Lesson 5: Financial Statements & Chart of Accounts PDF

Lesson 5 The Financial Statements LEARNING OBJECTIVES: At the end of the lesson, you should be able to a) Classify the type of Financial Statements; b) Identify the typical accounts used in Financial Statements.  TYPES OF FINANCIAL STATEMENTS The key product or the end product of the a...

Lesson 5 The Financial Statements LEARNING OBJECTIVES: At the end of the lesson, you should be able to a) Classify the type of Financial Statements; b) Identify the typical accounts used in Financial Statements.  TYPES OF FINANCIAL STATEMENTS The key product or the end product of the accounting process is a set of documents called financial statements comprised of the following: 1. Statement of Financial Position or Balance Sheet – shows the financial position of a business as of a given period. It consists of the assets, liabilities, and capital (owners equity). Example:  TYPES OF FINANCIAL STATEMENTS 2. Statement of Profit and Loss and other Comprehensive Income or Income Statement – shows the result of operations for a given period. It consist of revenue, cost and expenses. Example:  TYPES OF FINANCIAL STATEMENTS 3.Statement of Changes in Owner’s Equity or Statement of Owner’s Equity – shows the changes in the capital or owner’s equity as a result of additional investment or withdrawals by the owner, plus or minus the net income or net loss for the year. Example:  TYPES OF FINANCIAL STATEMENTS 4. Statement of Cash Flows – summarizes the cash receipts and cash disbursement for the accounting period. It summarizes the cash activities of the business by classifying cash inflows (receipts) and cash outflows (payments) in operating, investing, and financing activities. It shows the net increase or decrease of cash in a given period and the cash balance at the end of the period. This allows management to assess the business’ ability to generate cash and project future cash flows. Example of Statement of Cash Flow  TYPICAL ACCOUNT TITLE USED: Balance Sheet Balance sheet accounts namely assets, liabilities, and owner’s equity, are classified as real or permanent accounts. Assets – economic resources owned by the business expected for future gain. They are property and rights of value owned by the business. Liabilities - include debts, obligations to pay, and claims of the creditors on the assets of the business. Owner’s Equity or Capital – includes the interest of the owners on the business; claims of the owners on the assets of the business; and the investment of the owner plus or minus the results of operations. Owner’s equity or capital come from two main sources: investment of owners and earnings of the business.  ASSETS L  CLASSIFICATION OF CURRENT ASSETS : When it is… ❖ Expected to be realized in, or is intended for sale or consumption in the entity’s normal operating cycle; ❖ Held primarily for the purpose of being traded ❖ Expected to be realized within twelve months of the balance sheet date; or ❖ Cash or cash equivalent unless it is restricted from being exchange or used to settle a liability for at least twelve months after the balance sheet. Examples of current assets are as follows: 1. Cash – includes coins, currencies, checks, bank deposits, and other cash items readily available for use in the operations of the business. 2. Cash equivalents (non-cash) – are short-term investments that are readily convertible to known amount of cash which are subject to an insignificant risk to changes in value. 3. Marketable securities – are stocks and bonds purchased by the enterprise and are to be held for only a short span of time or duration. They are usually purchased when a business has excess cash.  CLASSIFICATION OF CURRENT ASSETS: 4. Trade and Other Receivables – includes the amounts collectible from any of the following accounts: a. Accounts Receivable - amount collectible from the customer to whom sales have been made or services have been rendered on account or credit. b. Notes Receivable – promissory note issued by the client or the customer in exchange for services or goods received as evidence of his/her obligation to pay c. Interest Receivable – amount of interest collectible on promissory notes received from customers and clients.  CLASSIFICATION OF CURRENT ASSETS: d. Advances to employees - certain amount of money loaned to employees payable in cash or through salary deductions. e. Accrued income – income already earned but not yet received. 5. Inventories – represent the unsold goods at the end of the period. This is applicable only to merchandising business.  CLASSIFICATION OF CURRENT ASSETS: 6. Prepaid Expenses – include supplies bought for use in the business or services and benefits to be received by the business in the future paid in advance. 7. Short – term investments – are the investments made by the company that are intended to be sold immediately  CLASSIFICATION OF CURRENT ASSETS: Contra –Asset Accounts – are accounts deducted from the related assets accounts. a. Allowance for bad debts - losses due to uncollectible accounts. This is deducted from the accounts receivable account to get the net realizable value. This is line with the financial statements’ qualitative characteristic of conservatism wherein no profits would be anticipated but all probable or estimated losses should be provided. b. Accumulated depreciation - represents the expired cost of property, plant, and equipment as a result of usage and passage of time. This is deducted from the cost of the related asset account to get the carrying value or book value of the asset.  CLASSIFICATION OF NON-CURRENT ASSETS: 1. Long-term investments – are assets held by an enterprise for the accretion of wealth through capital distribution such as interests, royalties, dividends and rentals, for capital appreciation or for other benefits to the investing enterprise such as those obtained through trading relationships. Investments are classified as long term when they are intended to be held for an extended period of time.  CLASSIFICATION OF NON-CURRENT ASSETS: 1. Property, Plant and Equipment – are tangible assets that are held by an enterprise for use in the production or supply of goods or services, or for administrative purposes. These assets are expected to be used for more than one period. Examples of PPE: a. Land - a piece of lot or real estate owned by the enterprise on which a building can be constructed for business purposes. b. Building - edifice or structure used to accommodate the office, store, or factory of a business enterprise in the conduct of its operations.  CLASSIFICATION OF NON-CURRENT ASSETS: c. Equipment - includes typewriter, air-conditioner, calculator, filing cabinet, computer, electric fan, trucks, and cars used by the business in its office, store, or factory. Specific account titles may be used such as office equipment, store equipment, delivery equipment, transportation equipment and machinery equipment. d. Furniture and fixtures - include tables, chairs, carpets, curtains, lamp and lighting fixtures, and wall decors. Specific account titles may be used such as office furniture and fixtures, and store furniture and fixtures.  CLASSIFICATION OF NON-CURRENT ASSETS: e. Intangible assets - identifiable, non-monetary assets without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. These include goodwill, patents, copyrights, licenses, franchises, trademarks, brand names, secret processes, subscription lists, and non-competition agreements.  GOODWILL ❖An intangible asset that accounts for the excess purchase price of another company. ❖Items included in goodwill are proprietary or intellectual property and brand recognition, which are not easily quantifiable. ❖Companies are required to review the value of goodwill on their financial statements at least once a year and record any impairments. ❖Goodwill has an indefinite life, while most other intangible assets have finite useful life.  GOODWILL ❖Goodwill is calculated by taking the purchase price of a company and subtracting the difference between the fair market value of the assets and liabilities. ❖Example of Goodwill computation: If the fair value of Company ABC’s assets minus liabilities is $12 billion, and a company purchases Company ABC for $15 billion, the premium paid for the acquisition is $3 billion ($15 billion - $12 billion). This $3 billion will be included on the acquirer’s balance sheet as goodwill.  LIABILITIES L  CLASSIFICATION OF CURRENT LIABILITIES : When… ❖ it is expected to be settled in the entity’s normal operating cycle; ❖ it is held primarily for the purpose of being traded ; ❖ it is due to be settled within twelve months after the balance sheet date; or ❖ the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date.  CLASSIFICATION OF CURRENT LIABILITIES: A. Trade and Other Payables These refer to the amounts payable to a person or a company: 1. Accounts Payable – include debts arising from the purchase of an asset or the acquisition of services on account. (Amount payable to suppliers or creditors for services, supplies, goods or property.) 2. Notes Payable – includes debts arising from the purchase of an asset or the acquisition of services on account evidenced by a promissory note. (Represents the principal amount of the face value of the promissory note which is issued by the maker.) 3. Loan Payable – is a liability to pay the bank or other financing institution arising from funds borrowed by the business from these institutions payable within twelve months or shorter.  CLASSIFICATION OF CURRENT LIABILITIES: Trade and Other Payables – include payables from any of the following accounts: 4. Utilities Payable – is an obligation to pay utility companies for services received from them. Example of this are telephone services to PLDT, electricity to MERALCO, and water services to MAYNILAD. 5. Unearned Revenues – represent obligations of the business arising from advance payments received before goods or services are provided to the customer. This will be settled when certain goods or services are delivered or rendered. Example Unearned Rent. Advance receipt of cash representing the payment for future rent. 6. Accrued Liabilities – include amounts owed to others for expenses already incurred but are not yet paid. Examples of these are salaries payable, utilities payable, taxes payable, and interest payable.  CLASSIFICATION OF NON - CURRENT LIABILITIES : … are long term liabilities or obligations which are payable for a period longer than one year. Examples of non-current liabilities are as follows: 1. Mortgage Payable – is a long-term debt of the business with security or collateral in the form of real properties. In case the business fails to pay the obligation, the creditor can foreclose or cause the mortgaged asset to be sold and used the proceeds of the sale to settle the obligation. 2. Bonds Payable – is a certificate of indebtedness under the seal of a corporation, specifying terms of repayment an the rate of interest to be charge. OWNER’S EQUITY L  OWNER’S EQUITY: … are the owner’s claims in the business. It is the residual interest in the assets of the enterprise after deducting all its liabilities. Examples: 1. Capital – is an account bearing the name of the owner representing the original and additional investment of the owner of the business increased by the amount of net income earned during the year. It is decreased by the cash or other assets withdrawn the owner or as well as the net loss incurred during the year.  OWNER’S EQUITY: Examples: 2. Drawing – represents the withdrawals made by the owner of the business in cash or other assets. 3. Income Summary – is a temporary account used at the end of the accounting period to close income and expense accounts. The balance of this account shows the net income or net loss for the period before it is closed to the capital account. Chart of Accounts – is a listing of the accounts used by companies in their financial records. The chart of accounts helps to identify where the money is coming from and where it is going. The chart of accounts is the foundation of the financial statements. Let’s Have Exercises... Below are balance sheet accounts. Classify these accounts by writing them under their proper columns: ASSEST, LIABILITIES and OWNER’S EQUITY. Land Prepaid Insurance Furniture and Fixtures Accounts Payable Unearned Rent Prepaid Rent Accounts Receivable Notes Receivable Bonds Payable Loan Payable Accrued Liabilities Mortgage Payable Notes Payable Owner, Drawing Cash Owner, Capital Truck Supplies Building Equipment Taxes Payable Utilities Payable Income Summary  Below are balance sheet accounts. Classify these accounts by writing them under their proper columns: ASSETS LIABILITIES OWNERS EQUITY Land Accounts Payable Owners, Capital Accounts Receivable Loan Payable Owners, Drawing Furniture & Fixtures Notes Payable Cash Income summary Bonds Payable Building Tax Payable Prepaid Insurance Unearned Rent Notes Receivable Accrued Liabilities Truck Mortgage Payable Prepaid Rent Utilities Payable Supplies Equipment THANK YOU... Quiz…