Preparation of Financial Statements

Income Statement 5. Income Tax Expenses

 a formal statement showing the

performance of the enterprise for a period Statement of Changes in Owner’s Equity
of time
 summarizes the revenues earned and  summarizes the changes that occurred in
expenses incurred for that period of time. owner’s equity during the period
 determines the profitability of the entity for
a certain period Owner’s Equity
 also called as the Statement of Financial
Withdrawal by Owner Owner’s Equity, beg.
Performance
 two ways to present income statement are Net Loss Net Income
Natural (for Service Concern Business) and Additional
Functional (for Other Nature of Business)
Investments
Owner’s Equity, end
Pro-forma Income Statement (Natural
Presentation) Pro-forma Statement of Changes in Owner’s
Equity
Revenues
Revenue 1 P xx Owner, Capital – beg.
Revenue 2 xx P xx
Revenue 3 xx P xx Add: Net Income P xx
Additional Investments xx
Less: Expenses xx
Expense 1 P xx Total P xx
Expense 2 xx Less: Withdrawals P xx
Expense 3 xx Net Loss xx
Expense 4 xx xx xx
Owner, Capital – end
Net Income (Loss) P xx P xx

Notes:
 Net Income (Loss) is called the “bottom
line” of the accounting process. It is also Balance Sheet
called as the result of operations.
 a formal statement showing the three
Sources of Income elements of comprising financial position,
1. Sale of merchandise to customers (Sales) namely assets, liabilities, and owner’s equity
2. Rendering of services (Service Revenue)  also called the Statement of Financial
3. Use of entity resources (Interest, Rent, Position
etc.)  used by the users to evaluate an entity’s
4. Disposal of resources other than products liquidity, financial flexibility, ability to
(Gains) generate profits, and solvency
 presents a “snapshot” of a company as of a
Classifications of Expenses certain period
1. Cost of Goods Sold  net balances of the each balance sheet items
2. Distribution Costs or Selling Expenses as of a period are needed rather than the
3. Administrative Expenses total for the period
4. Other Expenses
Liquidity – the ability of the entity to meet
currently maturing obligation Noncurrent Liabilities
- those not classified as current
Solvency – the availability of cash over a longer liabilities
term to maturing obligations

Flexibility – the ability to take effective actions

to alter the amounts and timings of cash flows so
that it can respond to unexpected needs and
opportunities

Format
a. Report Format – lists assets, liabilities, and
equity in vertical sequence
b. Account Format – follows the pattern A = L + Statement of Cash Flows
OE; assets on the left side, liabilities and
equity on the right side  a component of financial statements
Presentation summarizing the operating, investing and
financing activities of an entity
Assets – arranged based on liquidity or its  it provides information about the cash
ability to be easily converted into cash receipts and cash payments of an entity
during a period
Current Assets  shows the net increase or decrease in
a. Cash and Cash Equivalents cash during the period and the cash flows
b. Short-Term Investments of the entity and helps project the future
c. Trade and Other Receivables (net of net cash flows of the entity
allowance)
d. Inventories Operating Activities are the cash flows
e. Prepaid Expenses derived primarily from the principal
f. Other Current Assets (if any) revenue producing activities of the entity.

Noncurrent Assets a. Cash receipts from sale of goods and

a. Property, Plant and Equipment rendering of services
i. Land b. Cash received from royalties, rental, fees,
ii. Building commissions and other revenue
iii. Machinery c. Cash payments to suppliers for goods and
iv. Equipment services
v. Furniture and Fixtures d. Cash payments for selling, administrative
vi. Tools and other expenses
b. Long-term Investments
c. Intangible Assets Investing Activities are cash flows derived
d. Other Noncurrent Assets from the acquisition and disposal of long-
term assets and other investments not
Liabilities – arranged based on their included in cash equivalents.
maturity
a. Cash payments to acquire PPE,
Current Liabilities intangibles, and other long-term assets
a. Trade and Other Payables b. Cash receipts from sale of PPE,
b. Current Provisions intangibles, and other long-term assets
c. Short-Term Borrowing c. Cash receipts from sale of equity or debt
d. Current Portion of long-term Debt securities
e. Current Tax Liability
f. Other Current Liabilities
 d. Cash payments to acquire equity or debt + Increase in Current Liabilities
securities xx
e. Cash receipts from collections of long- - Decrease in Current Liabilities
term notes and (xx)
f. Cash payments to make long-term loans Cash Flows Provided by (Used in)
to others Operating Activities P xx

Financing Activities are the cash flows

derived from the equity and borrowings of
the entity

a. Cash receipts from additional investments

of cash
b. Cash payments from withdrawal of cash
c. Cash receipts from issuance of long-term
debt
d. Cash payments to settle long-term debt

Summary:

 Operating Activities include

transactions involving current assets
and current liabilities
 Investing Activities include transactions
involving noncurrent assets
 Financing Activities include transactions
involving noncurrent liabilities and owner’s
equity

Two ways of presenting Cash Flows

Provided by (Used in) Operating Activities:

A. Direct Method

Cash received from clients P xx

Payments to suppliers
xx
Payments to employees
xx
Payments to etc. xx
Cash Flows Provided by (Used in)
Operating Activities P xx

B. Indirect Method

Net Income (Loss) P xx

+ Noncash Expenses xx
- Gains from all sources (xx)
+ Losses from all sources xx
- Increase in Current Assets (xx)
+ Decrease in Current Assets
xx