Esperenza Bakeshop, Inc.

Esperanza opened a bakeshop on January 1, 2020. After one year of operation, she wanted to
know how much she earned and what is the financial status of the business. The following are
the business transactions entered into by the bakeshop and summarized data based on the
various receipts, checks and records she kept for reference. She has hired you to prepare the
financial reports of his shop at the end of 2020.
a) Esperenza borrowed a personal loan of P700,000 and invested 75% of the loan in her
bakeshop business.
b) She constructed a building at a cost of P1,000,000 to be used as her bakeshop. The
building has a useful life of 20 years.
c) He purchased bakery equipment and bakery supplies in the amount of P200,000 and
P150,000, respectively. She expects to use the bakery equipment for 8 years.
d) The bakeshop sold 400,000 for the sale and 20% of the sale remains uncollected at the
end of the year.
e) His expenses for the year include: salaries – P30,000; utilities – P75,000;
Security Services – P60,000; and Depreciation
f) At the end of the year, 50% of the bakery supplies has been used up.
g) He has incurred advertising expense in the amount of P80,000 which he has not yet paid
at the end of the year (this is accounts payable).

FINANCIAL REPORTS
Statement of Financial Position – informs the users of the financial condition of the
business as at a given data, usually at the end of the accounting period. It provides
information regarding the liquidity position and capital structure of a company as of a given
date.
Liquidity – ability of a company to pay maturing obligations. Current assets vs current
liabilities.
Statement of Changes in Equity – presents a summary of the changes that occurred in the
owner’s equity of the entity during a specific time period usually one year. It may show the
net income for the period, cash dividends declared and issuance of new shares.
Income Statement – shows the results of business operations whether net income or net
loss for a given period of time usually one year. It provides information regarding the
revenues, expenses and net income over a given accounting period. In analyzing earnings
 performance a comparison with the previous periods and with other companies, especially
those coming from the same industry, is a must.
Statement of Cash Flows – reports the firm’s receipts and disbursements of cash which are
classified according to the company’s major activities, namely (1) operating, (2) investing,
and (3)
financing. It provides information regarding the quality of earnings of a company. The
company may report a high net income but if such income is not converted into cash, it is
useless.

Notes to Financial Statements

Provides the following information:
1. Brief description of the company
2. Summary of significant accounting policies
3. Breakdown of amounts found in the financial statements
- property, plant and equipment
- inventories
- operating expenses

Users of financial statements

• Managers/Management
• Equity investors/shareholders
• Creditors
• Regulators/BIR, SEC
• Employees
Financial statement analysis is definitely used by management for monitoring performance and
for identifying strategies to further improve the Company’s operations.
Financial Ratios
1. Profitability ratios
2. Efficiency ratios
3. Liquidity ratios
4. Leverage ratios

Profitability Ratios
a. Return on equity (ROE)
b. Return on assets (ROA)
c. Gross Profit Margin
d. Operating profit Margin
e. Net Profit Margin

Return on Equity
Is a profitability measure that should be of interest to stock market investors.
ROE = Net Income / Stockholders’ Equity