SH1663

Financial Statements
I. Income Statement
A. Income Statement
• The basic structure of the income statement involves the following:
Entry Description
Net Revenue or Sales Represents the amount of goods or services sold, in terms
of price paid by the customers
Less: Cost of Goods Sold The amount of goods or services sold, in terms of cost to
the company. They are the costs directly associated with
buying or producing the goods sold.
Gross Profit
Less: Selling and General These include costs relating to the management and support
Administrative Expenses functions in an organization that are not directly involved
in the production and supply of goods and services of the
business.
Operating Profit This is the income from operations. It may also be known
as the earnings before income and taxes (EBIT), operating
income, or operating profit.
Less: Interest Expense Interest paid on debts
Income Before Taxes Earnings before taxes
Less: Tax Expense Taxes for the current period
Net Income Operating profit less financing expenses and taxes
Less: Preferred Stock Dividends paid to preferred stockholders
Dividends
Earnings Available to Net income less preferred stock dividends or residual
Common Shareholders income
• For a service enterprise, the income statement is simple. It only lists the income from
operations, like service revenue or professional fees. Operating expenses would then be
deducted from the operations income. If the income is greater than the operating expenses,
there will be a profit. If the income is less than the operating profit, there will be a loss.
Other income would also be added to the operating profit or loss, less other expenses.
• For a trading/merchandising firm, there are several additional components. Sales discounts
and allowances are deducted from the sales to arrive at net sales. The cost of goods sold is
obtained through the following equation:
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑜𝑜𝑜𝑜 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 + 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑜𝑜𝑜𝑜 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑜𝑜𝑜𝑜 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 −
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼.
After the computation of the Cost of Goods Sold, the income statement for trade companies
can proceed as seen in the template.
• The income statement for a manufacturing company is more complicated than that of a
trading firm. It identifies the cost of goods manufactured before the cost of goods sold is

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 SH1663

completed (since not everything that is produced would be sold). Also, work in process is
considered when computing for total cost of goods manufactured. To highlight:
o Total manufacturing cost – The total manufacturing cost is the total of direct materials,
direct labor, and manufacturing overhead.

Direct Materials Pxxx

Add: Direct Labor xxx
Add: Manufacturing Overhead xxx
Total Manufacturing Cost Pxxx

o Cost of goods manufactured – To obtain the total cost of goods manufactured, the
ending work in process should be deducted from the sum of beginning work in process
and total manufacturing cost.
Total Manufacturing Costs Pxxx
Add: Work in Process, Beginning xxx
(Work in Process, End) (xxx)
Total Cost of Goods Manufactured Pxxx

o Cost of goods available for sale – The beginning finished goods inventory is added to
the cost of goods manufactured to obtain the cost of goods available for sale.

Total Cost of Goods Manufactured Pxxx

Add: Finished Goods Inventory, Beginning xxx
Total Goods Available for Sale Pxxx

o Cost of goods sold - Finally, the ending finished goods inventory is deducted from the
total goods available for sale to get the cost of goods sold.

Total Goods Available for Sale Pxxx

(Finished Goods Inventory, End) xxx
Cost of Goods Sold Pxxx

II. Balance Sheet

A. Balance Sheet
• Assets are the things with value that a business owns. They are divided into two (2)
categories: Current assets are the resources that will be used for current operations (short
term) or within the current operating cycle. They also refer to assets that can be turned into
cash within the current operating cycles. Non-current assets, or long-term assets, refer to
the resources of the firm that are more durable and will last longer than a year.
• Liabilities are the debts and other financial obligations that a business has. They are also
classified as current and non-current. Current liabilities are the obligations of the firm that
will mature or need to be paid with the current accounting period. Non-current liabilities
are those that need to be paid or will mature in more than one (1) year.

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• The owner’s equity represents the owner’s share in the business. Using the accounting
equation, the owner’s equity should equal assets minus liabilities.
• A balance sheet could be reported using the account form, where assets are listed on the
left side and liabilities and owner’s equity on the right. It is called the account form because
it is similar to the T- account used in accounting. The report form, on the other hand, lists
the assets followed by the liabilities and owners’ equity.
• Of all the financial statements, the balance sheet is the only one that comes with a specific
date rather than an activity period. This is because the balance sheet presents the assets,
liabilities, and owner’s equity on that date, rather than income or expenses accumulated
over a time period.

References:
Benito, P. P., Chan Pao, T. P., & Yumang, K. (2016). Exploring small business and personal finance
in senior high. Quezon City: Phoenix Publishing House.
Lopez-Mariano, N. D. (2014). Elements of finance. Quezon City: Rex Book Store.

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