CHAPTER 2
FINANCIAL STATEMENTS
An introduction
Definition
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.
Components of financial statements
A complete set of financial statements comprises the following components:
1. Statement of financial position -Assets,Liabilities, equity
2. Income Statement
3. Statement of comprehensive income-OIC CRev.ortrp.)
4. Statement of changes in equity
6. Notes, comprising a summary of significant accounting accounting policies and other
explanatory notes
,Objective of financial statements
The objective offinancial statements is to provideinformation about the financial nsdi st financial
performance and cash making economic decisions.
e i an cial statements also show the results of the management's stewardship of the resources
entrusted to it.
To meet this objective,financial statements provideinformation 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
A 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 the statement of financial position to
evaluate such factors as liquidity,solvency and the need of the entity for additional financing.
,Definition of assets
Assets are defined as "resources controlled by the entity as a result of past transactions and
events and from which future economic benefits are expected to flow to the entity".
The essential characteristics of an asset are:
a. The asset is controlled by the entity.
b. The asset is the result of a past transaction or event.
c. The asset provides future economic benefits.
d. The cost of the asset can be measured reliably.
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, its 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 from being exchanged or
used to settle a liability for at least twelve months after the reporting period.
b. The entity holds the asset primarily for the purpose of
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 usually listed in the order of liquidity.
Current assets
the line items under current assets are:
a. Cash and cash equivalents securities
b. Financial assets at fair value such as trading 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 investments
c. Intangible assets
d: Other noncurrent assets
PAS 1, paragraph 56, provides that "when an entity presents current and noncurrent assets as
separate classifications on the face of the statement of financial position, it shall not classify
deferred tax assets as current 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”.
FINANCIAL STATEMENTS
An introduction
Definition
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.
Components of financial statements
A complete set of financial statements comprises the following components:
1. Statement of financial position -Assets,Liabilities, equity
2. Income Statement
3. Statement of comprehensive income-OIC CRev.ortrp.)
4. Statement of changes in equity
6. Notes, comprising a summary of significant accounting accounting policies and other
explanatory notes
,Objective of financial statements
The objective offinancial statements is to provideinformation about the financial nsdi st financial
performance and cash making economic decisions.
e i an cial statements also show the results of the management's stewardship of the resources
entrusted to it.
To meet this objective,financial statements provideinformation 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
A 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 the statement of financial position to
evaluate such factors as liquidity,solvency and the need of the entity for additional financing.
,Definition of assets
Assets are defined as "resources controlled by the entity as a result of past transactions and
events and from which future economic benefits are expected to flow to the entity".
The essential characteristics of an asset are:
a. The asset is controlled by the entity.
b. The asset is the result of a past transaction or event.
c. The asset provides future economic benefits.
d. The cost of the asset can be measured reliably.
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, its 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 from being exchanged or
used to settle a liability for at least twelve months after the reporting period.
b. The entity holds the asset primarily for the purpose of
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 usually listed in the order of liquidity.
Current assets
the line items under current assets are:
a. Cash and cash equivalents securities
b. Financial assets at fair value such as trading 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 investments
c. Intangible assets
d: Other noncurrent assets
PAS 1, paragraph 56, provides that "when an entity presents current and noncurrent assets as
separate classifications on the face of the statement of financial position, it shall not classify
deferred tax assets as current 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”.
