Financial Statements
What each statement tells you
Financial statements describe the business's resources, obligations, performance, and cash movements. Read them from the business's perspective, separately from the owner's personal finances.
Statement | Main question | Heading date |
|---|---|---|
Profit or loss | What income and expenses produced the period's result? | For the period ended |
Changes in owner's equity | How did profit, investment, and drawings change capital? | For the period ended |
Financial position | What assets, liabilities, and equity exist? | As of the reporting date |
Cash flows | Why did cash increase or decrease? | For the period ended |
Notes | Which policies and details explain the figures? | Accompany the statements |
Profit is not the same as cash received. Revenue can be earned before collection; expenses can be incurred before payment. Cash flows track actual receipts and payments instead.
Classify the account before adding it
Asset: a present economic resource controlled by the business because of past events. A receivable is a right to collect, even before the cash arrives.
Liability: a present obligation to transfer an economic resource because of past events. Unearned revenue is an obligation to provide work, not earned income.
Equity: the owner's residual claim: assets minus liabilities.
Income: increases in assets or decreases in liabilities that increase equity, excluding owner contributions.
Expense: decreases in assets or increases in liabilities that decrease equity, excluding distributions to owners.
Easily confused balances | How to distinguish them |
|---|---|
Prepaid insurance / insurance expense | The unused benefit is an asset; the used portion is an expense. |
Supplies / supplies expense | Supplies still available are an asset; supplies consumed are an expense. |
Unearned revenue / service revenue | Work still owed is a liability; work already performed produces revenue. |
Salaries payable / salaries expense | Payable is the unpaid obligation; expense is the cost incurred. Do not add a recorded payable again to a final expense balance. |
Owner investment / service revenue | Investment changes capital directly; it is not business income. |
Owner drawings / operating expense | Drawings reduce the owner's claim directly; they are not a cost of earning revenue. |
Current assets meet the operating-cycle, trading, twelve-month realization, or available-cash criteria in the course. Equipment and land used over several periods are non-current in these cases. A prepayment is current only when the facts support that classification.
Current liabilities include operating-cycle obligations and amounts due within twelve months, or obligations the business cannot defer for at least twelve months at the reporting date. Split a long-term loan into its current and non-current portions when the schedule is given. An account name alone does not establish its due date.
Accumulated depreciation reduces the carrying amount of equipment. An allowance for doubtful accounts reduces the corresponding receivable balance. Contra-assets reduce their related assets; they are not liabilities.
Follow the statements in order
Profit or loss → changes in equity → financial position. Net profit enters the equity statement; ending capital then enters financial position. Cash flows separately reconcile opening and closing cash.
The course also distinguishes income and expenses outside profit or loss as other comprehensive income. Comprehensive income combines profit or loss and other comprehensive income. For profit-or-loss presentation, operating is the default category; investing and financing depend on the nature of the underlying income or expense. These presentation categories are not substitutes for cash-flow classifications.
Worked example: Mira Repair Service
This is a constructed teaching example using the source methods. Its figures are separate from the exam and Practice Lab cases. All amounts are Philippine pesos (₱). Balances are final after adjustments for April 2026; do not make additional adjusting entries.
Given balances
Account or equity movement | Amount |
|---|---|
Cash | 47,800 |
Accounts receivable | 22,600 |
Unused supplies | 4,300 |
Prepaid insurance | 9,500 |
Equipment at cost | 163,000 |
Accumulated depreciation — equipment | 13,700 |
Accounts payable | 18,400 |
Salaries payable | 5,600 |
Unearned service revenue | 12,500 |
Loan payable | 104,000 |
Capital at April 1 | 70,000 |
Additional owner investment during April | 18,000 |
Owner drawings during April | 9,200 |
Earned service revenue | 58,400 |
Rent expense | 18,300 |
Salaries expense | 19,100 |
Utilities expense | 3,700 |
Insurance expense | 1,600 |
Supplies expense | 1,500 |
Receivables, supplies, and prepaid insurance are expected to be collected or used within twelve months. Equipment is used over several periods. The payables fall due next month; the unearned fees relate to work owed in May. Of the loan, ₱26,000 falls due within twelve months and ₱78,000 after that. There are no other equity changes or income/expense accounts.
1. Profit or loss: measure performance
Total expenses = 18,300 + 19,100 + 3,700 + 1,600 + 1,500 = ₱44,200.
Net profit = revenue − expenses = 58,400 − 44,200 = ₱14,200.
Use the earned revenue and final expense balances. Exclude the owner's investment and drawings because they are owner transactions. Exclude unused insurance and supplies because they still provide future benefits. Salaries payable is already an obligation balance; adding it to the final salaries expense would count cost twice.
Heading: Mira Repair Service — Statement of Profit or Loss — for the month ended April 30, 2026.
2. Changes in equity: explain the owner's claim
Ending capital = beginning capital + investment + net profit − drawings.
70,000 + 18,000 + 14,200 − 9,200 = ₱93,000.
Profit increases the owner's residual claim; investment increases it separately. Personal withdrawals reduce that claim without changing the business's measured profit. If the business had a net loss, subtract it instead of adding a profit.
Heading: Statement of Changes in Owner's Equity — for the month ended April 30, 2026.
3. Financial position: check resources and claims
Current assets = 47,800 cash + 22,600 receivables + 4,300 supplies + 9,500 prepaid insurance = ₱84,200.
Equipment carrying amount = cost − accumulated depreciation = 163,000 − 13,700 = ₱149,300.
Total assets = 84,200 + 149,300 = ₱233,500.
Current liabilities = 18,400 accounts payable + 5,600 salaries payable + 12,500 unearned fees + 26,000 current loan portion = ₱62,500. Non-current liabilities are the remaining loan portion of ₱78,000. Total liabilities = 62,500 + 78,000 = ₱140,500.
Check: assets = liabilities + equity = 140,500 + 93,000 = ₱233,500. This also gives equity independently: 233,500 − 140,500 = ₱93,000.
Do not add the whole loan again after splitting it. Do not deduct accumulated depreciation twice. An account form places assets beside liabilities/equity; a report form lists them vertically. Both must balance.
Heading: Statement of Financial Position — as of April 30, 2026.
4. Cash flows: reconcile actual cash
The cash records give opening cash of ₱40,600, receipts from customers of ₱63,200, operating payments of ₱48,700, cash equipment purchases of ₱12,100, owner cash investment of ₱18,000, loan-principal repayment of ₱4,000, and drawings of ₱9,200. These are all April cash movements.
Operating cash flow = 63,200 − 48,700 = ₱14,500.
Investing cash flow = −₱12,100 for equipment.
Financing cash flow = 18,000 − 4,000 − 9,200 = ₱4,800.
Net cash increase = 14,500 − 12,100 + 4,800 = ₱7,200.
Closing cash = 40,600 + 7,200 = ₱47,800, matching financial position.
Collections can include previous receivables; expenses and operating payments can occur at different times. That is why operating cash flow of ₱14,500 differs from net profit of ₱14,200. Use cash records, not the profit figure, to calculate the change in cash.
Heading: Statement of Cash Flows — for the month ended April 30, 2026. Detailed preparation and course interest classifications belong to the Completing the Cycle unit.
5. Notes: explain the figures
For this example, the notes would explain the prepaid-insurance coverage, equipment cost and accumulated depreciation, the loan repayment schedule, and the work still owed for unearned fees. Notes also state the basis of preparation and accounting policies. They explain the reported figures rather than adding another copy of the same totals.
Final checks
Classify balances before totaling; use timing and conditions, not only account names.
Transfer net profit and ending capital consistently between statements.
Reconcile closing cash with financial position.
Reported book equity does not automatically equal market value: historical measurement and unrecognized resources limit that interpretation.
Sources
FDNACCT Unit 3_Financial Statements_Study Guide.pdf, pp. 1–7.
FDNACCT Unit 3_Financial Statements_Example.pdf, pp. 1–4, for presentation and statement links.
FDNACCT_Formula Guide_Quiz #1.pdf, for the accounting and capital equations.