Financial statements are reports about a business's financial results and condition that are useful for determining its ability to generate and use cash, pay debts, track profitability trends over time, derive financial ratios, and investigate transactions. The document then provides an example balance sheet for a new business that illustrates assets like inventory, equipment, and improvements financed through owner's equity of PHP425,000 as well as liabilities like accounts payable and loans totaling PHP200,000.

2. Financial statements are a
collection of reports about
an organization's financial
results and condition. They
are useful for the following
reasons:

3. To determine the ability of a
business to generate cash,
and the sources and uses of
that cash.
To determine whether a
business has the capability to
pay back its debts.

4. To track financial results on
a trend line to spot any
looming profitability issues.
To derive financial ratios
from the statements that can
indicate the condition of the
business.

5. To investigate the details of
certain business transactions,
as outlined in the disclosures
that accompany the
statements.

6. You have just started your
business. You have a 60-square
meter store space, leasehold
improvements amounting to
PhP200,000, beginning inventory
valued at PhP50,000, and two
salespeople manning the store.

7. At the end of your opening
day, total sales were
PhP10,000. With a mark-up
of 40%, this translates to a
one-day profit of almost
PhP3,000. By month-end,
you’ve recorded total sales
of PhP200,000.

8. Let’s start with the balance
sheet, which essentially is a
report of the resources or
assets of the business vis-a-
vis the manner of financing
these assets (debt and/or
equity).

9. To illustrate, when you
were setting up your
business, you spent for the
following:

10. Inventories: PhP50,000
Leasehold improvements (all
expenses related to sprucing
up the store): PhP200,000
Delivery van (bought second-
hand): PhP250,000

11. In addition, you incurred
some PhP10,000 for
incorporation expenses and
business permits and
licenses. An additional
PhP5,000 was spent on
promotional materials and
insurance.

12. You also bought a
desktop computer and
printer for PhP30,000. And
finally, you had to have
enough cash to cover the first
two months of operations. You
estimated this at PhP80,000. So
all told, you disbursed a total of
PhP625,000.

13. What you had in actual personal
savings though amounted to only
PhP425,000. Therefore, you had
to borrow PhP200,000 to close
the financing gap. This amount
you sourced from a bank
(PhP175,000) and from a
supplier (PhP25,000).

14. ITEM AMOUNT CLASSIFICATION EXPLANATION
Cash Php80,000 Current Asset Minimum cash requirement
Inventories Php50,000 Current Asset
Beginning inventories for sale ;
also represents the minimum
inventory amount you have on
hand at all times
Prepaid Expenses Php15,000 Current Asset Expenses paid in advance
Office Equipment Php30,000
Non-Current Asset
or Fixed Asset
Represent assets used in the
business and not intended for
sale
Leasehold improvements Php200,000
Non-Current Asset
or Fixed Asset
Represent assets used in the
business and not intended for
sale
Delivery Van Php250,000
Non-Current Asset
or Fixed Asset
Represent assets used in the
business and not intended for
sale
Accounts Payable Php25,000 Current Liabilities Amount owed to supplier
Loans Php175,000
Long-term
Liabilities
Money owed to a bank or other
lender
Owner’s Equity Php425,000 Owner’s Equity
Residual interest of the owner
in the business