CHAPTER II

FINANCIAL
STATEMENTS
Acctg321 – Accounting Principles
  A financial statement is the combination
of the three major reports on a business.
It will contain the cash flow statement,
the income statement and the balance
FINANCIAL sheet of the business. All three together
STATEMENT produce an overall picture of the health
of the business.
  Financial statements are reports prepared
by a company’s management to present
the financial performance and position at
a point in time. A general-purpose set of
financial statements usually includes a
balance sheet, income statements,
statement of owner’s equity, and
FINANCIAL statement of cash flows. These statements
are prepared to give users outside of the
STATEMENT company, like investors and creditors,
more information about the company’s
financial positions. Publicly traded
companies are also required to present
these statements along with others to
regulator agencies in a timely manner.
 1) INCOME STATEMENT – is a statement showing
the result of the business operation for a
certain period.
 Income Statement, also known as the Profit
and Loss Statement, reports the company's
Financial financial performance in terms of net profit or
loss over a specified period. Income Statement
Reports is composed of the following two elements:
produced  Income: What the business has earned over a
by period (e.g. sales revenue, dividend income,
etc)
Accounting
 Expense: The cost incurred by the business
over a period (e.g. salaries and
wages, depreciation, rental charges, etc)
 Net profit or loss is arrived by deducting
expenses from income.
 2) Statement of Financial Position, also known
as the Balance Sheet, presents the financial
position of an entity at a given date. It is
comprised of the following three elements:
 Assets: Something a business owns or controls
Financial (e.g. cash, inventory, plant and machinery,
etc)
Reports
 Liabilities: Something a business owes to
produced someone (e.g. creditors, bank loans, etc)
by  Equity: What the business owes to its owners.
This represents the amount of capital that
Accounting remains in the business after its assets are used
to pay off its outstanding liabilities. Equity
therefore represents the difference between
the assets and liabilities.
 a) Single-step – when all expenses are
deducted from total income. This form
is used by service business.
Forms of
Income b) Multi-step – is one which shows the
different sections of the statement like
Statement the total sales, cost of sales, the
operating expenses, other income
and other expenses. This form is used
by merchandising business.
 a) Account Form – when the assets are
placed at the left side and the
liabilities and the owner’s equity at
the right side of the statement.
b) Report Form – the arrangement will be
Forms of from the top to bottom. The assets are
Balance listed first, followed by the liabilities the
owner’s equity.
Sheet
c) Financial Position Form – shows the
working capital position of the
business. The current assets less the
current liabilities equal the net working
capital.
 Balance Sheet
(Account Form)
Balance Sheet
(Report Form)
  ASSETS – are property or rights on property
owned by the business. The assets should be
classified only in to two: current assets and
non-current assets.
a) Current Assets – refers to cash and other
assets that are easily converted into cash or
consumed during the accounting period
Accounting usually one year.
Terminologies b) Non-Current Assets – refers to assets that
Assets have the following characteristics:
1. More or less permanent in nature;
2. They possess physical existence;
3. They are not for sale;
4. They are intended for use in the
operation.
  Cash on hand – refers to cash and other
cash items which are not yet deposited in
the bank.
 Cash in bank – is money deposited in the
bank.
 Marketable securities – is a term that refers
Current to company securities, usually stocks that
are sold for cash.
Assets  Notes Receivable – are claims of the
business from anyone evidenced by a
note.
 Interest Receivable – interest earned on an
interest-bearing note not yet collected.
 Accrued interest income - is a term,
synonymous with interest receivable.
 • Accounts Receivable – refers to claims of the
business from anyone for sales made or
services rendered on account.
• Estimated Uncollectible Account – sometimes
called allowance for bad debts.
• Advance to officers and employees – is a term
Current that refers to amounts given to officers and
employees usually deductible from their
Assets salaries.
• Merchandise inventory – refers to goods
unsold at the end of the accounting period or
on hand at the beginning of the year.
• Prepaid Expenses – are expenses paid in
advance or items that are bought which will
be used during accounting period.
  Tools – refers to small items of equipment like pliers,
hammer, screwdrivers, etc.
 Land – refers to land space owned by the business.
 Building – refers to the building or edifice
constructed, owned and intended for use by the
business.
 Furniture and Fixtures – is a term used to, include
tables and chairs, cabinets, counters, and other
Non-Current pieces of furniture used in the business.
Assets  Delivery equipment – is a term that includes cars,
jeeps, trucks, van, and other transportation
vehicles owned by the business.
 Accumulated Depreciation – is a contra-asset
account. It is a deduction from a particular fixed
asset account.
 Intangible assets – are assets that do not have
physical existence owned by the business.
Examples are goodwill, patents.
  LIABILITIES - is an obligation that a
business owes to someone and its
settlement involves the transfer of cash
or other resources. Liabilities must be
classified in the statement of financial
position as current or non-current
depending on the duration over which
Accounting the entity intends to settle the liability.
Terminologies a) Current liabilities – a liabilities that are
Liabilities expected to be settled within one
year from the reporting date.
b) Non-current liabilities - A liability which
will be settled over the long term.
  Accounts Payable – is a current liability
which refers to debts or obligations that
arise from purchase of goods or services
on account.
 Notes Payable – is a current liability if the
note is payable within one year.
 Interest Payable – is the interest due to an
Current interest bearing note. Accrued interest
Liabilities expense is term synonymous with interest
payable.
 Taxes Payable – are taxes due the for
government are not yet paid by the
business.
 Salaries Payable – are salaries not yet paid
by the business to its employees or workers.
 Long-term liabilities – are
obligations or debts of the business
that will be due and payable
Non-current beyond one year.
Liabilities
Mortgage Payable – is a long-term
liability account that refers to debt
secured by a mortgage on real
estate.
  OWNER’S EQUITY– is a term that refers to
the vested interest of the owner in the
business. Equity is what the business owes
to its owners.
Accounting  Owner’s drawing – is a term that shows the
Terminologies withdrawal of cash or other items from the
Owner’s Equity or business by the owner. This is deducted
Capital from the income earned by the business.
 Income and Expense Summary – is a
temporary account opened at the end of
the accounting period to absorb income
and expense accounts before finally
closing it to capital.
  INCOME – is generally term to mean any earning
made by the business.
 Service Income – refers to earnings derived from
services rendered whether on cash or on account.
 Fees – is another generally term used to designate
income.
Accounting  Legal Fee – is income from rendering legal services.
Terminologies  Sales – is a term to denote income derived from
Income the sales of goods.
 Commission income – is an income account to
designate earnings received from selling anything
on a commission basis.
 Other income – is another income account to
designate earnings received from sources other
than its main source of income.
  Taxes and Licenses – are payments made
by the business to the ‘s government for it’s
business operations.
 Salaries Expenses – refers to the cost of
services rendered by the employees or
Accounting workers of the business.
Terminologies  Supplies Expense – refers to the cost of
Cost and Expenses office items like stationery, bond papers,
carbon papers and etc.
 Delivery Expense – refers to the cost of
transportation in delivering goods or
services to customers.
 Bad debts Expense – refers to the portion of
accounts receivable which may not be
collected.
  Depreciation expense – refers to the
portion of the cost of the fixed asset which
has been charged to income during the
period.
 Insurance expense – refers to the
insurance premium paid by the business.
Accounting
Terminologies  Rent Expenses – refers to the space
Cost and Expenses occupied by the business or the payment
for the use of any property by the business.
 Interest Expense – refers to the amount
charged for the use of money.
 Advertising Expense – includes
promotional expenses in the selling of the
product.
  Utilities Expense – is a term used to denote
the cost of light and water consumed by
the business.
 Repair and Maintenance Expense – are
expenses for repairing or servicing
Accounting buildings, machinery, or equipment of the
Terminologies business.
Cost and Expenses  Salesmen Salaries – are fixed wages given
to salesmen.
 Cost of Good Goods Sold – is the purchase
price or the manufacturing cost of good
sold.
Difference Income Statement is dated for a
between the certain period covered like one
year, one month, quarterly
date of regardless of the year when the
Income business started.
Statement
Balance Sheet covers the period
and that of from the start of the business up to
the Balance the date stated in the balance
Sheet sheet.
 A. The heading of the Income Statement
is placed at the center of the
statement. It occupies 3 spaces or 3
lines.
How to First – the name of the business
prepare an and if no name is given in the problem,
Income place the name of the owner.
Statement Second – the name of the
statement, Income Statement.
Third - The period covered, say,
For the year ended Dec. 31, 2017; For the
month ended June 30, 2017.
 Ernesto’s Repair Shop
Income Statement
Example For the year ended December 31, 2017
 B. The Body of the Statement
1. Under the single-step income
statement, group all income
How to statement
prepare an 2. Group all the expenses under the
Income heading, operating expenses’ and
Statement 3. Deduct the operating expenses from
the total income from No. 1 to get the
net income for the period. Double rule
the net income.
 Ernesto’s Repair Shop
Income Statement
For the year ended December 31, 2017

Income from repairs 5,500

Less: Operating Expenses
Salaries and Wages 1,600
Rent Expense 500
Light & Water Expense 60
Taxes & Licenses 200
Supplies Expenses 700 3, 600
Net Income 2, 440
 A. The heading of the balance
sheet
1. The same as in (A-I) and (A-2). But
How to the date is expressed “as of
prepare the December 31, 2017 or as of June
30, 2017.” The term as of may be
Balance omitted.
Sheet 2. The date of the balance sheet is
not the same as that of the Income
Statement. It is dated as of a given
period.
 Ernesto’s Repair Shop
Statement of Financial Position
Example As of December 31, 2017
  Classify the following assets into current assets
and non-current assets
1. Cash on hand
2. Land
3. Building
4. Interest Receivable
EXERCISE 5. Prepaid Interest
No. 1 6. Unused office supplies
7. Prepaid Insurance
8. Petty Cash Fund
9. Transportation Vehicle
10. Prepaid Commission
  Classify the following into current liabilities and
non-current liabilities
1. Due to Mr. Reyes
2. Salaries Payable
3. Installment accounts due to six months
4. Philhealth contributions payable
EXERCISE 5. Mortgage Payable
No. 2 6. SSS premium payable
7. Notes payable in 3 years
8. Bonds Payable
9. Witholding taxes payable
10. Utilities payable
  Classify the following accounts into asset,
liability and capital/equity
1. Interest Income
2. Salaries Payable
3. Building
EXERCISE 4. Cash
No. 3 5. Prepaid Rent
6. Merchandise Inventory
7. Accounts receivable
8. Allowance for bad debts
9. Antonio, Drawing
10. Notes Receivable
  Classify the following account title where they
should be reported:
1. Supplies on hand
2. Accounts Payable
3. Prepaid Insurance
EXERCISE 4. Utilities Expense
No. 4 5. Service Income
6. Professional Fees
7. Unused Supplies
8. Ronald, Drawing
9. Repairs and Maintenance
 From the following data, prepare a properly classified Balance Sheet
and a Single-step Income Statement for Ace Mimeo Services
for the month of December, 2017.
Salaries expense P3,000
Rent expense 1, 350
Supplies Expense 1, 350
Taxes and Licenses 375
Light and water expense 270
Mimeographing fee 6,635
Other income 1, 680
EXERCISE Macario, Capital 52, 285
Notes Payable 30, 000
No. 5 Accounts Payable 2, 500
SSS premium payable 137.50
Office equipment 61,140
Office Furniture 3,000
Cash on hand 8,970
Cash in bank 13,482.50
Accounts Receivable 300
 Prepare the Income Statement of Dr. Ronald
Gervacio for the month ended December 31,
2017.
Dental Income P9, 800
Salaries 2,000
Supplies expense 2,000
EXERCISE Rent Expense 1, 500
No. 6 Light and water expense 300
Taxes and Licenses 392
Depreciation expense 1, 000
 Prepare an Income Statement and Statement of
Financial Position for Donna Cariaga business,
“Umaasa Rehab Clinic” for the month of
September.

Cash on hand P82, 350

Office Supplies 2, 000
Prepaid Rent 3, 500
Office equipment 45, 000
Accounting Furniture & Fixtures 110, 000
Accounts Payable 52, 000
Principles Notes Payable 18, 000
Interest Payable 8,500
Donna, Capital 124, 700
Donna, Drawing 2, 000
Salaries Expense 4, 000
Consulting Revenues 50, 000
Utilities expense 1, 350
Supplies Expense 3, 000