Entrep Finals Merge

PHILIPPINE STATE COLLEGE OF AERONAUTICS
INSTITUTE OF LIBERAL ARTS AND SCIENCES

AVIATION TOURISM DEPARTMENT
Learning Module 09: Introduction to Bookkeeping
LEARNING
MODULE 09:
Introduction to
Bookkeeping
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TABLE OF CONTENTS
Module
Title Page
No.
Introduction to Bookkeeping 9 1
Learning Outcomes 9 11
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Basically, bookkeeping is the process of recording and organizing a business’s

financial transaction, and a bookkeeper is a person responsible for that process.
Bookkeeping is the primary way business owners can figure out if their business is
profitable: keeping an eye on your numbers lets you identify financial challenges
early on and address them before they blossom into full-fledged crises. Bookkeeping
also helps you identify areas of profit expansion-areas you might have notice without
clear financial reports you can interpret easily.
In general, a bookkeeper records transaction sends invoices, makes payments,

manages accounts, and prepares financial statements. Bookkeeping and accounting
are similar, but bookkeeping lays basis for the accounting process-accounting
focuses more on analyzing the data that bookkeeping merely collects.
1. Understanding Business Accounts
In the world of bookkeeping, an account doesn’t refer to an individual bank

account. Instead, an account is record of all financial transactions of a certain type,
like sales or payroll.
There are five basic types of accounts:
 Assets, which are the cash and resources owned by the business (e.g., accounts
receivable, inventory)
 Liabilities, which are the obligations and debts owned by the business (e.g.,
accounts payable, loans)
 Revenue or income, which is the money earned by the business, usually
through sales
 Expenses or expenditure, which is the cash that flows out from the business
to pay for some item or service (e.g., salaries, utilities)
 Equity, which is the value remaining after the liabilities are subtracted from
assets, representing the owner’s held interest in the business (e.g., stocks,
retained earnings)
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Bookkeeping begins with setting up each necessary account so you can

record transactions in the appropriate categories. You likely won’t have the same
accounts as the business next door, but many accounts are common. The table
shows some frequently used small-business accounts and their type.
ACCOUNT ACCOUNT TYPE
Accounts payable Liability

Accounts receivable Asset
Cash Asset
Dividends Equity
Equipment Asset
Insurance expense Expense
Interest expense Expense
Interest income Revenue
Interest payable Liability
Inventory Asset
Owner’s capital Equity
Real state Asset
Rent expense Expense
Service income Revenue
Retained earnings Equity
Salaries and wages Expense
Sales income Revenue
Supplies Asset
Unearned service revenue Liability
Utilities expense Expense
2. Set-up your Business Accounts
Knowing the accounts, you need to track for your business is one thing:
setting them up another, back in the day, charts of accounts were recording in a
physical book called the general ledger (GL). But now, most businesses use computer
software to record accounts. It might be a virtual record rather than a hard copy, but
the overall file is still called the general ledger.
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There are three main methods for creating a GL:
 Spreadsheet software (e.g., Excel)

 Desktop accounting bookkeeping software (e.g., Quickbooks Desktop)
 Cloud-based bookkeeping software (e.g., Quickbooks Online, Wave)
Spreadsheet software is the cheapest option; Google Sheet doesn’t cost a

monthly fee, but trying to craft your own general ledger in a spreadsheet program
can easily spiral into disaster.
Desktop bookkeeping software usually requires high-up front fee, but the
software is then yours to keep. With online, cloud-based bookkeeping software, you
have to pay monthly fee to keep your online subscription, but it’s a much lower cost
than that of desktop software.
Alternatively, you can pay an accountant, bookkeeper, or outsourced

accounting company to manage your accounts and ledger for you.
2. Decide on Bookkeeping Method
If you plan to do your own books in the house instead of outsourcing to an

accounting or bookkeeping firm, you need to make one crucial choice before you
start setting everything up: Are you going to make to use single-entry bookkeeping or
double-entry bookkeeping?
With single-entry bookkeeping, you enter transaction only once. If a

customer pays you a sum, you enter that sum in your asset column only. Makes
sense, right? This method can work if your business is simple-as in, very, very simple.
If you work out of your home, don’t have any equipment or inventory to offer, and
don’t venture too frequently into the realm of cash transactions, you might consider
single-entry bookkeeping.
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However, most bookkeeping is done using the double-entry accounting

system, which is sort of like Newton’s Third Law of Motion, but for finances.
Newton’s laws hold that “for every action (in nature), there is an equal and opposite
reaction”. Likewise, in double-entry accounting, any transaction in one account
requires an equal and opposite entry in another account. It isn’t physics, but for
managing a business, it’s just as important.
In the double-entry bookkeeping system, you’ll record two entries for each
transaction: a debit (Dr) and a credit (Cr). Debits and credits are recorded as journal
entries in the ledger. The debit is usually recorded first (on the left), followed by the
credit (on the right)
A debit doesn’t necessarily mean cash flowing out; likewise, credit isn’t
necessarily money you’ve earned. The type of account defines whether a transaction
either debits or credits that account
Double entry bookkeeping is definitely more challenging than single-entry

bookkeeping, but don’t let the difficulty deter you. Double-entry ensures your books
are always balance, which means you’ll be tipped off immediately if profits start
dipping. Plus, most accounting software starts you off with double-entry bookkeeping
anyway. With that software all ready to go, you can tackle double-entry bookkeeping
with no sweat.
4. Record every Financial Transaction
You’ve created your set of financial accounts and picked a bookkeeping

system-now it’s time to record what’s actually happening with your money.
Each debit and credit transaction must be recorded correctly and in the right
account. Otherwise, your account balances won’t match and you won’t be able to
close your books.
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Account Type Debit recorded for… Credit recorded for…

Asset Increase Decrease
Liability Decrease Increase
Revenue Decrease Increase
Expense Increase Decrease
Equity Decrease Increase
To record a transaction, first determine the accounts that will be debited and
credited. For example, imagine that you’ve just purchased a new point-of-sale
system for your retail business. You paid for the system, which is cost Php 2,000 in
cash.
The transaction will affect two accounts: cash (an asset account) and
equipment (also an asset). Because you’ve decreasing your cash and increasing
your equipment, you would record a Php 2,000 debit (on the left) for the equipment
account and a Php 2,000 credit for cash account (on the right).
Note that the journal entries don’t include specific details about the item,
vendor, or biller; you just track debits and credits by account.
The General Journal

The general journal is a chronological record of the entity’s transactions. A
journal entry shows all the effects of a business transaction in terms of debits or
credits. Each transaction is initially recorded in a journal rather than directly in the
ledger. A journal is called the book of original entry. The nature and volume of
transactions of the business determine the number and type of journals needed. The
general journal is the simplest.
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Format
1. Date. The year and month are-not-month changes or a new page is needed.
2. Accounts Titles and Explanations. The account to be debited is entered at
the V extreme left of the first line the account to be credited is entered slightly
indented on the next line. A brief description of the transaction is usually made
on the line below the credit. Generally, skip a lie after each entry.
3. P.R. (Posting Reference). This will be used when the entries are posted, that
is until the amounts are transferred to the relate ledger accounts. The posting
process will be described later.
4. Debit. The debit amount for each account is entered in this column
5. Credit. The credit amount for each account is entered in this column.
Assume that Angelica Punzalan established its restaurant with an initial

investment of Php 200,000 on June 1.
The journal entry is shown below:
Date Accounts Titles and P.R. Debit Credit

Explanation
1. 2013
2. June 1 Cash
3. Punzalan, Capital 200,000
4. Initial Investment. 200,000
5.
Chart of Accounts
A listing of all the accounts and their account numbers in te ledger is known as
the chart of accounts. The chart is arranged in the financial statement order, that is,
assets first, followed by liabilities, owner’s equity, income, and expenses. The
accounts should be numbered flexibility to permit indexing and cross-referencing.
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When analyzing transactions, the accountant refers to the chart of accounts to

identify the pertinent accounts to be increased or decreased. If an appropriate
account title is not listed in the chart, an additional account may be added. Presented
below is the chart of accounts for the illustration:
Punzalan Restaurant
Chart of Accounts
Balance Sheet Accounts Income Statement Account
Assets Income
110 Cash 410 Service Income
120 Accounts Receivable 420 Interest Income
130
140
150
160
Liabilities Expenses
210 Accounts Payable 510 Insurance expense
220 Interest Payable 520 Interest expense
230 Unearned service revenue 530 Rent expense
540 Salaries and wages
550 Supplies expense
560 Utilities expense
Owner’s Equity
310 Punzalan, Capital
320 Punzalan Withdrawal
330 Income Summary
5. Balance the Books
The last step in basic bookkeeping is to balance and close the books. When
you tally up account debits and credits-often at the end of the quarter or year-the
totals should match. This means that your books are “balance”.
You have been recording journal entries to accounts as debits and credits. At
the end of the period, you’ll “post” these entries to the accounts themselves in the
general ledger and adjust the account balances accordingly.
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For example, if over the course of the month your cash account has had Php
3,000 in debits (increases) and Php 5,000 in credits (decreases), you would adjust
the cash account balance by a total of Php 2,000 (as a decrease).
Follow this method to adjust the balances for each account in your ledger. At
the end of this process, you’ll have what’s called an “adjusted trial balance”. When
you combine account types, the adjusted balances should mee the accounting
equation:
Assets = Liabilities + Equity
If two sides of the equations don’t match, you’ll need to go back through the
ledger and journal entries to find errors. Post corrected entries in the journal and
ledger, then follow the process again until the account accounts are balanced. Then
you’re ready to close the books and prepare financial reports.
The General Ledger
The general ledger is the principal book in which the commercial transactions
of a company are recorded. Before the days of accounting software, bookkeepers
and accountants actually kept physical nooks, and each ledger was a separate
physical book.
However, times have changed. A simpler definition is probably more

appropriate now too, especially with regards to ledgers and T-accounts.
So nowadays, one could say that: A ledger is simply a whole bunch of T-

accounts grouped.
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6. Prepare Financial Reports
Now that you’ve balances your books, you need to take a closer look at what
those books mean, summarizing the flow of money in each account creates a picture
of your company’s financial health. You can then use the picture to make decisions
about your business’s future.
Here are some of the most common financial reports created in bookkeeping:
 Balance Sheet. This document summarizes your business’s assets, liabilities, and
equity at a single period of time. Your total assets should equal the sum of all
liabilities and equity of accounts. The balance sheet provides a look at the current
health of your business and whether it has the ability to expand or needs to
reserve cash.
 Profit and Loss (P&L) Statement. Also called income statement. This report
breakdown business revenues, costs, and expenses over a period of time (e.g.,
quarter), the P& helps you compare your sales and expenses and make forecasts.
 Cash Flow Statement. The statement of cash flow is similar to the P&L =, but it
doesn’t include any non-cash items such as depreciation. Cash flow statements
help show where your business is earning and spending money and its immediate
viability and ability to pay bills.
Bookkeeping software helps you prepare these financial reports, may in real-
time, this can be a lifetime for small-business owners who need to make quick
financial decisions based on the immediate health of their business.
LEARNING OUTCOMES:
At the end of the discussion, the student must be able to:
 Understand what is bookkeeping
 Understand the business accounts
 Identify the different types of accounts
 Understand the double-entry booking system
 Perform key bookkeeping tasks
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Learning Module 10: Financial Statement Analysis
LEARNING
MODULE 10:
Financial Statement
Analysis
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TABLE OF CONTENTS
Module
Title Page
No.
Financial Statement Analysis 10 1
Financial Statement Analysis is a method of reviewing and analyzing a

company’s accounting reports (financial statements) in order to gauge its past,
present or projected future performance. This process of reviewing the financial
statements allows for better economic decision making.
Globally, publicly listed companies are required by law to file their financial
statements wit the relevant authorities. For examples, publicly listed firms in America
are required to submit their financial statements to the Securities and Exchange
Commission (SEC). Firms are also obligated to provide their financial statements in
the annual report that they share with their stakeholders. As financial statements are
prepared in order to meet requirements, the second step in the process is to analyze
them effectively so that future profitability and cash flows can be forecasted.
Therefore, the main purpose of financial statement analysis is to utilize

information about the past performance of the company in order to predict how it will
fare in the future. Another important purpose of the analysis of financial statements is
to identify potential problem areas and troubleshoot those.
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USERS OF FINANCIAL STATEMENT ANALYSIS
There are different users of financial statement analysis. These can be

classified into internal and external users. Internal users refer to the management of
the company who analyzes financial statements in order to make decisions related to
the operations of the company. On the other hand, external users do not necessarily
belong to the company but still hold some sort of financial interest. These include
owners, investors, creditors, government, employees, customers, and the general
public. These users are elaborated on below:
1. Management
The managers of the company use their financial statement analysis to make
intelligent decisions about their performance. For instance, they may gauge cost per
distribution channel, or how much cash they have left, from their accounting reports
and make decisions from these analysis results.
2. Owners
Small business owners need financial information from their operations to
determine whether the business id profitable. It helps in making decisions like
whether to continue operating the business, whether to improve business strategies
or whether to give upon the business altogether.
3. Investors
People who have purchased stock or shares in a company need financial
information to analyze the way the company is performing. They use financial
statement analysis to determine what to do with their investments in the company.
So, depending on how the company is doing, they will either hold onto their stock,
sell it or buy more.
4. Creditors
Creditors are interested in knowing if a company will be able to honor its
payments as they become due. They use cash flow analysis of the company’s
accounting records to measure the company’s liquidity, or its ability to make short-
term payments.
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5. Government
Governing and regulating bodies of the state look at financial statement
analysis to determine how the economy is performing in general so they can plan
their financial and industrial policies. Tax authorities also analyze a company’s
statements to calculate the tax burden that the company has to pay.
6. Employees
Employees need to know if their employment is secure and if there is a
possibility of a pay raise. They want to be abreast of their company’s profitability and
stability. Employees may also be interested in knowing the company’s financial
position to see whether there may be plans for expansion and hence, career
prospects for them.
7. Customers
Customers need to know about the ability of the company to service its
clients into the future. The need to know about the company’s stability of operations
is heightened of the customer (i.e. distributor or procurer of specialized products) or
dependent wholly on the company for its supplies.
8. General Public
Anyone in the general public, like students, analysts and researchers, may
be interested in using a company’s financial statement analysis. They may wish to
evaluate the effects of the firm on the environment, or the economy or even the local
community. For instance, if the company is running corporate social responsibility
programs for improving the community, the public may want to be aware of the future
operations of the company.
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There are basically two sources of capital for your

business:
 Internal Source
 Ex. SAVINGS
 External Source
 Ex. Financial support from FRIENDS and RELATIVES
Here’s a look at four options:
1. BOOTSTRAPPING - It means using whatever resources you have on hand to

help you get your business to the next level.
Where do entrepreneurs find the money?
While a large part comes from personal savings and home-equity loans,
they also tend to use plastic heavily. In fact, perhaps half of all startups are funded by
the owners’ credit card.
2. FRIENDS AND FAMILY – At the very early stages of any startup, entrepreneurs
also tend to raise money from relatives, colleagues and other people they know well.
3. BANKS – For most startups, getting a traditional bank loan is a long shot. That’s
because banks typically will only consider companies that have been in business for
two years. What’s more, they need to see a tangible asset that can be used as
collateral. The exception is a manufacturing company building or using heavy
equipment.
4. CUSTOMERS AND SUPPLIERS – Some customers may be willing to help fund

your product development if you customize it for them. As for suppliers, you may be
able to convince one to hold inventory for you, as long as you guarantee them, you’ll
pay for the material by a certain date. Remember: when you’re raising money for
your business, it pays to be creative.
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LEARNING FINANCIAL BASICS
It’s a good start by first putting a sound financial system in place to ensure that
your business will be managed properly. Having a foolproof recording system is a
step towards the right direction.
The mark of a good financial record is one where it shows clearly where the
company’s money is being spent-expenses-and where is it coming from, in the form
of revenues or earning.
Financial statements are also needed when you are applying for credit with
banks and financial institutions. There are two ways to set up your own financial
system manual and automated.
A manual record system works for small cm software maybe expensive and
impractical. To set up a formal financial system, you need to hire a certified public
accountant or a bookkeeper to make a chart of accounts, prepare a book such as
journals or ledgers which will be registered with the BIR. Aside from these he will be
in charge of periodically generating your financial statements, such as income
statements and the balance sheet, and to do the audited financial statements that
you have to submit with your income tax return at the end of the year.
METHODS OF FINANCIAL STATEMENT ANALYSIS
There are two main methods of analyzing financial statements: horizontal or

trend analysis, and vertical analysis. These are explained below along with the
advantages and disadvantages of each method.
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Horizontal Analysis
Horizontal analysis is the comparison of financial information of a company

with historical financial information of the same company over a number of reporting
periods. It could also be based on the ratios derived from the financial information
over the same time span. The main purpose is to see if the numbers are high or low
in comparison to past records, which may be used to investigate any causes for
concern. For example, certain expenditures that are high currently, but were well
under budget in previous years may cause the management to investigate the cause
for the rise in costs; it may be due to switching suppliers or using better quality raw
material.
This method analysis is simply grouping together all information, sorting them
by time period: weeks, months or years. The numbers in each period can also be
shown as a percentage of the numbers expressed in the baseline (earliest/starting)
year. The amount given to the baseline year is usually 100%. This analysis is also
called dynamic analysis or trend analysis.
Advantages and Disadvantages of Horizontal Analysis
When the analysis is conducted for all financial statements at the same time,
the complete impact of operational activities can be seen on the company’s financial
condition during the period under review. This is a clear advantage of using
horizontal analysis as the company can review its performance in comparison to the
previous periods and gauge how it's doing based on past results.
A disadvantage of horizontal analysis is that the aggregated information expressed in

the financial statements may have changed over time and therefore will cause
variances to creep up when account balances are compared across periods.
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Horizontal analysis can also be used to misrepresent results. It can be manipulated

to show comparisons across periods which would make the results appear stellar for
the company. For instance, if the profits for this month are only compared with those
of last month, they may appear outstanding but that may not be the case if compared
with the same month the previous year. Using consistent comparison periods can
address this problem.
Vertical Analysis
Vertical analysis is conducted on financial statements for a single time period

only. Each item in the statement is shown as a base figure of another item in the
statement, for a given time period, usually for year. Typically, this analysis means
that every item on an income and loss statement is expressed as a percentage of
gross sales, while every item on a balance sheet is expressed as a percentage of
total assets held by the firm.
Vertical analysis is also called static analysis because it is carried out for a
single time period.
Advantages and Disadvantages of Vertical Analysis
Vertical analysis only requires financial statements for a single reporting

period. It is useful for inter-firm or inter-departmental comparisons of performance as
one can see relative proportions of account balances, no matter the size of the
business or department.
Because basic vertical analysis is constricted by using a single time period, it

has the disadvantages of losing out on comparison across different time periods to
gauge performance. This can be addressed by using it in conjunction with timeline
analysis, which shows what changes have occurred in the financial accounts over
time, such as a comparative analysis over a three-year period. For instance, if the
cost of sales comes out to be only 30 percent of sales each year I the past, but this
year the percentage comes out to be 45 percent, it would be a cause for concern.
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KEY FINANCIAL STATEMENTS & HOW THEY

AREANALYZED
The main types of financial statements are the balance sheet, the income
statement and the statement of cash flows. These accounting reports are
analyzed in order to aid economic decision-making of a firm and also to predict
profitability and cash flows.
I. The Balance Sheet
The balance sheet shows the current financial position of the firm, at a given
single point in time. It is also called the statement of financial position. The structure
of the balance sheet is laid out such that on one side assets of the firm are listed,
while on the other side liabilities and shareholders’ equity is shown. The two sides of
the balance sheet must balance as follows:
Assets = Liabilities + Shareholders’ Equity
The main items on the balance sheet are explained below:
Current Assets
Current assets held by the firm refer to cash and cash equivalents. These
cash equivalents are assets that can be easily converted into cash within one year.
Current assets include marketable securities, inventory and accounts receivable.
Long-term Assets
Long-term assets are also called non-current assets and include fixed assets like
plant, equipment and machinery, and property, etc. A firm records depreciation of its
fixed, long-term assets every year. It is not an actual expense of cash paid, but is
only a reduction in the book value of the asset. The book value is calculated by
subtracting the accumulated depreciation of prior years from the price of the assets.
Total Assets = Current Assets + Book Value of Long-Term Assets
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Current Liabilities
Current liabilities of the firm are financial payments or obligations due after
one year. These include loans that the firm has to repay in more than a year, and
also capital leases which the firm has to pay for in exchange for using a fixed asset.
Shareholders’ Equity
Shareholders’ equity is also known as the book value of equity or net worth of
the firm. It is the difference between total assets owned by a form and total liabilities
outstanding. It is different from the market value of equity (stock market
capitalization) which is calculated as follows: number of shares outstanding multiplied
by the current share price.
XYZ HOTEL AND RESTAURANT

Balance Sheet
As of December 31, 2019
ASSETS LIABILITIES & SHAREHOLDER’S EQUITY

Current Assets: Liabilities:
Current Liabilities:
Cash 250,000 Notes Payable 15,000
Accounts Receivables 15,000 Accounts Payable 250,000
Office Supplies 6,000 Bonds Payable 6,000
Hotel Supplies 560,000 Salaries & Wages Payable 560,000
___________ Taxes Payable 258,000
___________
TOTAL CURRENT ASSETS 831,000
TOTAL CURRENT LIABILITIES 1,089,000
Non-Current Assets (Fixed Assets)
SHAREHOLDER’S EQUITY
Building 3,000,000 Common Shares 4,256,000
Property, Plant and Equipment 650,000 Preferred Shares 991,000
Long-term Investment 505,000 Retained Earnings 150,000
____________ _____________
TOTAL NON-CURRENT ASSETS 5,655,000 TOTAL SHAREHOLDER’S EQUITY 5,397,000
TOTAL ASSETS: 6,486,000 TOTAL LIABILITIES &

SHAREHOLDER’S EQUITY 6,486,000
Figure 10.1 Example of Balance Sheet
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Balance Sheet Analysis
The balance sheet is analyzed to obtain some key ratios that help explain the
health of the firm at a given point in time. These metrics are as follows:
Debt-Equity Ratio = Total Debt / Total Equity
The debt-equity ratio is also called a leverage ratio. It is calculated to assess

the leverage, or gearing, of a firm to show how much it relies on debt to finance its
activities. This ratio has pertinent implications for the financial health of the firm and
the risk and return of its shares.
Market-to-Book Ratio = Market Value of Equity / Book Value of Equity
The market-to-book ratio is used to reflect any changes in a firm’s

characteristics. The variations in this ratio also show any value added by the
management and its growth prospects.
Enterprise Value = Market Value of Equity = Debt – Cash
The enterprise value of a firm shows the underlying value of the business. It
reflects the true value of the firm’s assets, not including any cash or cash
equivalents, while unencumbered by the debt the firm carries.
II. The Income Statement
This indicates your earnings, expenses, and any gains or losses. It is also
known as the Profit and Loss Statement. Shows how much a business earned in a
given period. Expenses are deducted from the income (either from sales or from
other sources) to arrive at a net profit or net loss.
The purpose of an income statement is to report the revenues and

expenditures of a firm over a specific period of time. It was previously also called a
profit and loss account. The general structure of the income statement with major
components id as follows:
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Sales revenue
- Cost of goods sold (COGS)
= Gross Profit
- Selling, general and administrative costs (SG&A)
- Research and development (R&D)
= Earnings before interest, taxes, depreciation and amortization (EBITDA)
- Depreciation and amortization
= Earnings before interest and taxes (EBIT)
- Interest expense
= Earnings before taxes
- Taxes
= Net income
The net income on the income statement, if positive, shows that the company
has made a profit. If the net income is negative, it means the company incurred a
loss.
Earnings per share can e derived from knowing the total number of shares
outstanding of the company:
Earnings per Share = Net Income / Shares Outstanding
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Components of an Income Statement

Sales – gross revenue less returns and allowances
Cost of goods sold – direct cost of producing the items
Gross profit – profit from manufacturing the product
Operating expenses – Expenses incurred when running the business
Other income and expenses – Profit earned outside the business normal
operations
Net Profit – Gross profit less the expense. The net profit is the basis for computing
your income tax.
XYZ HOTEL AND RESTAURANT

Income Statement
For the year ended December 31, 2019
Sales revenue 25,000,000
Cost of goods sold (19,568,000)
Gross Profit 5,432,000
Selling, general and administrative cost (SG&A) (1,256,800)
Research and development (R&D) (112,300)
Earnings before interest, taxes, depreciation, and 4,062,900
amortization (EBITDA)
Depreciation and Amortization (1,980,560)
Earnings before interest and taxes (EBIT) 2,082,340
Interest expense (359,660)
Earnings before taxes (EBT) 1,722,680
Taxes (516,804)
Net Income 1,205,876
Figure 10.2 Example of Income Statement
Earnings per share can be derived from knowing the total number of shares
outstanding of the company:
Earnings per Share = Net Income / Shares Outstanding
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Income Statement Analysis
Some useful metrics based on the information provided in the income

statement and the balance sheets are as follows:
Profitability Ratios:
1. Net profit margin: This ratio calculates the amount of profit that the company has
earned after taxes and all expenses have been deducted from net sales.
Net profit Margin = Net Income / Net Sales
2. Return on Assets (ROA). This ratio shows the percentage of profit a company
earns in relation to its overall resources.
Return on Assets = Net Income / Average Total Assets
3. Return on Equity: This ratio is used to calculate company profit as a percentage of

total equity.
Return on Equity = Net Income / Book Value of Equity
Valuation Ratios:
Price to earnings ratios (P/E ratio)
The P/E ratio is used to evaluate whether the value of a stock is proportional
to the level of earnings it can generate for its stockholders. It assesses whether the
stock is overvalued or undervalued.
(P/E) Ratio = Market Capitalization / Net Income = Share Price /

Earnings per Share
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III. The Statement of Cash Flows
The statement of cash flows shows explicitly the sources of the firm’s cash
and where the cash is utilized. It is essentially a statement whereby the net income is
adjusted for non-cash expenses and any changes to the net working capital. It also
reflects changes in cash coming from, or being used by, investing and financing
activities of the firm. The structure and main components of the cash flow statement
are as follows:
Cash from operating activities = Net income + Depreciation ±

Changes in net working capital
Cash from financing activities = New debt + New shares – Dividends

– Shares repurchased
Cash from investment activities = Capital expenditure – Proceeds

from sales of long-term assets
All three of the above determine the bottom line: changes in cash flows.
Cash Flows Statement Analysis
To measure how much cash is available to the company for investments

without outside financing or money diverting from operations, it is useful to conduct a
simple cash flow statement analysis. The free cash flow, as the name suggests,
allows a company to be able to pay dividends, repay its debts, buy back its stock and
also make new investments to facilitate future growth. The excess cash produced by
the company, free cash flow, is calculated as follows:
Net Income
+ Amortization/Depreciation
- Changes in Working Capital
- Capital Expenditures
= Free Cash Flow
15 | P a g e
Some analysts also study the cash flow from operating activities to see if the
company is earning “quality” income. In order for the company to be doing extremely
well, the cash from operating activities must be consistently greater than the net
income earned by the company.
OTHER FINANCIAL STATEMENT INFORMATION
Apart from the key financial statements, complete financial reporting

statements also include the following:
Business and Operating Review
The business and operating review is also called “management discussion

and analysis”. It serves as a preface to all the complete reporting statements in which
the management talks about recent events, discloses essential information regarding
expansion and future plans, and discusses significant developments in the business
industry.
The business and operating review is a good place for the company to share
any good news with the general public. They have room to elaborate on plans that
would help enhance the company’s image and address any unpleasant events that
may have occurred, to show the customers that they truly care about talking openly
to their customers.
Statement of Change in Shareholders’ Equity
The statement of change in shareholders’ equity is also known as equity

analysis. It provides information about all the changes in the company’s equity value
over a certain period. It reconciles the opening balances of the equity accounts with
the closing balances. There are two types of changes expressed in the statement of
change in shareholders’ equity:
16 | P a g e
1. Changes arising from any transactions conducted with shareholders of the

company. For example, issuing new shares, paying dividends, purchasing
treasury stock, and issuing bonus shares, etc.
2. Changes that are a result of alterations in the comprehensive income of

the company. These changes might include revaluation of fixed assets,
net income for the period and fair value of for-sale investments, etc.
Notes to the Financial Statements
Notes to the financial statements are basically additional information provided

in a company’s financial statements. These notes provide details and information that
are left out of the main reporting documents. They are important for the sake of
clarity on many points as they outline the accounting methodology used for recording
certain transactions. The notes to the financial statements are essentially footnotes
because if included in the main statements, they would obscure the important
information, as they are generally quite elaborate and detailed.
The following notes are usually used to impart important disclosures for
explaining the numbers on the financial statements:
1. Notes that show the basis for presentation

2. Notes that advise on significant accounting policies
3. Notes about valuing inventory
4. Notes about depreciating assets
5. Notes about intangible assets
6. Notes that disclose subsequent events
7. Notes about employee benefits
8. Notes that reveal contingency plans
17 | P a g e
PROBLEMS WITH FINANCIAL STATEMENT ANALYSIS
Financial statement analysis is a brilliant tool to gauge the past performance

of a company and predict future performance, but there are several issues that one
should be aware of before using the financial statement analysis results blindly, as
these issues can interfere with how the results are interpreted. Some of the issues
are:
Comparability between Companies

This is a big issue for analysts because they can seemingly compare financial
statement analyses between different companies on the basis of ratios used, but in
reality, it may not paint an accurate picture. The financial ratios of two different
companies may be compared to see how they match up against each other, but each
company may aggregate all their information different from each other in order to
draw up their accounting statements. This may lead to incorrect conclusions drawn
about a company in relation to other companies in the industry.
Comparability between Periods

The change in accounts where financial information is stored may skew the
results of the financial statement analysis, from one period to the next. For example,
of a company records an expense in one period as cost of goods sold, while in
another period, it is recorded as a selling and distribution expense, the analysis
between those two periods would not be comparable.
Operational Information
Analysts do not take into account operational information of a company, as
only financial information is analyzed and reviewed. There may be several indicators
in operational information of the company which may be predictors of future
performance, for example. The number of backlogged orders, any changes in
licenses or warranty claims submitted to the company or even changes in the culture
and work environment. Therefore, analysis of financial information may only relay
half the story.
LEARNING OUTCOMES
At the end of the discussion, the student must be able to:
 Define financial statement analysis;
 Identify the different users of financial statement;
 Generate and analyze financial reports in the business;
 Recognize the different financial statement and analysis methods.
18 | P a g e
Learning Module 11: Global Trends in Business-Supply Chain
LEARNING
MODULE 11:
Global Trends in
Business-Supply Chain
1|Page
TABLE OF CONTENTS
Module
Title Page
No.
Global Trends in Business-Supply Chain 11 1
The Association of Southeast Asian Nations (ASEAN) is a regional grouping

that promotes economic, political, and security cooperation among its ten members:
Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore,
Thailand, and Vietnam. ASEAN countries have a total population of 650 million
people a combined gross domestic product (GDP) of $2.8 trillion. The group has
played a central role in Asian economic integration, spearheading negotiations
among Asia-Pacific nations to form one of the world’s largest free trade blocs and
signing six free trade agreements with other regional economies.
5 Advantages of ASEAN Integration in the Philippines
1. Easiest and cheaper travel options for everyone
Of course, it only makes sense that ASEAN wants to provide easier travel
services for their service providers. However, even citizens can enjoy the benefit of
improved air, sea, or land travel. Thanks to ASEAN, there are now VISA-free entry
countries like Cambodia, Indonesia, and Malaysia. Last October 2017, during the
23rd ASEAN Transport Ministers Meeting, members signed several plans to improve
transportation within the region.
2|Page
2. Cheaper goods and services
Other than better travel options, ASEAN also gives nations within the region to
do more trade for goods and services. Tax on imported goods is lowered or even
eliminated. Navotas Mayor John Rey Tianco said it best during the 50 th ASEAN
Anniversary, “A fully-implemented ASEAN Economic Community could mean lower
taxes and tariffs for imported goods and this, in turn, could lead to lower cost of living
and a greater purchasing power for us.
3. More and better jobs
With the progressive dynamic between the ASEAN region, with easier and
cheaper travel options, goods, and services, it only makes sense that it comes with
the extended bonus of better employment opportunities. Take not, the continent
makes up one-third of global GDP. You can only expect that Asia will keep doing
what it can to maintain and exceed this performance. It’s also highly beneficial to the
country’s IT industry, seeing as how ASEAN has 700 million digital consumers. In
fact, by 2025, the sector is expected to grow 500% to $200 billion. One of the
ASEAN’s goals, after all, is to decrease “unemployment and underemployment”
across the region.
4. More study options
The Filipinos would have more access to better jobs if they are better
equipped for these emerging roles. Thankfully, even the country’s education would
be enhanced because of ASEAN integration. For instance, last August 2017,
Canada’s Minister of Foreign Affairs announced in the ASEAN regional forum in
Manila that they would be offering a $10 Million Scholarship Program to support post-
secondary students and mid-career professional from Southeast Asia. The National
University in Singapore offers scholarships for ASEAN countries for graduate
coursework. These are only a few of the examples of quality international support for
Filipino students.
3|Page
5. The Philippines: Improved
ASEAN contributes to the advancement of the Philippines as a whole.

Because of the incredible support from other Southeast Asian nations, the country is
netter prepared for globalization. With the Filipinos’ way of life eventually improved, it
will be no surprise if the economy contains to perform well in the next few years.
ASEAN is one of the many reasons why the Philippines is in a good and stable pace
and potential investors, businessmen, and its citizens need not worry about the
country’s stability.
The Identification of Business Opportunity

Business opportunity identification is an important part of the entrepreneur’s
journey. It is very important to know how entrepreneurs identify an decide a new
business opportunity with the best chance to succeed.
The most important part of all business attempts common to most successful
startups is answering an unmet need in the market. Customers are always interested
in products that add value. They buy products needed only to satisfy some problems.
Three major types of opportunity:
 Recognized Opportunity
In this type of opportunity, proper reasoning is used to get new ideas. This
consists of accidental recognition of an opportunity for a business solution to a
challenge and a realization of idea or ideas from others like colleagues and
associates. This type of opportunity has to do with the exploitation of the existing
markets where both sources of supply and demand that exist are recognized and
brought together.
4|Page
 Discovered Opportunity
In this type of opportunity, when only the demand exists, but supply does not,
and vice versa, then the non-existent side has to be discovered. This type of
opportunity has to do with the exploration of existing and latent markets. For
discovered opportunity to occur, a purposeful search is necessary. An example of
could be when a country introduces a new course in their university curriculum and
many publishers have printed textbooks on this course, a discovered opportunity
might be the sales/distribution of this books to universities and students.
 Created/Enacted Opportunity
This type of opportunity is based on the principle of enactment where the
entrepreneur creates new means and new ends by using effectual reasoning. In this
type of opportunity, the supply and demand will not apparently exist; one or both of
them have to be created. This demands that several economic inventions like
marketing, financing and others have to be created for the opportunity to exist.
Opportunity identification is the collection of three main factors, which are;

the entrepreneur’s background, the business influence and the general environment.
The five stages for opportunity identification are as

follows:
1. Preparation
Preparation stage is that knowledge and experience exercise just before the
opportunity discovery process. These knowledge and experience are not often
deliberately acquired. However, preparation itself is actually a deliberate attempt to
widen capability in an area and become sensitive to concerns in a field of interest. In
an organized situation, the background of the business, the products or services or
the technological knowledge must have majorly informed the main ideas of the
successful venture. One cannot however, rule out the role of new ideas and
expertise originating from individuals in the organization that will eventually result in a
new business.
5|Page
2. Incubation
Incubation stage is the part of the opportunity identification process that
involves the consideration of a concept or a specific problem ordinarily not subjected
to conscious of formal analysis by businessman or his team. It is usually not
consciously done and therefore more often than not, an instinctive and unempirical
approach for the consideration of several potential alternatives.
3. Insight
Insight stage occurs at the moment a fundamental solution suddenly becomes
recognized unexpectedly. It is a particular moment that keeps occurring persistently
right to the process of opportunity identification. Insights have been found to be
extensive channels to the discovery of startup businesses and sometimes reveal
additional knowledge for the development of a current process of discovery. In
respect of a business venture, insight predictably encompasses the abrupt
recognition of an opportunity in business, the answer to an adequately pondered
crisis and the possession of a concept from social networks and associates.
4. Evaluation
Evaluation stage is about investigating if the recognized and developed ideas
are feasible, if the businessman has the required abilities to realize the ideas and if
the idea is sufficiently innovative for prospects. It sometimes involves full feasibility
analysis of the ideas through all forms of research instruments and criticisms from
relevant business acquaintances. It is fundamental to also investigate the prospects
and viability of the new insight ideas as the spirit of the entrepreneurship is to make
satisfactory and sensible profits.
5. Elaboration
Elaboration is the stage that exposes the opportunity/ideas too external
analysis with the tedious and time-consuming options selection, choice decision and
organization of resources. T is customarily in search of all legalities that could build
confidence and guarantee the practicability of the business. Elaboration also reduces
uncertainties by providing the detailed planning activities after the evaluation viability
confirmation. This will eventually reveal the concept areas that still need further
analysis and attention.
6|Page
LEARNING OUTCOMES
At the end of the discussion, the student must be able to
 Explain the advantages of the ASEAN Integration to the Philippines;
 Observe the trade system in the neighboring ASEAN countries;
 Stimulate creativity and critical thinking in identifying opportunities; and
 Apply innovative approaches in envisioning one’s entrepreneurial career
7|Page
Learning Module 12: Nine (9) Rules for Business Success
LEARNING
MODULE 12:
Nine (9) Rules for

Business Success
1|Page
TABLE OF CONTENTS
Module
Title Page
No.
Nine (9) Rules for Business Success 12 1
2|Page
(INSERT Picture of Mr. John L. Gokongwei Jr.)
“I chose to live my life unafraid even during times when I WAS afraid. I discovered
that opportunities don’t find you. You find your opportunities.”
“Call it trite – but believe me, success CAN BE achieved through hard work,
frugality, integrity, responsiveness to change, and most of all, the boldness to
dream.”
John L. Gokongwei Jr.
John Gokongwei Jr. came from a wealthy clan in Cebu but they lost
everything because of World War 2. He learned that war is a great equalizer, but he
bounced despite the difficult road, with his business conglomerate as one of the
fixtures of the Philippines business environment.
 Born August 11, 1926 in Xiamen, Fuijan Province, China

 Married to Elizabeth Yu-Gokongwei; with 6 children
 Founder and chairman of Emeritus of JG Summit Holdings, Inc
 Third richest entrepreneur in the country, had a net worth of $5.8
billion at the time of his death
 Masters in Business Administration, de La Salle University
 Advanced Management Program, Harvard University
(INSERT Figure 13.1 J.L. Gokongwei Jr. Businesses)
Entrepreneurs gladly accept change. If it is not happening, they stir up the

status quo and make important changes. Change is inevitable. Instead of being the
victims of change, entrepreneurs just look for opportunities to make the best out of
important changes.
The business strategy of John L. Gokongwei Jr. testify to this principle. When
Gokongwei entered the manufacturing industry, he changed the rules of the game in
the Philippines. In the telecommunications sector, he introduced the Unlimited
Texting and Unlimited intra-network calls that changed the Philippine cellular phone
industry.
3|Page
1. Change is inevitable and flexibility is the key.
Entrepreneurs gladly accept change. If it is not happening, they stir up the

status quo and make important changes. Change is inevitable. Instead of being the
victims of change, entrepreneurs just look for opportunities to make the best out of
important changes.
The business strategy of John L. Gokongwei Jr. testify to this principle. When
Gokongwei entered the manufacturing industry, he changed the rules of the game in
the Philippines. In the telecommunications sector, he introduced the Unlimited
Texting and Unlimited intra-network calls that changed the Philippine cellular phone
industry.
2. Personal stakes in the company encourage everyone to work hard.
By involving subordinates and members of the organization, they will feel

that they truly belong to the organization. As such, they will become stakeholders in
the company and they will work for the improvement of the organization.
3. Mistakes and disappointments are inevitable.
Failures are a part of life. Deal with it. Gokongwei faced a lot of odds in his
business career. At one time, he did not succeed in breaking through a particular
sector. Some of these businesses failed. Some even failed to take off the ground.
Yet, Gokongwei learned a lot of things from all those experiences and he became a
great business tycoon after.
4. Good brand building equals reputation.
Gokongwei has a lot of brands to his credit the budget airline company, Cebu
Pacific Air, telecommunications companies such as Sun Cellular, and Digitel
Philippines; snacks company Universal Robina Corporation; and shopping mall chain
Robinson’s Place! He has succeeded in building these brands and in turn, his
reputation soared!
4|Page
5. Family support is crucial.
John Gokongwei’s family has been crucial in building his empire. He was not
able to finish his college degree, but he sent his younger brother James to the
Massachusetts Institute of Technology to study and help him establish his empire.
His brothers and sisters helped him in his early endeavors. Until now, family
members such as his son Lance Gokongwei are very much active in helping him
manage his business empire.
6. Never lose sleep thinking of business risks.
Gokongwei knew how to enjoy life! Yet, he enjoyed the game of business,
more than just the rewards with it.
7. Pausing to recharge brings new vigor.
Even if he was very busy, Gokongwei tried to find time to rest and renew his
spirits. This helped him keep thinking of new businesses and improvements in his
operations.
8. Reading and traveling enriches one’s mind.
When he was young, Gokongwei was not afraid to brave the open seas to
sell his goods in manila. When he was older, he also went to different places to
enrich his mind. Reading was also a great part of his lifestyle as he was always on
the lookout for good ideas.
9. Philanthropy is a personal satisfaction.
When he became very rich, Gokongwei found ways to help others. His
businesses already generated thousands of jobs in the Philippines. Because he
values education. He has donated money to the Ateneo de Manila University to
support business education in the Philippines.
5|Page
John L. Gokongwei Jr. passed away at 93 on November 10, 2019. Yet, he

continues to make his mark in the Philippine business environment. His life is a
shining testimony to the great benefits of an entrepreneurial life.
“Entrepreneurship is not for the weak of heart. There is no easy path to success. You
will need to work harder than your employees, to keep your mind sharp, and to face
your inner fears. In the end, entrepreneurship is not only finding opportunities to
create value in the business sense, but also finding the opportunities to be your best
self.”
John L. Gokongwei Jr.
LEARNING OUTCOMES
At the end of discussion, the student must be able to:
 Understand the nine rules for business success;

 Determine the importance of the traits and characteristics of being a
successful entrepreneur.
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PHILIPPINE STATE COLLEGE OF AERONAUTICS

INSTITUTE OF LIBERAL ARTS AND SCIENCES

Basically, bookkeeping is the process of recording and organizing a business’s

In general, a bookkeeper records transaction sends invoices, makes payments,

1. Understanding Business Accounts

In the world of bookkeeping, an account doesn’t refer to an individual bank

There are five basic types of accounts:

Bookkeeping begins with setting up each necessary account so you can

ACCOUNT ACCOUNT TYPE

Accounts payable Liability

2. Set-up your Business Accounts

There are three main methods for creating a GL:

 Spreadsheet software (e.g., Excel)

Spreadsheet software is the cheapest option; Google Sheet doesn’t cost a

Alternatively, you can pay an accountant, bookkeeper, or outsourced

2. Decide on Bookkeeping Method

If you plan to do your own books in the house instead of outsourcing to an

With single-entry bookkeeping, you enter transaction only once. If a

However, most bookkeeping is done using the double-entry accounting

Double entry bookkeeping is definitely more challenging than single-entry

4. Record every Financial Transaction

You’ve created your set of financial accounts and picked a bookkeeping

Account Type Debit recorded for… Credit recorded for…

The General Journal

Assume that Angelica Punzalan established its restaurant with an initial

The journal entry is shown below:

Date Accounts Titles and P.R. Debit Credit

When analyzing transactions, the accountant refers to the chart of accounts to

5. Balance the Books

Assets = Liabilities + Equity

The General Ledger

However, times have changed. A simpler definition is probably more

So nowadays, one could say that: A ledger is simply a whole bunch of T-

6. Prepare Financial Reports

Financial Statement Analysis 10 1

Financial Statement Analysis is a method of reviewing and analyzing a

Therefore, the main purpose of financial statement analysis is to utilize

USERS OF FINANCIAL STATEMENT ANALYSIS

There are different users of financial statement analysis. These can be

There are basically two sources of capital for your

Here’s a look at four options:

1. BOOTSTRAPPING - It means using whatever resources you have on hand to

Where do entrepreneurs find the money?

4. CUSTOMERS AND SUPPLIERS – Some customers may be willing to help fund

LEARNING FINANCIAL BASICS

METHODS OF FINANCIAL STATEMENT ANALYSIS

There are two main methods of analyzing financial statements: horizontal or

Horizontal analysis is the comparison of financial information of a company

Advantages and Disadvantages of Horizontal Analysis

A disadvantage of horizontal analysis is that the aggregated information expressed in

Horizontal analysis can also be used to misrepresent results. It can be manipulated

Vertical analysis is conducted on financial statements for a single time period

Advantages and Disadvantages of Vertical Analysis

Vertical analysis only requires financial statements for a single reporting

Because basic vertical analysis is constricted by using a single time period, it

KEY FINANCIAL STATEMENTS & HOW THEY

I. The Balance Sheet

Assets = Liabilities + Shareholders’ Equity

The main items on the balance sheet are explained below:

Total Assets = Current Assets + Book Value of Long-Term Assets

XYZ HOTEL AND RESTAURANT

ASSETS LIABILITIES & SHAREHOLDER’S EQUITY