Financial Statements

Objectives of Financial Statements To provide information that is: 1.Useful to current and potential investors and creditors in making rational investment, credit, and other related decisions 2.Helpful to current and potential investors and creditors in assessing the amounts, timing, and uncertainty of future cash flows such as dividends or interest payments 3.Accurate in reporting the economic resources of the business

4 PRINCIPAL QUALITATIVE CHARACTERISTICS THAT DETERMINE THE USEFULNESS OF INFORMATION IN FINANCIAL STATEMENTS Understandability Relevance Reliability Comparability

Recognition of the Elements of Financial Statements Criteria for an element to be recognized in the basic financial statements: 1.It is probable that any future or economic benefit associated with the item will flow to or from the enterprise 2.The item has a cost or value that can be measured with reliability 3.The information is faithful, verifiable and neutral 4.The information about it is capable of making a difference in user decisions.

Recognition of assets Recognition of liabilities Recognition of income Recognition of expenses

Measurement of the Elements of Financial Statements Bases of measurement 1.Historical cost 2.Current cost 3.Realization (settlement) value 4.Present value

Elements directly related to the measurement of financial position in the BALANCE SHEET  Assets  Liabilities  equity Elements directly related to the measurement of performance in the INCOME STATEMENT  income  expenses STATEMENT OF CASH FLOWS reflects income statement elements and changes in balance sheet elements affecting cash.  Operating cash flows  Investing cash flows  Financing cash flows Elements of the STATEMENT OF CHANGES TO EQUITY are:  Investment by owners  Distribution to owners ELEMENTS OF FINANCIAL STATEMENTS

THE BALANCE SHEET Assets – are business resources that have probable future economic benefits Qualifications: 1.have future economic benefits 2.be under management’s control 3.result from past transactions Liabilities – are probable future sacrifices of economic benefits. Qualifications: 1.require transfer of assets having future economic benefits. 2.specify to whom the assets must be transferred 3.result from past transactions Owner’s Equity – the residual interest of the owner in the assets of the business. Also known as net assets Assets – liabilities = Owner’s equity

ROSAL’S BUSINESS Balance Sheet December 31, 2007 Assets Current Assets : CashP5,120 Accounts receivable 2,000 Total assets P7,120 ===== Liabilities and Owner’s Equity Liabilities: Note payableP1,000 Owner’s equity: Rosal, capital 6,120 Total liabilities and owner’s EquityP7,120 ====== Account form of the Balance Sheet

AMETHYST TRADING COMPANY Balance Sheet December 31, 2007 Assets Current assets CashP 150,000 Accounts receivable 50,000 Merchandise inventory200,000 Total current assets400,000 Non-current assets Store and delivery equipment300,000 Less: Accumulated depreciation 50,000 Total non-current assets250,000 Total assetsP650,000 ====== Liabilities Current liabilities Accounts payableP100,000 Wages payable 20,000 Total current liabilities120,000 Non-current liabilities Note payable (due in 2010)180,000 Total liabilitiesP300,000 ====== Owners’ Equity Arni dela Cruz, CapitalP175,000 Mel Santos, Capital175,000 Total owners’ equity350,000 Total liabilities and owners’ equityP650,000 ====== Report form of the Balance Sheet

THE INCOME STATEMENT 1.Revenues – inflows or settlements of liabilities during a particular accounting period. Characteristics: It arises from the company’s primary earning activity and not from incidental or investment transactions It is recurring 2.Gains – increases to equity (net assets) resulting from peripheral or incidental transactions not associated with the company’s major or central line of business. 3.Expenses – outflows of assets or incurrences of liabilities during a particular accounting period. It must be incurred in conjunction with the company’s revenue-generating process. 4.Losses- decrease to equity (net assets) resulting from peripheral or incidental transactions not associated with the company’s major or central line of business.

STATEMENT OF CHANGES IN EQUITY 1.Investment by owners Cash or other assets exchanged for shares Service performance exchanged for shares Conversion of liabilities to equity ownership 2.Distribution to owners Cash dividend payments or declarations Transfer of assets to owners Liquidating distributions Conversion of equity ownership to liabilities 3.Capital maintenance adjustment – revaluation or restatement of assets and liabilities

STATEMENT OF CASH FLOWS 1.Operating cash flows – inflows and outflows of cash from: Acquiring Selling Delivery goods for sale Providing services 2.Investing cash flows Acquiring and selling investments, property, plant, and equipment and intangibles Lending money and collecting on loans 3.Financing cash flows Obtaining resources from owners Paying of dividends Obtaining and repaying resources from creditors on long-term credit

ROSAL’S BUSINESS Income Statement For the Year Ended December 31, 2007 Service revenue P2,690 Rent income 990 Total Revenue 3,680 Less: Expenses Wages expense 1,630 Utilities expense 310 Miscellaneous expense 120 2,060 Net incomeP1,620 ======

ROSAL’S BUSINESS Statement of Capital For the Year Ended December 31, 2007 Rosal, Capital, January 1, 2007P5,000 Add: Net Income 1,620 P6,620 Less: Drawings (500) Rosal, Capital, December 31, 2007P6,120 ======