Statement of Cash Flow

- is a summary of the cash inflows and cash outflows that brought cash to its ending balance

- “cash is king”

Business Activities that affect cash balance

1. Operating

- Includes transactions that result in generating income and incurring expenses

- all interest income and expense fall under operating

2. Investing

- includes business transactions involving acquisition and disposal of assets other than
inventory

3. Financing

- Pertain to transactions between the business and its owner/s and creditors (lenders)

Ans the ff:

1. Opening an account under the business’ name and depositing cash for initial contribution
of the owner (F)

2. Paying barangay, municipal, and other related taxes for the creation of the business entity
(O)

3. Purchasing land to the business (I)

4. Purchasing a building (I)

5. Purchasing computers and printer for office use (I)

6. Borrowing cash from a bank for additional working capital (F)

7. Purchasing office tables and chairs (I)

8. Selling and distributing merchandise sold by the company (O)

9. Conducting advertising for public exposure of goods for sale (O)

10. Paid electricity and water consumption during the month (O)

11. Rendered service to customers (O)

12. Made internet subscription for office use (O)

13. Mortgaged business property to acquire loan from the bank (F)

14. Owner withdrew cash for personal use (F)

15. Paid salaries of employees (O)

Exercise 2

Using the choices provided, indicate the presentation of each of the transactions below in a
statement of cash flows

1. Purchase of truck for cash (investing, outflow)

2. Sale of ordinary shares for cash (financing)

3. Payment for insurance expense (operating)

4. Payment of Notes payable (financing) *but if specifies for machines, it becomes investing

5. Collection of trade accounts receivable (operating)

6. Payment of cash dividends (financing, outflow) *business and stockholder

7. Borrowing money from the bank (financing, inflow)

8. Sale of office building for cash (investing, inflow)

9. Payment of interest on notes payable (all interest income and expense fall under operating,
operating)

10. Issuance of note payable in exchange of land and building (investing)

*ACCOUNTS PAYABLE IS OPERATING

* notes payable if financing

Page 1 of 33
Types of Cash Flow Statement
• Direct
- lists the receipt and payment of cash from specific activities

How to prepare the SCF under the direct method

1. Identify the activities that increased/decreased cash

2. Classify these under operating, financing or investing

3. Identify whether the effect is a net increase/net decrease to cash (get the total, if its positive
its net increase and if its negative, its net decrease *end cash balance)

4. Compute the ending balance by adding/deducting the net increase/decrease from the
beginning balance

Beg Cash Balance

Operating

Investing

Financing

End Cash balance

Name of Company

Statement of Cash Flows

For the period ending December 31, 20xx

Cash flows from Operating Income:

Receipt from cash services Pxx

Collections on accounts receivable xx

Payment on salaries, rent, utilities, and other expenses (xx)

Net Cash inflow from operating activities Pxx

Cash Flows from Investing Activities:

Purchase or delivery equipment P(xx)

sale of machinery xx

Net cash inflow from financing activities Pxx



Cash flows from financing activities:

Additional investment by owner Pxx

Cash withdrawn by owner (xx)

Net cash inflow from financing activities xx



Net Cash Flow P xx

Beginning Cash Balance xx

Ending Cash Balance P xx

Exercise:

Cash investments by S. Santos

Purchase of delivery equipment

Sale of machinery

Receipts from cash services

Cash withdrawal by s Santos

Page 2 of 33


Operating- 127,960

Investing- 15,000

Financing- 85,000

Beg. Cash 232,960

Operating 127,960

Investing 15,000

Financing 85,000

End Cash 460,920

Exercise 4

Cash investments by S. Santos 72,000 Operating=

175,000-55,000-43,000-36,000-5,700= 35,300

Purchase of delivery equipment 70,000 Investing= (70,000)+50,000= (20,000)

Financing= 72,000-90,000= (18,000)

Sale of machinery 50,000

Beg. Cash 199,280

Cash from sales 175,000 Operating 35,300

Investing (20,000)

Cash withdrawal by s Santos 90,000 Financing (18,000)

End Cash 196,580

Payment of salaries 55,000

Purchase of merchandise 43,000

Payment or rent 36,000

Payment of utilities 5,700

Exercise 5

Received 180k cash investment from the owner F

Provided 400k services on account NA

Incurred 220k operating expenses on account NA

Colected 320,000 cash from accounts receivable O

Allowed 30,000 cash withdrawal to the owner of the F

business

Paid 160,000 cash on accounts payable O

Performed services for 30,000 cash O

Paid 12,000 cash for expenses O

Page 3 of 33
Exercise 6: Individual Work

Seguerra Company started the year with a cash balance of ₱ 346,000. You were asked to
prepare its statement of cash flows for the year ending December 31, 2019. Transactions from

the company’s activities include the following:

- contributions from owners amounting to₱ 458,000,

- proceeds from a long-term bank loan of ₱ 290,000

- payment for dividends of ₱ 49,000

During the year, the company had ₱ 985,200 cash collected from customers, of which 12%
was used to pay for the entire year’s rent. Lastly, the company sold an unutilized property in
Laguna amounting for ₱ 1,430,000, 5% of which was used for the down payment of a newly

purchased property in Cavite.

Seguerra Company

Statement of Cash Flows

For the period ending Dec 31, 2019

Beginning cash balance 346,000

Cash flows from Operating Activities

Collection from customers P 985,200

Payment of annual rent (118,224)

Net Cash Inflow from OA P 866,976

Cash Flows from Investing Activities

Sale of unutilized property (laguna) 1,430,000

Purchase of property (cavite) (71,500)

Net Cash Inflow from IA 1,358,500

Cash Flow from Financing Activities

Contribution from owners 458,000

Proceeds from long-term bank loan 290,000

Payment for dividends (stocks) 49,000

Net cash Inflow from FA 699,000

Net Cash Flow 2,924,476

Ending cash Balance 3,270,476

Exercise 7: Individual Work

Sahara, Inc. is a company engaging in the manufacture of RTW garments. The company needs
to do the cash flow statement for the year ended December 31, 2019.

- The company acquired a 5%, 3-month loan of ₱ 450,000 on June 1, 2019. The principal and
interest was paid at the end of the term.

- A debtor paid an outstanding balance of ₱ 64,500 at the beginning of the year.

- Sahara, Inc. paid 12% taxes out of the ₱ 211,450 cash collection from their clients.

- An idle property in Quezon with a fair value of ₱ 350,000 was sold and 32% of the proceeds
was used to purchase an equipment.

450,000 x 5% x 3/12= 5625

Operating Investing Financing

Page 4 of 33
 (5625) 350,000 450,000

64,500 (112,000) (450,000)

211,450 238,000

(25,374)

237,451

Sahara Inc

Statement of Cash Flows

For the period ending Dec 31, 2019

Beginning cash balance 0

Cash flows from Operating Activities

Interest and Principal paid P(5625)

Outstanding balance 64,500

cash collection from clients 211,450

paid taxes (25,374)

Net Cash Inflow from OA P 237,451

Cash Flows from Investing Activities

Sold property (quezon) 350,000

Purchase of equipment (112,000)

Net Cash Inflow from IA 238,000

Cash Flow from Financing Activities

Loaned money 450,000

Payment of loan (450,000)

Net cash Inflow from FA 0

Net Cash Flow 475,451

Ending cash Balance P 475,451

• Indirect
- derives the net cash provided by (or used in) operating activities by adjusting profit for
income and expense items not resulting from cash transactions

Indirect method adjusts net income for three types of adjustments:

1. Changes that occur in the non-cash current assets and current liabilities

2. Income statement items involving operations that do not require cash outflow or cash
inflow in the period

3. Eliminating gains and losses resulting from investing and financing activities

Name of Company

Statement of Cash Flows

For the period ending, December 31, 20xx

Cash Flows from operating activities:

Net Income P xx

Page 5 of 33
 Adjustment for:

Noncash Expenses (eg. depreciation) xx

Increase in current asset accounts (xx)

Decrease in current liability accounts (xx)

Decrease in current asset accounts xx

Increase in current liabilities account xx

Net cash inflow from operating income P xx

Cash Flows from investing activities:

Purchase of delivery equipment P (xx)

sale of machinery xx

net cash inflow from financing activities xx

Cash flows from financing activities:

Additional investment by owner P xx

cash withdrawn by owner (xx)

net cash inflow from financing activities xx

Net Cash flow P xx

Beginning cash balance xx

Ending cash balance P xx

1. Paris Merchandising Co.’s net income is P72,000 and net operating cash flows totaled
P77,000. The difference is attributed to depreciation expense. Explain how this caused the
difference between the two amounts.

2. Paris Merchandising Co.’s net income is P80,000 and net operating cash flows totaled
P68,000. The difference is attributed to an increase in accounts receivable. Explain how this
caused the difference between the two amounts.

3. Paris Merchandising Co.’s net. Income is P97,000 and net operating cash flows totaled
P93,000. The difference is attributed to a decrease in unearned revenue. Explain how this
caused the difference between the two amounts.

4. Paris Merchandising Co.’s net income is P79,000 and net operating cash flows totaled
85,000. The difference is attributed to a decrease in prepaid insurance. Explain how this
caused the difference between the two amounts.

5. Paris Merchandising Co/’s net income is 64,000 and net operating cash flows is totaled
85,000. The difference is attributed to an increase in salaries payable. Explain how this
caused the difference between the two amounts.

Increase in CA, increase in net income (-)

Decrease in CL, increase in NI (-)

Decrease in CA, decrease In NI (+)

Increase CL, decrease in NI (+)

Exercise 8

The following are relevant information used in determining Phoenix Co.’s net income of
107,000. Required: Determine the net cash flows from its operating activities

Depreciation Expense 5,000

Services made on account 12,000

Page 6 of 33
Services made for customer’s advances 4,000

Expired portion of prepaid insurance premium 6,000

Unpaid salaries 14,000

Services made for customers advances

Unearned revenue

Service income

Net Income 107,000

Adjustments:

Dep Expense 5,000

Services made on acct (12,000)

Services made for customers advances (4,000)

Expired prepaid insurance 6,000

Unpaid salaries 14,000

Net Cash Flows P116,000

The Perez Company provides only the following information for the year 2017:

Net loss: P35,000

Increase in accounts receivable: 4050

Depreciation Expense: P42,000

Required: Compute net cash provided (used) by operating activities of Perez Company using
indirect method

Net Loss (35,000)

Increase in AR (4050)

Dep Expense 42,000

P2,950

Exercise 10

The Phina company uses indirect method for preparing its statement of cash flows. It reported
a net income of P100,000 for the year 2017. During the year, changes in selected accounts
were as follows:

- increase in accounts receivable: 22,000

- Increase in accounts payable: 18,600

- Increase in inventory: 14,800

- Decrease in non-trade notes payable: 30,000

- Increase in machinery and equipment: 32,000

The depreciation expense was 34,000 for the year 2017

Required: compute net cash provided (used) by operating activities using indirect method

ans: 115,800

Exercise 11

For a recent year, a corporation’s financial statements reported the following:

Net income 100,000

Dep Expense 10,000

Increase in AR 30,000

Page 7 of 33
Decrease in AP 15,000

Based on the above information, what amount will the corporation report as cash provided by
operating activities on the cash flow statement?

Net income 100,000

Dep Expense 10,000

Increase in AR (30,000)

Decrease in AP (15,000)

NCF 65,000

Exercise 12

A corporation reported the following information for the past year:

Net Income 200,000

Dep Expense 30,000

Gain on sale of truck 5,000

Proceeds from sale of truck 8,000

Decrease in AR 10,000

Assuming these are the only facts, what amount will the corporation report as the cash
provided by operating activities on the cash flow statement?

Net Income P 200,000

Dep Expense 30,000

Gain on sale of truck 5,000

Proceeds from sale of truck 8,000

Decrease in AR 10,000

NCF P 235,000

*gain is part of operating

* proceeds is investing

Using the information in question 12, what amount will be reported under cash form investing
activities ?

8,000

Exercise 13

Phillip Enterprises uses the indirect method in preparing its statement of cash flows. It reported
a net income of P60,000 for the year 2019 and beginning cash balance is P100,000.

During the year, changes in selected amounts were as follows:

- depreciation expense : P120,000

- Increase in trade and other receivables: P5,000

- Decrease in inventory: P180,000

- Decrease in prepaid assets: P60,000

- Decrease in trade and other payables: P30,000

Additional Information:

- equipment with carrying amount of 120,000 was sold for 85,000 resulting to a loss on sale of
35,000

- Acquisition of equipment for cash amounted to 400,000

Page 8 of 33
- Owner drawings totaled 45,000

Required: prepare the company’s statement of cash flows using indirect method

Phillip Enterprises

Statement of Cash flows

December 31, 2019

Beginning Cash Balance P 100,000

Cash Flow from Operating Activities

Net Income P 60,000

Adjustments for:

Depreciation Expense 120,000

Increase in Trade and other Receivables (5,000)

Decrease in Inventory 180,000

Decrease in Prepaid Assets 60,000

Loss on sale of equipment 35,000

Decrease in Trade and other Payables 30,000

Net cash inflow from Operating Activities 480,000

Cash Flows from Investing Activities

Acquisition of equipment (400,000)

Sale of Equipment 85,000

Net cash inflow from investing activities (315,000)

Cash Flows from Financing Activities

Owner’s Drawing (45,000)

Net Cash inflow from financing activities (45,000)

Net Cash Flow 120,000

Ending Cash Balance 220,000

SA 2.4

Account Titles 2019 2018

Inventory 155,000 130,000

Prepaid Insurance 25,000 25,000

Salaries Payable 35,000 25,000

Utilities Payable 20,000 25,000

Interest Payable 12,000 8,000

Equipment 70,000 0

Land 0 1,500,000

Loan from bank 100,000 0

Drawing made by owner 40,000 0

Additional information

- at the beginning of the year 2019, the business had a cash balance of 500,000

- Proceeds from the sale of land during 2019 is 1,000,000

Page 9 of 33
- Depreciation expense was 40,000

- Incurred a loss of 444,000

Fukuoka Bakeshop

Statement of Cash Flows

For the year ending December 31, 2019

Cash flow from operating activities

Net Loss (444,000)

Adjustments:

Increase in Inventory (25,000)

Increase in Salaries Payable 10,000

Decrease in utilities payable (5,000)

Increase in Interest Payable 4,000

Depreciation Expense 40,000

Loss on sale of land 500,000 P80,000

Cash flow from Investing Activities

Purchase of equipment (70,000)

Proceeds from sale of land 1,000,000 930,000

Cash flow from financing activities

Loan Proceeds from the bank 100,000

withdrawal by the owner (40,000) 60,000

Net cash inflow 1,070,000

Beginning cash balance 500,000

Ending cash balance 1,570,000

Statement of Financial Position

Objectives of SFP

- data on the assets controlled by the company helps management achieve a competitive
edge over its rivals

- Gives the creditors an assessment of whether the company can say its current liabilities

- Gives an idea to lenders of long-term loans whether the company can settle the interest and
principal of the loan on the agreed settlement date

- Helps in analyzing the company’s financial structure which I the level of borrowings from
external parties and the equity interest of the owners in the enterprise

Elements of the SFP

1. Assets

- these are resources controlled by the business from which future economic benefits will flow
to the entity

- Company must both own and control its assets and resources

2. Liabilities

- these are existing obligations of the entity that will be settled through an outflow of its
resources

3. Capital

- this is the residual (remaining) interest in the resources of the entity after deducting all
liabilities

- A= L+C (cannot interchange L and C)

4. Current and Non-current assets

Page 10 of 33
- current assets are expected to be realized within 12 months/1 yr from the end of reporting
period. All other assets are classified as non-current

5. Trade and Non-trade Receivables

- receivables arising from the sale of goods or services in the ordinary course of business.
Receivables arising from other sources are classifies as non-trade receivables

6. Current and non-current liabilities

- current liabilities are expected to be settled within 12 months from the end of reporting
period. All other liabilities are classified as non-current

7. Trade and non-trade payables

- obligations arising from purchases of inventory that are sold in the ordinary course of
business. Payables arising from other sources are classified as non-trade payables

Exercise 1

An entity has the ff. assets. Identify the current and noncurrent assets.

Cash ₱ 10,000.00 (current)

Accounts receivable 20,000.00 (current)

Notes receivable (nontrade) - ₱ 30,000 due within 1 year 50,000.00 (30,000 current)

Inventory 65,000.00 (current)

Supplies 5,000.00 (current)

Land 100,000.00 (non-current)

Building 400,000.00 (non-current)

Accumulated depreciation (120,000.00) (non-current)

Total assets ₱530,000.00

current: 130,000

non-current: 400,000

Exercise 2

An entity has the ff. liabilities. Identify the current and noncurrent liabilities.

Accounts payable ₱ 30,000.00 (current)

Notes payable (nontrade) - ₱ 100,000 due within 1 year 500,000.00 (100,000 current)

Rent payable 10,000.00 (current)

Utilities payable 5,000.00 (current)

Interest payable 100,000.00 (current)

Salaries payable 400,000.00 (current)

Unearned income 120,000.00 (current)

Total liabilities ₱ 1,165,000.00

current: 765,000

non-current: 400,000

Exercise 3

An entity has the ff. liabilities. Identify the current and noncurrent assets and liabilities.

Cash ₱ 50,000.00 (current)

Accounts receivable 30,000.00 (current)

Notes receivable (nontrade) - ₱ 45,000 due within 1 year 70,000.00 (45,000 current)

Inventory 55,000.00 (current)

Prepaid supplies 15,000.00 (current)

Land 300,000.00

Building 700,000.00

Accumulated depreciation (360,000.00) (non current)

Page 11 of 33
Accounts payable 80,000.00 (current)

Notes payable (nontrade) - ₱ 50,000 due within 1 year 300,000.00 (50,000 current)

Rent payable 50,000.00 (current)

Utilities payable 35,000.00 (current)

Interest payable 30,000.00 (current)

Salaries payable 60,000.00 (current)

Unearned income 130,000.00 (current)

current assets: 195,000

non-current: 665,000

1,000,000-360,000+25,000= 665,000

Current liabilities: 435,000

non-current: 250,000

Notes payable (trade) - ₱ 50,000 due within 1 year 300,000.00 (current)

ans: Whole 300,000 is current because trade is current

Line items in SFP

- line item: a caption used to describe a group of accounts with similar nature

I. Assets

1. Cash and Cash equivalents

Cash PXX

Cash Equivalents XX

Cash and Cash equivalents P XX

- Cash and cash equivalents are not the same

- Cash Equivalents: treasury bills, short term government bonds, marketable securities,
commercial paper, money market fund

2. Trade and other receivables

Accounts Receivable PXX

Allowance for bad debts XX

Notes Receivable XX

Advances to suppliers XX

Trade and other receivables PXX

3. Inventory

- beginning, purchases, goods available for sale (lesson before)

4. Prepaid Assets

Prepaid supplies PXX

Prepaid rent XX

Prepaid insurance XX

Prepaid assets PXX

5. Property, plant and equipment (PPE)

Land PXX

Building XX

Accumulated Depreciation-building XX

Equipment XX

Page 12 of 33
Accumulated depreciation- equipment XX

Property, plant and equipment PXX

II. Liabilities

1. Trade and other payable

Accounts payable PXX

Notes payable XX

Interest payable XX

Salaries payable XX

Utilities payable XX

Unearned income XX

Trade and other payables XX

2. Short term borrowings

3. Current portion of long-term borrowings

4. Long-term borrowings

5. Income tax payable

Exercise 4:

An entity has the ff account balances

Identify the following

1. Cash and cash equivalents

2. Trade and other receivables

3. Prepaid assets

4. Property, Plants and Equipment

5. Trade and other payables

1. 60,000

2. 80,000

3. 75,000

4. 1,430,000

5. 350,000

Forms of SFP

1. Report form- vertical

2. Account form- horizontal

Exercise 4

An entity has the ff. account balances.

Identify the following:

1. Cash and cash equivalents

2. Trade and other receivables

3. Prepaid assets

4. Property, plant and equipment

5. Trade and other payables

Cash on hand ₱ 10,000.00

Cash in bank 50,000.00

Accounts receivable 70,000.00

Page 13 of 33
Notes receivable (nontrade) - ₱ 15,000 due within 1 year 60,000.00

Allowance for bad debts (5,000.00)

Inventory 40,000.00

Prepaid supplies 15,000.00

Prepaid rent 25,000.00

Prepaid insurance 35,000.00

Land 600,000.00

Equipment 300,000.00

Accumulated depreciation - equipment (50,000.00)

Building 800,000.00

Accumulated depreciation - building (220,000.00)

Accounts payable 35,000.00

Notes payable (nontrade) - ₱ 20,000 due within 1 year 65,000.00

Utilities payable 45,000.00

Interest payable 20,000.00

Salaries payable 80,000.00

Unearned income 150,000.00

Cash and Cash Equivalents

Cash on Hand 10,000

Cash in Bank 50,000 60,000

Trade and other receivables

Accounts Receivable 70,000

Notes Receivable 15,000

Allowance for bad debts (5,000)

Inventory 40,000 120,000

Prepaid Assets

Prepaid Supplies 15,000

Prepaid Rent 25,000

Prepaid Insurance 35,000 75,000

Property, plant, and equipment

Land 600,000

Equipment 300,000

Accumulated Depreciation- equipment (50,000)

Building 800,000

Accumulated Depreciation- building (220,000) 1,430,000

Trade and other payables

Accounts payable 35,000

Notes payable 20,000

Utilities payable 45,000

Interest payable 20,000

Salaries payable 80,000

Unearned income 150,000 350,000

Exercise 5: (ASSIGNMENT)

Given the trial balance below, prepare the SFP of Vinta Business. Solutions using the report
form.(Hint: Get the net income and adjust the balance of Vinta, Capital.)

Vinta Business Solutions

Trial Balance

Page 14 of 33
 December 31, 2017

Account Titles Debit Credit

Cash P 45,000

Accounts Receivable 360,000

Trade Notes receivable 70,000

Nontrade notes receivable 86,000

Interest receivable 24,000

Office Supplies 21,000

Land 300,000

Building 1,590,000

Accumulated Depreciation- building P 292,000

equipment 2,150,000

Accumulated depreciation- equipment 735,000

Accounts payable 213,000

Salaries payable 14,000

Unearned consulting revenues 300,000

Vinta, Capital 2,655,000

Vinta Drawing 600,000

Consulting revenues 2,258,000

Interest income 24,000

Salaries expense 889,000

Supplies expense 42,000

Repairs expense 116,000

Depreciation expense 161,000

Miscellaneous expense 37,000

P 6,491,000 P 6,491,000

Vinta Business Solutions

Statement of Financial Position

For the period ending Dec 31, 2017

Page 15 of 33
 ASSETS

Current Assets

Cash 45,000

Accounts receivable 360,000

Trade Notes Receivable 70,000

Interest Receivable 24,000

Office Supplies 21,000

Total current assets 520,000

Non-current assets

Non-trade notes receivable 86,000

Land 300,000

Building 1,590,000

Accumulated depreciation- building (292,000)

Equipment 2,150,000

Accumulated Depreciation- equipment (735,000)

Total non-current assets 3,099,000

3,619,000

* land until accumulated dep— building is under property, plant and equipment

* non-trade receivables and PPE is the only ones under non-current assets

* Write PPE lang instead of land until accumulated dep- eq, no need to show solution unless
asked

LIABILITIES

Current Liabilities

Accounts Payable 213,000

Salaries payable 14,000

Unearned consulting revenues 300,000

Total Liabilities 527,000

* accounts payable and salaries payable, unearned revenues is trade and other payables

* non-trade notes payable is under non-current liabilities

CAPITAL

Vinta, Capital 2,055,000


Net income 1,037,000

Total Capital 3,092,000

Total Liabilities and Capital 3,619,000

Statement of Changes in Equity

Beg Capital 2,655,000

Additional Investments 0

Withdrawal 600,000

Net income 1,037,000

End capital 3,092,000

Net income= 3,619,000-527,000-2,055,000= 1,037,000

Page 16 of 33
SA 2.5
A. Lita Company

Trial Balance

December 31, 2019

Account Titles Debit Credit

Cash 50,000

Accounts Receivables 150,000

Allowance to bad debts 25,000

Trade notes receivable 18,000

inventory 150,000

Prepaid supplies 25,000

Prepaid rent 35,000

Prepaisd insurance 20,000

Land 1,000,000

Building 2,200,000

Accumulated depreciation- building 1,500,000

Equipment 750,000

Accumulated depreciation- equipment 250,000

accounts payable 150,000

Notes payable- short term loan 200,000

Notes payable- Long term loan (50,000 is 1,400,000

to be paid within one year)

Interest Payable 55,000

Salaries Payable 145,000

Utilities payable 38,000

Unearned Income 45,000

Owner’s, capital 590,000

4,398,000 4,398,000

Page 17 of 33
 A. Lila Company

Statement of Financial Position

December 31, 2019

ASSETS

Current

Cash and cash equivalents 50,000

Trade and other receivables 143,000

Inventory 150,000

Prepaid Assets 80,000 423,000

Non-current

Property, plant and equipment 2,200,000 2,200,000

Total Asset 2,623,000

LIABILITIES

Current

Trade and other payables 433,000

Short-term borrowings 200,000

Current portion of long term borrowings 50,000 683,000

Non-current

Long-term borrowings 1,350,000 1,350,000

Total Liabilities 2,033,000

CAPITAL

Owner’s capital 590,000

Total Capital 590,000

Total Capital and Liabilities 2,623,000

Financial Statement Analysis

- is a process of evaluating and interpreting on entity’s financial statements to assess its
financial statements to assess its financial health for the purpose of making better economic
decisions

FS Analysis may involve analyzing one or more of the ff:

1. Industry and economic trend

2. Solvency and capital structure

- solvency: ability of a business to pay its debts

- Capital structure: how a business efficiently finances its operations

3. Operational frequency: refers to how well a business is managing its resources to maximize
earnings

4. Profitability: refers to the ability of the business to generate profit

Methods of FS analysis

1. FS ratio analysis

2. Horizontal and vertical analysis

Liquidity Ratios
- provide a measure of the ability of the business to pay its liabilities

1. Current ratios

- the most commonly used ratio used in measuring the ability of a business to pay its
short-term debts

Page 18 of 33
 - formula: current assets/current liabilities

2. Quick ratios

- much stricter ratio to measure the ability of a business to pay its short term debts

- formula: (Cash + Marketable Securities + Net Accounts Receivable)/current liabilities

- *net a/r- make sure to deduct allowance for bad debts

3. Working capital

- measure the ability of a business to pay its short-term debts by the excess of CA over
CL

- formula: Current assets-current liabilities

Activity Ratios
- provide a measure of how efficient a business is utilizing its resources

1. Inventory turnover

- measure of the number of times inventory is sold and replenished during a period

- cost of goods sold/average inventory

- formula: Average inventory= (beg inventory+ end inventory)/2

- COGS will not be given (ask jai how to compute)

2. Days of inventory (Ave Sale Pd.)

- measure of the number of days inventory is held before it is sold

- formula: 365 days for the year/inventory turn over

- Teacher might change the number of days for the numerator

3. Accounts Receivable turnover

- measure of the number of times accounts receivable have been collected during a
period

- formula: Credit Sales/ Avg net accounts receivable

- Avg net A/R= (Beginning Accounts Receivable+Ending Accounts Receivable)/2

- Credit Sales are earned but not yet collected

- Counter part of credit sales is cash sales

4. Days of receivable (Ave. Coll. pd.)

- measure of the average Time to collect a receivable

- 365 or 360/accounts receivable turn over

Debt Management
Ratios

- provide a measure of the extent a business uses debt financing

1.) Debt ratios

- measures the proportion of assets financed through debt

- formula: total liabilities/ total assets

2.) equity ratios

- measures the proportion of assets financed through equity

- formula: total equity/ total assets

- total equity/total capital/total net assets (same)

3.) Debt-to-equity ratios

- indicates how much debt is used to finance the assets relative to the amount

pertaining to owners

- Formula: total Liabilities/ total equity

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Profitability Ratios
- provide a measure of the performance of a business in terms of its ability to generate profit

1. Gross Profit ratio

- shows the relationship between sales and CGS

- formula: gross profit/ net sales

- Net sales= sales- sales discount - sales returns- sales allowance

2. Net Profit Ratio

- measures profitability after considering all income and expenses

- formula: Net Profit/net sales

3. Return on assets

- measures the profit generated in relation to the total

- Net profit/total assets

4. Return on equity/ (return on net assets)

- measures the profit generated in relation to the resources invested by the owners of the
business

- formula: net profit/total equity

Exercise 1

An entity reported the following on the asset section in the SFP:

Cash 50,000

Inventory 10,000

Machineries 20,000

Current liabilities is 10,000

1. Working Capital: 50,000

2. Current Ratios: 6,000

3. Quick Ratios: 5,000

Exercise 2

An entity reported the following on the current asset section in the SFP for 2017:

Cash and cash equivalents

Accounts Receivable- net

Inventory

Prepaid assets

1. Inventory turnover

1,400,000/400,000= 3.5 times

2. Days of inventory (Ave Sale Pd.)

365/3.5= 104.29= 104 days

3. Accounts Receivable turnover

3,200,000/988,000= 3.24 times

4. Days of receivable (Ave. Coll. pd.)

365/3.24= 112.65= 113 days

Exercise 3

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An entity reported the ff. on its balance sheet

Liabilities

Total current liabilities 1,160,000

Total non-current liabilities 180,000

Total Liabilities 1,340,000

Equity

Owner’s Capital 1,690,000

Total Liabilities and equity 3,030,000

A= L+C so A is 3,030,000

1. Debt ratios

1,340,000/ 3,030,000 = 0.44= 44%

2. equity ratios

1,690,000/3,030,000= 0.56= 56%

3. Debt-to-equity ratios

1,340,000/1,690,000= 0.79= 79%

*Always percentage form

Exercise 4

Vinca company

Income statement

December 31, 2017

Sales

Cost of sales

Gross profit

Salaries expense

Utilities expense

Rent expense

Depreciation expense

Bad debts expense

Interest expense

Profit

1. Gross Profit ratio

2,600,000/ 4,000,000= 0.65= 65%

Cost of sales ratio= 35%

2. Net Profit Ratio

1,196,000/4,000,000= 0.30= 30%

3. Return on assets

1,196,000/3,030,000= 0.39= 39%

4. Return on equity/ (return on net assets)

1,196,000/1,690,000= 0.71= 71%

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Exercise 5

A. If a firm has ₱ 10,000 of inventories, ₱ 50,000 of cash, ₱ 20,000 machineries and ₱ 10,000
current liabilities, what is the firm’s working capital?

60,000-10,000= 50,000

B. If a firm has ₱ 40,000 of inventories, ₱ 70,000 of cash, ₱ 40,000 machineries and ₱ 40,000
current liabilities, what is the firm’s current ratio?

110,000/40,000= 2.75

C. If a firm has ₱ 60,000 accounts receivable, ₱ 50,000 in cash, ₱ 20,000 allowance for bad
debts and ₱ 40,000 current liabilities, what is the firm’s quick ratio?

90,000/40,000= 2,25

D. If a firm has ₱ 10,000 in ending inventories, ₱ 20,000 in beginning inventories, ₱ 20,000 cost
of goods sold, what is the firm’s inventory turnover?

20,000/15,000= 1.33

E. If a firm has ₱ 35,000 in ending inventories, ₱ 76,000 in beginning inventories, ₱ 95,000 cost
of goods sold, what is the firm’s average sale period?

ASP= 365/1.61= 213 days

F. If a firm has ₱ 80,000 credit sales, ₱ 50,000 in beginning accounts receivable, and ₱ 73,000
ending accounts receivable, what is the firm’s accounts receivable turnover?

80,000/61500= 1.3

G. If a firm has ₱ 100,000 credit sales, ₱ 67,000 in beginning accounts receivable, and ₱
89,000 ending accounts receivable, what is the firm’s average collection period?

ACP= 365/1.28x= 285 days, 100,000/78,000= 1.28 x

H. If a firm has ₱ 60,000 accounts receivable, ₱ 50,000 in cash, ₱ 20,000 inventory, ₱ 20,000
notes payable, and ₱ 10,000 accounts payable, what is the firm’s debt ratio?

30,000/130,000= 0.23= 23%

I If a firm has ₱ 20,000 accounts receivable, ₱ 40,000 in cash, ₱ 10,000 inventory, and ₱
20,000 equity, what is the firm’s equity ratio?

Equity Ratio: 20,000/70,000= 0.29= 29%

J. If a firm has ₱ 10,000 accounts payable, ₱ 25,000 notes payable, and ₱ 75,000 equity, what
is the firm’s debt-to-equity ratio?

35,000/75,000= 0.47= 47%

1. Compute the inventory turnover ratio and average selling period from the following data of a
trading company

- Sales: 75,000

- Gross profit: 35,000

- Opening inventory: 9,000

- Closing inventory: 7,000

ITO= 40,000/8,000= 5

DOI= 365/5= 73 days

2. The ITM trading company provides you the following data for the year 2016:

- inventory turnover ratio: 12 times

- Opening inventory at cost= 36,000

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- Closing inventory at cost: 54,000

Calculate cost of goods sold for the year 2016

COGS/45,000= 12X

COGS= 540,000

3.

644,790/47515= 13.57 times

4. 952,600/23,880= 39.89 times

5. 213,000/2,434,000= 0.0875= 8.75%

6. 315,000/total assets= 0.12

Total assets= 2,625,000

7. 1,722,000/16,332,000= 0.1054= 10.54%

8. 937,500/ SHE= 1.25

SHE= 750,000

Exercise 6

Annual reports of super oats and better oats reveal the following for a recent year

Super Oats Better Oats

Sales 189,650 183,550

Accounts receivable, January 1 10,950 25,250

Accounts Receivable, December 31 13,750 26,850

1.) Average a/r

Super Oats

189,650/ 12,350= 15.36

Better oats

183,550/26,050= 7.05

2.) Days of Receivable

365/15.36= 23 days

365/7.05= 52 days

Exercise 7

Compute for the following financial ratios for 2017:

g. Days of receivable

a. Current ratio
h. Debt ratio

b. Quick ratio
i. Equity ratio

c. Working capital
j. Debt-to-equity ratio

k. Gross profit ratio

d. Inventory turnover
l. Net profit ratio

e. Days of inventory
m. Return on assets

f. Accounts receivable turnover

n. Return on equity

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Page 24 of 33
Compute for the following financial ratios for 2017:

a. Current ratio

2,164,000/1,030,000= 2.10

b. Quick ratio

1,563,000+45,000/1,030,000= 1.56x

c. Working capital

2,164,000-1,030,000= 1,134,000

d. Inventory turnover

300,000+500,000/2= 400,000

2,300,000/400,000= 5.75x

e. Days of inventory

365/5.75= 63 days

f. Accounts receivable turnover

4,300,000/1,141,500= 3.77 x

g. Days of receivable

365/3.77= 96 days

h. Debt ratio

1,380,000/ 3,014,000= 45.79%= 46%

i. Equity ratio

1,634,000/3,014,000= 54.21%

j. Debt-to-equity ratio

1,380,000/1,634,000= 84.46%

k. Gross profit ratio

3,100,000/5,400,000= 57%

l. Net profit ratio

1,552,000/5,400,000= 29%

m. Return on assets

1,552,000/3,090,000= 51%

n. Return on equity

1,552,000/1,634,000= 0.95= 95%

Exercise 8

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1.) ARTO= CS/Ave. Net Rec.

11.25= CS/ (85,000+ 155,000)/2= 1,350,000

Total Sales= 1,350,000+ 390,000= 1,740,000

2.) Gross Profit= 1,740,000-522,000= 1,218,000

3.) Profit= 1,218,000-591,600= 626,400

- ₱ 390,000 worth of sales were made on cash.

- The beginning balance of receivables is ₱ 85,000.

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- The accounts receivable turnover is determined to be 11.25 times.

- The beginning balance of inventory is ₱ 96,000.

- The current ratio is determined to be 1.75.

Average inventory= 84,000+ 96,000/2= 90,000

1.75= CA/434,000= 759,500

Cash= 759,500- 170,500- 84,000-155,000-230,000= 120,000

Total Assets: 759,500+ 1,850,500= 2,610,000

Total Liabilities= 1,044,000

Total Capital= 1,566,000

Methods of FS analysis

1.) FS ratio analysis

2.) Horizontal and vertical analysis

Horizontal Analysis

- comparison of financial information over two or more reporting periods (trend

analysis)



Steps in Horizontal

Analysis

1.) compute for the change in the amounts in a baseline year (earlier period) and a later
period

2.) Divide the change by the amount in the baseline year

Exercise 9 (google classroom)

Universe Company

Balance Sheets

As of December 31, 2018 and 2017

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Cash and Cash Equivalents (50,000)= (50,000)/80,000= (62.5%)

Trade and other receivables 1,368,000= 1,368,000/304,000= 450%

Inventory 200,000= 200,000/300,000= 67%

Prepaid Assets (2,000)= (2,000)/50,000= (4%)

For bad debts= increase is bad because it means its the accounts receivable you cant
collect

Why do we need to perform a horizontal analysis?

- helps us compare data that has been gathered for two or more years

- Helps us locate areas that may need changes or improvements

- Helps identify positive or negative trends

Vertical Analysis

- involves the analysis of the financial statements of one reporting period. It is a

proportional analysis whereby each amount in the financial statement is shown as a
percentage of another item

Why do we need to perform a vertical analysis?

- helps in comparing financial statements of businesses in all sizes

Whichever account title has the biggest amount is your base

Exercise 2- Vertical Analysis

Sales= 312,500 (100%)

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Gross Profit= 250,000 (80%)

Operating Expense= 62,500 (20%)

Net Operating Profit= 37,500

Finance Cost= 25,000 (8%)

Net Profit= 12,500

Exercise 3- Vertical Analysis

a. 423,920

b. 28%

c. 19%

d. 196,820

e. 121,200

f. 32%

g. 1,514,000

h. 100%

i. 408,780

j. 499,620

k. 908,400

l. 60%

m. 605,600

n. 40%

PPE is more significant. Company aims to get rid of inventory. PPE is used to make
products.

SA#2.6
A. Indicate the effects in total assets and on the current ratio

Effect on Total Assets Effect on Current Ratio

1. Cash received from customers for accounts

receivables balances due P100,000

2. Sale of fixed assets for cash P1,000,050

3. Declaration of payment of cash dividends

P500,000

4. Payment of interest expense P10,500

5. Purchase of fixed assets for cash P2,050,025

6. Purchase of office supplies for cash P34,500

B. Indicate the effects on total liabilities and debt-to-equity ratio

Effect on Total Effect on debt-to-

Liabilities equity Ratio

1. Cash received from customers for accounts

receivable balances due P50,000

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2. Loan obtained from bank P1,000,000

3. Declaration and payment of cash dividends

P550,000

4. Purchase of fixed assets of cash dividends

P10,500

Answers (not sure pa)

A.

1. No effect, no effect

2. No effect, increase

3. Decrease of P500,000, None

4. Decrease of 10,500, decrease

5. No effect, decrease

6. No effect, no effect

B.

1. none, none

2. Increase, increase

3. decrease, decrease

4. increase, increase

CASH CONTROLS
Internal Control

- the plan of organization and all the related methods and measures adopted within
the organization whose primary objective is to protect and safeguard its assets from
employee theft and unauthorized use

- Improves the accuracy and reliability of its accounting records by reducing the risk of
unintentional mistakes and wrongdoings in the accounting process

How are internal controls implemented

1. Assignment of responsibilities

2. Separation of duties

Duties that need to be separated for a one man job

- Reporting, Handling and authorization of cash

3. Documentation process

- during the audit, 5 will disappear from 1-10

- That means #5 was stolen or its misplaced

- How you can tell whether the cash control is well-documented

4. physical (human intervention), mechanical (machine) and electronic controls

ex.

- vault (mechanical)

- Locked warehouse (physical)

- Computer with passcode (electronic)

- Burglar alarm (electronic)

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- Time clock (electronic)

- CCTV (electronic)

5. Independent internal control verification

- a company has internal audit and separate independent internal control

- The separate independent internal control audits the performance of the internal
audit

6. Other control measures

The steps are not exclusive. The company can have their own way. The first 5 steps
given are just the standard steps.

Limitations of internal control

- reasonable assurance

- audited financial statement telling that based on the given financial statements
the conclusion is there is a reasonable assurance is the financial statements are
free from mistakes

- The financial are free from error or not material misstated

- Human factor

- Conspiracy

- between 2 or more employees or manager, basta 2 people)

Internal control (Procedure for cash)

- consists of coins, currency, checks, money orders, and money on hand or on

deposit in a bank or similar depository

Activity 1: for each of the following items of internal controls, identify a way on how
controls of cash receipts and cash disbursements (you pay cash using cheques) can
be implemented

Aspects of internal control Cash Receipts Cash Payments

1. Assignment of Only assigned employees are Only authorized personnel are

responsibilities authorized to handle cash.
allowed to sign checks

Person is chosen by the company.

Only competent people who know
how to handle cash

2. Separation of duties Diff employees collect and handle Diff personnel approve and make
the cash and record cash receipts payments

3. Documentation process Use pre-official receipts, cash Pre-numbered cheque/vouchers are

receipts, deposit slips
used

*receipts should be numbered and

documented

4. physical, mechanical, Keep cash sales, access to bank Bank cheques (unused) are kept in
and electronic controls vaults, storage area, and can use vault or sale with limited access
cash register

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5. Independent internal Accountant counts cash receipts Cheque and check vouchers are
verification given by a cashier daily compared to invoices

6. Other control measures Employees are required to deposit Stamp invoices as “PAID”
all cash in bank daily

Voucher system

- set of procedures and approvals acceptance of duties and designed to control the
company’s cash payments with the corresponding responsibilities

- Voucher payable, voucher #1

- The one who will prepare the cheque will ask muna where the voucher is

- The company may or may not implement the voucher system (usually implemented
by big companies)

- Vouchers are prepared before the cheque

Petty cash fund

- special fund established for payment of small amounts

Bank Account

- a record made by banks for each of their depositor/customer

Types of Bank Accounts

1. Savings Account

- a bank account where you can keep your cash and at the same time withdraw from
it while it earns a certain percentage of interest

- Modest interest rate

2. Current or checking Accounts

- a bank account from which one can withdraw cash from the amount deposited in a
bank by writing checks

- Basic checking account: no interest

- Interest bearing checking account: account will earn interest

3. Time or term deposit

- an interest-bearing fund maintained at a bank for a fixed period of time

- Cannot withdraw or get the money from the bank within the period fixed

- This is good because the money you cannot retrieve will earn interest

Preparation of Checks

Check

- an instrument that orders a bank to pay a person named on the check a definite
amount of money from the drawer’s bank account

Parties Involved in a Check

1. Drawer

- the one writing the check and also the one whose signature appears on the check

2. Payee

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- the one who is named on the check or the bearer thereof and is entitled to payment
from the drawee

3. Drawee

- the bank in which the drawer’s bank account is maintained

- The drawee is the bank

Payee

Drawee Drawer

Other parts

1. Date

- normally a check is dated as at the date it was written

- Ex. Assume that today is jan 1, 2018

a. A check written today is a regular check

b. A check written today and dated November 1,2017 is an antedated check

c. A check written today and dated February 1, 2018 us a postdated check

d. If you received a check from a customer that is dated April 1, 2017, that check is a
stale check (8 months have passed) *the cheque will not be recognized by the bank
if it is passed 6 months, the remedy is to run after the drawer (the one who paid the
cheque) ask the debtor is he/she can prepare another one

2. Amount in numbers and amount in words

3. Signature

- basta may signature, kahit wala nang printed name

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