The Users of Financial Statements

1. Investors/ Shareholders – use the FS to make important investment decisions with a firm.
2. Creditors – use the FS to make significant decisions in granting credit with an enterprise.
3. Employees and Labor Unions – use FS to judge the fairness of wages, future job prospects and bargain for better wages.
4. Regulators – often have legal authority over certain activities of organization such as BIR, SEC and BSP.
5. Customers – use the financial information about the continuance of a company especially when they have a long-term involvement with
or are dependent on the entity.
6. Public – use the financial information to assess the contributions of the entity to the economy such as number of people they employ and
their patronage of local suppliers.

The Accounting Equation

The Accounting Equation reflect the sources of the company’s assets: the funds generated by the creditors through short term and
long term borrowing and the funds provided by its owners / shareholders in a form of initial investment in a form of cash and non-cash
assets. Thus, the accounting equation is expressed in this way:

ASSETS = LIABILITIES + OWNER’S EQUITY

This equation can be rearranged to: ASSETS – LIABILITIES = OWNER’S EQUITY

The Breakdown of Equity yields the following expanded accounting equation:

ASSETS = LIABILITIES + OWNER’S CAPITAL – OWNER’S WITHDRAWALS + REVENUES – EXPENSES

Assets – represent the economic resources owned or controlled by a company that yields future benefits. Examples are cash and cash
equivalents, short-term investments/marketable securities, trade and other receivables, inventories, prepaid expenses, unused office
supplies, property, plant and equipment such as land, office and store equipment, office and store furniture and fixtures, building, vehicles
and machineries and intangible assets which include goodwill, franchise, trademarks, patents, copyrights, etc.
Liabilities – are creditor’s claims on assets. The term payable refers to a liability that promises a future outflow of resources. Examples are
accounts payable, note payable, bank loan payable, accrued expenses or expenses payable, deferred or unearned revenues.
Equity – is the owner’s claim on assets. Equity is equal to assets minus liabilities and commonly referred to as net asset or residual equity
of the company. The company investment and revenues increase the equity account while withdrawals and expenses normally decrease
the account.

The Basic Financial Statements

The basic financial statements are the following:

1. The statement of financial position – it shows the financial condition of a business entity in terms of assets, liabilities and equity.
2. The income statement – it reflects the financial performance of a company in terms of net income or net loss. Total revenues generated
by the enterprise for a given period are reported together with the total expenses incurred are shown in this statement.
3. The statement of cash flows – it highlights the sources and use of cash of the company which covers three parts: the operating, the
investing and financing activities.
4. The statement of changes in equity – shows the movement of capital account in terms of initial and additional investments, withdrawals
and effects of net income or net loss in this account.
5. Notes to Financial Statements – significant disclosures are very important which includes the accounting policies, background of the
company and the breakdown/details affecting all the accounts of the FS.

The Users of Financial Statements

1. Investors/ Shareholders – use the FS to make important investment decisions with a firm.
2. Creditors – use the FS to make significant decisions in granting credit with an enterprise.
3. Employees and Labor Unions – use FS to judge the fairness of wages, future job prospects and bargain for better wages.
4. Regulators – often have legal authority over certain activities of organization such as BIR, SEC and BSP.
5. Customers – use the financial information about the continuance of a company especially when they have a long-term involvement with
or are dependent on the entity.
6. Public – use the financial information to assess the contributions of the entity to the economy such as number of people they employ and
their patronage of local suppliers.

The Accounting Equation

The Accounting Equation reflect the sources of the company’s assets: the funds generated by the creditors through short term and
long term borrowing and the funds provided by its owners / shareholders in a form of initial investment in a form of cash and non-cash
assets. Thus, the accounting equation is expressed in this way:

ASSETS = LIABILITIES + OWNER’S EQUITY

This equation can be rearranged to: ASSETS – LIABILITIES = OWNER’S EQUITY

The Breakdown of Equity yields the following expanded accounting equation:

ASSETS = LIABILITIES + OWNER’S CAPITAL – OWNER’S WITHDRAWALS + REVENUES – EXPENSES

Assets – represent the economic resources owned or controlled by a company that yields future benefits. Examples are cash and cash
equivalents, short-term investments/marketable securities, trade and other receivables, inventories, prepaid expenses, unused office
supplies, property, plant and equipment such as land, office and store equipment, office and store furniture and fixtures, building, vehicles
and machineries and intangible assets which include goodwill, franchise, trademarks, patents, copyrights, etc.
Liabilities – are creditor’s claims on assets. The term payable refers to a liability that promises a future outflow of resources. Examples are
accounts payable, note payable, bank loan payable, accrued expenses or expenses payable, deferred or unearned revenues.
Equity – is the owner’s claim on assets. Equity is equal to assets minus liabilities and commonly referred to as net asset or residual equity
of the company. The company investment and revenues increase the equity account while withdrawals and expenses normally decrease
the account.

The Basic Financial Statements

The basic financial statements are the following:

1. The statement of financial position – it shows the financial condition of a business entity in terms of assets, liabilities and equity.
2. The income statement – it reflects the financial performance of a company in terms of net income or net loss. Total revenues generated
by the enterprise for a given period are reported together with the total expenses incurred are shown in this statement.
3. The statement of cash flows – it highlights the sources and use of cash of the company which covers three parts: the operating, the
investing and financing activities.
4. The statement of changes in equity – shows the movement of capital account in terms of initial and additional investments, withdrawals
and effects of net income or net loss in this account.
5. Notes to Financial Statements – significant disclosures are very important which includes the accounting policies, background of the
company and the breakdown/details affecting all the accounts of the FS.