The document discusses key financial statements including the balance sheet, income statement, statement of retained earnings, and statement of cash flows. It provides explanations of the purpose and components of each statement. The balance sheet summarizes a company's financial position at a point in time, showing assets, liabilities, and equity. The income statement measures performance over a period by reporting revenues and expenses. The statement of retained earnings tracks changes in retained earnings. The statement of cash flows reports cash inflows and outflows from operating, investing, and financing activities.

1. READING &
UNDERSTANDING
BASIC FINANCIAL
STATEMENTS
…MAKE BETTER USE OF THE INFORMATION
IN FINANCIAL STATEMENTS

2. AGENDA
Purpose of financial statements
The Balance Sheet
The Income Statement
Statement of Retained Earnings
Statement of Cash Flows
Notes to the financial statements
Fundamental concepts and assumptions
Accrual vs. cash-basis accounting
Standards for comparison
Tools of analysis

3. PRIMARY FINANCIAL STATEMENTS
Basic financial statements:
Balance Sheet
Income Statement
 Statement of Retained Earnings
Statement of Cash Flows

4. PRIMARY FINANCIAL STATEMENTS
Primary financial statements answer basic
questions including:
What is the company’s current financial status?
What was the company’s operating results for
the period?
How did the company obtain and use cash
during the period?

5. THE BALANCE SHEET
Summary of the financial position of a company at a particular
date
Assets: cash, accounts receivable, inventory, land, buildings,
equipment and intangible items
Liabilities: accounts payable, notes payable and mortgages
payable
Owners’ Equity: net assets after all obligations have been
satisfied

6. THE BALANCE SHEET
What are the resources of the company?
What are the company’s existing
obligations?
What are the company’s net assets?

7. In financial accounting, a balance sheet or statement
of financial position is a summary of the financial
balances of a sole proprietorship, a business
partnership, a corporation or other business
organization Assets, liabilities and ownership
equity are listed as of a specific date, such as the end
of its financial year. A balance sheet is often
described as a "snapshot of a company's financial
condition". Of the four basic financial statements,
the balance sheet is the only statement which applies
to a single point in time of a business' calendar year.

8. A standard company balance sheet has three
parts: assets, liabilities, and ownership equity.
The main categories of assets are usually listed
first, and typically in order of liquidity. Assets
are followed by the liabilities. The difference
between the assets and the liabilities is known as
equity or the net assets or the net
worth or capital of the company and according to
the accounting equation, net worth must equal
assets minus liabilities.

9. ACCOUNTING EQUATION
Assets = Liabilities + Owners’ Equity
Sources of Funding
Creditors’
claims
against
resources
= +
Owners’
claims
against
resources
Resources
Resources
to use to
generate
revenues

10. Assets
Cash 40
Accounts receivable 100
Land 200
Total assets 340
Liabilities
Accounts payable 50
Notes payable 150
200
Owners’ Equity
Capital stock 100
Retained earnings 40
140
Total liabilities
and owners’ equity 340
SAMPLE BALANCE SHEET
Must
Equal

11. Fiber Inc
Balance Sheet
For the Year Ended Dec. 31,2020
ASSET
Current Assets:
Bank and cash
Non-Current Assets:
Baking equipment
TOTALASSETS
LIABILITIES AND EQUITY
Non- Current Liabilities:
Loan
Owner’s Equity
Capital
TOTAL LIABILITIES AND
EQUITY
DEBIT CREDIT
Php 12,000
12,000
14,800
14,800
Php 26,800
1,000
1,000
25,800
25,800
Php 26,800

12. CLASSIFIED AND COMPARATIVE BALANCE
SHEETS
They distinguish between:
Current and long-term assets
Current and long-term liabilities
Listed in decreasing order of liquidity
Comparative so financial statement users can identify
significant changes over time. They have more than one
year on the Balance Sheet.

13. BALANCE SHEET LIMITATIONS
Assets recorded at historical value
Only recognizes assets that can be
expressed in monetary terms
Owners’ equity is usually less than the
company’s market value

14. Prepare a balance sheet of Zandra’s Art Gallery for the year ended
December 31,2020
Cash Php 840,500
Account Receivable 50,000
Art supplies 12,000
Prepaid Rent 30,000
Prepaid Insurance 18,000
Transportation Equipment 300,000
Office Equipment 50,000
Accounts Payable 37,000
Notes Payable 200,000
Utilities Payables 900
Unearned Painting Revenue 250,000
Zandra’s Capital 812,600

15. THE INCOME STATEMENT
Shows the results of a company’s operations over a period of time.
What goods were sold or services performed that provided revenue for the
company?
What costs were incurred in normal operations to generate these revenues?
What are the earnings or company profit?

16. THE INCOME STATEMENT
Revenues
Assets (cash or AR) created through business operations
Expenses
Assets (cash or AP) consumed through business operations
Net Income or (Net Loss)
Revenues - Expenses

17. Interest,
Taxes,
Depreciation,
and
Amortization

18. The Example Company
Income Statement
For the Years Ended December 31, 2019 and 2020
2020 2019
Revenues:
Sales 100 85
Other revenue 30 15
Total revenues 130 100
Expenses:
Cost of goods sold 62 58
Operating & admin. 16 12
Income tax 20 18
Total expenses 98 88
Net Income 32 12

19. DEBIT CREDIT
Revenue Php 10,045.23
Expenses
Payroll Php 4,778.76
Rent 300.00
Server 1,415.21
Administrative 3,407.01
Total Expenses 9,900.98
NET INCOME Php 144.25
MENDOZA CORPORATION
INCOME STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2020

20. Service rendered Php 94,600
Salary 25,000
Telephone & Internet 6,500
Water & electricity 16,000
Property rates and taxes 1,000
Insurance 7,300
Advertising costs 1,000
Fuel 2,500
Stationery 412
Bank Charges 654
Tax expense 3,414
PREPARE AN INCOME STATEMENT OF 24 K JEWELRY STORE FOR THE YEAR ENDED
DECEMBER 31, 2020.

21. An additional financial
statement that identifies
changes in retained
earnings from one
accounting period to the
next.
STATEMENT OF RETAINED EARNINGS
Beginning retained earnings
+ Net income
– Dividends paid
= Ending retained earnings
Net income results in:
Increase in net assets
Increase in retained earnings
Increase in owners’ equity
Dividends result in:
Decrease in net assets
Decrease in retained
earnings
Decrease in owners’ equity

22. STATEMENT OF CASH FLOWS
Reports the amount of cash collected and paid out by a company in
operating, investing and financing activities for a period of time.
How did the company receive cash?
How did the company use its cash?
Complementary to the income statement.
Indicates ability of a company to generate income in the future.

23. STATEMENT OF CASH FLOWS
Cash inflows
Sell goods or services
Sell other assets or by borrowing
Receive cash from investments by owners
Cash outflows
Pay operating expenses
Expand operations, repay loans
Pay owners a return on investment

24. MATCH CLASSIFICATION OF
CASH FLOWS
Operating activities – Transactions and events that enter into the
determination of net income.
Investing activities – Transactions and events that involve the purchase
and sale of securities, property, plant, equipment, and other assets not
generally held for resale, and the making and collecting of loans.
Financing activities – Transactions and events whereby resources and
obtained from, or
repaid to, owners and creditors.

25. OPERATING ACTIVITIES
Cash Inflow
Sale of goods or
services
Sale of investments
in trading securities
Interest revenue
Dividend revenue
Cash Outflow
Inventory payments
Interest payments
Wages
Utilities, rent
Taxes

26. INVESTING ACTIVITIES
Cash Inflow
Sale of plant assets
Sale of securities, other than
trading securities
Collection of principal on loans
Cash Outflow
Purchase of plant assets
Purchase of securities, other than
trading securities
Making of loans to other entities

27. FINANCING ACTIVITIES
Cash Inflow
Issuance of own stock
Borrowing
Cash Outflow
Dividend payments
Repaying principal on borrowing
Treasury stock purchase

28. CASH
OUTFLOWS
Operating
Activities
Financing
Activities
Investing
Activities
CASH
INFLOWS
Financing
Activities
Operating
Activities
Investing
Activities
STATEMENT OF CASH FLOWS

29. STATEMENT OF CASH FLOWS ANALYSIS
Operating Investing Financing General Explanation
Building up pile of cash,
Possibly looking for
Acquisition
Operating cash flow being
Used to buy fixed assets
And pay down debt
Operating cash flow and sale of fixed assets
being used to pay down debt.
Operating cash flow and borrowed
money being used
to expand
1.
2.
3.
4.
+
+
+
+
+
─
+
─
+
─
─
+

30. STATEMENT OF CASH FLOWS ANALYSIS
Operating Investing Financing General Explanation
Operating cash flow problems covered by sale
of fixed assets, borrowing and owner
contributions.
Rapid growth, short falls in operating cash flow;
purchase of fixed assets.
Sale of fixed assets is financing operating cash
flow shortages.
Company is using reserves
to finance cash flow
short falls.
5.
6.
7.
8.
─
─
─
─
+
─
+
─
+
+
─
─

32. Generally Accepted Accounting Principles
International Financial Reporting Standards

35. The following list shows common prepaid expenses
examples:
•Rent (paying for a commercial space before using it)
•Small business insurance policies
•Equipment you pay for before use
•Salaries
•Estimated taxes
•Some utility bills(Natural gas LPG, Council rates,
Internet, Transportation costs,
streaming services)
•Interest expenses

36. The Example Company
Statement of Cash Flows
December 31, 2011
Cash Flows From Operating Activities:
Receipts 48
Payments (43) 5
Cash Flows From Investing Activities:
Receipts 0
Payments (4) (4)
Cash Flows Used By Financing Activities:
Receipts 10
Payments (6) 4
Net Cash Flow 5

37. Cash Flow From Operating Activities
Operating Income
Add: Depreciation
Add/(Deduct):
Increase/ (Decrease) in Income Tax Payable
(Increase)/Decrease in Prepaid Expenses
Increase/(Decrease) in Rent Payable
Increase/(Decrease) in Percentage Tax Payable
Increase/(Decrease) in EWT Payable
NET CASH PROVIDED BY OPERATING ACTIVITIES
Cash Flow From Investing Activities
(Increase)/ Decrease in Machineries & Equipment
(Increase)/ Decrease in Furniture & Fixtures
(Increase)/ Decrease in Leasehold Improvement
Cash Flow from Financing Activities
Add/(Deduct):
Increase/ (Decrease) in Invested Capital
Drawings or Withdrawals
Net Cash Provided by Financing Activities
Net Increase in Cash
Cash balance, beginning
Cash balance, ending
MENDOZA CORPORATION
STATEMENTS OF CASH FLOW
FOR THE YEAR ENDED DECEMBER 31, 2020
Dr. Cr
Php. 22,672.35
31,813.26
2,429.18
(75,000.00)
6,000.00
10,380.31
4,527.00
Php. 2,822.10
Php. (72,848.00)
(68,965.00)
(50,000.00)
(191,813.00)
280,000.00
---
280,000.00
91,009.09
----
Php. 91,009.09

38. Balance Sheet 12/31/10
Cash 80,000
Other 4,550,000
Total 4,630,000
Liabilities 2,970,000
Cap. stock 900,000
R/E 760,000
Total 4,630,000
Revenues 12,443,000
Expenses 11,578,400
Net income 864,600
Income Statement
Cash 110,000
Other 4,975,000
Total 5,085,000
Liabilities 2,860,400
Cap. stock 1,000,000
R/E 1,224,600
Total 5,085,000
Balance
Sheet 12/31/11
Cash--Op. Act. 973,000
Cash--Inv. Act. (1,188,000)
Cash--Fin. Act. 245,000
Net increase 30,000
Beg. cash 80,000
End. cash 110,000
Cash Flow Statement
R/E 12/31/10 760,000
Net income 864,600
Dividends (400,000)
R/E 12/31/11 1,224,600
Stmt of Retained Earnings

39. NOTES TO THE FINANCIAL STATEMENTS
Notes are used to convey information required by GAAP or to provide
further explanation.

40. NOTES TO THE FINANCIAL STATEMENTS
Four general types of notes:
Summary of significant accounting policies: assumptions
and estimates.
Additional information about the summary totals.
Disclosure of important information that is not
recognized in the financial statements.
Supplementary information required by the FASB or the
SEC.

41. WHAT ARE THE FUNDAMENTAL CONCEPTS AND
ASSUMPTIONS?
Separate Entity Concept
Arm’s-Length Transactions
Cost Principle
Monetary Measurement Concept
Going Concern Assumption

42. Entity ─ The organizational unit for which
accounting records are maintained.
Separate entity concept ─ The activities of an
entity are to be separate from those of its individual
owners.
SEPARATE ENTITY CONCEPT
Proprietorship
Partnership
Corporation

43. THE COST PRINCIPLE
All transactions are recorded at historical cost.
Historical cost is assumed to represent the fair market
value of the item at the date of the transaction
because it reflects the actual use of resources by
independent parties.

44. THE MONETARY MEASUREMENT CONCEPT
Accountants measure only those economic activities that
can be measured in monetary terms.
Listed values may not be the same as actual market
values:
 Inflation
 Measurement issues

45. THE GOING CONCERN ASSUMPTION
An entity will have a continuing existence for the foreseeable future.

46. WHY USE ACCRUAL ACCOUNTING?
GAAP – Generally Accepted Accounting Principles
Business requires periodic, timely reporting
Accrual-basis accounting better measures a firm’s performance than does
cash flow data.

47. THE TIME PERIOD CONCEPT
The life of a business is divided into distinct and
relatively short time periods so the accounting
information can be timely, generally 12 months or less.

48. DEFINE ACCRUAL ACCOUNTING
A system of accounting in which revenues and expenses are recorded as they
are earned and incurred, not necessarily when cash is received
or paid.
Provides a more accurate picture of a
company’s profitability.
Statement users can make more informed judgments concerning the
company’s earnings
potential.

49. REVENUE RECOGNITION
Revenues are recorded when two main criteria are met:
Cash has either been collected
or collection is reasonably
assured.
The earning process is
substantially complete



50. THE MATCHING PRINCIPLE
All costs and expenses incurred in generating revenues must be
recognized in the same reporting period as the related revenues.
This process of matching expenses with recognized revenues determines
the amount of net income reported on the income statement.
costs and expenses
related revenues

51. CASH-BASIS ACCOUNTING
Revenues and expenses are recognized only when cash is received or
payments are made.
Mainly used by small businesses.
Not an accurate picture of true profitability.

52. During 2020, Crown Consulting billed its client for Php 48,000.
On December 31, 2020, it had received Php 41,000, with the
remaining Php. 7,000 to be received in 2011. Total expenses
during 2010 were Php 31,000 with Php 3,000 of these costs not
yet paid at December 31. Determine net income under both
methods.
Cash-Basis Accounting
Cash receipts Php 41,000
Cash disbursement 28,000
Income Php 13,000
Accrual-Basis Accounting
Revenues earned Php 48,000
Expenses incurred Php 31,000
Income Php 17,000
ACCRUAL VS. CASH-BASIS ACCOUNTING

53. PURPOSE OF ANALYSIS
Internal Users
Managers
Officers
Internal Auditors
External Users
Shareholders
Lenders
Customers
Financial statement analysis helps users make
better decisions.

54. Liquidity and
Efficiency Solvency
Profitability Market
Ability to meet
short-term
obligations and to
efficiently generate
revenues
Ability to
generate future
revenues and
meet long-term
obligations
Ability to
generate
positive market
expectations
Ability to provide
financial rewards
sufficient to attract
and retain
financing
BUILDING BLOCKS OF ANALYSIS

55.  Intra-company
 Competitor
 Industry
 Guidelines
STANDARDS FOR COMPARISON

56. TOOLS OF ANALYSIS
Horizontal Analysis
Comparing a company’s financial condition and performance across time.

57. TOOLS OF ANALYSIS
Vertical Analysis
Comparing a company’s financial condition and performance to a
base amount.

58. DEBT RATIO AND ITS PURPOSE
Measure of leverage
Varies from industry to industry, but should be around 50%
Total liabilities
Total assets
=

59. CURRENT RATIO AND ITS PURPOSE
Measure of liquidity
Also called Working Capital Ratio
Some successful companies have current ratios less than 1.0
Total current assets
Total current liabilities
=

60. ASSET TURNOVER AND ITS PURPOSE
Measure of company efficiency
The higher the asset turnover ratio, the more efficient the company is using
its assets to generate sales.
Sales
Total assets
=

61. RETURN ON SALES AND ITS PURPOSE
Measure of the amount of profit earned per dollar of sales.
Evaluated within the appropriate industry.
Net income
Sales
=

62. RETURN ON EQUITY AND ITS PURPOSE
Overall measure of performance─profit earned per dollar of investment.
Typically between 15% and 25%.
Net income
Owners’ equity
=

63. THANK YOU!