FINANCIAL STATEMENTS

1. STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

- It is a formal statement showing the three elements : assets, liabilities and equity
- Investors, creditors and other statement users analyze the statement of financial
position to evaluate such factors as liquidity, solvency and the need of the entity for
additional financing.
- Liquidity is the ability of the entity to meet currently maturing obligations
- Solvency is the availability of cash over the longer term to meet maturing obligations

ASSETS
- It is controlled by the entity
- It is a result of a past event
- Provides future economic benefits
- Cost of the asset can be measured reliably.
CURRENT ASSETS
- Held primarily for the purpose of trading
- Expects to realize the asset within twelve months after the reporting period
- Expects to realize the asset or intends to sell or consume it within the entity’s normal
operating cycle.
- Presented in order of liquidity
Examples
1. Cash and cash equivalents
2. Trading securities
3. Trade and other receivables
4. Inventories
5. Prepaid expenses (rent, insurance etc.)

NONCURRENT ASSETS
- All other assets not classified as current.
Examples
1. Property plant and equipment
2. Long term investments
3. Intangible assets
4. Other noncurrent assets

LIABILITIES
- Defined as a present obligation of an entity arising from past event, the settlement of
which is expected to result in an outflow from the entity of resources embodying
economic benefits.
- Essential characteristics include:
o It is a present obligation of a particular entity
o Arises from past event
o Settlement of the liability requires an outflow of resources embodying
economic benefits
CURRENT LIABILITIES
 - The entity expects to settle the liability within the entity’s normal operating cycle
- The entity holds the liability primarily for the purpose of trading
- Due to be settled within twelve months after the reporting period
- Does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting period.
Examples
1. Trade and other payables (including unearned income)
2. Current provisions
3. Short-term borrowing
4. Current portion of long-term debt
5. Current tax liability

NONCURRENT LIABILITY
- All liabilities not classified as current liabilities
Examples
1. Noncurrent portion of long-term debt
2. Finance lease liability
3. Deferred tax liability
4. Long-term obligations to entity officers
5. Long-term deferred revenues

EQUITY
- It is the residual interest in the assets of the entity after deducting all of the liabilities
- Total assets – liabilities
- It is increased by profitable operations and contribution by owners
- Decreased by unprofitable operations and distribution to owners
Examples
1. Owner’s capital
2. Owner’s withdrawal
3. Partner’s capital
4. Partner’s withdrawal
5. Share capital
6. Share premium
STATEMENT OF FINANCIAL PERFORMANCE (Income Statement)
- It shows the company’s performance in the annual operation of the business
- Net loss generally signifies a poor performance
- Net profit generally signifies good performance
INCOME
- Comprises of revenues and gains
- Revenues are those income related to daily business operating transactions.
- Gains are those not related to day-to-day operations
EXPENSES
- Comprises of cost of sales/cost of goods sold and losses
- COGS are those expenses directly related to the production of the goods or services
sold on a daily operation
- Losses are those not related to the ordinary business operations.
STATEMENT OF CASH FLOWS
- A component of financial statements summarizing the operating, investing and
financing activities of an entity
- Provides information about the cash receipts (inflows) and cash payments of an entity
- It is useful in assessing the ability of the entity to generate cash and cash equivalents.

OPERATING ACTIVITIES
- Cash flows derived primarily from the principal revenue producting activities of the
entity
- Usually affects a current asset or a current liability account and those involved in the
computation of net income or loss.
Examples
1. Cash receipts from sale of goods or rendering services
2. Cash receipts from royalties, rental fees, commissions and other revenue
3. Cash payments to suppliers for goods and services
4. Cash payment for selling, administrative and other expenses
5. Cash receipts and cash payments of an insurance enterprise for premiums and claims,
annuities and other policy benefits
6. Cash payments or refunds of income taxes unless they can be specifically identified with
financing and investing activities
7. Cash receipts and payments for securities held for dealing or trading purposes.

INVESTING ACTIVITIES
- Cash flows derived from the acquisition and disposal of long-term assets and other
investments not included in cash equivalent.
- Usually those that involve a noncurrent asset account.
Examples
1. Cash payments to acquire property, plant and equipment, intangibles and other long-term
assets
2. Cash receipts from sales of property, plant and equipment , intangibles and other long-
term assets
3. Cash payments to acquire equity or debt instruments of other entities and interests in joint
ventures.

FINANCING ACTIVITIES
- Cash flows derived from the equity capital and borrowings of the entity
- Transactions between entity and the owners – equity financing ; and transactions
between entity and the creditors – debt financing
- Usually affects noncurrent liabilities and equity of an entity.
Examples
1. Cash receipts from issuing shares or other equity instruments
2. Cash payments to owners to acquire or redeem the enterprise’s shares
3. Cash receipts from issuing debentures, loans, notes, bonds, mortgages, and other short or
long term borrowings
4. Cash payments for amounts borrowed.