FINANCIAL
AN INTRODUCTION TO
STATEMENTS
what? how? why?
Hazel Joy M. Demagante, CPA
ACCOUNTING defined as
the process of identifying, measuring and communicating
economic information to permit informed judgment and
decision by users of the information.
- American Accounting Association
a system of 2 parts
Accounting
primarily deals with
FINANCIAL INFORMATION
Input Output
journal entries identifying, measuring, summarize, communicate financial statements
recording / reports
to make
Informed Decisions
purpose
QUESTION:
What branch of accounting deals with the
preparation of financial statements?
How do we define
FINANCIAL
STATEMENTS?
Financial Statements are the means by which the
information accumulated and processed in financial
accounting is periodically communicated to the users.
These are a structured financial representation of the
financial position and financial performance of an entity
(Valix, 2015)
COMPLETE SET OF
FINANCIAL STATEMENTS
According to IAS 1.10
01 Statement of Financial Position
02 Statement of Comprehensive Income
03 Statement of Changes in Equity
04 Statement of Cash Flows
05 Notes, comprising a summary of significant accounting
policies and other explanatory notes
STATEMENT OF
FINANCIAL POSITION
a.k.a. the balance sheet
shows
at a certain day
COMPANY POSITION
thru
Asset
Liabilities
Equity
STATEMENT OF
COMPREHENSIVE INCOME a.k.a. the income statement
reflects
for a period of time
COMPANY PERFORMANCE
has two parts
Other Comprehensive Income
Profit or Loss Statement
(P/L) (OCI)
total income less expenses, items of income and expenses that
excluding the components of other are not recognized in profit or loss
comprehensive income (IAS 1.7) (IAS 1.7)
ABM 2 Class Financial & Advanced Accounting
STATEMENT OF
CHANGES IN EQUITY
reflects its
NET WORTH
by showing
total income/loss
beginning equity balance
investments/withdrawals
- sole proprietorship -
STATEMENT OF
CASH FLOWS
reports its
CASH INFLOWS AND OUTFLOWS
by showing its
operating activities
investing activities
financing activities
QUESTION:
If financial statements deal with financial
information, why is there a need for the
notes and other summary?
NOTES TO FINANCIAL
STATEMENTS
presents
BOTH FINANCIAL AND NON-FINANCIAL INFORMATION
which includes but not limited to
basis of preparation
accounting policies
other relevant information
TIME PERIOD OF FINANCIAL
STATEMENTS
Statement of Comprehensive Income
Statement of Changes in Equity
Statement of Cash Flows
Notes to Financial Statements Statements of Financial Position
Jan. 1, '21 Dec. 31, '21 Apr. 15, '22
Reporting Period
Release of financial statements
OTHER KEY DETAILS
01 Result of past
transactions
02 Cannot reflect
ALL information
03 Complies with
acct. standards
The figures presented in these Users still need to consider For SME's and larger company,
financial statements reflects pertinent information from FS are required to comply with
events that happened during other sources. International/Philippine
the reporting period. Financial Reporting Standard.
CONCEPTUAL
The role of
FRAMEWORK and other accounting standards
a complete. comprehensive and single
document promulgated by International a summary of the terms and concepts
Accounting Standards Board (IASB). that underlie the preparation and
presentation of financial statements for
external users.
WHAT
IT IS
CONCEPTUAL FRAMEWORK
for financial reporting
the underlying theory for the
an attempt to provide an overall development of accounting
theoretical foundation for accounting standards
QUESTION:
What are the difference/s between the
Conceptual Framework and different
accounting standards?
CONCEPTUAL ACCOUNTING
FRAMEWORK vs. STANDARDS
a body of interrelated objectives international principles and rules
and fundamentals / the for the presentation of financial
foundation of establishing new accounts (Donnelly, 2021)
accounting standards
IAS 1 Presentation of Financial Statements
These concepts provide guidance in IAS 2 Inventories
selecting transactions, events and IAS 7 Statement of Cash Flows
circumstances to be accounted for, how IAS 8 Accounting Policies, Changes in
they should be recognized and measured, Accounting Estimates and Errors
and how they should be summarized and IAS 10 Events after Reporting Period
reported (FASB). IAS 11 Construction Contracts
QUESTION:
What do you think overrides in making
professional judgment, conceptual
framework or accounting standards?
FRAMEWORK
or STANDARD
If there is a standard governing a certain transaction,
accounting standards overrides the framework
In the absence of standards, the framework may be
used to develop and apply accounting policies
In case of conflict, reporting standards should prevail
over the conceptual framework.
QUESTION:
What do you think are the differences
and similarities between financial reports
and financial statements?
FINANCIAL
Conceptual Framework for
REPORTING
FINANCIAL REPORTING
according to conceptual framework
according to the
conceptual framework
also includes not only financial
is the provision of financial information about an statements but also other information
entity to external users such as financial highlights, summary of
important financial figures, analysis
primarily through and ratios, etc.
as well as nonfinancial information such
Financial Statements as description of major products and a
listing of corporate officers and
directors, etc.
QUESTION:
Who is the primary user of financial
reports?
USERS IN FINANCIAL
REPORTING
according to conceptal framework
PRIMARY USERS OTHER USERS
the parties to whom financial users of financial information other
statements are primarily directed than the existing primary users
Existing and potential investors / lenders employees / customers / government
/ creditors and their agencies
deals with
the why
OBJECTIVES OF
FINANCIAL REPORTING
according to conceptual framework
Overall Objective Specific Objectives
The overall objective of financial reporting is to provide information useful in making decisions
to provide financial information about the about providing resources to the entity
reporting entity that is useful to existing and
potential investors, lenders and creditors in provide information useful in assessing the
making decisions about providing resources prospects of future net cash flows to the entity
to the entity.
provide information about entity resources, claims,
and changes in resources and claims
UNDERLYING
The role of
ASSUMPTIONS to avoid misunderstandings
the only In the absence of evidence,
assumption that entity will continue indefinitely
is mentioned in
the framework
Going Concern
TIme Period
the indefinite life of an
UNDERLYING
entity is subdivided into
equal length of time
amounts are stated in terms
ASSUMPTIONS
AKA POSTULATES
of a unit of measure
Monetary Unit Economic Entity
the entity is separate from the
owners, managers, and
employees
QUESTION:
What type of information should be
included in financial reports?
QUALITATIVE
Useful attributes
CHARACTERISTICS of financial statements
QUALITATIVE
CHARACTERISTICS
attributes that make financial
information useful to users
classified into
Enhancing Qualities
Fundamental Qualities
these qualitative characteristics these qualitative characteristics
relate to the content or substance of relate to the presentation or form of
financial information the financial information
usefulness presentation/format
FUNDAMENTAL
bare minimum
CHARACTERISTICS
Without these qualities, information are deemed useless.
RELEVANCE FAITHFUL REPRESENTATION
the capacity to influence decision reports reflect what really happened
1 Predictive Value 1 Free from error
2 Confirmatory Value 2 Completeness
3 Neutrality
Information must both be both relevant AND faithfully represented for it to be useful.
RELEVANCE
fundamental qualities
1 Predictive Value 2 Confirmatory Value
It is predictive if it increases the It provides feedback about previous
likelihood of accurately forecasting evaluations. In other words, it
outcome / events. enable users to confirm or correct
Quarterly net income (interim reporting) may be
earlier expectations.
used to forecast annualy figures.
Financial reporting figures/amounts can
confirm whether an entity exceeded its budget
or not.
FAITHFUL REPRESENTION
fundamental qualities
1 Free from Error
There are no errors or omissions in the description or transactions, as
well as the process in which the information went through.
However, free from error does not mean it is perfectly accurate in
all aspects.
FAITHFUL REPRESENTION
fundamental qualities
2 Completeness
Information should be presented in a way that facilitates
understanding and avoids erroneous implications. It is the result
significant and of adequate disclosure standard or the principle of full
relevant information
disclosure.
recorded transactons
Completeness applies to both financial and non-financial
information.
disclosures
NEUTRALITY
fundamental qualities
3 Neutrality
Neutrality means "free from bias". It is not slanted, weighted,
emphasized, de-emphasized, nor manipulated to make it more
favorable or unfavorable to users.
It should not favor one party to the detriment of another and
should be directed to the common needs of many users.
QUESTION:
What is the difference between
relevance and materiality?
general guide:
if knowledge of it would
affect or influence decision
a "quantitative threshold"
linked closely to relevance a "subquality" of relevance
based on nature or magnitude
(or both) of items
MATERIALITY
in relation to relevance
dependent on good judgment,
no specific threshold was
professional expertise and
provided by the conceptual
common sense
framework depends on relative size
rather than absolute size
ENHANCING
enhances usefulness
CHARACTERISTICS
relate to the presentation or form of financial information
1 Verifiability
2 Comparability
3 Understandability
4 Timeliness
Enhancing qualitative characteristics does not make the information useful.
ENHANCING QUALITIES
1 Verifiability
Verifiability means that different knowledgeable and independent
observes could reach consensus, although not necessarily complete
agreement.
Verifiability implies consensus and verification could be direct or
indirect.
ENHANCING QUALITIES
2 Comparability
The characteristic that enables users to identify and understand
similarities and differences among items.
Comparison can be made within an entity or across industries.
ENHANCING QUALITIES
3 Understandability
Information must be comprehensible or intelligible. It should be
presented in a form and expressed in terminology that a user
understand.
In short, it is readily understandable by users.
QUESTION:
Financial statements cannot be
realistically be understood by everyone. If
reports should be readily understandable,
who are these people?
ENHANCING QUALITIES
4 Timeliness
Financial information must be available or communicated early enough
when a decision is to be made.
Relevant and faithfully represented information made available
after a decision is made is useless and of no value.
REFERENCES:
Financial Accounting Standards Board (FASB)
Retrieved from https://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1176168367774
IAS 1 - Presentation of Financial Statements
Retrieved from https://www.iasplus.com/en/standards/ias/ias1
Peralta, J.F., Valix, C.A., & Valix, C.T. (2015). Financial Accounting Volume I, Part I.
GIC Enterprises & Co., Inc. Manila, Philippines
