Financial Statement Presentation and Closing the Books

General Purpose of Financial Statements

• are those intended to meet “equally” the needs of all users.

• Its objective is to provide information about the financial position, financial performance and changes in the financial position of an enterprise, as well as its cash flows.

Income Statement

Also known as the Result of Operation of Entity; provides information regarding the financial performance of the business or its profitability which is important as this will enhance the resources of the business and its capacity to generate cash and cash equivalents.

Statement of Changes in Equity

Shows the changes in the interest of the owner’s for a sole-propietorship owned business, partners in partnership, and shareholders in a corporation.

Statement of Financial Position

List down the economic resources controlled by the firm, and from which liquidity and solvency are determined.

Statement of Cash Flows

shows how cash was affected by the operating, investing, and financing activities.

Financial Information

based on historical data and not on market per value.

Accrual

is the basis of reporting except for cash flow

Consistency

of presentation should be observed from one period to the next unless a change is justified which information should be disclosed.

Comparability

requires that previous information must be presented to make the current information more meaningful.

Going Concern

requires that management must assess the ability of the firm to continue operating otherwise reports under a quitting concern must be prepared.

Materiality

of information requires that reports are expected to reasonably influence decisions that primary users make.

Nature of Expense

This includes depreciation, advertising, transportation, and employee benefits. This is normally used for a simple business such as that of a service provider. To simplify the format, two sections may be formed, one for revenues and the other for expenses.

Single step form

This form makes a single step of deducting the total expenses from the total revenues to arrive at the profit or loss.

Function of Expense

This presents the expenses according to its function or use: cost of sales, distribution cost, administrative cost and financial cost, to name a few.

Account Form

This follows the accounting equation where assets are listed on the left-hand column of the report with the liabilities and owner’s equity listed on the right-hand column.

Report Form

This shows in one straight column the assets followed by the liabilities and owner’s equity.

Current Assets

This includes cash and cash equivalents which are not restricted in use, as well as other assets expected to be realized into cash, or sold or consumed within the normal operating cycle of the business or one year, whichever is longer.

Cash

This includes currencies or coins or negotiable instruments such as a bank check or a postal money order used as a medium of exchange.

Cash on Hand

This is for cash items in the custody of the officer-in-charge.

Cash in Bank

This is for cash depostied in the bank under a current or savings account; used as an account title if the money is bigger.

Cash equivalents

These are short term, highly liquid investments such as a three-month time deposit or a three-month government treasury bill.

Marketable Securities

These are highly traded in securities such as the stocks and bonds purchased by the enterprise that are to be held for a short-term duration. Like the cash equivalents, they are usually purchased when the enterprise has temporary idle or excess cash.

Receivables

These are collectibes from customers, clients and other persons for the goods, services or money given by the business.

Accounts Receivable

This is used if only an oral or an implied promise is received from the client or customer.

Notes Receivable

This is evidenced by a promissory note issued by the debtor.

Other Receivables

Also known as Interest Receivable when interest is collectible on promissory notes received from clients and customers or Rent Receivable for rent collectible from tenants.

Dividends Receivable

This is a dividend collectible from investments made in stocks or bonds.

Merchandise Inventory

This is an account title used to represent the stock of goods available for sale by the business. This is applicable only for a merchandising business.

Prepaid Expenses

These represent advance payments made for benefits or services to be received by the business in the future.

• Supplies

• Prepaid Insurance

• Prepaid Rent

Examples of Prepaid Expenses

Contra asset accounts

Deduction from current assets are called:

Allowance for Bad Debts

This represents customers’ accounts doubtful of collection. This is deducted from accounts receivable to arrive at its net realizable value.

Non-current assets

These are those assets not included as current assets such as the long-term investments, property, plant, and equipment and intangibles.

Long-term investments

These are held for wealth accretion, regular income, capital appreciation, and control.

• Investments in Securities

• Invetments in Subsidiaries/Associates

Examples of Long-term Investments.

• Property

• Plant

• Equipment

• Plant Assets

These are assets not intended for sale but are acquired since they are needed to operate the business.

Land

This is a lot or real estate owned and used by the business on which a building could be constructed.

Building

This is a structure used to house the office, store, or factory.

Equipment

This consists of typewriter, air conditioner, calculator, filing cabinet, computer, electric fan, trucks, or cars.

Furniture and Fixtures

This consists of tables, chairs, curtains, lighting, and wall decors.

Leasehold or Lease Right

This is for fee, lessee is given the right to use the property of a lessor over a long period of time. Most often improvements are made herein such as painting, walling, and fencing.

Accumulated Depreciation

This is a contra asset or off-set account representing expired cost of the plant, property, or equipment because of usage and passage of time. This is a deduction form the property, plant, and equipment account.

Intangibles

This are identifiable non-monetary assets, no physical substance, with future economic benefits, separable or capable of being sold or transferred such as Patents. Or it may arise form ctractual or legal rights such as Franchise or Copyright.

Other Assets

These are Advances to Employees (long term), Deposits for Utilities or Containers.

Current Liabilities

These are the debts or obligations reasonably expected to be liquidated in the normal course of the enterprise’s operating cycle or paid within a period of one year using current assets or the creation of other current liabilities.

Accounts Payable

This is to trade creditors for purchase of goods or services on credit supported by the oral or implied promise of the business.

Notes Payable

This is a liability supported by a promissory note issued by the business to the creditor.

Loan Payable

This is a liability to pay a bank or a financing institution for amount of money borrowed by the business.

Utilities Payable

This ia a liability to pay utility companies like PLDT, Meralco, and Manila Water for telephone, electricity, and water services received from them.

Other Payables

This includes Interest Payable which represents additional charge and obligation to pay for interest-bearing promissory notes issued by the business and Salaries payable which represents obligation to pay employees for services received from them and Taxes Payable which are oligations due to the government for sales, earnings, gains, and value of property owned/sold by the business.

Non-current liabilities

These are long-term liabilities or obligations which are payable longer than one year.

Mortgage Payable

Which is an obligation secured by the real property of the business.

Bond Payable

Which is a long-term promise usually from five to ten or twenty years supported by formal contact containing the face value of the bond, the interest rate, the interest payment date, and the maturity date.

Closing the books

This means bringing the temporary or nominal accounts to zero balance by transferring them to the capital account or owner’s equity.

Income Summary

This is an account used to close the nominal values and bring them to the capital account.

Post Closing Trial Balance

This is prepared after closing the books and contains only real accounts with balances. It has the same accounts as those found in the statement of financial position.

Opening Entry

This is to bring forward the accounts with balances to the next accounting period. This should be prepared based on the post closing trial balance.

Reversing Entries

These are the oppoite of ajusting entries and are prepared on the first day of the succeeding reporting period.

Financial Analysis

This serves as a stepping stone to forecasting the company’s future financial position and performance. This also becomes a powerful and effective tool whch will assist all users in obtaining meaningful knowledge and in making informed judgement and decision.

Comparative Financial Statements

This assists users in making economic decisions relevant to an understanding of the current period financial statements.

Intracomparability

For the first accounting period, accountants usually prepare comparative financial statements by presenting side by side the data for two periods.

Intercomparability or Benchmarking

The comparison may also be made between two companies.

Profitability

This is the ability of the company to enhance owner’s equity through profit. The relevant information are the revenues earned, the net income obtained, the assets used in the operation, and the investment made by the owner.

Liquidity

This is the ability of the business to pay for its short-term obligations. Short term creditors such as suppliers and lenders (banks) are interested in this information.

Solvency

This is a long term liquidity and is measured based on ability of the business to pay for long term obligations when they fall due. This is determined by computing for the debt ratio and the equity ratio.

Debt ratio

This shows the proportion of the assets provided by the creditors.

Equity Ratio

This shows the proportion of the assets invested by the owner.