Financial statements explained for Philippine business owners and managers

Financial statements summarize a company's financial position (what it owns and owes), financial performance (whether it made money) and cash flows (where cash came from and went). In the Philippines, companies prepare them under the Philippine Financial Reporting Standards (PFRS) or the frameworks applicable to smaller entities, and file audited statements with the SEC and the BIR as required. For managers, the more important use is monthly: understanding the business early enough to act.

The main statements

The trial balance: where statements start

The trial balance lists every general ledger account with its debit or credit balance at a date. Total debits equal total credits. Statements are built by grouping trial balance accounts into line items. If the trial balance is wrong, so are the statements, which is why the month-end close focuses on reconciling accounts before reporting.

Reading the statement of financial position

• Current assets: cash, receivables, inventory, prepaid expenses
• Non-current assets: property and equipment, long-term investments
• Current liabilities: payables, accrued expenses, short-term loans, taxes payable
• Non-current liabilities: long-term loans, lease liabilities, retirement obligations
• Equity: capital and retained earnings

Watch working capital (current assets minus current liabilities) and the current ratio (current assets ÷ current liabilities) as signs of short-term health.

Reading the statement of financial performance

Revenue less cost of sales gives gross profit. Less operating expenses gives operating income. After finance costs and income tax, you reach net income. Track gross margin and operating margin by month, business unit and branch if your system supports it.

Reading the statement of cash flows

• Operating activities: cash from running the business. Profit with weak operating cash flow often means receivables or inventory are growing too fast.
• Investing activities: buying or selling equipment and investments.
• Financing activities: loans, repayments, capital and dividends.

Ratios managers should watch monthly

Getting statements faster and more useful

• Integrate operations so sales, purchases, inventory and payroll post automatically
• Use consistent account structures across companies for comparability
• Tag transactions by branch, department or project for segment views
• Compare to budget every month (budget vs. actual)
• Consolidate groups in the system (consolidation guide)

Annual requirements

Corporations file annual audited financial statements with the SEC and attach them to annual income tax returns with the BIR, subject to thresholds and filing schedules set by each agency. Work with your external auditor on the applicable framework and deadlines.

Where Cirquolus fits

Cirquolus Financial statements provides the statement of financial position, statement of financial performance and cash flow statement, with trial balance, journal and report inquiries. It is part of financial management, which connects payables, receivables and journals with purchasing and sales.

Frequently asked questions

What are the basic financial statements?

The statement of financial position, statement of financial performance (income statement), statement of cash flows, statement of changes in equity, and notes.

What is the difference between a trial balance and a balance sheet?

A trial balance lists all ledger account balances to check that debits equal credits. The balance sheet groups asset, liability and equity accounts into a formal statement.

Why can a profitable company run out of cash?

Profit is recorded when earned, but cash arrives when customers pay. Growing receivables and inventory can consume cash even when profits are strong.

How often should management review financial statements?

Monthly, with a short management pack covering performance, cash, key ratios and variances against budget.