FINANCIAL STATEMENTS

Financial statements are the means by which the information accumulated and processed
in financial accounting is periodically communicated to the users.

The financial statements are the end product or main output of the financial accounting
process. Financial statements are a structured financial representation of the financial
position and financial performance of an entity.

General purpose financial statements

An entity shall prepare and present general purpose financial statements in accordance
with the International Financial Reporting Standards.

General purpose financial statements or simply referred to as financial statements are

those intended to meet the needs of users who are not in a position to require an entity
to prepare reports tailored to their particular information needs.

In other words, general purpose financial statements are directed to all common users
and not to specific users.

Components of financial statements

A complete set of financial statements comprises the following components:
1. Statement of financial position
2. Income statement
3. Statement of comprehensive income
4. Statement of changes in equity
5. Statement of cash flows
6. Notes, comprising a summary of significant accounting policies and other
explanatory notes

Objective financial statements

The objective of financial statements is to provide information about the financial
position, financial performance and cash flows of an entity that is useful to a wide range
of users in making economic decisions.

Financial statements also show the results of the management's stewardship of the
resources entrusted to it.
To meet this objective, financial statements provide information about the following:

a. Assets
 b. Liabilities
c. Equity
d. Income and expenses, including gains and losses
e. Contributions by and distributions to owners in their capacity as owners.
f. Cash flows

Frequency of reporting
Financial statements shall be presented at least annually.

When an entity's end of reporting period changes and financial statements are presented
for a period longer or shorter than one year, an entity shall disclose:

a. The period covered by the financial statements.

b. The reason for using a longer or shorter period.
c. The fact that amounts presented in the financial statements are not entirely
comparable.

Statement of financial position

statement of financial position is a formal statement showing the three elements
comprising financial position, namely assets, liabilities and equity.

Investors, creditors and other statement users analyze the statement of financial
position to evaluate such factors as liquidity, solvency and the need of the entity for
additional financing.
Definition of asset

An asset is an economic resource controlled by an entity as result of past event.

An economic resource is a right that has the potential to produce economic benefits.

Classification of assets
Assets are classified only into two, namely current assets and noncurrent assets.

When an entity supplies goods or services within a clearly identifiable operating cycle,
the separate classification of current and noncurrent assets is a useful information by•
distinguishing between net assets that are continuously circulating as working capital
from the net assets used in long-term operations.

The operating cycle of an entity is the time between the acquisition of assets for
processing and their realization in cash or cash equivalents.
When the entity's normal operating cycle is not clearly identifiable, the duration is
assumed to be twelve months.

Current assets
PAS 1, paragraph 66, provides that an entity shall classify an asset as current when:

a. The asset is cash or cash equivalent unless the asset is restricted to settle a
liability for more than twelve months after the reporting period.
b. The entity holds the asset primarily for the purpose of trading.
c. The entity expects to realize the asset within twelve months after the reporting
period.
d. The entity expects to realize the asset or intends to sell or consume it within the
entity's normal operating cycle.

Presentation of current assets

Current assets are usually listed in the order of liquidity, PAS 1, paragraph 54, provides
that as a minimum, the line items under current assets are:

a. Cash and cash equivalents

b. Financial assets at fair value such as trading securities and other investments in
quoted equity instruments
c. Trade and other receivables
d. Inventories
e. Prepaid expenses

Noncurrent assets
The caption "noncurrent assets" is a residual definition.
PAS 1, paragraph 66, simply states that "an entity shall classify all other assets not
classified as current as noncurrent". In other words, what is not included in the definition
of current assets is deemed excluded. All others are classified as noncurrent assets.
Accordingly, noncurrent assets include the following:
a. Property, plant and equipment
b. Long-term investment
c. Intangible assets
d. Deferred tax assets
e. Other noncurrent assets
Property, plant and equipment
PAS 16, paragraph 6, defines property, plant and equipment as "tangible assets which are
held by an entity for use in production or supply of goods and services, for rental to
others, or for administrative purposes, and are expected to be used during more than one
period".
Examples of property, plant and equipment include land, building, machinery, equipment,
furniture, fixtures, patterns, molds, dies and tools.

Most property, plant and equipment, except land, are presented at cost less accumulated
depreciation.

Long-term investments
The International Accounting Standards Committee define g investment as "an asset held
by an entity for the accretion of wealth through capital distribution, such as interest
royalties, dividends and rentals, for capital appreciation or for other benefits to the
investing entity such as those obtained through trading relationships"

Intangible assets

An intangible asset is simply defined as an identifiable nonmoneta.1Y asset without

physical substance.

The common examples of identifiable intangible assets include patent, franchise,

copyright, lease right, trademark and computer software.

An example of an unidentifiable intangible asset is goodwill.

Other noncurrent assets

Other noncurrent assets are those assets that do not fit into the definition of the
previously mentioned noncurrent assets.

Examples of other noncurrent assets include long-term advances to officers, directors,

shareholders and employees, or abandoned property and long-term refundable deposit.

Definition of liability
A liability is a present obligation of an entity to transfer an economic resource as a result
of past event.
An obligation is a duty or responsibility that an entity has no practical ability to avoid.
An obligation can either be legal or constructive.
A liability is classified as current and noncurrent.
Current liabilities
PAS 1, paragraph 69, provides that an entity shall classify a liability as current when:
a. The entity expects to settle the liability within the entity's normal Operating
cycle.
b. The entity holds the liability primarily for the purpose of trading.
c. The liability is due to be settled within twelve months after the reporting period.
d. The entity does not have an unconditional right to defer settlement of the liability
for at least twelve months after the reporting period.

Presentation of current liabilities

PAS 1, paragraph 54, provides that as a minimum, the face of the statement of financial
position shall include the following line items for current liabilities:
a. Trade and other payables
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability

The term "trade and other payables" is a line item for accounts payable, notes payable,
accrued interest on note payable, dividends payable and accrued expenses.

No objection can be raised if the trade accounts and notes payable are separately
presented.

Noncurrent liabilities
The term "noncurrent liabilities" is also a residual definition.

PAS 1, paragraph 69, provides that all liabilities not classified as current are classified
as noncurrent.

a. Noncurrent portion of long-term debt

b. Finance lease liability
c. Deferred tax liability
d. Long-term obligations to company officers
e. Long-term deferred revenue

Currently maturing long-term debt

A liability which is due to be settled within twelve months after the reporting period is
classified as current, even if:

a. The original term was for a period longer than twelve months.

b. An agreement to refinance or to reschedule payment on a long-term basis is

completed after the reporting period and before the financial statements are
authorized for issue.

However, if the refinancing on a long-term basis is completed on or before the end of the
reporting period, the refinancing is an adjusting event and therefore the obligation is
classified as noncurrent.

Discretion to refinance

If the entity has the discretion to refinance or roll over an obligation for at least twelve
months after the reporting period under an existing loan facility, the obligation is
classified as noncurrent even if it would otherwise be due within a shorter period.

The reason for this treatment is that such obligation is considered to form part of the
entity's long-term refinancing because the entity has an unconditional right under the
existing loan agreement to defer payment for at least twelve months after the end of
the reporting period.

Note that the refinancing or rolling over must be at the discretion of the entity.
Otherwise, if the refinancing or rolling over is not at the discretion of the entity, the
obligation is classified as a current liability.

Covenants
Covenants are often attached to borrowing agreements which represent undertakings by
the borrower.

Covenants are actually restrictions on the borrower as to undertaking further

borrowings, paying dividends, maintaining specified level of working capital and so forth.

Under these covenants, if certain conditions relating to the borrower's financial situation
are breached, the liability becomes payable on demand.
Effect of breach of covenants

PAS 1, paragraph 74, provides that the liability is classified as current even if the lender
has agreed, after the reporting period and before the statements are authorized for
issue, not to demand payment as a consequence of the breach.

This liability is classified as current because at reporting date the borrower does not
have an unconditional right to defer payment for at least twelve months after the
reporting period.

However, Paragraph 75 provides that the liability is classified as noncurrent if the lender
has agreed on or before the end of reporting period to provide a grace period ending at
least twelve months after the end of reporting period.

Definition of equity
The term equity is the residual interest in the assets of the entity after deducting all of
its liabilities.

Simply stated, equity means "net assets" or total assets minus liabilities.

The terms used in reporting the equity of an entity depending on the form of the
business organization are:

a. Owner's equity in a proprietorship

b. Partners' equity in a partnership
c. Stockholders' equity or shareholders' equity in a corporation

However, the term equity may simply be used for all business entities.

Under PAS 1, paragraph 7, the holders of instruments classified as equity are simply
known as owners.

Shareholders' equity
Shareholders' equity is the residual interest of owners in the net assets of a corporation
measured by the excess of assets over liabilities.

Generally, the elements constituting shareholders' equity with their equivalent IAS term
are:
Philippine Term IAS Term
Capital stock Share capital
Subscribed capital stock Subscribed share capital
Preferred stock Preference share capital Notes to
Common stock Ordinary share capital financial
Additional paid capital Share premium statements
Retained earnings (deficit) Accumulated profits (losses)
Notes to
Retained earnings appropriated Appropriation reserve
financial
Revaluation surplus Revaluation reserve
statements
Treasury stock Treasury share
provide
narrative description or disaggregation of items presented in the financial statements
and information about items that do not qualify for recognition.

Notes contain information in addition to that presented in the statement of financial

position, income statement, statement of comprehensive income, statement of changes in
equity and statement of cash flows.

In other words, notes to financial statements are used to report information that does
not fit into the body of the financial statements in order to enhance the
understandability of the financial statements.

The purpose of the notes to financial statements is "to provide the necessary disclosures
required by Philippine Financial Reporting Standards."

Forms of statement of financial position

In practice, there are two customary forms in presenting the statement of financial
position, namely:

a. Report form

This form sets forth the three major sections in a downward sequence of assets,
liabilities and equity.

b. Account form

As the title suggests, the presentation follows that of an account, meaning, the
assets are shown on the left side and the liabilities and equity on the right side of
the statement of financial position.
The following is an illustration of the two forms of statement of financial position.

Report form
SAMPLAR COMPANY
Statement of Financial Position
December 31, 2020

ASSETS
Current Assets: Note
Cash and cash equivalents (1) 500,000
Financial assets at fair value 200,000
Trade and other receivables (2) 700,000
Inventories (3) 900,000
Prepaid expenses (4) 50,000
Total current assets 2,350,000

Noncurrent assets:
Property, plant and equipment (5) 5,000,000
Investment in associate, at equity 1,000,000
Long-term investments (6) 5,100,000
Intangible assets (7) 2,000,000
Other noncurrent assets (8) 100,000
Total noncurrent assets 13,200,000
Total assets 15,550,000

LIABILITIES AND SHAREHOLDERS’ EQUITY

 Current liabilities:
Trade and other payables (9) 750,000
Note payable – short-term debt 400,000
Current portion of bonds payable 200,000
Warranty liability 50,000
Total current liabilities 1,400,000

Noncurrent liabilities:
Bonds payable – remaining portion 1,800,000
Note payable – due July 1, 2022 600,000
Deferred tax liability 100,000
Total noncurrent liabilities 2,500,000

Shareholders’ equity:
Share capital, ₱100 par 5,000,000
Reserves (10) 3,000,000
Retained earnings 3,650,000
Total shareholders’ equity 11,650,000

Total liabilities and shareholder’s equity 15,550,000

Note 1 — Cash and cash equivalents
Cash on hand 40,000
Cash in bank 300,000
Petty cash fund 10,000
BSP Treasury bill, purchased on December 1, 2020
and due March 1, 2021 150,000
Total cash and cash equivalents 500,000
Note 5 – Property, plant and equipment
Note
Land 2 – Trade and other receivables 1,500,000
Accounts
Note 3 – receivable
Building Inventories 580,000
4,500,000
Allowance
Machinery
Finished for
anddoubtful
equipment account (20,000)
1,000,000
Note 4 –goods
Prepaid Expenses 300,000
Notes receivable
Furniture
Goods and fixtures 100,000
300,000
Officeinsupplies
process unused 400,000
30,000
Accrued
Patterns,
Raw interest on notes
molds, dyes
materials receivable
and tools, net 10,000
100,000
150,000
Prepaid insurance 20,000
Advances
Total to
Manufacturing employees,
supplies collectible currently 30,000
7,400,000
50,000
Total prepaid expenses 50,000
Accumulated
Total trade depreciation
and
inventories other receivables (2,400,000)
700,000
900,000
Carrying amount 5,000,000
Note 6 – Long-term investments
Plant expansion
Note fund assets
7 – Intangible 2,000,000
Accumulated Depreciation:
Investment
Patent
Note in bonds
8 – Other noncurrent assets 3,000,000
500,000
Building 1,900,000
Cash surrender
Franchise
Long-term value deposit
refundable 100,000
1,500,000
20,000
Machinery and equipment 350,000
Long-term
otheradvances
long-term
Total intangible toinvestments
assets officers 80,000
5,100,000
2,000,000
Furniture and fixtures 150,000
Total other noncurrent assets 100,000
Total accumulated depreciation 2,400,000
Note 9 – Trade and other payables
Accounts payable 350,000
Notes payable 150,000
Accrued interest on note payable 15,000
Income tax payable 50,000
Dividends payable 100,000
Accrued expenses 85,000
Total trade and other payables 750,000
Note 10 – Reserves
Share premium 2,000,000
Retained earnings appropriated for contingencies 1,000,000
Total reserves 3,000,000
Account Form LIABILITIES AND
SAMPLAR COMPANY EQUITY
Statement of Financial Position Current liabilities:
December 31, 2020 Trade and other payables 750,000
Note payable – short-term 400,000
debt
Current portion of bonds 200,000
payable
Warranty liability 50,000
Total current liabilities 1,400,000

Noncurrent liabilities:
Bonds payable – remaining 1,800,000
portion
Note payable – due July 1, 600,000
2022
Deferred tax liability 100,000
Total noncurrent 2,500,000
liabilities

Equity:
Share capital, ₱100 par 5,000,000
Reserves 3,000,000
Retained earnings 3,650,000
Total equity 11,650,000

Total liabilities and equity 15,550,000

 ASSETS
Current assets:
Cash and cash equivalents 500,000
Financial assets at fair value 200,000
Trade and other receivables 700,000
Inventories 900,000
Prepaid expenses 50,000
Total current assets 2,350,000

Noncurrent assets:
Property, plant and 5,000,000
equipment
Investment in associate 1,000,000
Long-term investments 5,100,000
Intangible assets 2,000,000
Other noncurrent assets 100,000
Total noncurrent assets 13,200,000

Total assets 15,550,000