Lesson No.

2 – Financial Statements:
Financial statements are the main output of the financial accounting process. They are the instruments
that contain financial information about a business entity which different users of financial statements use as
basis in order to make an informed decision.
A complete set of financial statements is composed of the following:
1. Statement of Financial Position
2. Income Statement
3. Statement of Comprehensive Income
4. Statement of Changes in Equity
5. Statement of Cash Flows
6. Notes comprising a summary of significant accounting policies and other explanatory notes.
Classification and Presentation of General Ledger Accounts in the “Statement of Financial Position”:
In classifying general ledger accounts, the rule to follow is known as “materiality and aggregation.”
Aggregation means that similar accounts are grouped together and presented in the statement of financial
position as a single “line item.” For example, the accounts cash on hand, cash in bank, petty cash fund, and
other accounts that are cash in nature are grouped in a line item known as “cash and cash equivalents.” The
line item “cash and cash equivalents” is shown on the face of the statement of financial position while the
details of the line item are shown in the “notes to financial statements.” Another example is the line item known
as “trade and other receivables” which includes accounts like accounts receivable, notes receivable, advances
to employees, subscription receivable, and other accounts which are receivable in nature. Materiality, on the
other hand, means that if an account has a balance which is material or substantial in relation to the total of the
line item, it can be shown as a separate line item. For example, an account title “Cash in Bank-PNB” has a
balance of P100,000 while the total line item “Cash and Cash Equivalents,” where “Cash in Bank-PNB” is
included, amounts to P300,000. The balance of “Cash in Bank-PNB” can be shown as a separate line item. (i.e.
separate from Cash and Cash Equivalents).
PAS 1 gives a list of the basic balance sheet line items as follows:
Current Assets: Current Liabilities:
Cash and Cash Equivalents Trade and Other Payables
Financial Asset at Fair Value Current Provisions
Trade and Other Receivables Short-term Borrowings
Inventories Current Portion of Long-term Debt
Prepaid Expenses Current Tax Liability
Non-current Assets: Non-current Liabilities:
Property, Plant, and Equipment Non-current Portion of Long-term Debt
Long-term Investments Finance Lease Liability
Intangible Assets Deferred Tax Liability
Other Current Assets Long-term Obligations to Company Officers
Long-term Deferred Revenue
Shareholders’ Equity:
Share Capital
Reserves
Retained Earnings

Classification and Presentation of General Ledger Accounts in the Income Statement and Statement of
Comprehensive Income:
An income statement is a formal statement showing the business entity’s revenue, expenses, gains,
losses, and the corresponding net income or net loss in accordance with GAAP. A statement of comprehensive
income, on the other hand, comprises items of unrealized gains and unrealized losses that are not shown as
gains or losses in the income statement but are considered components of “other comprehensive income.” To
provide a concrete example, assume a business entity purchased shares of stocks of another corporation for
P100,000 as an investment. The basis for measurement of this investment as mandated by PAS is “fair value”
except if fair value cannot be determined, in which case the basis for measurement is cost. Assume further that
on balance sheet date, the fair value of this investment in the stock market goes down to P80,000. In this case,
an unrealized loss of P20,000 is recognized. However, it will not be shown in the income statement as “other
expense.” Instead, it will be shown in the statement of comprehensive income as unrealized loss of P20,000
and in the statement of financial position under the line item “reserves” under the shareholders’ equity section.
It should be emphasized that it is considered an “unrealized loss” because the investment has not yet been
sold. In other words, there is actually no transaction yet. The only reason it is recognized is because
recognition is required by PAS. A business entity has the option of presenting two separate statements:
income statement; and statement of comprehensive income. Alternatively, it can combine the two statements
and present a single statement titled “Statement of Comprehensive Income.”
Illustrative Problem:
You have been provided with the adjusted trial balance of Geoffrey Co. as of December 31, 2019:
Cash on Hand P 125,000
Cash in Bank – BDO 560,000
Petty Cash Fund 20,000
Change Fund 10,000
Plant Expansion Fund 1,200,000
Sinking Fund (1) 800,000
Trading Securities (2) 180,000
Financial Assets at Fair Value (3) 170,000
Accounts Receivable 540,000
Allowance for Doubtful Accounts 50,000
Notes Receivable 220,000
Interest Receivable 2,400
Advances to Officers (4) 350,000
Cash Deposit – Angeles Electric Corporation (5) 50,000
Inventories 750,000
Prepaid Insurance 58,000
Store Supplies 25,000
Office Supplies 15,000
Land 4,000,000
Store Equipment 1,000,000
Accumulated Depreciation – Store Equipment 400,000
Office Equipment 300,000
Accumulated Depreciation – Office Equipment 120,000
Accounts Payable 320,000
Notes Payable 150,000
Interest Payable 95,000
Dividends Payable (6) 200,000
Income Tax Payable (7) 282,120
Bonds Payable, due Dec. 31, 2021 (1) 2,000,000
Loan Payable – BDO, due Apr. 30, 2022 1,000,000
Loan Payable – RCBC, due Oct. 31, 2020 500,000
Share Capital, P100 par 2,000,000
Retained Earnings 630,000
Retained Earnings Appropriated for Plant Expansion (8) 1,200,000
Retained Earnings Appropriated for Sinking Fund 800,000
Sales 10,000,000
Sales Discount 100,000
Interest Income 5,400
Unrealized Gain – Trading Securities (2) 30,000
Cost of Goods Sold 8,000,000
Selling Expenses 400,000
Administrative Expenses 300,000
Income Tax Expense 282,120
Interest Expense (9) 255,000
Loss on Sale of Store Equipment 25,000
Loss on Sale of Office Equipment 15,000
Unrealized Loss – Financial Assets at Fair Value (3) 30,000 .
Total P19,782,520 P19,782,520
Additional Information:
(1) Under the bond indenture, Geoffrey Co. is required to maintain a sinking fund to ensure payment of bonds
payable.
(2) Trading securities represent investment in SMC ordinary shares that were purchased on Nov. 15, 2019 for
P150,000. The market value of the shares on Dec. 31, 2019 amount to P180,000 resulting in unrealized
gain of P30,000.
(3) Financial assets at fair value represents investment in PLDT ordinary shares that were acquired on March
1, 2019 for P200,000. The market value of these shares on Dec. 31, 2019 amount to P170,000 resulting in
unrealized loss of P30,000.
(4) Advances to officers is composed of the following:
Advances to President P250,000, due Sept. 30, 2024
Advances to Corporate Secretary 100,000, due May 1, 2020
(5) The cash deposit – AEC can be collected only upon serving termination notice by Geoffrey Co. to Angeles
Electric Corporation in the event of business closure.
(6) On Dec. 15, 2019, cash dividends of P200,000 have been declared to be paid on Jan. 20, 2020 to share
holders of record on Jan. 10, 2020.
(7) The income tax rate is 30%.
(8) The P1,200,000 retained earnings appropriated for plant expansion already includes the 2019
appropriation of P300,000 while the P800,000 retained earnings appropriate for sinking fund already
includes the 2019 appropriation of P200,000.
(9) The interest expense is composed of the following:
Interest on bonds P160,000
Interest on Loan Payable – BDO 80,000
Interest on Loan Payable – RCBC 15,000
Total P255,000
Required:
1. Prepare a single statement of comprehensive income. Use functional presentation.
2. Prepare a statement of changes in equity for the year 2019.
3. Prepare a properly classified statement of financial position on Dec. 31, 2019.
Solution: Geoffrey Company
Statement of Comprehensive Income
For the year ended December 31, 2019
Note
Net Sales (1) P 9,900,000
Less: Cost of Goods Sold 8,000,000
Gross Income P 1,900,000
Add: Other Income (2) 35,400
Total Income P1,935,000
Less: Expenses
Selling Expenses P 400,000
Administrative Expenses 300,000
Other Expenses (3) 40,000
Finance Cost (4) 255,000 955,000
Net Income before income tax P 940,400
Less: Income Tax Expense 282,120
Net Income P 658,280
Other Comprehensive Income:
Unrealized loss – Financial Assets at Fair Value (30,000)
Comprehensive Income P 628,280
Geoffrey Company
Statement of Changes in Equity
For the Year Ended December 31, 2019
Share Capital Reserves Retained Earnings
Balances Jan. 1 P 2,000,000 P 1,500,000 P 1,330,000
Comprehensive Income:
Net Income 658,280
Unrealized Loss – Financial Assets at Fair Value (30,000)
Cash Dividends declared (200,000)
Current Retained Earnings Appropriation:
Plant Expansion Fund 300,000 (300,000)
Sinking Fund . . 200,000 (200,000)
Balances Dec. 31 P 2,000,000 P 1,970,000 P 1,288,280
Geoffrey Company
Statement of Financial Position
As of December 31, 2019
ASSETS Note
Current Assets:
Cash and Cash Equivalents 5 P 155,000
Cash in Bank – BDO 560,000
Trading Securities 6 180,000
Financial Assets at Fair Value 7 170,000
Trade and Other Receivables 8 812,400
Inventories 750,000
Prepaid Expenses 9 98,000
Total Current Assets P 2,725,400
Non-current Assets:
Property, Plant, and Equipment, net 10 P 4,780,000
Long-term Investments 11 2,000,000
Other Non-current Assets 12 300,000
Total Non-current Assets P 7,080,000
Total Assets P 9,805,400
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Trade and Other Payables 13 P 1,047,120
Loan Payable – RCBC 500,000
Total Current Liabilities P 1,547,120
Non-current Liabilities:
Bonds Payable P 2,000,000
Loan Payable – BDO 1,000,000
Total Non-current Liabilities P 3,000,000
Total Liabilities P 4,547,120
Shareholders’ Equity
Share Capital, P100 par P 2,000,000
Reserves 14 1,970,000
Retained Earnings 1,288,280
Shareholders’ Equity P 5,258,280
Total Liabilities and Shareholders’ Equity P 9,805,400
Notes to Financial Statements:
Note 1- Net Sales:
Sales P10,000,000
Less: Sales Discount 100,000
Net Sales P 9,900,000
Note 2 – Other Income:
Unrealized Gain Trading Securities P 30,000
Interest Income 5,400
Total P 35,400
Note 3 – Other Expenses:
Loss on Sale of Store Equipment P 25,000
Loss on Sale of Office Equipment 15,000
Total P 40,000
Note 4 – Finance Costs:
Interest on Bonds P 160,000
Interest on Loan Payable – BDO 80,000
Interest on Loan Payable – RCBC 15,000
Total P 255,000
Note 5 – Cash and Cash Equivalents:
Cash on Hand P 125,000
Petty Cash Fund 20,000
Change Fund 10,000
Total P 155,000
Note 6 – Trading Securities:
Trading securities represent investment in SMC ordinary shares that was purchased on November 30, 2019
for P150,000. The market value of these shares on December 31, 2019 amount to P180,000 resulting in
unrealized gain of P30,000 which is reported as other income.
Note 7 – Financial Assets at Fair Value:
Financial assets at fair value represent investment in PLDT ordinary shares that was acquired on March 1,
2019 for P200,000. The market value of these shares on Dec. 31, 2019 amount to P170,000 resulting in
unrealized loss of P30,000 which is to be reported as component of other comprehensive income.
Note 8 – Trade and Other Receivables:
Accounts Receivable P 540,000
Allowance for Doubtful Accounts (50,000)
Notes Receivable 220,000
Interest Receivable 2,400
Advances to Officers 100,000
Total P 812,400
Note 9 – Prepaid Expenses:
Prepaid Insurance P 58,000
Store Supplies 25,000
Office Supplies 15,000
Total P 98,000
Note 10 – Property, Plant, and Equipment:
Cost Accum. Dep’n Carrying Amt
Land P 4,000,000 P - P 4,000,000
Store Equipment 1,000,000 400,000 600,000
Office Equipment 300,000 120,000 180,000
Total P 5,300,000 P 520,000 P 4,780,000
Note 11 – Long-term Investment:
Plant Expansion Fund P 1,200,000
Sinking Fund 800,000
Total P 2,000,000
Note 12 – Other Non-current Assets:
Advances to Officers P 250,000
Cash Deposit – Angeles Electric Corp. 50,000
Total P 300,000
Note 13 – Trade and Other Payables:
Accounts Payable P 320,000
Notes Payable 150,000
Interest Payable 95,000
Dividends Payable 200,000
Income Tax Payable 282,120
Total P 1,047,120
Note 14 – Reserves:
Retained Earnings Appropriate for Plant Expansion P 1,200,000
Retained Earnings for Sinking Fund 800,000
Unrealized Loss – Financial Assets at FV (30,000)
Total P 1,970,000

Explanations:
1. Other income and other expenses are items f income and expenses which are not directly related to the
main profit-making activity of the business entity.
2. Finance costs represent all interest expense incurred in relation to borrowings.
3. What will be closed to retained earnings is the net income of P658,280. The unrealized loss – financial
assets at fair value will be reported as part of the line item “reserves.”
4. The line item “reserves” is basically composed of share premium, appropriated retained earnings,
revaluation surplus, and other comprehensive income.
5. Financial assets are actually investments in shares of stocks, bonds, certificates of deposit, treasury bills,
and other money market instruments. When a business entity is engaged in the buying and selling of
financial securities, the financial securities shall be referred to as “trading securities.” As required by PAS,
any increase or decrease in market value of such securities on balance sheet date is recorded as unrealized
gain or loss to be reported in the income statement even if the trading securities are not yet actually sold. In
other words, the basis for the measurement of trading securities is “fair value through profit or loss.”
Financial assets at fair value are essentially the same as trading securities. The only difference is that the
acquiring business entity is not engaged in the buying and selling of financial securities. The financial assets
are acquired to generate income from dividends or interest. Such financial assets are classified as current
assets if management intends to sell them in the near future or when the need for working capital arises.
They are classified as non-current assets if management intends to hold them for a considerable period of
time. As required by PAS, any increase or decrease in market value on balance sheet date is recognized as
unrealized gain or loss to be reported as component of other comprehensive income. Such unrealized gain
or loss will then form part of the line item “reserves” under shareholders’ equity. In other words, the basis for
measurement for financial assets at fair value is fair value through other comprehensive income.
6. Plant expansion fund and sinking fund are funds set up for non-current purposes. Plant expansion fund is
for the construction of additional plant facilities while sinking fund is for the payment of long-term debt. They
are, therefore, reported as “long-term investment.”
7. The “Cash in Bank-BDO” account should actually form part of the line item “Cash and Cash Equivalents,”
but is shown as a separate line item because its account balance is material. There will also be instances
when the standard itself (i.e. PAS or PFRS) will regulate the use of a separate line item.
8. If a non-current asset cannot qualify as property, plant, and equipment. Long term investment or intangible
asset, it is included in the line item “Other Non-current Assets.”