Chapter 8
1. Financial statements are the means by which the information accumulated and processed in
financial accounting is periodically communicated to the users.
2. The components of financial statements are:
a. Statement of financial position
b. Income statement
c. Statement of comprehensive income
d. Statement of changes in equity
e. Statement of cash flows
f. Notes, comprising of significant accounting policies and other explanatory notes
3. The objective of financial statements is to provide information about financial position, financial
performance and cash flows of an entity that is useful to a wide range of users in making
economic decisions.
4. Financial statements shall be presented at least annually. When an entity’s end of reporting
period changes and financial statements are presented for a period longer or shorter than one
year, an entity shall disclose; The period covered by the financial statements, the reason for
using a longer or shorter period, and the fact that amounts presented in the financial
statements are not entirely comparable.
5. A statement of financial position is a formal statement showing the three elements comprising
financial position, namely assets, liabilities, and equity.
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10. A liability which is due to be settled within twelve months after the reporting period is classified
as current, even if: The original term was for a period longer than twelve months, an agreement
to refinance or to reschedule payment on a long-term basis is completed after the reporting
period and before the financial statements are authorized for issue.
11. Under covenants, if certain conditions relating to the borrower’s financial situation are
breached, the liability becomes payable on demand.
12. Equity is the residual interest in the assets of the entity after deducting all of its liabilities. Simply
stated, equity means “net assets or total assets minus liabilities.
13. The elements are:
a. Share capital
b. Subscribed share capital
c. Preference share capital
d. Ordinary share capital
e. Share premium
f. Accumulated profits (losses)
g. Appropriation reserve
h. Revaluation reserve
i. Treasury share
14. Notes to financial statements provide narrative description or disaggregation of items presented
in the financial statements and information about items that do not qualify for recognition.
15. The two forms of financial position are:
Report form – The report form sets forth the three major sections in a downward
sequence of assets, liabilities and equity
Account form – The presentation follows that of a 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.
Chapter 9
1. An income statement is a formal statement showing the financial performance of an entity for a
given period of time.
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3. The common sources of income are:
Sales of merchandise to customers
Rendering of services
Use of entity resources
Disposal of resources other than products
4. The components of expenses are:
Cost of goods or cost of sales
Distribution costs or selling expenses
Administrative expenses
Other expenses
Income tax expense
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7. Distributions costs constitute costs which are directly related to selling, advertising and delivery
of goods to customers.
Salesmen’s salaries
Salesmen’s commissions
Traveling and marketing expenses
Advertising and publicity
Feight out
Depreciation of deliver equipment and store equipment
8. Administrative expenses constitute cost of administering the business.
Doubtful accounts
Office salaries
Expenses of general accounting and credit department
Office supplies used
Certain taxes
Contribution
Professional fee
Depreciation of office building and office equipment
Amortization of intangible assets
9. Other expenses are those expenses which are not directly related to the selling and
administrative function.
Loss on sale of trading investments
Loss on disposal of property, plant, and equipment
Loss on sale of noncurrent investment
Casualty loss – flood, earthquake, and fire
10. The two forms of Income statement are:
The functional presentation, classifies expenses according to their function as part of
cost of good sold, distribution cost, administrative expense and other expenses.
The natural presentation, expenses are aggregated according to their mature and not
allocated among the various functions within the entity.
11. PAS 1 does not prescribe any format, because each method of presentation has merit for
different types of entities, management is required to select the presentation that isa reliable
and more relevant.
12. 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.
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