CHAPTER 3: PREPARATION FINANCIAL STATEMENT

Learning Outcome(s): At the end of this chapter, the student should be able to;

1. describe financial stamen

2. identify the users of financial statements;
3. discuss the basic guidelines in the preparation of financial statements; and
4. prepare financial statements.

If you were the owner of a

startup business that needed
more funds to finance its
3.1 FINANCIAL STATEMENTS marketing endeavors, what
would you do?

Financial statements assist the

bank manager in determining
how much loans to extend to the QUESTION TO PONDER
borrower based on his/her
capacity top pay and the bank’s
cash flow

Financial statements are considered the financial product of the whole accounting process.
They are structured representations of the financial position, financial performance, and cash
flow of the business. They also reflect the efficiently of the management of the company in
handling the resources entrusted by the owners.

A complete set of financial statements is composed of the following:

1. Statement of financial position

2. Statement of financial condition
3. Statement of changes in equity
4. Cash flow statement
5. Notes to the financial statements

In Philippines, the preparation of the financial statements is based on guidelines and

directives issued by the Financial Reporting Standard Council (FRSC). The guidelines
issued by the FRSC is called Philippine Financial Reporting Standards (PFRSs) or
referred to, in short, as Standards in accounting.
3.2 USERS OF FINANCIAL STATEMENTS

The users of financial statements are broadly classified as follows:

1. External users
 Individuals or parties that are not directly involved in the operation of the
business.
 Government agencies --- Securities and Exchange Commission (SEC), Bangko
Sentral ng Pilipinas (BSP), and Bureau of Internal Revenue (BIR); creditors;
suppliers; customers; and prospective investors.

2. Internal users
 Individuals who have direct and active participation in various quantifiable
transactions of the business and in the preparation of the financial
statements. The employees and the management are considered internal
users.

The users of the financial statements need different and distinct information for various
reasons, as presented in Table below

USERS INFORMATION NEEDS

1. The The government and its regulatory agencies check financial
government statements to determine the allocation of resources and the
and its activities of entities. The information helps them regulate the
agencies activities of businesses, formulate taxation policies, and compute
the national income and similar statistics.
2. Investors both Investors, whether present or prospective, and any provider of
present and risk capital including financial advisers are concern with the risk
prospective inherent in, and the return on their investment. They needed
information to determine if they should buy, hold, or sell their
investments. Shareholders are also interested in information that
enables them to assess the capacity of the businesses to pay
dividends.

3. Suppliers and Suppliers of raw materials and goods and other creditors need
other trade information that allows them to determine whether amounts owed
creditors to them can be paid when due. Trade creditors are interested in
a business over a shorter period than lenders, unless they are
dependent on the continuation of the business as a major
customer.
4. Lenders, Lenders, banks and other lending institution look for information
banks, and that enables them to determine whether their loans and interest
other financial earned can be paid when due. The information presented in the
institutions financial statements them increasing or decreasing the amount of
loans.
 5. Management The management is interested in the information contained in the
financial statements to carry out its planning, decision – making,
and control responsibilities. The information provides basis in
evaluating management performance relative to resource
utilization.
6. Employees The employees and their representative groups like labor unions
and associations are interested information about the stability and
profitability of their employers. They also look information that helps
them assess the ability of the business to provide remuneration,
retirement benefits, and employment opportunities.
7. Customers The customers are interested in information about the continuance
of an entity, especially when they have a long – term involvement
with, or are dependent on it.
8. Public The business affects members of the public in a variety of ways.
For example, businesses may contribute substantially to the
different aspects of the local economy including the number of
people they employ and their patronage of local suppliers. Financial
statements assist the public by providing information about the
trends and recent developments of the business entity and the
range of its activities.

3.3 BASIC GUIDELINES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements, including the presentation of items or information

contained therein, whether in the Philippine context or in the global business environment,
follows the general requirements of the Framework and Standards.

The Framewrok sets ot the The Standards, particularly the

general concepts that Philippine Accounting Standards
underlie the preparation and (PAS) 1 outlines the specific
prsentationof financial provisions and requirements in
statement in the absence of a preparing and presenting the
specific Standard. financial statements.

BASIC REQUIREMENTS IN THE PREPARATION AND PRESENTATION OF THE

FINANCIAL STATEMENTS MENTIONED IN THE FRAMEWORK AND STANDARDS

1. Fair Presentation
Salient features of fair presentation requirements
 The faithful representation of the effects of transactions, other events,
and conditions in accordance with the definition and recognition
criteria for assets, liabilities, income, and expenses.
  An application of the Philippine Financial Reporting Standards
(PFRSs), with additional disclosure when necessary, is presumed to
result in financial statements that achieve a fair presentation.
 A business whose financial statements comply with PFRSs must take
an explicit and unreserved statement of such compliance in the notes.
 Financial statements must not be described as complying with PFRSs
unless they comply with all the requirements of PFRSs.

2. Going Concern Assumption

Guidelines should be observed be relative to the going concern assumption
 The management shall make an assessment of the business ability to
continue as a going concern.
 Material uncertainties related to events or conditions that may cast
significant doubt upon the ability of the business to continue as a
going concern shall be disclosed.
 When financial statements are not prepared on a going concern basis,
the basis on which the financial statements are prepared and the
reason why the business is not regarded as a going concern shall be
disclosed.
 The management must take into account all available information
about the future in assessing whether the going concern assumption
is appropriate.
 When the business has a history of profitable operation and there is
ready access to financial resources in times of need, it can be
concluded that the going concern basis of accounting is appropriate
even without detailed analysis.
 Before it can satisfy itself that the going concern is appropriate, in
other cases, the management should consider the following wide
range of factors relating to:
a. Current and expected profitability
b. Debt repayment schedules
c. Potential sources of replacement financing

3. Accrual Basis of Accounting

Under this basis, the effects of transactions and other events are recognized
when they occur and not when cash is received or paid and the transactions
are recorded in the accounting records and reported in the financial
statements within the periods to which they relate.
The time of cash collection and cash payment does not significantly influence
the time of incurrence or recognition of the transaction.

4. Consistency of Presentation
Consistency requires that the presentation and classification of items in the
financial statements are retained from one period to the next. Thus,
presentation of items in the financial statements is consistently applied in all
reporting periods.
 A business, however, is not precluded from changing the presentation and
classification of information of the financial statement applied subject to the
following conditions:
 Another present or classification of the item is more appropriate since
it provides more relevant information to the users.
 The Standard allows change in the presentation.
 Comparability is not impaired.

5. Materiality and Aggregation

The Philippine Accounting Standards has underlined the following guidelines
on materiality and aggregation:
 Omission or misstatement of items is material if it, individually or
collectively, influences the economic decision of users taken on the
basis of the financial statements.
 Materiality depends on the size and nature of the omission or
misstatement determined in the surrounding circumstances. The size
or nature of the item, or a combination of both, can be determining
factor.
 Each material class of similar items shall be presented separately in
the financial statements. Items of a dissimilar nature of functions shall
be presented separately unless they are immaterial.
 If a line item is not individual material, it is aggregated with other items
and included in the financial statements or in the notes.
 An item that is not sufficiently material to warrant separate reporting in
the financial statements may, nevertheless, be sufficient to be
presented separately in the note.
 The specific disclosure requirement in a Standard need to be satisfied
if the information is not material.

6. Offsetting Principle
It requires that assets and liabilities, and income and expenses, are reported
separately. They shall not be offset unless required or permitted by a
Standard.
Offsetting does not refer to measuring bassets net of valuation allowances, as
in the process of deducting obsolescence allowance on inventories or
doubtful account on receivables.
For example, overpayment of a debtor should not be offset against the
receivable. The overpayment shall be presented as a liability while the
receivable shall be presented as an asset.

7. Comparability of Information
The basic objective of comparability is to assist users financial statements in
making an economic decision based on the assessment of trends of financial
information for predictive purposes.
Requirements in applying the concept of comparability of information
  A comparison shall be included for narrative and descriptive
information when it is relevant to an understanding of the current
period’[s financial statements.
 Comparative information shall be disclosed in relation to the previous
period for all amounts reported in the financial statements except
when a Standard permits or requires otherwise.
 When the presentation or classification of items in the financial
statements is amended, comparative amounts shall be reclassified
unless the reclassification is impracticable.
 When comparative amounts are reclassified, an entity shall disclose
the following:
a. The nature of the reclassification
b. The amount of each item or class of item is reclassified
c. The reason for reclassification
 When it is impracticable to reclassify comparative amounts, an entity
shall disclose the following:
a. The reason for not reclassifying the amounts
b. The nature of the adjustments that would have been made if the
c. amounts had been reclassified

8. Disclosure of Accounting Policies

The Standard requires that business disclose the accounting policies
adopted. It is usually made on the notes to the financial statement.
Accounting policies are the specific principles, bases, conventions, rules,
and practices applied by an entity in preparing and presenting financial
statements.
It is intended to enhance the relevance and reliability of the financial
statements and the comparability of those financial statements over time with
the financial statements of other businesses.

3.4 STAMENT OF FINANCIAL POSITION

The statement of financial position (new title for balance sheet) is a structured
financial statement that shows the assets, liabilities, and equity of a business entity
as of a given date.

The term “as of a given date “ indicates that the statement of financial position can be
prepared anytime of the year and the information is considered true and correct as of
the date indicated in the statement.

Three accounting elements found in the statement of financial position which directly
related to the measurement of financial position.

1. Assets are resources controlled by the entity as a result of past event and from
which future economic benefits are expected to flow to the entity.
 2. Liabilities are present obligations of the entity arising from past events, the
settlement of which is expected to results in an outflow from the entity of resources
embodying economic benefits.

3. Equity is the residual interest in the asset of the entity after deducting all its liabilities.

The financial position of a business entity is usually expressed in the terms of its
liquidity, solvency, financial structure, and capacity for adaption.

 Liquidity refers to the ability of a business entity of settle its currently

maturing financial obligations. Obligations are currently maturing if they
become due within one year from the date of the statement of financial
position notwithstanding the normal operating cycle of a business.

 Solvency is the ability of a business to pay its long- term financial

obligations. Financial obligations are classified long-term if they mature
beyond one year from the date of the statement of financial position.

 Financial structure indicates the amount of capital or resources financed

by creditors and the amount provided by owners .The analysis of the
financial structure of the business focuses on the right-side of the
counting equation (Assets = Liabilities + Capital).

 Capacity for adaptation refers to the ability of a business to invest

excess available resources or raise needed funds through borrowing
without difficulty in times of need. When the business has very high
capacity adaptation, it can easily find funding sources when the need
arises.

SAMPLE OF STATEMENT OF FINANCIAL STATEMENT

ILLUSTRATION 1
LINE ITEM PRESENTATION

JENNY Merchandising
Statement of financial Position
As of December 31, 2018

Assets
Current assets
Cash and cash equivalents (Note 1) 2 500 000
Trading securities 1 000 000
Trade and other receivables (Note 2) 3 000 000
Inventories 2 600 000
Prepaid expenses (Note 3) 50 000
 Total current assets 9 150 000
Non – current assets
Property, plant, and equipment (Note 4) 12 000 000
Long – term investment (Note 5) 6 000 000
Intangible assets (Note 6) 3 000 000
Other non – current assets (Note 7) 500 000
Total non – current assets 21 500 000
Total assets 30 650 000

Liabilities and Owner’s Equity

Current liabilities
Trade and other payables (Note 8) 2 300 000
Short – term investment 1 000 000
Warranty payable 100 000
Total current liabilities 3 400 000
Non – current liabilities
Bonds payable 5 000 000
Deferred tax liability 150 000
Total non – current liabilities 5 150 000
Total liabilities 8 550 000
Owner’s equity
Jenny, Capital 22 100 000
Total liabilities and owner’s equity 30 650 000

In the notes to the financial statements, the following disclosure shall appear:

Note 1 – Cash and Cash Equivalents

Cash on hand 80 000
Cash in bank 2 400 000
Petty cash fund 20 000
Total cash and cash equivalent 2 500 000
Note 2 – Trade and Other Receivables
Accounts receivable 2 260 000
Allowance for doubtful accounts (100 000)
Notes of receivable 800 000
Accrued interest on notes receivable 40 000
Total trade and other receivables 3 000 000
Note 3 – Prepaid Expenses
Unused office supplies 30 000
Prepaid rent 20 000
Total prepaid expenses 50 000
Note 4 – Property, Plant, and Equipment
Acquisition Accumulated Book
Cost Depreciation Value
Land 9 500 000 - 9 500 000
 Building 8 000 000 3 200 000 4 800 000
Office equipment 1 000 000 500 000 500 000
Total 18 500 000 3 700 000 14 800 000
Note 5 – Long – term Investment
Sinking fund 2 000 000
Building expansion fund 2 500 000
Investment in bonds 1 500 000
Total long – term investment 6 000 000
Note 6 – Intangibles
Computer software 1 300 000
Goodwill 2 500 000
Total intangibles 3 800 000
Note 7 – Other Non – current Assets
Long – term advances to officers 400 000
` Long – refundable deposits 100 000
Total other non – current assets 500 000
Note 8 – Trade and Other Payables
Accounts payable 1 200 000
Notes payable 1 000 000
Income tax payable 60 000
Accrued expenses 40 000
Total trade and other payables 2 300 000

3.5 STAMENT OF COMPREHENSIVE INCOME

The statement of comprehensive income (new title for income statement) is a

structure financial statement that shows the financial performance of the business
entity for given period.

The “period” indicates that the statement covers a month ,quarter ,six month ,or a
year.

The accounting elements comprising the statement of comprehensive income are the
following:

a. Income is the summary of in economic benefits during the accounting

period in the form of inflows or enhancement of asset of decreases of
liabilities that result in increase in equity other than those relating to
contributions from equity participants.

b. Expenses are decrease income benefits during the accounting period in

the form of outflows or depletion of assets incurrences of liabilities that
result in decrease in equity ,other than those relating to distribution to
 equity participants .

.Profit is frequently used as a measure of performance or the basis of other measure

such as determination of return on investment (ROI) or earnings per share (EPS).

The Standards mentions two methods of presenting the statement of comprehensive

income, namely:

1. Nature of expense method

2. Function of expense or cost of sales method

The choice between the function of expense method and the nature of expense
method depends on historical and industrial factors and the nature of the entity .Both
methods can indicate cost that might vary, directly or indirectly, with the level of sales
or production of the entity.

Because each method presentation has merit for different types of entities, the
management of a business organization is required to select the most relevant one.
Because information on the nature of expense is useful I predicting future of expense
classification is used.

The pro-forma of statement of comprehensive income using the nature of expense method
presentation appears as follows:

Revenue xxxxxx
Other income xxxxxx
Change in inventories of finished goods xxxxxx
And work in process xxxxxx
Total income

Expenses
Raw materials or inventory purchases xxxxxx
Employee benefits costs xxxxxx
Depreciation and amortization xxxxxx
Other expenses xxxxxx xxxxxx
Net income xxxxxx

On the other hand, the pro – forma statement of comprehensive income using the function of
expense method appears as follows:

Revenue xxxxxx

Less: Cost of sales xxxxxx

Gross income xxxxxx
Less: Selling or distribution expenses xxxxxx
Administrative expenses xxxxxx
 Finance costs xxxxxx
Other expenses xxxxxx xxxxxx
Net income xxxxxx

Sample of Statement of Comprehensive Income of Expense

ILLUSTRATION
Method 2 Line Item Presentation

YVONE Merchandising
Statement of Comprehensive Income
Year Ended December 31, 2018

Net sales revenue (Note 1) 7 500 000

Other income (Note 2) 500 000
Increase in inventory (Note 3) 400 000
Total income 8 400 000
Expenses: 4 400 000
Net purchases (Note 4) 850 000
Employee benefit costs (Note 5) 50 000
Doubtful accounts 100 000
Salesperson’s commission
Depreciation (Note 6) 90 000
Advertising 20 000
Supplies expense (Note 7) 25 000
Finance costs (Note 8) 20 000 5 555 000
Net income before tax 2 845 000
Income tax – 30% 853 500
Net income 1 991 500

The following disclosure shall appear in the notes to the financial statements:

Note 1 – Net sales revenue

Sales 7 800 000
Sales returns and allowances (180 000)
Sales discounts (120 000)
Net sales revenue 7 500 000

Note 2 – Other income

Rent income 250 000
Dividend income 150 000
Interest income 100 000
Total 500 000

Note 3 – Increase in inventory

Merchandise inventory, December 31 1 200 000
Merchandise inventory, January 1 800 000
 Increase in inventory 400 000

Note 4 – Net purchases

Purchases 4 500 000
Freight – in 150 000
Purchase returns and allowances (110 000)
Purchase discounts (140 000)
Net purchases 4 400 000

Note 5 – Employee benefit costs

Sales salaries 300 000
SSS contribution – distribution 15 000
Pag – IBIG contribution – distribution 5 000
Officer and staff salaries 500 000
SSS contribution 18 000
Pag – IBIG contribution 12 000
Total 850 000

Note 6 – Depreciation
Depreciation expenses – delivery vehicle 40 000
Depreciation – office furniture 50 000
Total 90 000
Note 7 – Supplies
Office supplies 10 000
Store supplies 15 000
Total 25 000

Note 8 – Finance costs

Interest expense on bank loan 20 000

Sample of Statement of Comprehensive Income of Expense or

ILLUSTRATION 3
Cost of Sales Method Line Item Presentation

YVONE Merchandising
Statement of Comprehensive Income
Year Ended December 31, 2018

Net sales revenue (Note 1) 7 500 000

Less: Cost of sales (Note 2) 4 000 000
Gross income 3 400 000
Other income (Note 3) 500 000
Total income 4 000 000
Expense:
Distribution expenses (Note 4) 495 000
Administrative expense (Note 5) 640 000
 Finance costs (Note 6) 20 000 1 155 000
Income before tax 2 845 000
Income tax 853 000
Net income 1 991 500

The notes to the financial statements shall disclose the following information:

Note – Net sales revenue

Sales 7 800 000
Sales returns and allowances (180 000)
Sales discounts (120 000)
Net sales revenue 7 500 000

Note 2 – Cost of sales

Merchandise inventory, January 1 800 000
Purchases 4 500 000
Freight – in 150 000
Total 5 450 000
Purchase returns and allowances 110 000
Purchase discounts 140 000 250 000
Goods available for sale 5 200 000
Less: Merchandise inventory, December 31 1 200 000
Cost of sales 4 000 000

Note 3 – Other income

Rent income 250 000
Dividend income 150 000
Interest income 100 000
Total 500 000

Note 4 – Distribution expenses

Sales salaries 300 000
SSS contribution 15 000
Pag – IBIG contribution 5 000
Salesperson’s commission 100 000
Depreciation expense – delivery vehicle 40 000
Advertising expenses 20 000
Store expenses 15 000
Total 495 000

Note 5 – Administrative expenses

Officer and staff salaries 500 000
Depreciation – office furniture 50 000
SSS contribution 18 000
Pag – IBIG contribution 12 000
Doubtful accounts 50 000
Office supplies 10 000
 Total 640 000

Note 6 – Finance costs

Interest expense on bank loan 20 000

As a minimum, the statement of comprehensive income includes line items that present the
following amounts for the period:
1. Revenue
2. Finance cost
3. Share of the profit or loss of associates and joint ventures accounted for using
the equity method
4. Tax expense
5. Single amount comprising the total of post – tax profit or loss on the disposal of
assets from discontinued operation
6. Profit or loss for the period

3.6 STAMENT OF CHANGES EQUITY

The statement of changes in equity is a financial statement showing the following:

a. net income or loss for the period

b. Each item of income and expense for the period that is recognized directly in
equity and the total of these items as required by the standards.

c. Total income and expense for the period showing separately the total amount
attributable to equity holders of the parents company and to minority interest
in a corporation.

d. for each component of equity ,the effect of changes in accounting policies and

correction of errors.

The statement of changes in equity, stated otherwise is a statement that reflects all
the elements that cause changes in an entity’s equity between two dates of
statement of financial position.

ILLUSTRATION 4
 Sample of Statement of Changes in Equity Sole
Proprietorship

NICANOR Trading
Statement of Changes in Equity
Year ended December 31, 2018

January 1, 2018 Capital balance 790 000

Add: Additional investment 150 000
Net income 380 000 530 000
Total 1 320 000
Less: NICANOR, Drawing ` 90 000
December 31, 2018 Capital balance 1 230 000

In the event the operating performance during the given period results in a loss, the amount
of loss shall be deducted from the beginning capital balance.

Sample of Statement of Changes in Equity Partnership

ILLUSTRATION 5

ANGEL AND PRINCIPLES Partnership

Statement of Changes in Equity
Year Ended December 31, 2018

60% 40%
Jenny Angel Total
January 1, 2018, Capital balances 560 000 490 000 1 050 000
Add: Additional investment 120 000 180 000 300 000
Distribution of profit 252 000 168 000 420 000
Total 932 000 838 000 1 770 000
Less: Partner’s Withdrawal 150 000 130 000 280 000
December 31, 2018, Capital balances 782 000 708 000 1 490 000

The distribution of profit or loss to partners shall be based on the profit and loss agreement
of the partners.

ILLUSTRATION 6
 Sample of Statement of Changes in Equity Partnership

HYZEL Corporation
Statement of Changes in Equity
Year Ended December 31, 2018

Share Capital Reserves Retained Earnings

Balance – January1, 2018 9 000 000 2 900 000 3 000 000
Net income for the period 2 900 000
Correction of prior period 2017
overstatement of 300 000
depreciation
Dividends payments (500 000)
Issuance of 20 000 ordinary
shares par 100
at 120 per share 2 000 000 400 000
Issuance of 10 000 preference
shares, par 100
at 120 per share 1 000 000 200 000
Current appropriation for
plant expansion 400 000 (400 000)
Current appropriation for
contingencies 300 000 (300 000)
Revaluation increment 500 000
Foreign currency translation 100 000
Balances – December 31 12 000 000 4 800 000 5 000 000

Share capital represents funds contributed by shareholders. An entity’s capital be in

the form of ordinary shares capital or preference shares capital.

Retained earnings is a line item in the equity that represents the accumulated
amount of net income or loss, errors of prior periods, dividends distributions, changes
in accounting policy, and other equity adjustments other arising from contributions
from shareholders.

Reserves are a line – item in the equity section that includes the following:

1. Appropriate reserve
2. Share premium
3. Revaluation adjustment
4. Foreign currency translation reserve

Appropriation reserve is a transfer of an amount from the retained earnings. The

creation of reserves may be required by law in order to give the entity and its
creditors an added measure of protection from the effects of losses, voluntary action
of the management, or contractual obligations.
 Share premium represents the excess amount contributed by the shareholders over
the par value. The par value is the minimum issue price of the shares appearing in
the certificate of stock.

Revaluation adjustment represents the excess of the depreciated replacement cost

or sound value of the revaluated property, plant, and equipment over the book value.

Foreign currency translation reserve this arises from the translation of financial
elements or transactions in foreign currency into the functional of an entity. The
translation may give rise to translation gain or translation loss.

3.7 STAMENT OF CASH FLOWS

The statement of cash flows is a financial statement that provides information

about the historical change --- inflows and outflows --- in cash and cash equivalents
of an entity during the period operating, investing, and financing activities.

 Cash comprises cash on hand and demand deposits.

 Cash equivalents are short – term, highly liquid investments that are readily
convertible into known amounts of cash near their maturity that they present
insignificant risk of changes in value or interest rates.

 Operating activities are the principal revenue – producing activities of the

entity and other activities that are neither investing nor financing.

 Investing activities are the acquisition and disposal of long – term assets
and other investments not included in cash equivalents.

 Financing activities are activities that result in changes in the size and
composition of the contributed equity and liabilities of the entity.

Information about the cash flows of an entity is useful in providing users of financial
statements with a basis to assess the ability of the entity to generate cash and cash
equivalents and the needs of the entity to utilize those cash flows.

Sample of Statement Cash flows

ILLUSTRATION 6

IZZY Merchandising
Statement of Changes in Equity
Year Ended December 31, 2018
 Cash flows from operating activities

Cash flows provided by operating activities

Cash sales (60% x 8 000 000) 4 800 000
Collections from customers 1 000 000
Rental income (80% x 500 000) 400 000 6 200 000

Cash outflows used in operating activities

Salaries (90% x 3 000 000) 2 700 000
Payment to supplies 800 000

Other expenses
(90% x 700 000) 630 000 4 130 000
Net cash provided by operating activities 2 070 000

Cash flows from investing activities

Cash inflows provided by investing activities 1 400 000
Issuance of bonds
Cash outflows used in investing activities
Investment stocks 500 000
Acquisition of fixtures 300 000
Construction of building 1 800 000 2 600 000
Net cash used by investing activities 1 200 000

Cash flows from financing activities

Cash inflows provided by financing activities
Additional bank loan 2 000 000
Additional investment of the owner 3 000 000 5 000 000
Cash outflows used in financing activities
Partial payment of bank loan 2 000 000
Net cash provided by financing activities 3 000 000

Increase in cash and cash equivalents 3 870 000

Add: Cash and cash equivalents, January 1, 2018 690 000
Cash and cash equivalents, December 31, 2018 4 560 000
The increase in cash and cash equivalents
Of 3 870 000
Net cash provided by operating activities 2 070 000
Net cash used by investing activities 1 200 000
Net cash provided by financing activities 3 000 000
Increase in cash and cash equivalents 3 870 000

The cash and cash equivalents of 4 560 000 should tally with the cash on the statement of
financial position as of December 31, 2018.
 CHAPTER REVIEW
I. TRUE or FALSE
Write True if the statement is correct. If it is not, write False, and state your
reason briefly.

1. A business may depart from the requirement of a specific standard in any

instance if compliance is in conflict with the objective of financial statements
resulting in misleading financial statements.

2. Philippine accounting standards (PAS) 1 provide guidelines for the proper

presentation of general-purpose financial statements in order to provide
desired information to specific users.

3. Financial statements are unstructured representation of the financial position,

financial performance, and cash flows of the business.

4. Fair presentation implies faithful representation of assets, liabilities, income,

and expenses notwithstanding the principles of materiality and cost –
effectiveness.

5. An item that can be realized or intended for sale in the normal operating cycle
of an entity is classified as a current asset.

6. Liabilities may arise because of future commitments such as warranty

payable.

7. In the nature of expense method, expenses are classified according to their

function as part of cost of sales, marketing costs administrative activities, and
other operating activities.

8. An income usually results in the decrease in economic benefits in the form of

outflow of resources.

9. A statement of comprehensive income is synonymous with statement of

changes in equity.

10. Equity represents the interest of the owners in the entity after paying all the
liabilities.

II. Required: prepare the statement of financial position as of December 31, 2018
with supporting schedule.

JENNY Merchandising provided the following accounts on December 31, 2018.

 Long – term investment in bonds 1 125 000
Held for trading securities 675 000
Bank loan payable 3 000 000
Cash in bank 1 350 000
Land held for speculation 225 000
Prepaid advertising 52 500
Jenny, Capital 5 087 500
Accounts receivable – trade 1 575 000
Inventories 600 000
Office supplies 37 500
Notes receivable – trade 750 000
Accounts payable – trade 900 000
Petty cash fund 22 500
Property, plant, and equipment 3 750 000
Accrued expenses 262 500
Allowance for doubtful accounts 187 500
Accumulated depreciation 1 125 000
Jenny, Drawing 250 000
Advances to employees 150 000

III. Required: Prepare the statement of comprehensive income for the year using
the following methods:
1. Nature of expense method with supporting notes
2. Function of expense method with supporting notes

NICANOR Merchandising provided the following information for the year 2018:

Depression – office equipment 150 000

Merchandise inventory, December 31 1 350 000
Purchases 4 500 000
Sales returns and allowances 90 000
Purchase discounts 75 000
Income tax expense 222 750
Sales salaries 600 000
Sales 7 500 000
Merchandise inventory, January 1 1 500 000
Office supplies 112 500
Depreciation – building 375 000
Freight in 150 000
Office salaries 450 000
Depreciation – store equipment 225 000
Sales discounts 60 000
Store supplies 75 000
Purchase returns and allowances 105 000