Business Finance

• Financial statements


  Structured and standardized representation of the financial position, financial performance, and cash flow of the business
• Components of a complete set of financial statements

  • Statement of financial position or condition (balance sheet)
  • Statement of comprehensive income (income statement)
  • Statement of Changes in Equity
  • Statement of Cash Flow
  • Notes to the Financial Statements
• Balance sheet


  Shows a company's assets, liabilities, and equity at a specific point in time
• Income statement


  Reveals a company's revenues, expenses, and profits over a specific period
• Statement of Changes in Equity


  Details changes in equity from activities like issuing shares or distributing dividends
• Statement of Cash Flow


  Illustrates how cash flows in and out of a company during a specific period, categorized into operating, investing, and financing activities
• Notes to the Financial Statements


  Provide additional information and explanations about items presented in the financial statements
• There is no hierarchy of importance among the financial statements
• A good finance officer must appreciate and understand that the financial statements are interrelated to one another
• Decisions must be based on a comprehensive understanding of financial statements
• In the Philippines, the preparation of financial statements is based on the guidelines and directives issued by Financial Reporting Standard Council (FRSC)
• The guidelines issued by the FRSC is called Philippine Financial Reporting Standards (PFRSs) or shortly referred to as Standards in accounting
• External users of financial statements

  • Government agencies such as the Securities and Exchange Commission (SEC), the Bangko Sentral ng Pilipinas (BSP), the Bureau of Internal Revenue (BIR)
  • Creditors
  • Suppliers
  • Customers
  • Prospective investors
• Internal users of financial statements

  • Employees
  • Management
• Information needs of users of financial statements

  • Government and its agencies - to determine allocation of resources, regulate activities, formulate taxation policies, compute national income
  • Present and prospective investors - to determine if they should buy, hold, or sell investments, assess capacity to pay dividends
  • Suppliers and other trade creditors - to determine if amounts owed can be paid when due
  • Creditors, lenders, banks, and other financial institutions - to determine if loans and interest can be paid back
  • Management - to carry out planning, decision-making, and control responsibilities, evaluate performance
  • Employees - to assess stability, profitability, and ability to provide compensation and benefits
  • Customers - to assess continuance of entity
  • General public - to understand trends and recent developments, range of activities
• The preparation of financial statements follows the general requirements of the Framework and the Standards
• Framework


  Sets out the general concepts that underlie the preparation and presentation of financial statements in the absence of a specific Standards
• Standards


  Particularly the Philippines Financial Reporting Standards (PFRS)/ Philippine Accounting Standards (PSA), outlines the specific provisions and requirements in preparing and presenting financial statements
• Fair presentation


  Financial statements include all necessary information that will influence the decision of economic users
• Salient features of fair presentation requirements


  • Fair presentation requires the faithful representation of the effects of transactions as well as other events and conditions in accordance with the definition and recognition criteria for assets, liabilities, income and expenses
  • An application of the standards, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation
  • A business whose financial statements comply with the standards must make an explicit and unreserved statement of such compliance in the notes to financial statements
  • Financial statements shall not be described as complying with the standards unless they comply with all the requirements of the said standards
• Going concern


  An accounting term that means a company has the resources needed to continue operating indefinitely until it provides evidence that it is unable to do so
• Guidelines for 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 a ready access to financial resources in times of need, it can be concluded that the going concern basis of accounting is appropriate without detailed analysis
  • Before it can satisfy itself that the going concern is appropriate, in other cases, the management should consider a wide range of factors relating to current and expected profitability, debt repayment schedules, and potential sources of replacement financing
• Accrual basis of accounting


  The business must prepare its financial statements using the accrual basis of accounting except for cash flow information
• Consistency of presentation


  Presentation and classification of items in the financial statements must be retained from one period to the next, subject to certain conditions for change
• Conditions for changing presentation and classification


  • Another presentation or classification of the item is more appropriate since it will provide more relevant information to the users
  • The standards allow change in the presentation
  • Comparability is not impaired
• Guidelines on materiality and aggregation


  • Omission or misstatement of items is material if it, individually or collectively, influences the economic decision of users
  • Materiality depends on the size and nature of the omission or misstatement determined in the surrounding circumstances
  • Each material class of similar items shall be presented separately in the financial statements
  • Items of a dissimilar nature of function shall be presented separately unless they are immaterial
  • If a line item is not individually material, it is aggregated with other items either on the face of the financial statements or in the notes
  • An item that is not sufficiently material to warrant separate presentation on the face of the financial statements may, nevertheless, be sufficient to be presented separately in the note
  • The specific disclosure requirement in a Standard need not be satisfied if the information is not material
• Offsetting


  Assets and liabilities as well as income and expenses are reported separately, except when offsetting reflects the substance of the transaction or other event
• Comparability of information


  Assists users of financial statements in making economic decisions based on the assessment of the historical trends in the company's financial information for predictive purposes
• Requirements for 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 the standards specifically permit or require otherwise
• Offsetting in the statement of comprehensive income and in the statement of financial position, except when offsetting reflects the substance of the transaction or other event, detracts users to understand the transactions, other events, and conditions that have occurred and to assess the entity's future cash flows
• Comparability of Information


  The basic objective is to assist users of financial statements in making economic decisions based on the assessment of the historical trends in the company's financial information for predictive purposes
• Requirements for 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 the standards permit or require 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 nature of the reclassification, the amount of each item or class of items that is reclassified, the reason for the reclassification
  • When it is impracticable to reclassify comparative amounts, an entity shall disclose: the reason for not reclassifying the amounts, the nature of the adjustments that would have been made if the amounts had been
• Accounting policies


  The specific principles, bases, conventions, rules, and practices applied by an entity in preparing and presenting financial statements
• The disclosure requirement for accounting policies is intended to enhance the relevance and reliability of the financial statements and the comparability of those financial statements over time and with the financial statements of other businesses
• Statement of financial position (balance sheet)


  A structured financial statement that shows the assets, liabilities, and equity of a business entity reported as of a given date
• Assets


  Resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
• Liabilities


  Present obligations of the entity arising from past events, the settlement of which are expected to result in an outflow from the entity of resources embodying economic benefits
• Equity


  The residual interest in the assets of the company after deducting all of its liabilities
• Aspects of financial position

  • Liquidity
  • Solvency
  • Financial structure (capital structure)
  • Capacity for adaptation
• Liquidity


  The ability of a business entity to settle its currently maturing financial obligations