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Terminologies
Financial statements- are used by investors, market analysts,
and creditors to evaluate a company's financial health and
earnings potential. The three major financial statement reports
are the balance sheet, income statement, and statement of cash
flows.
Liquidity refers to the company’s
ability to pay maturing obligation.
Accounting Equation:
ASSETS = LIABILITIES+OWNER’S
 STATEMENT OF
FINANCIAL POSITION OR
BALANCE SHEET
This financial report provides information
regarding the liquidity position and capital
structure of the company as of a given date.
Two types of SFP or
balance sheet
Report Form- traditional form of statement
of financial position which consist of one
column.
Account Form- two columns with assets on
the left side and liabilites and owners equity
on the right side.
Report Form
Account Form
Current Assets
readily convertible into cash
ex: cash,accounts receivables
Non-Current Assets
assets that cannot be convertible to
cash. ex: Property, equipment
Current Liabilities
liabilities that fall due within one
year from the reporting date.
ex: Accounts, payable,
expense,unearned income.
Non-Current Liabilities

liabilities that do not fall due within

one year from the reporting date.
ex: Loan payable, Mortage payable
 STATEMENT OF
PROFIT OR LOSS OR INCOME
STATEMENT
provide information regarding the
revenues or sales, expenses,and net
income of the company over a given
accounting time. This accounting period
may be for a month, a quarter, or a year.
Statement of Profit or Loss or
Income Statement
 STATEMENT OF
CASHFLOW
provides an explanation regarding the
change in cash balance from one
accounting period to another. The cash
flows are also classified into three main
categories: operating, investing, and
financing.
Statement of Cash Flow
 Operating Activities

It includes sale of goods,

service performed,
providing and delivering
goods
Operating Activities
Cashf Inflow
- sale of goods and service
performed
-from royalties fees, commissions
and other revenues
Operating Activities
Cashf Outflow
- payments to supplier if goods
and service.
-payments to employee.
-payments to taxes
-payments for interest expenses
Investing Activities
Cashf Inflow
-sale of Property and equipment
-sale of Investment in debt or
equity securities
-collection on notes receivable in
investment
Investing Activities
Cashf Outflow
-payments to acquire property
and equipment.
-payments to acquire debt or
securities
-payments to note receivable in
investment
Financing Activities
Cashf Inflow
-investment by owners
-inssuance of notes payable in
financing
Financing Activities
Cashf Outflow
-payment to owners in the form of
withdrawals
-payment to settle notes payable
financing
Statement of Changes in
Stockholders’ Equity
Equity provides information that explains
the changes in thestockholders’ equity
account from one accounting period to
another. This changes may be due to the
following:
Statement of Changes in
Stockholders’ Equity
1. Profit or loss for the accounting period
2. Cash dividend declaration
3. Issuance of new shares of stocks
4. Other transactions that affect the stockholder’s equity
such as other comprehensive income, treasury
stocks, and revaluation of assets.
 Notes of Financial Statements

The notes of financial statements are

integral part of financial statements.
Among the additional information
that the notes of financial statements
provide are the following:
Notes of Financial Statements

1. Brief description of the company

2. Summary of significant accounting
policies.
3. Breakdown of amounts found in the
financial statements.
REVIEW OF THE
PROCESS OF FINANCIAL
STATEMENT PREPARATION
 Review of the
Process of Financial
Statement Preparation
1. Analyzing business transactions

• In this step, a transaction is analyzed to find out if it

affects the company and if it needs to be recorded.
• Personal transactions of the owners and managers
that do not affect the company should not be recorded.
• In this step, a decision may have to be made to
identify if a transaction needs to be recorded in special
journals such as a sales or purchases journal.
1. Analyzing business transactions

• In this step, a transaction is analyzed to find out if it

affects the company and if it needs to be recorded.
• Personal transactions of the owners and managers
that do not affect the company should not be recorded.
• In this step, a decision may have to be made to
identify if a transaction needs to be recorded in special
journals such as a sales or purchases journal.
2. Recording in the journals
• Using the rules of debit and credit, transactions are initially
entered in a record called a Journal and the entrymade is
called a Journal Entry.
• The journal serves as a record of when transactions
occurred and were recorded.
• For repetitive transactions or high volume transactions (e.g.
one thousand sales transactions in one day),Special Journals
are made. These special journals include sales journal,
purchases journal, cash receipts journal,and cash
disbursements journal.
3. Posting to ledger accounts

• A transaction is first recorded in a journal. Periodically, the

journal entries are transferred to the accounts in
the ledger.
• The process of transferring the debits and credits from the
journal entries to the accounts is called Posting.
• Ledgers provide chronological details as to how transactions
affect individual accounts. There are two types of
ledgers: the General Ledger and Subsidiary Ledger. The
general ledger is a summary of the different Subsidiary
Ledgers and can serve as a control account.
 4. Preparing the unadjusted trial balance

• Errors may occur in posting debits and credits from

the journal to the ledger. One way to detect such
errors is by preparing a trial balance.
• Double-entry accounting requires that debits must
always equal credits. The trial balance verifies this
equality.
 4. Preparing the unadjusted trial balance

• The steps in preparing a trial balance are as follows:

1. List the name of the company, the title of the trial balance,
and the date the trial balance is prepared.
2. List the accounts from the ledger and enter their debit or
credit balance in the Debit or Credit column
of the trial balance.
3. Total the Debit and Credit columns of the trial balance.
4. Verify that the total of the Debit column equals the total of
the Credit column.
 5. Making the adjusting entries

• At the end of the accounting period, many of the account

balances in the ledger can be reported in the
financial statements without change.
•The analysis and updating of accounts at the end of the
period before the financial statements are prepared is
called the Adjusting Process.
The journal entries that bring the accounts up to date at the
end of the accounting period are called Adjusting
Entries.
 6.Preparing the adjusted trial balance

An adjusted trial balance is prepared after

taking into consideration the effects of the
adjusting entries. Again, this is to ensure that
the total debit balances equal the credit
balances after posting and journalizing
adjusting entries made.
 7. Preparing the financial statements

From the adjusted trial balance, the

financial statements can then be
prepared. These are the statement of
financial position, statement of profit or
loss, and the statement of cash flows.
 7. Preparing the financial statements

From the adjusted trial balance, the

financial statements can then be
prepared. These are the statement of
financial position, statement of profit or
loss, and the statement of cash flows.
 8. Making the closing entries

Upon closing:
- If the revenues exceed expenses during an
accounting period, retained earnings will
increase.
- The reverse is true which means that if the
expenses exceed revenues, the retained
earnings will decrease.
 8. Making the closing entries

In closing temporary accounts:

- Revenue account balances are transferred to an account
called Income Summary Account (sometimes profit or
loss summary).
- Expense account balances are also transferred to the
Income Summary Account.
- The balance of the Income Summary (net income or net
loss) is transferred to the owner’s capital account.
- The balance of the owner’s drawing account is transferred
to the owner’s capital account.
 9. Post-closing trial balance

A Post-Closing Trial Balance shows the

accounts that are permanent or real.
These are the accounts that can be
seen in your balance sheet.
The post-closing trial balance is prepared to
test if the debit balances equal the credit
balances after closing
entries are considered.
 Activity
Prepare a balance sheet using the following (scrambled)
accounts:
THANK
You