FABM2
STATEMENT OF FINANCIAL POSITION
 Referred to as a balance sheet
 Divided into 2 parts: assets and liabilities (claim of
creditors) and equity (claim of owners)
 A report based on accounting equation (A=L+E)
 Format:
Company Name
Statement of Financial Position
As of December 31, 20XX
Tells the reader that the balances report on SFP is the
net effect of all transactions related to the specific
account form the date of the establishment of the
company up to the date of the SFP.
Elements of SFP
ASSETS
 Resources with future benefits that are within
control of the company
Kinds of Assets
1. Cash
- Money owned by the company
- Cash on hand – cash kept in the company’s
premises (bills, coins, bank checks)
- Cash on bank – money in the bank which
can be kept in a savings or checking
account
- Funds readily available to be spent
- Sourced from contribution of owners,
proceeds from borrowings, sale of assets
or collection from customers
- Time deposit account – deposit in the bank
that earns higher interest because the
depositor commits not to withdraw the
funds over the agreed upon time
- Time deposits are not classified as cash
(term up to 90 days – cash equivalents;
mature longer 90 days – investments)
@krizelsevilla
- Cash equivalents – not immediately
available for use; generally reported in the
SFP together with cash; line account is
cash and cash equivalents
- The components of cash equivalents (cash
on hand, cash in bank, cash equivalents)
are required to be disclosed in the
accompanying notes to financial
statements
2. Receivables
- Company’s right to collect or claim
payment
- The right to collect from unpaid sales or
lending activities
- Cash on Delivery – sales agreement may
require a customer to pay the seller
immediately upon delivery of goods
- Accounts Receivable – receivable from
customers; has a term of 30 days
- Notes Receivable – evidenced by
promissory note (PN)
- Promissory Note – legal document that
says the borrower promises to pay on
scheduled payment dates
- Specific sum – principal and interest based
on principal and stated interest rates
3. Inventories
- Reports the cost of unsold merchandise
- Merchandise held for resale
- Consignment is an important issue in
inventory accounting
- Supplies are items that are to be used in
the day to day activities NOT inventory
4. Prepaid Expenses
- Future expenses that the company had
paid for in advance
- Expenses are recorded only when
purchased goods and services are used
- Accrual accounting – expenses are
recognized when services are used
- Insurance – insured will pay premium at
the beginning of the contract period and
the insurer (insurance company) will
reimburse the insured party for losses if
the insured event occur
5. Property, Plant and Equipment
- Long-term assets that are used in the
operations of the company
- Examples: land, building, warehouse,
automobiles, delivery vehicle, computer
equipment and manufacturing equipment
- ONLY those assets owned and controlled
by the company will be reported as PPE
- Such benefits are to be used more than a
year
- Cost of purchasing PPE is recognized as
asset not an expense
- Capitalization – recognizing asset
- Depreciation – transferring of cost of asset
to expense; linked to usage; will increase
expense and decrease asset
- To compute, divide the cost of the asset
over its useful life
- Accumulated depreciation – contra-asset
account; used to catch the depreciation
and decrease the asset value to be
reported in the SFP
- Net Book Value of the PPE – cost of PPE,
net of the balance of accumulated
depreciation as of the SFP date
- Land is not depreciated because this does
not have a useful life
6. Intangible Assets
- Long-tem assets; will be used in the
business for more than a year
- Amortization – allocation of the cost of
intangible assets to the year it was used
FABM2
- Computed similar to depreciation; cost of - Unpaid expenses of the company as of the There are two acceptable formats: account form
the asset is amortized over its useful life cut-off date of the Statement of Financial and report form.
- NO TANGIBLE PROPERTIES; you cannot see Position
or touch - Kinds of Accrued Expenses: Salaries Account Form
- Examples: patent, brand name and Payable, Utilities Payable, Rent Payable,  Mimics the general ledger T-account format
trademark Interest Payable  Assets on left, Liabilities and Equity on right
- PATENT – grant conferred by the 3. Unearned Income Assets Liabilities and Equity
government to the creator of invention - Liability payable in goods or service Cash Accounts Payable
(product or process) for the sole right to - Customer deposit or down payments are Account Receivable Accrued Expenses
make, use, and sell that invention for a not record as sales until the deliveries are Inventory Unearned Income
specified period of time made Prepaid Expenses Notes Payable
- BRAND NAME – word/s used to identify a - Not through direct cash payments to the Notes Receivable Long-Term Payable
specific product and its manufacturer customer Property, Plant and Equipment
(Jollibee, McDonalds, Apple) - Settled by the delivery of goods or Intangible Assets Owner, Capital
- TRADEMARK – symbol that represent the rendering services Total Assets Total Liabilities and Equity
brand (happy red bee = Jollibee, tall clown 4. Long-Term Liabilities
in stripes = McDonalds, swoosh checkmark - Obligations with due dates that fall more
Report Form
= Nike) than one year from the date of SFP
 Simple list; assets are listed first, followed by
- Bank loan is common example
liabilities and finally the equity account
LIABILITIES - Can all be paid at maturity or in
Assets
 Right side of SFP installment over the term of the loan
Cash
 Obligations that the company is required to pay - Part of financing activities of the company
Accounts Receivable
 Creditors – entities to whom the company is
EQUITY Inventory
indebted
Prepaid Expenses
Kinds of Liabilities  Net assets of the business
Notes Receivable
1. Payables  Composed of the owner’s investments and the
Property, Plant and Equipment
- Obligations to make payments to creditors accumulated net income of the company, net of
Intangible Assets
- 2 kinds of payables: Accounts Payable any distributions of the owners
Total Assets
(AP) and Notes Payable (NP)  Reflects the portion of the asset that belongs to
Liabilities and Equity
- Accounts Payable refers to obligation to the owners of the business
Accounts Payable
the supplier of inventories  For a sole proprietorship, SFP will reflect one
- Notes Payable refers to an obligation Accrued Expenses
equity account – Owner’s Capital
Unearned Income
evidenced by a promissory note  Net Income – closed to the capital account
Notes Payable
- The issuer of the promissory note reports  Drawings – may be maintained to follow the
this as NP in his accounting book, the Long-term Payable
withdrawals of the owners during the year; also
holder of the PN has the right to collect Owner, Capital
closed to the capital account
and reports NR in his accounting book Total Liabilities and Equity
2. Accrued Expenses Presentation of Statement of Financial Position
Classified Statement of Financial Position

@krizelsevilla
FABM2
- Assets and Liabilities are classified as to current or
non-current
- Assets are classified as current if it can be used or
converted to cash within one year (Cash, Accounts
Receivables and Inventory)
- Prepaid Expenses maybe classified as current if
the advance payment is expected to be used
within one year
- Classification of Notes Receivable is dependent on
the term of the payments (similar to Notes
Payable)
- Those collectibles after one year are reported as
non-current (PPE, Intangible Assets)
- Current Liabilities are payables due to be paid
within one year (Accounts Payable and Accrued
Expenses)
- Unearned Income is current if the delivery of
goods or services for the settlement of the
advance payment is within one year
- Long-term Liabilities are generally classified to as
non-current
Normal Balances
 Debit entry should be placed on the left-side of
the T-account (assets)
 Credit entry should be on the right side of the T-
account (liabilities and equity)
 An account is increased by an entry on the side of
its normal balance and decreased by an entry on
the opposite side of its normal balance
STATEMENT OF COMPREHENSIVE INCOME
 Statement that reports the results of operations of
the business for one accounting period
 SCI contains the following:
a) Revenue generated by operating the
business
b) Costs spent to generate the revenue
@krizelsevilla
c) Income, which is the excess of revenue
over costs
 Described as “for the year period” report
 Amounts presented on the report include ONLY
those that occurred within the given period
 The bottom line of SCI is net income
 An action-pack statement
Components of Statement of Comprehensive Income
Income and Expenses are the general terms used
to describe the elements of the SCI
INCOME
- Transaction that increase assets and/or decrease
liabilities leading to increase in equity
- Two kinds: revenue and gain
- Revenues – income generated from the primary
operations of the business
- Gains – income derived from other activities of the
business
EXPENSES
- Transaction that decrease assets and/or increase
liabilities leading to decreasing in equity
- Two kinds: expenses and losses
- Expenses – related to the primary operations of
the business
- Losses – from other activities of the business
Accrual Concept of Accounting
 Accrual is one of the fundamental concepts of
financial accounting
 Accrual states that revenue must be reported on
the accounting period that it was earned and
expenses must be reported during the same
reporting period they were incurred
 This is the concept that dictates when an item
must be reported on the SCI
 Matching Principle – expenses are “matched” and
recorded in the same period that the revenue it
generated was recognized
 Principle of Rational Allocation – requires the cost
of long-term expenditure to be rationally allocated
over the period of usage based on the expected
pattern of usage
 Example of expenses estimated using rational
allocation is the depreciation of equipment
 If the accountants cannot determine how long the
expenditure will benefit the business, then
conservatism dictates that the cost of the
expenditure should be charged to expense
immediately. This method is used for costs of
advertising
Elements of Statement of Comprehensive Income
REVENUE
Service Income
- Used to describe revenue derived from rendering
of services
- More specific account name: Rental Income,
Professional Fee and Tuition Fee Revenue
Sales
- Used to describe revenue derived from selling of
goods
- More specific account name: Office Supplies
Sales, Book Sales and Food Sales
- Revenue from sales of goods is recognized when
goods have been delivered
- When goods are returned, it is reported under the
name Sales Return and Allowances (a contra sales
account)
- When a customer took advantage of the discount
offered by the business, it is reported as Sales
Discount (a contra sales account)
- Net Sales = Gross Sales - Sales Returns and
Allowances and Sales Discount
FABM2
EXPENSES
Cost of Goods Sold (COGS)
- Account used by the companies that sells goods
- Cost of Sales collects the cost of the merchandise
sold
- Includes purchase price of inventory, brokerage
and shipment cost to bring goods to the premises
of the company
- Shipment cost is called Freight-In
- Part of inventory accounting
- Two ways of keeping records of inventory:
Perpetual Inventory System (inventory and COGS
accounts are perpetually updated every time a
sale is made) and Periodic Inventory System
(inventory account is periodically updated at the
end of the year or end of the month)
- Two contra-Purchase accounts: Purchase Returns
and Allowances (returns of defective products)
and Purchase Discount
- Net Purchases = Purchases + Freight-In -
Purchase Returns – Purchase Discount
- COGS formula:
Beginning Inventory
Add: Net Purchases
Cost of Goods Available for Sale
Less: Ending Inventory
Cost of Goods Sold
immediately charge to expense the amount
deemed uncollectible
- Ways to compute for uncollectible amounts
a. Percentage of sales (determination of the
historical relationship between bad debts
and sales)
b. Percentage of accounts receivables
c. Aging of receivables
Other Expenses and Income
- Interest income from investment of excess cash,
interest expense from borrowings and gain or loss
from sale of equipment
Presentation of Statement of Comprehensive Income
SINGLE-STEP
- Closely related to the nature of expense format
- Lists down expenses based on the source of
expenses: Salaries, Purchases, Supplies, Utilities,
Fuel and Depreciation
Goods Sold, General and Administrative
Expenses, Selling Expenses
- General and Administrative Expenses – those
incurred in the daily operations and management
of the business (Building Rent, Consultant Fees,
Depreciation on Office Equipment, Insurance,
Supplies, Subscriptions, Utilities, Salary and
benefits attributable to corporate management,
as well as any legal staff)
- Selling Expense – costs related to marketing,
selling and distributing the company’s
merchandise (Commissions, Advertising,
Promotional Materials Distributed, Rent of the
Sales Showroom, Rent of the Sales Offices,
Salaries and Fringe Benefits of Sales Personnel,
Utilities and Telephone Usage in the Sales
Department)

Operating Expenses
- All other expenses related to the operation of the
business
Normal Balances
- Include: Salaries of employees, Supplies, Utilities,
- Normal balance of equity accounts is credit
Gasoline Expense, Representation, Bad Debts
- Normal balance of all income accounts is credit
Expense, Depreciation and Amortization
MULTI-STEP - Normal balance of all expense accounts is debit
- Bad Debts Expense – uncollectible accounts from
- Associated with the function of expense
customers
- More popularly used in business STATEMENT OF CHANGES IN EQUITY
- The accounting rule (1) periodically analyze the
- FUNCTIONS OF EXPENSE classifies operating  Prepared to meet to understand the transactions
collectability of Accounts Receivable (2)
expense into 3 categories based on usage: Cost of that caused movements in equity accounts

@krizelsevilla
FABM2
 A statement dated “for the year ended” - Taxed separately from the partners except for - PAID-IN CAPITAL – amount of contributions given
 Summarizes the equity transactions’ with the those formed for the practice of the profession of or will be given to the corporation in exchange for
owners of the business that occurred during the partners (lawyers, accountants, etc.) its common stock (capital contribution); composed
year - Section 22B, National Internal Revenue Code of of capital stock and additional paid-in capital
the Philippines - Capital Stock – reflects the Par Value (minimum
Forms of Business Organizations Preparation of SOCE price by which corporations can issue stocks to
SOLE PROPRIETORSHIP ABC Company stockholders) of the issued common stock
- Simplest form of business organization Statement of Changes in Equity - Additional Paid-In Capital – excess of the issue
- There is only one owner For the period ended December 31, 20X1 price over the Par
- The owner is also the manager - RETAINED EARNINGS – reports the undistributed
- The business has no legal personality separate Balance, January 1, Partner A, Partner B, Partner Total earnings of the corporation
from its owner 20X1 Capital Capital C, Capital - Balance of RE is computed as: Net Income – Net
Preparation of SOCE Add: Net Income Losses and Dividends
ABC Company Partner’s - Dividends – distributions to stockholders, similar
Statement of Changes in Equity Contribution to owner’s drawings
For the period ended December 31, 20X1 Less: Drawings - Various kinds of Dividends: Cash Dividends
Balance, December (distribution to shareholders are in cash), Property
Owner, Capital, January 1, 20X1 31, 20X1 Dividends (shareholders will be given non-cash
Add: Net Income assets of the corporation), Stock Dividends
Owner’s Contribution CORPORATION (corporation’s own stock will be distributed to the
Less: Drawings - Most complex form of business organization shareholder)
- Owned by many owners called stockholders or Preparation of SOCE
Owner, Capital, December 31, 20X1
shareholders ABC Company
- Divided into common stocks or shares of stocks Statement of Changes in Equity
PARTNERSHIP - The Corporation Code governs all corporations in For the period ended December 31, 20X1
- Business owned by two or more owners called the Philippines; dividends may be distributed only
partners from accumulated earnings Capital Additional Retained Total
- Partners are generally involved in the - Corporations are registered with the Securities Stock Paid-In Capital Earnings
management of the business and Exchange Commissions (SEC) Balance, January
- The agreement of partners is stated in the - Some corporations are listed in the Philippine 1, 20X1
contract of partnership specifically, the partner’s Stock Exchange (PSE) – provides a platform where Add: Net Income
profit and loss sharing arrangements investors can buy and sell stocks of listed Issuance of new
- Has a legal personality separate from its owners corporations stocks
- Article 1768, Title IX Partnership, republic Act No. - One of the characteristics of corporation: Less: Dividends
386 - Civil Code of the Philippines states that “The separation of ownership and management Balance,
partnership has a juridical personality separate - A LEGAL ENTITY SEPARATE FROM ITS OWNERS December 31,
and distinct from that of each of the partners, - Stockholders’ equity is divided into 2 parts: Paid-In 20X1
even in case of failure to comply with the Capital and Retained Earnings
requirements of article 1772, first paragraph.”

@krizelsevilla
FABM2
STATEMENT OF CASH FLOWS long-term assets as well as proceeds from the Preparing the Statement of Cash Flows
 Explains the net changes in cash for the year disposal of such long-term assets
 CASH RECEIPTS may be form (1) sales to - Hints on the company’s ability to generate cash in
customers (2) collection from customer accounts the future
(3) loans and other borrowings (4) owner’s - A negative cash flows from investing activities
contributions implies that the company used cash to acquire
 CASH DISBURSEMENTS may be for payments of long-term assets intended to generate cash and
(1) business expenses (2) purchases of inventories revenue in the future
and other assets (3) liabilities to creditors (4) - A positive cash flows may indicate that the
dividends to owners company is divesting or downsizing
 Dated “for the year ended” - Examples of Cash Flow transactions:
 The report is based on 3 major activities of the 1. Cash payments to acquire new property,
business – operating, investing and financing plant and equipment, intangible assets
and other long-term assets
Sections of the Statement of Cash Flows 2. Cash receipts from sale of property, plant
OPERATING ACTIVITIES and equipment, intangible assets and
- Primarily derived from the main revenue- other long-term assets
producing activities 3. Cash loans made to other parties (long- - Analysis of Accounts Receivable Account
- The transactions reported in this section term note receivable)
4. Cash collection on long-term note AR, Beg. Credit Customer AR, End.
represents the cash components of the events Balance Sales Payments Balance
that enter into the determination of net income in receivable
the SCI
- Reveals the present ability of the company to FINANCING ACTIVTIES - Analysis of Inventory Account
generate cash from its operations - Last section of the SCF
Inventory Purch Inventory
- Examples of Cash Flow transactions: - Reports cash received and cash paid to equity Beg. COGS End.
owners and long-term creditors Balance ases Balance
1. Cash received from customers
2. Cash received from fees, commissions and - Examples of Cash Flow transactions:
other income 1. Cash received from issuing common - Analysis of Accounts Payable Account
3. Cash payments to suppliers shares (or capital contributions from
owners) AP, Beg. Purch Paym AP, End.
4. Cash payments to employees Balance ases ents Balance
5. Cash payments for other operating 2. Cash received from issuing notes or
expenses getting a long-term loan from a bank
6. Interest payments 3. Cash dividends distributed to shareholders - An alternative presentation of the operating
4. Cash withdrawals of owners section of SFP is referred to as “indirect method”
INVESTING ACTIVITIES 5. Cash payment for principal of long-term - Indirect method shows the reconciliation from
- Second section of the SCF loan accrual net income to net cash flows from
- Reported are cash used for acquisition of property, operations
plant and equipment, intangible assets and other T-account of Cash - Adjustment to net income include:
- Cash receipts = debit and cash payments = credit

@krizelsevilla
 FABM2
1. Non-cash expense such as depreciation
and amortization are added back to net
income. This is an expense that does not
have a counterpart. We refer to these as
“Non-cash” expense.
2. Changes in current assets and current
liabilities
- Analyze the adjustments for the changes in
current assets and current liabilities

Credit AR, End. AR, Beg. Customer

Sales Balance Balance Payments

Inventory Inventory Purcha

COGS End. Beg.
Balance Balance ses

- To determine the payments, plug in purchases in

the AP Analysis
AP, Inv. Inv. AP,
Payme
Beg. COGS End. Beg.
nts End.
Bal. Bal. Bal. Bal.

Inv. Inv. AP, AP, Paym

COGS End. Beg. Beg. End.
Bal. Bal. Bal. Bal. ents

Inv. Inv. AP, AP, Paym

COGS End. Beg. End. Beg.
Bal. Bal. Bal. Bal. ents

Change in current assets /

current liabilities
Increase in current assets
Decrease in current assets
Increase in current liabilities
Decrease in current liabilities
Adjustment to net income
Deduct from net income
Add to net income
Add to net income
Deduct from net income

@krizelsevilla