This will be useful if you are in the field of accounting. This topic will be presenting financial statements. It will be beneficial to students who are inclined into, business and accounting

1. EVALUATING FINANCIAL
STATEMENTS
LECTURE 4 and 5*
(GROUP 1 AND 2 SHOULD ARRANGE THE
DIVISION OF SLIDES)

2. FINANCIAL STATEMENTS
•Represent a formal record of the financial
activities of an entity.
•These are written reports that quantify the
financial strength, performance and
liquidity of a company.

3. There are Basic Financial Statements
1. Income Statement
2. Statement of Retained Earnings
3. Balance Sheet

4. Income Statement
Also known as the Profit and Loss Statement,
reports the company's financial performance in
terms of net profit or loss over a specified period.
A Simple format of Income Statement
Revenues – Expenses = Net Income

5. 1. Revenues are earned for the sale of goods or
services.
Ex. Sales, Service Revenue & Interest Revenue
2. Expenses are incurred when a business receives
goods and services.
Ex. Salaries expense, utility expense and interest
expense.

6. Multi-Step Income Statement format
Sales
- Cost of Goods Sold
Gross Profit
- Operating Expenses
Income from
Operations
+/-Non-Operating Items
Income before Taxes
- Income Taxes
Net Income
Cost of Goods
Sold represents
the expenses a
business incurred
to buy or make a
product for
resale.

7. Ex.
A pharmaceutical store buys a
medicine for Php 50,000.00 and
then sells it for Php 70,000.00.
The Cost of Goods Sold is Php
50,000.00

8. Operating Expenses are the usual
expenses incurred in operating a
business.
Accounts such as:
•Salaries expense
•Utility expense
•Depreciation expenses

9. Non-Operating items are revenue
expenses, gains and losses that do not
relates to the company’s primary
operations.
Accounts include:
•Interest Expense
•Gains and Losses of the Sale of
Equipment and Investments.

10. Income Taxes are computed by multiplying
Income before taxes by the income tax rate.
Ex.
Income before taxes is Php 50,000.00. The
income tax rate is 30%. The income taxes = Php
50,000.00 * 30% = Php 15,000.00

11. The Statement of Retained Earnings
Reports how net income and dividends affected a company’s
financial positions during the period.
Beg. Bal. Retained Earnings
+Net Income
-Dividends
End. Bal. Retained Earnings

12. The Balance Sheet
The purpose of balance sheet is to report the financial
position of an accounting entry at a particular point in
time.
Basic format for the balance sheet is:
Assets = Liabilities + Equity

13. Assets are economic resources owned by a company
Ex.
• Cash
• Accounts Receivables
• Supplies
• Buildings
• Equipment

14. Liabilities are the company’s debts or obligations.
Ex.
• Accounts Payable
• Unearned Revenues
• Bonds Payable

15. Equity is the residual balance.
Assets – liabilities = Equity
Note: if the business is corporation equity is called “stockholder’s
equity”, it represents the financing provided by the stockholders
along with the earnings from the business not paid out as
dividends.

16. Types of Assets
1. Current Assets are assets that will be used or turned into
cash within one year.
Ex. Cash, accounts receivable, inventory, short-term
investments, supplies and prepaid.

17. 2. Non-Current Assets comprise the remainder of the assets.
Ex. Long-term Investments land, building, equipment and
patents.
Current Assets
+ Non-Current Assets
Total Assets

18. Types of Liabilities
1. Current Liabilities are obligations that will be paid in cash
(or other services) or satisfied by providing service within the
coming year.
Ex. Accounts payable, Short-term notes payable, and taxes
payable.

19. 2. Long-Term Liabilities are obligations that will not be paid or
satisfied within the year.
Ex. Mortgage payable and bonds payable.
Current Liabilities
+ Long-Term Liabilities
Total Liabilities

20. Stockholder’s Equity is divided into two categories: contributed
capital and retained earnings.
Contributed Capital
+ Retained Earnings
Total Stockholder’s Equity

21. Contributed Capital is the amount of cash (or
other assets) provided by the shareholders.
•Common Stock and Additional Paid in Capital
are accounts in this section.
Retained Earnings is the total earnings that have
not been distributed to owners as dividends.

22. Current Assets
+ Non-Current Assets
Total Assets
Current Liabilities
+ Long-Term Liabilities
+ Stockholder’s Equity
Total Liabilities and
Stockholders’ Equity

23. Note: the Balance Sheet must be prepared
after the statement of Retained Earnings
in order to have calculated the ending
balance of Retained Earnings.

24. Order of Preparation
Income
Statement
Net Income
Statement of Retained
Earnings
Beg. Retained Earnings
+ Net Income
- Dividends
End. Retained Earnings
Balance Sheet
Ending Balance
Retained Earnings

25. Example Problem
Cash 5,000 Sales 100,000
Utility Expense 8,000 Buildings 65,000
Common Stock 45,000 Accounts Payable 12,000
Supplies 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid-In Capital 20,000
Bonds Payable 40,000 Supplies Expense 3,000
Salaries Expense 16,000 Accounts Receivable 10,000
Inventories 45,000 Retained Earnings 5,000 (beg. Bal.)
Income Tax Rate 30%

26. Step One
Classify the accounts as assets,
liabilities, equity, revenue or
expenses.

27. Cash 5,000 Sales 100,000
Utility Expense 8,000 Buildings 65,000
Common Stock 45,000 Accounts Payable 12,000
Supplies 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid-In Capital 20,000
Bonds Payable 40,000 Supplies Expense 3,000
Salaries Expense 16,000 Accounts Receivable 10,000
Inventories 45,000 Retained Earnings 5,000 (beg. Bal.)
Income Tax Rate 30%
Assets

28. Cash 5,000 Sales 100,000
Utility Expense 8,000 Buildings 65,000
Common Stock 45,000 Accounts Payable 12,000
Supplies 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid-In Capital 20,000
Bonds Payable 40,000 Supplies Expense 3,000
Salaries Expense 16,000 Accounts Receivable 10,000
Inventories 45,000 Retained Earnings 5,000 (beg. Bal.)
Income Tax Rate 30%
Liabilities

29. Cash 5,000 Sales 100,000
Utility Expense 8,000 Buildings 65,000
Common Stock 45,000 Accounts Payable 12,000
Supplies 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid-In Capital 20,000
Bonds Payable 40,000 Supplies Expense 3,000
Salaries Expense 16,000 Accounts Receivable 10,000
Inventories 45,000 Retained Earnings 5,000 (beg. Bal.)
Income Tax Rate 30%
Equity

30. Cash 5,000 Sales 100,000
Utility Expense 8,000 Buildings 65,000
Common Stock 45,000 Accounts Payable 12,000
Supplies 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid-In Capital 20,000
Bonds Payable 40,000 Supplies Expense 3,000
Salaries Expense 16,000 Accounts Receivable 10,000
Inventories 45,000 Retained Earnings 5,000 (beg. Bal.)
Income Tax Rate 30%
Revenues

31. Cash 5,000 Sales 100,000
Utility Expense 8,000 Buildings 65,000
Common Stock 45,000 Accounts Payable 12,000
Supplies 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid-In Capital 20,000
Bonds Payable 40,000 Supplies Expense 3,000
Salaries Expense 16,000 Accounts Receivable 10,000
Inventories 45,000 Retained Earnings 5,000 (beg. Bal.)
Income Tax Rate 30%
Expenses

32. Step Two
Prepare the Income Statement
Sales Revenue
- Cost of Goods Sold
Gross Profit
- Operating Expense
Income from Operations
+/- Non-Operating Items
Income before Taxes
- Income taxes
Net Income

33. Income Statement
Sales 100,000
Less (-) Cost of Goods Sold 58,000
Gross Margin 42,000
Less (-) Operating Expenses 27,000
Income from Operations 15,000
Less (-) Non-Operating items 5,000
Income before taxes 10,000
Less (-) Income taxes 3,000
Net Income 7,000

34. Note:
Operating Expenses include:
Utility Expense 8,000
Salaries Expense 16,000
Supplies expense 3,000
Non-operating items include:
Interest expense 5,000
Income Taxes = Income before taxes *
Income Tax rate
10,000 * 30% = 3,000

35. Step Three
Prepare the statement of Retained Earnings.
Beg. Balance, Retained Earnings
+ Net Income
- Dividends
End. Balance, Retained Earnings
*Statement of Retained Earnings
Beg. Balance, Retained earnings 5,000
+ Net Income 7,000
- Dividends -0
Ending Balance, Retained Earnings 12,000
Note: Net Income is brought forward from the income statement.

36. Step Four
Prepare the Balance Sheet
Current Assets
+ Non- Current Assets
Total Assets
Current Liabilities
+ Long-term Liabilities
+ Stockholder’s Equity
Total Liabilities and Stockholder’s
Equity

37. Balance Sheet
Current Assets: Current Liabilities
Cash 5,000 Accounts Payable 12,000
Accounts Receivable 10,000 Long-Term Liabilities:
Inventories 45,000 Bonds Payable 40,000
Supplies 4,000 Stockholders’ Equity:
Non-Current Assets: Common Stock 45,000
Buildings 65,000 Additional Paid-In Capital 20,000
Retained Earnings 12,000
Total Assets 129,000 Total Liabilities 129,000
Ending balance is brought forward
from the statement of Retained
Earnings.