Fabm-2 2

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
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
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
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
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.
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
85,000. The difference is attributed to a decrease in prepaid insurance. Explain how this
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
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:
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
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
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
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
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
1,000,000-360,000+25,000= 665,000
Current liabilities: 435,000
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
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
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
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
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
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
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
Page 19 of 33
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
Page 20 of 33
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%
Page 21 of 33
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
Page 22 of 33
- 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
Page 23 of 33
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
Page 25 of 33
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.
Page 26 of 33
- 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
Page 27 of 33
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%)
Page 28 of 33
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
Page 29 of 33
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)
Page 30 of 33
- 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
Page 31 of 33
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
Page 32 of 33
- 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
Page 33 of 33

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Statement of Cash Flow

Business Activities that aﬀect cash balance

- Includes transactions that result in generating income and incurring expenses

- all interest income and expense fall under operating

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)

11. Rendered service to customers (O)

12. Made internet subscription for oﬃce use (O)

14. Owner withdrew cash for personal use (F)

15. Paid salaries of employees (O)

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

2. Sale of ordinary shares for cash (financing)

3. Payment for insurance expense (operating)

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)

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

*ACCOUNTS PAYABLE IS OPERATING

* notes payable if financing

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

Beg Cash Balance

End Cash balance

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)

Net cash inflow from financing activities Pxx

Additional investment by owner Pxx

Cash withdrawn by owner (xx)

Net cash inflow from financing activities xx

Beginning Cash Balance xx

Ending Cash Balance P xx

Cash investments by S. Santos

Purchase of delivery equipment

Receipts from cash services

Cash withdrawal by s Santos

Beg. Cash 232,960

End Cash 460,920

Cash investments by S. Santos 72,000 Operating=

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

Cash from sales 175,000 Operating 35,300

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

End Cash 196,580

Purchase of merchandise 43,000

Payment or rent 36,000

Payment of utilities 5,700

Received 180k cash investment from the owner F

Provided 400k services on account NA