Preparation of Financial Statements

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Preparation of Financial Statements

Income Statement
 a formal statement showing the performance of the enterprise for a period of time  summarizes the revenues earned and expenses incurred for that period of time.  determines the profitability of the entity for a certain period  also called as the Statement of Financial Performance  two ways to present income statement are Natural (for Service Concern Business) and Functional (for Other Nature of Business)

Statement of Changes in Owner’s Equity
 summarizes the changes that occurred in owner’s equity during the period

Owner’s Equity
Withdrawal by Owner Net Loss Owner’s Equity, beg. Net Income Additional Investments Owner’s Equity, end Pro-forma Statement of Changes in Owner’s Equity Owner, Capital – beg. Add: Net Income Additional Investments Total Less: Withdrawals Net Loss Owner, Capital – end P xx P xx xx P xx xx xx P xx xx P xx

Pro-forma Income Statement (Natural Presentation) Revenues Revenue 1 Revenue 2 Revenue 3 Less: Expenses Expense 1 Expense 2 Expense 3 Expense 4 Net Income (Loss)

P xx xx xx

P xx

P xx xx xx xx

Balance Sheet
xx P xx  a formal statement showing the three elements of comprising financial position, namely assets, liabilities, and owner’s equity  also called the Statement of Financial Position  used by the users to evaluate an entity’s liquidity, financial flexibility, ability to generate profits, and solvency  presents a “snapshot” of a company as of a certain period  net balances of the each balance sheet items as of a period are needed rather than the total for the period Liquidity – the ability of the entity to meet currently maturing obligation Solvency – the availability of cash over a longer 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

Notes:  Net Income (Loss) is called the “bottom line” of the accounting process. It is also called as the result of operations. Sources of Income 1. Sale of merchandise to customers (Sales) 2. Rendering of services (Service Revenue) 3. Use of entity resources (Interest, Rent, etc.) 4. Disposal of resources other than products (Gains) Classifications of Expenses 1. Cost of Goods Sold 2. Distribution Costs or Selling Expenses 3. Administrative Expenses 4. Other Expenses 5. Income Tax Expenses

Format a. Report Format – lists assets, liabilities, and equity in vertical sequence b. Account Format – follows the pattern A = L + OE; assets on the left side, liabilities and equity on the right side Presentation Assets – arranged based on liquidity or its ability to be easily converted into cash Current Assets a. Cash and Cash Equivalents b. Short-Term Investments c. Trade and Other Receivables (net of allowance) d. Inventories e. Prepaid Expenses f. Other Current Assets (if any) Noncurrent Assets a. Property, Plant and Equipment i. Land ii. Building iii. Machinery iv. Equipment v. Furniture and Fixtures vi. Tools b. Long-term Investments c. Intangible Assets d. Other Noncurrent Assets Liabilities – arranged based on their maturity Current Liabilities a. Trade and Other Payables b. Current Provisions c. Short-Term Borrowing d. Current Portion of long-term Debt e. Current Tax Liability f. Other Current Liabilities Noncurrent Liabilities - those not classified as current liabilities

Statement of Cash Flows
 a component of financial statements summarizing the operating, investing and financing activities of an entity it provides information about the cash receipts and cash payments of an entity during a period shows the net increase or decrease in cash during the period and the cash flows of the entity and helps project the future net cash flows of the entity

 

Operating Activities are the cash flows derived primarily from the principal revenue producing activities of the entity. a. Cash receipts from sale of goods and rendering of services b. Cash received from royalties, rental, fees, commissions and other revenue c. Cash payments to suppliers for goods and services d. Cash payments for selling, administrative and other expenses Investing Activities are cash flows derived from the acquisition and disposal of long-term assets and other investments not included in cash equivalents. a. Cash payments to acquire PPE, intangibles, and other long-term assets b. Cash receipts from sale of PPE, intangibles, and other long-term assets c. Cash receipts from sale of equity or debt securities d. Cash payments to acquire equity or debt securities e. Cash receipts from collections of long-term notes and f. Cash payments to make long-term loans to others 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 Payments to suppliers Payments to employees Payments to etc. Cash Flows Provided by (Used in) Operating Activities B. Indirect Method Net Income (Loss) + Noncash Expenses - Gains from all sources + Losses from all sources - Increase in Current Assets + Decrease in Current Assets + Increase in Current Liabilities - Decrease in Current Liabilities Cash Flows Provided by (Used in) Operating Activities P xx xx (xx) xx (xx) xx xx (xx) P xx P xx xx xx xx P xx

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