Chapter V

FINANCIAL STUDY

Financial study refers to the assessment of the effectiveness with which

funds, investment and debt, are employed in a firm, efficiency and profitability of

its operations, and value and safety of debtor’s claims against the firm’s assets. It

employs techniques such as financial ratios to understand the problems and

opportunities inherent in an investment or financing decision [ CITATION

Mck15 \l 1033 ]. This chapter covers the total project cost of the business,

financial assumptions, sources of financing, financial statements, and the various

financial tools that will be used by the business in determining the profitability,

stability, and liquidity of the firm.

Objectives of the Study

The general objective of the study is to determine a complete and realistic

financial projection and use the financial ratios which will test the feasibility of the

project in terms of solvency and profitability. Specifically, it attempts to discuss

the following objectives:

1. to determine the total projected cost for the proposed business;

2. to state the financial assumptions used in preparing the projected

financial statements;

3. to present the financial condition and performance of the business

through a set of projected financial statements; and

4. to evaluate the financial viability of the business using ratios, break-

even point and payback period.

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Total Project Cost

The net investment or project cost represents the initial cash outlay that

is required to obtain future returns or the net cash outflow to support a capital

investment project.[ CITATION Cab11 \l 1033 ]

The total project cost computed covers the first month of operation of

the business as it is deemed applicable to the business. Since the business is

operating in a job-order operating system, immediate cash outlay for the direct

materials isn’t necessary at the start of the month. Estimated income generated

for one month can cover the expenses for the same month which still yields

reasonable income. Also, revenues from the sales of the packages are deemed

to be quick as indicated in the various ratios included in this chapter to measure

the profitability and liquidity of the business.

Computation of the total project cost for one month includes the fixed

asset requirements, working capital for one month, other expenses, selling

expenses and cash contingencies. The business has a total project cost of

Php 900,000.00 with a cash contingency of Php 92,951.62. These total project

cost will be a shared investment between the three partners of the business.
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Table 5.1
Total Project Cost for One Month
Fixed assets requirements    
Service Equipment 69,695.00  
Service Furnitures and Fixtures 17,784.25  
Office furniture and fixture 6,274.25 93,753.50
Working capital for one
month  
Direct materials 568,386.00  
Overhead    
10,250.7
Indirect materials 5  
20,000.0
Rent expense – Store 0  
2,519.0
Utilities expense – Store 0  
1,890.7
Maintenance – Store 5  
5,754.0
Supplies - Store 0  
SSS Contribution 3291.30  
562.5
Philhealth Contribution 0 612,654.30
Other Expense    
63,533.3
Salaries expense 3  
10,255.2
Leasehold improvements 5  
11,978.0
Service Tools & Supplies 0  
839.0
Office Supplies 0  
9,535.0
Legal Fees & Licenses 0 96,140.58
Selling expenses    
2,500.0
Delivery expenses 0  
2,000.0 4,500.0
Advertising Expenses 0 0
Cash Contingencies   92,951.62
Total Project Cost   900,000.00
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Initial Capital Requirements

Each partner will contribute Php300,000 or Php900,000 in total amount for

the business. Each of the partners’ contribution will come from their own personal

savings and from loans from friends and relatives.

Financial Assumptions

The following assumptions were used by the proponents in the

computation and analysis of the financial capacity and stability of the firm:

1. Initial Capital Requirement

The business has an initial capital of Php 900,000 contributed by

the partners in equal amount.

2. Working Days

There will be six (6) working days in a week, an average of twenty

six (26) days in a month and three hundred twelve (312) days in a year at

eight (8) working hours a day.

3. Accounting Reporting Period

A calendar year of business starting on January 2017 would be

implemented.

4. Sales

a. The initial selling prices of the packages, exclusive of VAT are:

- Package 1 = Php 72.30

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- Package 2 = Php 245.00

- Package 3 = Php 860.00

- Package 4 = Php 1255.00

- Package 5 = Php 2368.00

b. Selling prices are subject to inflation rate of 2.05 percent

c. Cash sales is equivalent to 100 percent of gross sales.

d. The sales volumes of the different packages for the first year of

operations are assumed. For package one, the sales volume for the

first year, 2017, is 3,432. For package two, 2,808. For package

three, 3,120. For package four, 1,248. And for package five, 1,248.

Sales volume would increase by 10 percent per year.

e. The percentage of the population of BatStateU who will not avail

any of the packages is 5 percent yearly.

f. Percentage of the target market to the total population of the target

market who will avail the add-on services are as follows: Delivery to

classroom is 15 percent, “Harana” is 7 percent, surprise planning is

10 percent and others (per hour) is 5 percent. The percentages

increase by 1 percent each year for the next five years.

5. Purchases

a. Cost of purchases is assumed to increase by 2.05 percent based

on average inflation rate.

b. The direct materials would be purchased 60 percent on credit and

40 percent cash.
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c. Purchase of indirect materials is on cash basis only.

d. Every year-end, 90 percent of the credit purchases and the

beginning balance of the accounts payable will be paid.

6. Inventory

a. The FIFO method would be used in valuing the inventory.

b. The Merchandise Inventory, end would be 5 percent of the goods

available for sale.

c. Allowance for spoilage would be 5 percent of units to-be ending

inventory

7. Labor

a. There would be five employees.

b. Labor rate for the event planners, packagers and cashier is Php9,

100 per month. The cashier’s labor rate is Php 7,800 per month.

General Manager’s labor rate is Php20,800 per month. Labor rates

are assumed to increase by 2.05 percent annually.

c. Salary of the bookkeeper is Php5, 000 per month.

d. The employees will be paid on the 15th and 30th of each month.

8. Employee Benefits

SSS and PhilHealth of the employees are part of the Fringe

Benefits as expenses.

9. Utilities

Utility expenses are assumed to increase by 2.05 percent.

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10. Rent Expense

Rent expense is assumed to be Php20, 000 per month and

assumed to be fixed throughout the year and the following years.

11. Maintenance Expense

Maintenance expense’s increase is based on the inflation rate of

2.05 percent.

12. Property, Plant, and Equipment

a. Acquisition of equipment, and furniture and fixtures is on a cash

basis. No additional machinery would be purchased for the first five

years of operation.

b. The firm will use the straight line method of depreciation with no

residual value.

c. The office equipment, and furniture and fixtures would have a 5-

year useful life.

d. Store equipment and furniture would have a 5-year useful life.

13. Leasehold Improvements

The firm will not be having major improvements on the location.

Only minor developments of the location are needed and it will be

expensed as incurred.

14. Advertising Expense

Advertising expense from 2017-2021 will have a yearly decrease of

20 percent.
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15. Delivery Expense

Delivery expense is expected to be Php2,500 monthly.

16. VAT

a. The VAT rate is 12 percent.

b. VAT Payable would be equivalent to one month VAT.

17. Partnership Equity

a. Net income or loss is shared equally among the partners after

deducting the salaries to be given to the managing partner in

accordance with the agreement of the partners.

b. The managing partner is entitled to a salary allowance of Php20,

800 monthly.

c. Withdrawal is allowed for partners in the first year of operation. The

partners are allowed to withdraw 90 percent from their outstanding

balance during the year, excluding their initial investment.

18. Inflation Rate

Inflation rate is 2.05 percent per year as provided by the National

Statistics Office.

Sources of Financing

Financing is the borrowing of money from a financial institution for a fee or

interest over a set time. It means asking any financial institution (bank, credit

union, finance company) or another person to lend you money that you promise

to repay at some point in the future. [ CITATION Mck15 \l 1033 ]

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Projected Financial Statements

Financial statements are reports that show how income and expenses

have affected the company as a whole. They provide a snapshot of the current

financial standing of the business. (Wolfe, 2015).It is a document showing and

reporting the financial performance and resources of the business or an entity

(Valix, et al., 2013). Financial statement is the main output of the accounting

process. This is useful in making sound economic decisions through analysis and

interpreting the financial statement

Projected Statement of Financial Performance

A projected statement of financial performance is a formal document

prepared by finance or accounting officers within a company. Income projection

statements look at the money the business will gain over a specific period,

normally one year, minus anticipated expenses for that period. The primary

purpose of creating an income projection statement is to figure out how much

money the company will generate in the future.  (Thibodeaux, 2015). It measures

the profitability of the business in its operations.

The projected income statement forecasts the profitability of the business

in the next five years of operations. Such projection assures the creditors and

investors that the business will remain a going concern, far from bankruptcy and

any significant risk for the next years. For the first year of operation, the business

has a net income of Php 1,380,387.00 while for the fifth year, it will yield a Php

2,818,983.00
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Projected Statement of Financial Position

The statement of the financial position, also known as the balance sheet,

is a financial statement of a business or company that shows its financial health’s

condition. It shows the entity’s asset, liability and equity. It tells how much money,

cash or asset does an enterprise have, how much its debt are and what is left to

the owners or shareholders (Valix, et al., 2013). It measures the financial stability

of the business in its annual operations. It also measures the solvency and the

ability of the business to generate cash.

For the first year of operations, the business has total assets of Php

1,493,850.06, total liabilities of Php 455,811.35 and total partner’s equity of Php

1,493,850.06. For the fifth year of the business, it will have total assets of Php

2,036,174.23, total liabilities of Php 827,08.64 and total equity of Php

1,209,085.59.

Projected Cash Flow Statement Analysis

The Cash Flow Projection shows how cash is expected to flow in and out

of your business. It is an important tool for cash flow management, letting you

know when your expenditures are too high or when you might want to arrange

short term investments to deal with a cash flow surplus. (Ward, 2015)It reports

the cash generated and the cash disbursements during a specific time. It is

derive from the balance sheet and income statement. It provides information

about cash receipt (increase) and cash payment (decrease). It highlights the
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major activities such as operating, investing and financing which affect the overall

cash balance (Valix, 2011).

Projecting the cash flow for five years foresees if the business has a

consistent ability to generate cash from its operations. For the first year of

operations, the business has cash flows from operating activities worth Php

1,504,844.49. Its cash flow used in investing activities is Php 83,708.48 and from

its financing activities Php 342,348.42 with a total ending balance of Php

1,078,787.59. For the fifth year of operations, its cash flows from operating

activities is worth Php 2,865,031.32, and from its financing activities is Php

2,781,770.33, with an ending cash balance of Php 1,435,262.00

Projected Statement of Changes in Equity

The statement of changes in equity presents all the changes in owner’s

equity. It tells about the status of owner’s wealth. It also shows the movement in

all components of owner’s equity and the entity’s total comprehensive income

(Valix, et al., 2013). It provides information on how the capital is being utilized in

the business. Moreover, the investors can know the effects of the operation to

their investments.

For the first year of operations, the partners have the following share in net

income: Aldovino and Marquez have Php 376,929.04 each while Reyes has Php

626,529.04. Aldovino and Marquez have withdrawals amounting to Php

337,692.90 each while Reyes has Php 563,876.14. For the fifth year of

operations, Aldovino and Marquez have Php 849,426.24 while Reyes has Php
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1,120,131.45. Aldovino and Marquez have withdrawals amounting to Php

837,223.48 while Reyes have withdrawals of Php 1,107,323.37

Notes to Financial Statements

The notes typically describe each item on the balance sheet, income

statement and cash flow statement in further detail. Notes to financial statement

are considered an integral part of the financial statements. However, the

approaches that the notes and financial statement are presented and reported

are critically for investment decision making by existing and prospective investors

in order to earn optimal returns on their investments. (Onoja, 2015) Necessary

disclosures are needed to provide reliable and measurable information to the

users of the financial statements – be it general or special users.

Presented in the following pages are the projected financial statements of

Pick-a-Boo Celebrations together with its Notes to Financial Statements. The

projected financial statements include the Projected Statement of Financial

Performance, Projected Statement of Financial Position, Projected Statement of

Changes in Partners’ Equity and Projected Statement of Cash Flows.