Introduction to

Financial
Statements
 Lesson
• describeobjectives;
the three types of
financial statements- balance
sheet, income statement, and
cash flow statement
• prepare financial statements
• illustrate the formula and
format for the preparation of
budgets and projected financial
Types of Financial 1
BALANCE SHEET
is a list of assets,
Statement liabilities, and owner’s
equity as of specific
date, usually at the end
INCOME STATEMENT
2 of the month or year
is a summary of the
revenue and expenses
for a specific period of
time, such as month or
STATEMENT OF CASH
3 a year.
FLOW
is a summary of cash
inflows and cash
outflows for specific
period of time, such
 Balance Sheet
CAMPANY ABC
Balance Sheet
Current Assets Currents Liabilities
31 December 2017
Cash and Cash Accrued Wages and
Equivalents Taxes
Account Receivable Accounts Payable
Inventory Noted Payable
Fixed Assets Long-term Debt
Plant, Property, and
Equipment
Stockholder’s Equity
Common Stock + Retained
Earnings
Total Assets This must equal:
(Currents Assets + Fixed
Assets) _(Current Liabilities
– Long-term Debt)
Total Liabilities and
Equity
 Fundamental Balance
Sheet Equation
Assets = Liabilities + Stockholder’s Equity
 Current Assets
Is an asset that can easily
be sold or converted into
cash. Current assets are
vital to the operations of
the business. They are used
as funding for the daily
operations and to pay short-
 1. Cash and Cash
Equivalents
Cash is actual money. Cash
equivalents are current assets
that are easily convertible into
cash. Some examples of cash
equivalents are savings
accounts, checking accounts,
bonds that are maturing within
2. Short-term
Investment
Although it is good to
have cash in order to
have enough to support
operations, too much
idle cash could mean
inefficient use of
company assets. In
order to avoid such
inefficiency, companies
2. Short-term
Investment
For instance, if a firm
has significant amount
of cash which it does not
anticipate to use for the
next six months, the
finance manager, with
top management
approval, may decide to
2. Short-term Investment

Furthermore, placement
of cash in short-term
investment eliminates
the possibility that such
cash will be used for
something else than its
intended purpose.
 3. Marketable
These are very liquid short-term
Securities
investment and they are a good
substitute to cash. Although the
yield on marketable securities
are much lower compared to
other financial instruments,
firms-the larger ones, most
especially-have them and find
them very beneficial. Aside from
the yield, marketable securities
are also serve to finance the
 4. Accounts Receivables
These represent products and services sold by the firm
to customer on credit. Equally important with
managing a firm’s cash and cash equivalents is having
an effective system in place for managing its
receivable. A firm certainly needs to work with
customers and provide them with attractive credit
terms.
 4. Accounts Receivables
However, goods and services sold on credit have to be
collected within a reasonable amount of time to ensure
that the firm has enough cash to support its operations
and pay its short-term obligations. Another issue face
by the finance manager on collection is when payments
issued by customers are post dated check.
 4. Accounts Receivables
Post-dated check can only be encashed at a later date.
Thus, it would be beneficial for the firm to speed up
collection process and the eventual conversion of the
payments into cash. One payment arrangement that is
commonly used by firms is preauthorized debits.
 4. Account Receivables
Preauthorized debit is a payment system that works
well when a firm collects repetitive or routine
payments from customers. In this arrangement, funds
from a customer’s bank account are automatically
transferred into the firm’s bank account.
 5. Inventory
This includes raw materials, work in process, and
products that are ready to be sold. Not having enough
inventory will result to lost sales and dissatisfied
customers. However, too much inventory is
counterproductive as surplus inventory is akin to
money sitting idly; money could be used for the other
operational needs of the firm. Excess inventory also
exposes the firm to the risk of pilferage and
obsolescence.
 5. Inventory
For instance, a local firm engaged in the
manufacturing of bread, cakes, and pastries closely
monitor the level of supply of raw materials such as
eggs, lard, oil, butter, and flour. In one of the internal
audits conducted by the accounting supervisor, it was
discovered that excessive supplies of raw materials
made it harder for the firm to monitor shortage and
variances.
 Fixed Assets
Is a type of asset that the
firm does not expect to sell
or otherwise convert to cash
within a year or the current
period. Fixed asset cannot
be easily converted into
 1. Tangible Assets
These are assets which can be
physically seen or touched by those
who use them.
Building Machine
Plants Land
s ry

Equipme Furnitur
nt e
 Depreciation
Is a reduction in the
value of a fixed
asset. It is a
noncash outlay but
is deducted as an
 2. Intangible Assets
It is an asset that are not
physical. It also helps the
Tradema Brand
company
rks
generate more
Names
income.
Copyrig
Patents
ht
 Current
Liabilities
Is a financial
obligation of a firm
that is due one year
Long-
term
Liabilities
Is a financial obligation
of a firm that is due
more than one year
into the future. It is
used to finance the
 Owner’s
Equity
It is defined as the
difference between the
value of all assets and the
value of all liabilities. It is
also a portion owned by
shareholders. Owner’s
equity consist of CAPITAL
Capital
Is what the owners
contributed to the
business
Retained Earnings
Is the portion of the
net income that was
retained after
 A1 Bear Toe, Inc.
Balance Sheet
31-Dec-17
(in Millions)

Assets Liabilities and Owner's Equity

Currents Assets: Current Liabilities:
Cash Equivalents ₱6,500.00 Account Payables ₱ 350.00
Account Receivable ₱750.00 Notes Payable ₱ 1,300.00
Inventories ₱800.00 Total Current Liabilities ₱ 1,650.00
Total Current Assets ₱8,050.00 Long-term Debt ₱ 800.00
Net Fixed Assets: Total Liabilities ₱ 2,450.00
Plant and Equipment Owner's Equity:
₱9,600.00
(Net of Depreciation) Common Stocks
₱ 4,000.00
(500 000 shares)
Additional Paid-in Capital ₱ 3,500.00
Retained Earnings ₱ 7,700.00
Total Owner's Equity ₱ 15,200.00
Total Assets ₱17,650.00 Total Liabilities and Owner's Equity ₱ 17,650.00
Income
Statement
Financial statement
that presents the
success or failure of
the business operations
of a company for a
given period in terms
Revenue -
Expenses
Revenue
Refers to the economic benefits that flow to the
business in the form on increases in assets.
Printing
Printing Shop
Revenues
Accounting
Accounting Revenues/Auditing
Firm Revenues/Consultanc
y Revenues
Laundry Shop Laundry
Revenues
Repair
Repair Shop
Revenues
Expense
Pertains to a decrease in economic benefits of the
business due to reduction in assets or addition to
liabilities, resulting from the business operations.
Salaries or Doubtful
Wages Account
Expense Expense
Utilities Depreciation
Expense Expense
Taxes and
Licenses Rent Expense
Expense
Supplies Miscellaneous
Expense Expense
 Statemen
t Cash
of Flow
Statement of cash flow
provides information about
the cash receipts and cash
payments of an entity during
the period. It is a formal
statement that classifies
 Cash Flow
From Operating
Activities
Refers to money generated from the
regular activities of the firms such
as production, selling of goods, or
provision of services to customers.
It is also includes changes in
working capital which is current
assets-current liabilities. Changes in
 From Operating
Cash Flow Activities
Cash Inflows
 Receipts from sale of goods and
performance of services. Revenue
 Receipts from royalties, fees, Accounts
commissions, and other revenue.
Cash Outflows Expense
 Payments to suppliers of goods and Accounts
services. AR/AP
 Payments to employees. Accounts
 Payments to taxes.
 Payments of interest expense.
 Cash
Flow
From Investing
Activities
Refers to the change in a firm’s cash
position resulting from investment
made, including money spent on plant
and equipment. For instance, the firm
might show an overall negative cash
flow but if there was a huge
investment made in machineries and
 From Investing
Cash Activities
Flow
Cash Inflows
 Receipts from sale of property andNon-Current
equipment. assets
 Receipts from sale of investments in Notes
debt or equity securities. Receivable
 Receipts from collections on notes Account
Debt
receivable. Securities
Cash Outflows
 Payment to acquire property and
equipment.
 Cash
Flow
From Financing
Activities
Refers to changes in the company’s
cash position due to the activities of
the firm such as raising capital or
repayment of debt-adding loans, debt
restructuring, deferment of payment,
and issuance of new stocks in the
financial market.
 Cash From Financing
Flow Activities
Cash Inflows
 Receipts from investments by
owners.
 Receipts from issuance of notes
payable.
Cash Outflows
Owner’s
Withdrawals of the owner.Notes
Withdraw
 Payments to settle note Payable
payable.
Equity als
Account
 ABM Online Company
Statement of Cash Flows
For the month ended June 30, 2019

Cash Flows from Operating Activities

Cash Receive from clients ₱60,400.00

Payments to suppliers -₱10,000.00

Payments to employees -₱13,800.00

Payments for office rent -₱8,000.00

Payments for insurance -₱14,400.00

Payments for utilities -₱3,000.00

Net cash provided by (used in) operating Activities ₱11,200.00

Cash Flows from Investing Activities

Payments to acquire service vehicle -₱420,000.00

Payments to acquire office equipment -₱15,000.00
Net cash provided by(used in) financing activities -₱435,000.00
Cash Flows from Financing Activities
Cash Received as investments by owner ₱250,000.00
Cash received from borrowings ₱210,000.00
Payments for withdrawals by the owner -₱14,000.00
Net cash provided by (used in) financing activities ₱446,000.00
Net Increase (Decrease) in Cash ₱22,200.00
Cash balance at beginning of the period ₱0.00
Cash balance at the end of the period ₱22,200.00
The following are the various cash flows and other
information of the TEEN WOLF Company for 2020
Additional information: The company’s statement of
financial position reported the cash balance of
Php.500,000 as of January 1, 2020 and Php.719,000 as of
December 31, 2020.
a. Payment on interest ₱82,000.00 OUTFLOWS OPERATING
b. Proceeds from the sale of land ₱79,000.00 INFLOWS INVESTING
c. cash withdrawal ₱121,000.00 OUTFLOWS FINANCING
d. Depreciation expense ₱24,000.00 NON-CASH NON-CASH
e. Collections from Customers ₱983,000.00 INFLOWS OPERATING
f. Payments of income taxes ₱154,000.00 OUTFLOWS OPERATING
g. Additional cash investment ₱189,000.00 INFLOWS FINANCING
h. payments to suppliers and employees ₱675,000.00 OUTFLOWS OPERATING
i. Increase in inventories ₱46,000.00 NON-CASH NON-CASH
 TEEN WOLF COMPANY
Statement of Cash Flows
For the year ended December 31, 2020
Cash Flows from Operating Activities
e. Collections from Customers ₱983,000.00
h. payments to suppliers and employees -₱675,000.00
f. Payments of income taxes -₱154,000.00
a. Payment on interest -₱82,000.00
Net cash provided by (used in) operating Activities ₱72,000.00
Cash Flows from Investing Activities
b. Proceeds from the sale of land ₱79,000.00
Net cash provided by(used in) financing activities ₱79,000.00
Cash Flows from Financing Activities
g. Additional cash investment ₱189,000.00
c. cash withdrawal -₱121,000.00
Net cash provided by (used in) financing activities ₱68,000.00
Net Increase (Decrease) in Cash ₱219,000.00
Cash balance at beginning of the period ₱500,000.00
Cash balance at the end of the period ₱719,000.00
Thank
you!!
 ACTIVITY 1
1. What kind of asset(s) would you purchase
a new smartphone or a new laptop?
Explain your choice. (consider the impact
of such purchase on your personal cash
position and the depreciation of this type
of asset.)
2. What do you think are the most important
assets in your household that will help you
achieve your goal of finishing senior high
school? Come up with a list of 10 assets
and classify them as fixed or current