Lesson 2: FINANCIAL STATEMENTS AND ACCOUNTS
Main types of financial statements
1. Statement of Financial Position. Also known as the Balance Sheet, presents the
financial position of an entity at a given date. Three elements:
Assets: Something a business owns or controls (e.g. cash, inventory, plant and
machinery, etc)
Liabilities: Something a business owes to someone (e.g. creditors, bank loans,
etc)
Equity: What the business owes to its owners.
2. 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.
Income Statement is composed of the following two elements:
Income: What the business has earned over a period (e.g. sales revenue,
dividend income, etc)
Expense: Cost incurred by the business over a period (e.g. salaries and
wages, depreciation,etc)
3. Cash Flow Statement. Cash Flow Statement, presents the movement in cash and
bank balances over a period. The movement in cash flows is classified into the
following segments:
Operating Activities: Represents the cash flow from primary activities of a
business.
Investing Activities: Represents cash flow from the purchase and sale of
assets other than inventories (e.g. purchase of a factory plant)
Financing Activities: Represents cash flow generated or spent on raising and
repaying share capital and debt together with the payments of interest and
dividends.
4. Statement of Changes in Equity. Statement of Changes in Equity, also known as
the Statement of Retained Earnings, details the movement in owners' equity over a
period. The movement in owners' equity is derived from the following components:
Net Profit or loss during the period as reported in the income statement
Share capital issued or repaid during the period
Dividend payments
Gains or losses recognized directly in equity (e.g. revaluation surpluses)
Effects of a change in accounting policy or correction of accounting error
5. Notes to Financial Statements. Also referred to as footnotes. These provide
additional information pertaining to a company's operations and financial position and
are considered to be an integral part of the financial statements. The notes are required
by the full disclosure principle.
Basic Elements
, 1. Assets. In simple terms, assets are properties or rights owned by the business. They
may be classified as current or non-current.
A. Current assets – Assets are considered current if they are held for the purpose of
being traded, expected to be realized or consumed within twelve months after the
end of the period or its normal operating cycle (whichever is longer).
Cash and Cash Equivalents – bills, coins, funds for current purposes, checks,
cash in bank, etc.
Receivables – Accounts Receivable (receivable from customers), Notes
Receivable (receivables supported by promissory notes), Rent Receivable,
Interest Receivable, Due from Employees (or Advances to Employees), and
other claims
• Allowance for Doubtful Accounts – This is a valuation account which
shows the estimated uncollectible amount of accounts receivable. It is
a contra-asset account and is presented as a deduction to the related asset –
accounts receivable.
Inventories – assets held for sale in the ordinary course of business
Prepaid expenses – expenses paid in advance, such as, Prepaid Rent, Prepaid
Insurance, Prepaid Advertising, and Office Supplies
B. Non-current assets – Assets that do not meet the criteria to be classified as
current. Hence, they are long-term in nature – useful for a period longer that 12
months or the company's normal operating cycle.
Long-term investments – investments for long-term purposes such as
investment in stocks, bonds, and properties; and funds set up for long-term
purposes
Land – land area owned for business operations (not for sale)
Building – such as office building, factory, warehouse, or store
Equipment – Machinery, Furniture and Fixtures (shelves, tables, chairs, etc.),
Office Equipment, Computer Equipment, Delivery Equipment, and others
• Accumulated Depreciation – This is a valuation account which represents
the decrease in value of a fixed asset due to continued use, wear & tear,
passage of time, and obsolescence. It is a contra-asset account and is
presented as a deduction to the related fixed asset.
Intangibles – long-term assets with no physical substance, such as goodwill,
patent, copyright, trademark, etc.
2. Liabilities. Liabilities are economic obligations or payables of the business. It
represent claims by other parties aside from the owners against the assets of a
company.
Like assets, liabilities may be classified as either current or non-current.
Main types of financial statements
1. Statement of Financial Position. Also known as the Balance Sheet, presents the
financial position of an entity at a given date. Three elements:
Assets: Something a business owns or controls (e.g. cash, inventory, plant and
machinery, etc)
Liabilities: Something a business owes to someone (e.g. creditors, bank loans,
etc)
Equity: What the business owes to its owners.
2. 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.
Income Statement is composed of the following two elements:
Income: What the business has earned over a period (e.g. sales revenue,
dividend income, etc)
Expense: Cost incurred by the business over a period (e.g. salaries and
wages, depreciation,etc)
3. Cash Flow Statement. Cash Flow Statement, presents the movement in cash and
bank balances over a period. The movement in cash flows is classified into the
following segments:
Operating Activities: Represents the cash flow from primary activities of a
business.
Investing Activities: Represents cash flow from the purchase and sale of
assets other than inventories (e.g. purchase of a factory plant)
Financing Activities: Represents cash flow generated or spent on raising and
repaying share capital and debt together with the payments of interest and
dividends.
4. Statement of Changes in Equity. Statement of Changes in Equity, also known as
the Statement of Retained Earnings, details the movement in owners' equity over a
period. The movement in owners' equity is derived from the following components:
Net Profit or loss during the period as reported in the income statement
Share capital issued or repaid during the period
Dividend payments
Gains or losses recognized directly in equity (e.g. revaluation surpluses)
Effects of a change in accounting policy or correction of accounting error
5. Notes to Financial Statements. Also referred to as footnotes. These provide
additional information pertaining to a company's operations and financial position and
are considered to be an integral part of the financial statements. The notes are required
by the full disclosure principle.
Basic Elements
, 1. Assets. In simple terms, assets are properties or rights owned by the business. They
may be classified as current or non-current.
A. Current assets – Assets are considered current if they are held for the purpose of
being traded, expected to be realized or consumed within twelve months after the
end of the period or its normal operating cycle (whichever is longer).
Cash and Cash Equivalents – bills, coins, funds for current purposes, checks,
cash in bank, etc.
Receivables – Accounts Receivable (receivable from customers), Notes
Receivable (receivables supported by promissory notes), Rent Receivable,
Interest Receivable, Due from Employees (or Advances to Employees), and
other claims
• Allowance for Doubtful Accounts – This is a valuation account which
shows the estimated uncollectible amount of accounts receivable. It is
a contra-asset account and is presented as a deduction to the related asset –
accounts receivable.
Inventories – assets held for sale in the ordinary course of business
Prepaid expenses – expenses paid in advance, such as, Prepaid Rent, Prepaid
Insurance, Prepaid Advertising, and Office Supplies
B. Non-current assets – Assets that do not meet the criteria to be classified as
current. Hence, they are long-term in nature – useful for a period longer that 12
months or the company's normal operating cycle.
Long-term investments – investments for long-term purposes such as
investment in stocks, bonds, and properties; and funds set up for long-term
purposes
Land – land area owned for business operations (not for sale)
Building – such as office building, factory, warehouse, or store
Equipment – Machinery, Furniture and Fixtures (shelves, tables, chairs, etc.),
Office Equipment, Computer Equipment, Delivery Equipment, and others
• Accumulated Depreciation – This is a valuation account which represents
the decrease in value of a fixed asset due to continued use, wear & tear,
passage of time, and obsolescence. It is a contra-asset account and is
presented as a deduction to the related fixed asset.
Intangibles – long-term assets with no physical substance, such as goodwill,
patent, copyright, trademark, etc.
2. Liabilities. Liabilities are economic obligations or payables of the business. It
represent claims by other parties aside from the owners against the assets of a
company.
Like assets, liabilities may be classified as either current or non-current.
