Chapter 2 FINANCIAL STATEMENTS

Financial Statements
Are means by which the information accumulated and processed in financial accounting is periodically communicated to the users. Are structured financial representation of the financial position and financial performance of an entity.

Components of financial statements

Statement of Financial position Income statement Statement of comprehensive income Statement of changes in equity Statement of cash flows Notes, comprising a summary of significant accounting policies and other explanatory notes.

Statement of Financial Position

Is a formal statement showing the three elements comprising financial position, namely assets, liabilities and equity. Liquidity Solvency Need for additional financing

Assets
defined as resources controlled by the entity as result of past transactions and events and from which future economic benefits are expected to flow to the entity. It can be measured reliably.

Classification of assets
Current Assets Cash and cash equivalent Financial assets at fair value Trade and other receivables Inventories Prepaid expenses

Classification of Assets
Noncurrent Assets Property, plant and equipment Long-term investments Intangible assets Other noncurrent assets

Liabilities
defined as present obligations of an entity arising from past transactions or events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Classification of Liabilities
Current liabilities Trade and other payables Current provisions Short term borrowings Current portion of long term debt Current tax liability

Classification of liabilities
Noncurrent liabilities Non current portion of long term debt Finance lease liability Deferred tax liability Long-term obligations to company officers Long-term deferred revenue

Equity
It is the residual interest in the assets of the entity after deducting all of its liabilities. Owners equity in a proprietorship Partners equity in a partnership Stockholders equity or shareholders equity a corporation

in

Forms of Statement of Financial Position

Report form this form sets forth the three major sections in a downward sequence of assets, liabilities and equity. Account form the presentation follows that of an account, meaning the assets are shown on the left side and the liabilities and equity on the right side of the statement of financial position.

Comprehensive income
Is the change in equity during a period resulting from transactions and other events, other than changes resulting from transactions with owners in their capacity as owners.

Income Statement
Is a formal statement showing the financial performance of an entity for a given period of time. The financial performance of an entity is primarily measured in terms of the level of income earned by the entity through the effective and efficient utilization of its resources.

Sources of income
Sales of merchandise to customers Rendering of services Use of entity resources Disposal of resources other than products.

Components of expense
Cost of sales Distribution costs or selling expenses Administrative expenses Other expenses Income tax expense

Statement of cash flows

It is a basic component of the financial statements which summarizes the operating, investing, and financing activities of an entity. It provides information about the cash receipts and cash payments of an entity during a period.