends +/- Other changes = Ending equity
Components
• Outstanding Shares
• A big part of shareholders' equity is the number of shares that are still in
circulation. It is the amount of a company's stock that investors have bought
but that the company has not bought back.
• It shows how much stock the company has given to investors, company
officers, and people who work for the company, including restricted shares.
• This number includes the par value of both common stock and any preferred
shares sold by the company.
• Outstanding shares are also a key part of other calculations, such as the
market capitalization and earnings per share calculations (EPS).
Components…… contd…
• Additional Paid-in Capital
• Shareholders' equity also includes "additional paid-in capital," which is the
amount of money paid for shares of stock above the stated par value (APIC).
• This number comes from the difference between the par value of common
and preferred stock and the price each type of stock has sold for, as well as
the number of shares that have been sold for the first time.
• APIC only happens when an investor buys stock from a company directly.
• It is the amount an investor pays over the face value of a company's shares
when the company goes public for the first time (IPO).
• In the equity part of a company's balance sheet, you can find the APIC
number.
Components…… contd…
• Retained Earnings
• When a company keeps its earnings instead of giving them to stockholders as
dividends, a positive balance is made in the company's "retained earnings"
account.
• A company's retained earnings are often used to pay off debt or put money
back into the business.
• This number is part of the shareholders' equity and is usually the biggest part
of this calculation.
• You can find a company's retained earnings on its balance sheet under
"shareholders' equity" or on a separate "statement of retained earnings."
• The amount of earnings that a company keeps can be called its "retention
ratio" or its "retained surplus."
Components…… contd…
• Treasury Stock
• The last part of shareholders' equity is treasury stock, or the number of shares that
the company has bought back from investors.
• A company will keep some of its own stock in its treasury in case it needs it later.
• It could sell the stock later to get more money or use it to stop a hostile takeover.
• On a company's balance sheet, treasury stock lowers the total amount of
shareholders' equity.
• This number is subtracted from a company's total equity because when it is
repurchased, it reduces the number of shares that investors can buy.
• In the equity section of a company's balance sheet, treasury stock is shown as a
negative number.
• Treasury stock is also called "treasury shares" or "stock that was bought back."
 Following are the most common changes in
shareholders’ equity:
• When a company issues new shares of capital, it increases the amount of common stock and paid-up
capital.
• The net income (loss) for the period adds to (or takes away from) the amount of retained earnings.
• When cash dividends are paid out, retained earnings go down.
• When you buy treasury stock, the treasury stock component goes up, but the total net shareholders'
equity goes down.
• The sale of treasury stock lowers the amount of treasury stock, affects retained earnings and additional
paid-up capital, and raises the total shareholders' equity in the end.
• When bonus shares are given out, it affects the common stock, the additional paid-up capital, and the
earnings that are kept.
• When fixed assets are revalued, the revaluation surplus goes up.
• When the revaluation of fixed assets is reversed, the revaluation surplus may go down.
• Effect of foreign-exchange translation: foreign-exchange reserve goes up or down.
• Changes in the value of available-for-sale securities cause the available-for-sale securities reserve to go
up or down.
• Restatement of financial statements, for example, because of a change in accounting principle: changes
in retained earnings.
Preparation: The format of Statement of
Changes in Equity
• Bear in mind that SCE’s Header is composed of three lines
• 1st- Entity’s Name
• 2nd- Statement Title
• 3rd- Date for the accounting period
• - For SCE, the template is: “For the period ended ____________”. This phrase
states that the amounts placed on the statement are not to be carried to the
next accounting period.
 • The following are transactions that cause changes in owner’s equity
during a period:
1. Additional investment or contribution to the business by the owner
• Effect: Increase in equity
2. Withdrawals or drawings from the business by the owner
• Effect: Decrease in equity
3. Earning of Profit by the business
• Effect: Increase in equity
4. Incurrence of loss by the business
• Effect: Decrease in equity
• The "Capital, ending balance" from
the last accounting period is the
"Capital, beginning balance."
• Also, the amount of Comprehensive
Income, which is the last number on
the Statement of Comprehensive
Income, shows how much money was
made or lost.
• So, if the amount calculated in the
Statement of Comprehensive Income
is wrong, it will also affect the
Statement of Changes in Equity and
make it wrong.
Sample Problem #1:
• Amlos Studio started with a • Requirement:
beginning capital of ₱180,000 on • Prepare the statement of changes
January 1, 2019. The following in equity using the pro-forma
were the transactions during the statement provided below. Be sure
year: to place a proper heading for the
a. Mr. Amlos, the sole proprietor of statement.
Amlos Studio made additional
capital investments of ₱360,000 to
the business.
b. Total income earned amounted to
₱1,000,000.
c. Total expenses incurred amounted
to ₱560,000.
d. Mr. Amlos made drawings of
₱140,000 from the business.
Solution
Sample Problem #2:
Requirements
• Prepare a Statement of Changes in Equity. Note: The profit/ loss is
missing. Hence, you need to solve for it first using the Statement of
Comprehensive Income.
CASH FLOW STATEMENT
What is a Statement of Cash Flows?
• Provides an analysis of inflows and/or outflows of cash from/to
operating, investing and financing activities (Deloitte Global Services
Limited, 2015). This statement shows cash transactions only
compared to the SCI which follows the accrual principle.
Importance
• The CFS provides the net change in the cash balance of a company for
a period. This helps owners see if their revenues are translated to
cash collections or if they have enough cash inflows in order to pay
any maturing liabilities.
 Different parts of the Cash Flow Statement
• Operating Activities – Activities that are directly related to the main
revenue-producing activities of the company such as cash from customers and
cash paid to suppliers/employees (Deloitte Global Services Limited, 2015).
• Investing Activities – Cash transactions related to purchase or sale of
non-current assets (Deloitte Global Services Limited, 2015).
• Financing Activities – Cash transactions related to changes in equity and
borrowings.
• Net change in cash or net cash flow (increase/decrease) – The net amount of
change in cash whether it is an increase or decrease for the current period. The
total change brought by operating, investing and financing activities.
• Beginning Cash Balance – The balance of the cash account at the beginning of
the accounting period.
• Ending Cash Balance – The balance of the cash account at the end of the
accounting period computed using the beginning balance plus the net change
in cash for the current period.
 Explain how each of the above activities would affect the
statement of cash flows of Delta Company.
1. Purchase of available for sale investment
2. Sale of equipment at a loss
3. Increase in accounts payable
4. Decrease in accounts payable
5. Increase in inventory
6. Loan from bank by signing a note
7. Increase in accounts receivable
8. Purchase of equipment by issuing a note
9. Purchase of land and building.
10. Decrease in accounts receivable.
11. Payment of dividends.
12. Issuance of stock for cash.
13. Sale of land at a gain.
14. Depreciation expense.
Preparations
• There are two methods of preparing the operating activities section:
Indirect Method and Direct Method. Both methods calculate the
same total of cash flows from operating activities, although the
methodologies are considerably different.
Indirect Method
Direct Method
• The direct method starts with the whole accrual-basis income
statement, not just the net income, and changes each line to the cash
basis. Cash flows are the money that comes in and goes out as a result
of normal daily activities. For example, sales based on the accrual
method are turned into cash from customers by adding or subtracting
the change in trade accounts receivable.
• The FASB prefers the direct method because it gives more useful
information to the people who use the financial statements. If the
direct method is used, the FASB requires that a reconciliation of net
income to net cash provided or used by operating activities be included
in the statement or in the footnotes. Most of the time, this
reconciliation looks a lot like the section on cash flow from operating
activities that was made using the indirect method.
Investing Activities
Financing Activities
 Exercise-2 (Net cash provided/used by
investing activities)
• The Big and Fast company provides the following information about its
activities in the year 2016.
• Marketable securities purchased: $45,000
• Treasury stock purchased: $56,000
• Inventory purchased: $412,000
• Land sold: $95,000
• Machinery purchased: $278,000
• Common stock issued: $168,000
• Required: Compute net cash provided/used by investing activities to be
reported in the statement of cash flows of Big and Fast company.
 Note: The following activities have not been included in the above computation
because these are not investing activities.
[Link] of treasury stock – a financing activity.
[Link] of inventory – an operating activity.
[Link] of common stock – a financing activity.
Exercise-2(b)
• The P&G company provides the following information for the year
2016:
• Old plant asset sold for $164,000 and the gain on such sale was of $5,000.
• Treasury stock purchased for $42,000.
• Investment purchased for $25,000.
• A new plant asset purchased for $115,000.
• Common stock issued for $375,000
• Required: Calculate net cash provided/used by investing activites for
P&G company using above information.
 Notes:
[Link] sale proceeds of old plant asset of $164,000 include gain of $5,000.
[Link] of treasury stock and the issuance of common stock are not investing activities.
Exercise-3 (Net cash provided/used by
financing activities)
• The following activities were performed by L&M corporation during
the year 2015.
• Treasury stock purchased: $35,000
• Accounts payable paid: $585,000
• Note receivable collected: $50,000
• Dividends paid: $190,000
• Bonds payable issued: $340,000
• Common stock issued: $175,000
• Required: Compute net cash provided/used by financing activities to
be reported in the statement of cash flows of L&M corporation.
 Note: The following activities are not financing activities and have therefore not
been included in the above computation:
[Link] of accounts payable.
[Link] of note receivable.
Exercise-3 (b):
• Consider the following information of a company:
• Sale of common stock: $880,000
• Sale of preferred stock: $120,000
• Payment of dividends: $156,000
• Purchase of treasury stock: $965,000
• Required: Compute net cash provided/used by financing activities
using above information.
References
• “What Are the Components of Shareholders’ Equity?” Investopedia, 19 Jan. 2022,
[Link]/ask/answers/012115/[Link].
• Bragg, Steven. “Statement of Changes in Equity — AccountingTools.” Statement of Changes in Equity
— AccountingTools, 14 Sept. 2022,
[Link]/articles/[Link].
• “Statement of Changes in Equity.” Statement of Changes in Shareholders’ Equity | Format |
Example, 30 Aug. 2020, [Link]/969555/changes-in-shareholders-equity.
• Lagao, John Paul. “MODULE 2 – FABM 2 -.” [Link],
[Link]/[Link]. Accessed 6 Nov. 2022.
• Javed, Rashid. “Exercise-10 (Computation of Net Cash Flows From Operating Activities - Indirect
Method) - Accounting for Management.” Accounting for Management, 21 Apr. 2017,
[Link]/exercise-10-socf.
• Andales, Alexander. FABM2 Quarter 1 – Module 5: Cash Flow Statement.
[Link]/wp-content/uploads/2021/08/[Link].
• Apuro, Renniel. Fundamentals of Accountancy, Business and Management 2 Module WEEK 5
Statement of Cash Flows. [Link]/[Link].