Business Finance - Preparation of Financial Statements

Prayer for Guidance

  • Request for Learning: A plea to learn things that are important, emphasizing values such as generosity, compassion, justice, truth, and hope.
  • Key Virtues Requested:
    • Generosity with gifts.
    • Compassion towards the less fortunate.
    • Keeping true values against worldly values.
    • Magnanimity in face of contradictions.
    • Faith in goodness.
    • Charity as a tool to right wrongs.
  • Aim: To excel in love for the poor and use this as a standard for personal conduct.

Business Finance

Chapter 3: Preparation of Financial Statements
  • Author: Mr. Delfin J. Gallardo, LPT
Definitions of Financial Instruments
  • Financial Instrument:
    • A contract that creates a financial asset for one entity and a financial liability or equity for another.
    • It regulates saving, borrowing, lending, and investing activities among different participants in the system.
Terminology in Financial Instruments

  • Term Bond:

    • A bond with a single maturity date.
    • May be a single loan or multiple bonds with the same maturity.
    • May be secured by collateral (real property).

  • Primary Market:

    • The market where new shares of stock are issued by corporations.

  • Debenture Bond:

    • A bond that is not secured by collateral.
    • Possibility for the issuing company to redeem the bond before maturity.
Types of Financial Institutions
  • Financial Intermediary:
    • Acts as a middleman between investors and borrowers.
    • Accepts deposits, extends loans, transfers and manages funds for investments.
Users of Financial Statements
  • External Users: Not directly involved in the operations. Examples:
    • SEC, BSP, BIR
  • Internal Users: Directly involved in the business. Examples:
    • Management, Employees, Customers, Investors, Suppliers, Creditors.
General Framework
  • Preparation and Presentation Standards:
    • Governed by the Philippine Financial Reporting Standards.
    • General concepts of preparation in absence of specific standards.
Basic Guidelines in Preparation of Financial Statements
  • Fair Presentation:
    • Must include all necessary information influencing decision-making.
  • Going Concern Assumption:
    • The entity is presumed to continue operations indefinitely unless proven otherwise.
  • Accrual Basis of Accounting:
    • Financial statements prepared according to accrual basis for accurate past transaction information.
  • Consistency of Presentation:
    • Retain presentation and classification of items across periods.
  • Materiality and Aggregation:
    • Misstatements are material if they influence economic decisions.
  • Offsetting Principle:
    • Assets and liabilities reported separately; overpayments shouldn’t offset receivables.
  • Comparability of Information:
    • Assists in making economic decisions by analyzing trends.
  • Disclosure of Accounting Policies:
    • Enhances relevance, reliability, and comparability of financial statements.
Financial Statements Overview
  • Statement of Financial Position (Balance Sheet):
    • Shows assets, liabilities, and equity as of a specific date.
    • Expressed in terms of liquidity, solvency, and financial structure.
  • Statement of Comprehensive Income (Income Statement):
    • Reflects financial performance over a timeframe (month, quarter, half-year, or year).
    • Income: Inflows or enhancements of assets resulting in increased equity.
    • Expenses: Outflows decreasing assets or rising liabilities leading to lower equity.
  • Statement of Cash Flows:
    • Provides details of cash inflows and outflows from operating, investing, and financing activities.
Key Components of Financial Statements
  • Assets: Resources generating business activity (cash, inventories).
  • Liabilities: Present obligations leading to outflows of economic benefits.
  • Equity: Residual interest in assets after liabilities have been deducted.
  • Liquidity: Capability of settling current obligations.
  • Solvency: Ability to settle long-term obligations.
  • Financial Structure: Ratio of capital supplied by creditors versus owners.
Conclusion
  • Prepared By: Mr. Delfin J. Gallardo, LPT
  • Thank You for Listening!
    • Highlighting the importance of understanding financial statements for both internal and external users to make informed economic decisions.