Financial Statements

Elements of Financial Statements

3.1  Statement of Financial Position [Balance Sheet]

Forms

Elements

ASSETS

A present economic resource controlled by the entity as a result of past events

·         Economic resource – the right that has the potential to produce economic benefits

·         Control – the present ability to direct the use of the economic resource and obtain the economic benefits that may flow from it

o    no other party controls that asset

o    the right to deploy that asset in its activities

o    ability to enforce legal rights on that asset

Current assets – assets that are

·         expected to be realized (converted to cash) or intended to be sold or to be consumed within the entity’s normal operating cycle*

·         held primarily for the purpose of trading

·         expected to be realized within twelve months after the reporting period

·         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

Current assets are listed according to its liquidity, its nearness to cash.

1.  Cash and cash equivalents

·         Cash – cash on hand and in banks that is available for use in the operations of the business

·         Cash equivalents – highly liquid investments that can be quickly converted into cash, not subject to significant risk of changes in value, and must be held for the purpose of ‘meeting short-term cash commitments’

Examples include money market funds, such as:

o    Investment in treasury bills (short-term debt instruments of government)

o    Investment in commercial papers (short-term debt instruments of corporations)

o    Investment in certificate of deposits (short-term debt instruments of banks)

2.  Trade and other receivables

·         Trade receivable / Accounts receivable – receivable resulting from a company’s normal trade, that is, providing services or selling goods on account [on credit; on charge account; on open-account credit]

·         Notes receivable – receivable with a written promissory note from another party from a company’s normal trade, usually requiring an additional receipt of explicit interest

·         Other receivables

o    Advances to employees – advances by the company to employees

o    Loans receivable – loans given by by the company to individuals and other entities

o    Accrued income – revenue already earned, but not yet received (recorded as part of adjusting entries at period-end)

3.  Inventory – encompass goods that are

·         purchased and held for resale

o    merchandise purchased by a retailer and held for resale [Merchandise Inventory]

o    land and other property held for resale

·         raw materials and factory supplies awaiting use in the production process

·         work in progress being produced by the entity

·         finished goods produced

4.  Prepaid expense [Deferred expense] – expense paid in advance, thus creating benefits, but not yet used

o   includes office supplies

Non-current assets – residual by definition, an entity shall classify all other assets as non-current.

1. Property, plant, and equipment (PPE) – tangible items that

·         are held for use in the production or supply of goods or services, for rental to others (except for land and building), or for administrative purposes

·         are expected to be used during more than one period

o    Land

o    Land improvements

o    Building

o    Machinery

o    Vehicles

o    Furniture and fixtures

o    Fittings

o    Office equipment

o    Bearer plants

Note: There are other non-current assets, but for FDNACCT, only Property, Plant, and Equipment items are discussed.

LIABILITIES

A present obligation of the entity to transfer an economic resource as a result of past events

·         Obligation – a duty or responsibility that an entity has no practical ability to avoid and owed to another party/parties

o    person

o    another entity

·         Transfer an economic resource

o    pay cash

o    deliver goods or provide services

o    a group of people / a group of entities

o    society at large

o    exchange economic resources with another party on unfavourable terms (E.g., Forwards; Options)

o    transfer an economic resource if a specified uncertain future event occurs

o    Issue a financial instrument if that financial instrument will oblige the entity to transfer an economic recourse

·         Result of past events

o    the entity has already obtained economic benefits or taken an action

o    the entity will or may have to transfer an economic resource that it would not otherwise have had to transfer

Current liabilities – liabilities that

·         are expected to be settled in the entity’s normal operating cycle

·         are owed primarily for the purpose of trading

·         are due to be settled within twelve months after the reporting period

·         do not have the right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period

1.  Trade and other payables

·         Trade payable / Accounts payable – payable resulting from a company’s normal trade, that is, buying assets and goods on account [on credit; on charge account; on open-account credit]

·         Notes payable – payable with a written promise to pay cash at some future date (legal IOUs), usually requiring an additional payment of explicit interest

·         Other payables

o    Accrued expense – expense already used, but not yet paid (recorded as part of adjusting entries at period-end)

2.  Loans payable - current portion – a portion of long-term Loans Payable that is payable within the next year

3.  Unearned income [Deferred income] – revenue received in advance, but not yet earned

Non-Current liabilities – residual by definition, an entity shall classify all other liabilities that are not current as non- current

1.  Loans payable - noncurrent portion – long-term Loans Payable that is not yet due within the next year

2.  Long-term notes payable – long-term promissory notes that is not yet due within the next year

3.  Mortgage payable – long-term promissory note secured by an asset the title of which is pledged to the lender

Deferrals and Accruals

OWNER’S EQUITY

The residual interest in the assets of the entity after deducting all its liabilities Owner’s financial interest or net worth in a business

BASIC ACCOUNTING EQUATION

3.2  Statement of Financial Performance

Statement of Profit & Loss [Income Statement; Statement of Operations]

Statement of Other Comprehensive Income

Forms

Nature of expense method

·         Classifies expenses within profit or loss according to their nature

Function of expense method

·         Classifies expenses by their function within the entity

o   Cost of sales – cost of providing service / cost of goods sold

o   Distribution costs – expenses related to selling and distributing the goods to the customers

o   Administrative costs – expenses related to the general administration of the business

o   Finance costs – interest expense

Elements

INCOME

·         Earnings of an entity

·         Inflow of resources resulting from services provided or goods sold to customers

·         Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims

o   Service income / Professional fees – revenue from services provided to clients

o   Sales – revenue from sale of goods to customers

o   Other income – revenue from sources other than the main line of business

§  Interest income

§  Rent income

§  Commissions income

§  Income from investments

§  Gain on sale of PPE item

EXPENSES

·         Outflow of resources incurred for generating income

·         Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims

o   Delivery expense

o   Insurance expense

o   Interest expense

o   Marketing expense (advertising, promotion)

o   Office supplies expense

o   Professional fees (accounting, audit, legal)

o   Rent expense

o   Repair & maintenance expense

o   Representation & entertainment expense

o   Salaries & wages expense

3.3  Statement of Changes in Owner’s Equity

o   Employee benefits

o   Taxes & licenses expense

o   Transportation & travel expense

o   Utilities expense

o   Miscellaneous expenses /

Other expenses / Sundry expenses

o   Bad debts expense*

o   Doubtful debts expense*

o   Depreciation expense*

*recorded as part of adjusting entries at period-end

Items affecting equity

·         Income and expenses

·         Contributions [investment] by owner

Owner’s capital – financial investment of the owner

o   Cash

o   Other assets

§  Recorded at its fair market value at the time of investment

·         Distributions to [withdrawal by] owner

Owner’s drawings – temporary withdrawal of the profit of the business

---

Capital

·         Capital / Owner’s capital – financial investment of the owner

·         Capital employed – the long-term source of financing, which includes both the capital of the owner and non-current liabilities

·         Working capital – refers to net current assets (Current assets minus Current liabilities)

·         Capital expenditures – expenditures for purchase of non-current assets

·         Capital budgeting – the process of investment appraisal

---

EXPANDED ACCOUNTING EQUATION

3.4  Statement of Cash Flows

To be discussed in detail in Unit 4.9.

3.5  Preparing financial statements with accompanying notes (service business) Notes to Financial Statements

The notes shall:

·         present information about the basis of preparation of the financial statements and the specific accounting policies used

·         disclose the information required by IFRSs that is not presented elsewhere in the financial statements

·         provide information that is not presented elsewhere in the financial statements, but is relevant to an understanding of any of them

REFERENCES

·         IFRS Foundation (2003, December). IAS 10 - Events after the Reporting Period

·         IFRS Foundation (2018, March). Conceptual Framework for Financial Reporting.

·         IFRS Foundation (2024, April). IFRS 18 - Presentation and Disclosure in Financial Statements.

·         Spiceland, Sepe, Thomas, Tan, Low, Low (2019), Intermediate Accounting Global Edition (2nd Edition), McGraw- Hill Education (Asia).