CHAPTER V

METHODS OF FINANCING

Funds for financing engineering or any business enterprise maybe

classified into: (1) equity, and (2) borrowed or debt capital. The investors in
the enterprise own equity capital and they expect to earn profit from their
investment.
However, there is no obligation to pay them when there is no profit. When
funds are borrowed, the borrower is supposed to pay interest and to repay the
principal on a specific date, whether or not the operations of the enterprise
have been profitable or not. Loans are fixed obligations, and failure to repay
these on time usually leads to embarrassment or foreclosure of the property
pledged as collateral.

WORKING CAPITAL

Working or circulating capital includes all those funds, which are required
to make the enterprise a going concern. There are two kinds of working
capital: initial and regular working capital. Initial working capital is the amount
needed at the beginning of operations
and permits the enterprise to begin functioning before it receives any income
from the sales of its products or service. Regular working capital is what is
needed when operations have been normalized. It is usually less than initial
working capital.
TYPES OF BUSINESS ORGANIZATIONS
The four principal types of business organizations are:
(1) The individual ownership or sole proprietorship
(2) The partnership
(3) The corporation
(4) Cooperatives
SOLE PROPRIETORSHIP

The sole proprietorship or individual ownership is the simplest form of

business organization, wherein the business is owned entirely by one person
1
who is responsible for the operation. All profits that are obtained from the
business are his alone, but he must also bear all losses should they be
incurred.

PARTNERSHIP

A partnership is an association of two or more persons for the purpose of

engaging in a business for profit.
FORMATION OF THE PARTNERSHIP. A partnership is usually formed by the
voluntary agreement of the partners either verbally or in writing. To prevent
misunderstanding among the partners, the common practice is that to have in
writing all points on which the partners have agreed in a form called the
articles of co-partnership. The contract among the partners usually state the
relations between the partners on matters relating to the proportion in which
profits or losses are shared, their investments, the rights and duties of each
partner, and provisions for the withdrawal of any partner or the dissolution of
the partnership.
To be more specific, the partnership contract will contain the following
provisions:
1. The name, location, and nature of the business.
2. The names of the partners, and the duties and rights of each.
3. Amount to be invested by each partner. This provision must include
a procedure for valuing any non-cash assets invested or withdrawn
by any partner.
4. Procedure for sharing profits or losses.
5. Withdrawals to be allowed each partner.
6. Provision for insurance on the lives of the partners, naming the
partnership or the surviving partners as beneficiaries.
7. The accounting period to be used.
8. Provision for audit by certified public accountants.
9. Provision for settlement of disputes.
10. Provision for dissolution of the partnership.
2
 THE CORPORATION

A corporation is a distinct legal entity, separate from the individuals who

own it, and which can engage in practically any business transaction which a
real person could do.
CAPITALIZATION OF A CORPORATION

A corporation is capitalized through the sale of shares of stock. There

are two principal types of capital stock: common stock and preferred stock.
There are many varieties, which exist within these classes relative to income,
control, and other matters. If only on class of stock is issued it is usually
common stock, although it is sometimes called capital stock.

COMMON STOCK

Common stock represents the ownership of stockholders who have a

residual claim on the assets of the corporation after all other claims have been
settled. No return is guaranteed on the investment of common stockholders.
Common stockholders, as owners of the corporation, have certain legal
rights, among which are the following:
1. To call and hold meetings, usually upon the request of a majority of
the stockholders.
2. To vote at stockholders’ meetings.
3. To elect the members of the board of directors who will manage the
affairs of the corporation.
4. To amend the charter of the corporation subject to government
approval.
5. To prepare and amend the by-laws of the corporation.
6. To inspect the books of the corporation.
7. To receive dividends when such are declared.
8. To share the remaining assets, if any, when the corporation is
dissolved.

3
PREFERRED STOCK
Preferred stock also represents ownership, and it possesses the same
rights as common stock, but in addition, it enjoys certain preferences, not
possessed by common stock.
Preferred stock has priority over common stock in the receipts
of dividends, and it usually guaranteed a fixed annual dividend,
regardless of the amount of the earnings of the corporation. In case the
corporation is dissolved, the owner of the preferred stock has priority over the
assets before the common stockholders. However, due to a guaranteed
dividend on the preferred stock, the preferred stockholders usually have no
right to vote in meetings.
BONDS
A bond is a certificate of indebtedness of a corporation usually for a
period not less than 10 years, and guaranteed by a mortgage on certain
assets of the corporation or its subsidiaries.
Bonds are issued when there is need for more capital such as for
expansion of the plant or the services rendered by the corporation. Bonds
represent indebtedness, and in return for the money borrowed the corporation
agrees to pay interest at a stipulated rate and at
specified periods in addition to the payment of the loan at the time of maturity
or prior to that date. Because of the guarantee existing
behind the bond, it represents a more stable investment than either a
common or preferred stock. However, the bondholder has no voice in
managing the affairs of the corporation, and is not given any share in the
profits of the corporation.
The par value of a bond is the amount stated on the bond. The bond rate
is the rate of interest quoted on the bond.
CLASSIFICATION OF BONDS

Bonds are classified into several ways. Bonds may be classified

according to the method of payment of interest, as to the
security behind the bond, and in many other ways.
According to the method of paying interest, bonds are classified into:
4
 1. Registered Bonds. In all registered bonds, the owner’s name is
recorded in the books of the corporation, and interest is paid
periodically to the owners without their asking for it.
2. Coupon Bonds. These are bonds to which are attached coupons
indicating the interest due and the date when such interest is to be
paid. The owner can collect the interest due by surrendering the
same to the officers of the corporation or cashing it at specified
banks.
According to the security behind the bonds, the classification is as
follows:
1. Mortgage Bonds. These are bonds whose security is a mortgage
on certain specified assets of the corporation. If
the corporation fails to pay the bond value on the date of maturity,
title to the property is transferred to the bondholders, who may take
possession and sell the same to reimburse the amounts they have
invested.
2. Collateral Trust Bonds. In such types of bonds, the corporation
pledges securities, which it owns, such as the stocks or bonds of
one of its subsidiaries. In case of default in the payment of the bond
value at maturity the bondholders have to depend on the assets of
the subsidiary
for redemption of their investment. Usually however the issuing
corporation includes a guaranty involving its properties to enhance
the value of the bond to prospective investors.
3. Equipment Obligations Bonds. These are bonds refer primarily to
bonds whose guaranty is alien on railroad equipment, such as
freight and passenger cars, locomotives, and other railroad
equipment.
4. Debenture Bonds. These are bonds without any security behind
them except a promise to pay by the issuing corporation. These
bonds may only be issued by large and
well-known firms, whose record of achievement is, known to the
public.
5
 5. Joint Bonds. Sometimes two or more corporations issue bonds
which are guaranteed jointly and severally by them. Such bonds are
called joint bonds. Each of the issuing corporations is liable for the
entire bond issue in case of default.
BOND AMORTIZATION AND RETIREMENT

Bonds represent debt, and therefore some provision must be made for its
payment at some future time. The amount necessary to redeem or retire
bonds may be done in three ways.
1. The corporation may issue another set of bonds equal to the
amount of bonds due for redemption. This method in effect is
borrowing from Pedro to pay Jose, and will cause
the corporation to be perpetually in debt.
2. The corporation may set up a sinking fund into which payments are
made periodically and usually of equal amounts. The amounts
deposited, together with the interests they earn become at maturity
date equal to the amount of the bonds to be retired. The
bondholders are then paid the par value of their bonds. The
corporation, however, must, in addition to the amount set aside for
bond retirement, pay periodically the interest on the bonds. To
determine the amount of the periodic payment, let
A = amount of the periodic payment, part of which will pay for
bond retirement, the balance for periodic interest.
F = the amount of the bond issue, which will be repaid at
maturity date
n = the number of periods until the bonds are retired.
i = rate of interest on the bonds per period.
In this case, the total periodic payment will be
A = Fi + F (A/F, i%, n) = F (A/P, i%, n)
since i + (A/F, i%, n) = (A/P, i%, n)
3. Usually the interest on the bonds is more than the interest on the
sinking fund set up by the company. In such a case, it is more economical to
retire the bonds annually in order that the corporation may take advantage
of
 6
4. the higher bond rate. The corporation may therefore float or issue
callable or serial bonds.
These bonds permit repayment of the principal on certain bonds before
maturity. The callable bonds to be retired on a definite date are usually
determined by lot, while those for serial bonds are indicated on the bond
issue, and bonds are retired according to a certain schedule where the serial
number of the bonds to be retired at specific dates is stated.
In retiring a bond issue where a sinking fund is set up for such a
purpose, the company prepares an amortization schedule, which shows the
method of repaying the principal and interest. In general,
amortization is defined to be any method of repaying a debt, the principal and
interest included, usually by a series of equal payments at periodic intervals of
time.
The periodic payments made to amortize a bonded debt are used to
pay the interest already due and to redeem a certain number of the bonds.
The periodic payments cannot be kept equal, but are to be kept as nearly as
possible. Fractions of a bond cannot be retired.
For example, if the denomination of the bonds is P1.00 and if P842.10
is available for redeeming the bonds, then 8 bonds are redeemed, not 8.42
bonds; if P875.31 is available, 9 bonds are redeemed.
Example: A corporation floats P1,000,000 worth of bonds of P1,000
denomination. The bond rate is 9% and the bonds are to be retired in 10
years, the annual payments being as nearly equal as possible. Prepare an
amortization schedule.
Solution:
F = P1,000,000 n = 10 I = 9%

P1,000,000
Number of bonds = = 1,000 bonds
P1,000
 7
Amortization Schedule
Year P I= 9% #of bonds PR Total P
retired
1 P1,000,00 P90,000 66 P66,000 P156,000
0
2 934,000 84,060 72 72,000 156,060
3 862,000 77,580 78 78,000 155,580
4 784,000 70,560 85 85,000 155,560
5 699,000 62,910 93 93,000 155,910
6 606,000 54,540 101 101,000 155,540
7 505,000 45,450 110 110,000 155,450
8 395,000 35,550 120 120,000 155,550
9 275,000 24,750 131 131,000 155,750
10 144,000 12,960 144 144,000 156,960
T 6,204,000 558,360 1,000 1,000,00 1,558,360
0

VALUE OF A BOND

The value of a bond is defined to be the present worth of all the amounts
the bondholder will receive through his possession of the bond. The
bondholder will receive two types of payments, which are:
1. A single payment which the owner will receive at the date of
maturity of the bond, which is usually equal to the par value
of the bond, and
2. The periodic payments for interest on the bond until the issuing
corporation redeems it.

DERIVATION OF THE FORMULA FOR VALUE OF A BOND

Let Vn = value of the bond n periods before redemption

F = par value of the bond
C = amount paid to the bondholder at maturity of the bond which is
usually equal to F
 n = number of periods prior for redemption
r = rate of interest on the bond per period
8
i = actual rate of interest on the amount invested in the bond,
usually called yield.
57
Vn C
1 2 3 4 (n-1) n
0     
Fr Fr Fr Fr Fr Fr
Graphical Presentation of Bond Value

From the figure, it is clear that the periodic interest payments on the
bonds form an ordinary annuity, each payment being Fr. The present value of
n such payments is Fr (P/A, i%, n). The single payment C at the maturity date
of the bond has a present value of C
(P/F, i%, n). The present value of the bond is therefore
Vn = C (P/F, i%, n) + Fr (P/A, i%, n)
or Vn = C + Fr (1+i) n - 1
(1+i) n i (1+i) n

In solving the second formula, for the rate of interest i, interpolation

methods are usually employed due to the difficulty of a direct solution.
Chapter VI
PRINCIPLES OF ACCOUNTING

INTRODUCTION
Accounting is the process of recording all the transactions of the
company which affect any investment of capital, so that at any time the results
of the investment may be known. Accounting has also been defined as the
body of principles by means of which all business transactions expressible in
terms of money are recorded, classified, and periodically summarized and
interpreted.
 Bookkeeping is the systematic recording of all business transactions in
financial terms. The study of bookkeeping usually emphasizes technique,
while the study of accounting gives emphasis on theory.

DEFINITIONS OF CERTAIN ACCOUNTING TERMS

Assets are defined as anything of value possessed by an enterprise.
They consist of property and the right to property, tangible or intangible, which
may be used for the payment of debt.
Liabilities are debts or claims of anyone other than the owners of the
property upon the assets of the company. They consist of all the obligations of
the company to other persons in the form of money, other assets, and
services, to be paid now or in the future.
Ownership or Proprietorship is the excess of assets over liabilities. It
represents the investment of a person or several persons in the enterprise.
Equities are the claims of anyone against the assets of the enterprise. It
therefore includes the liabilities to creditors as well as the claims of the
owners.
TYPES OF ASSETS
Assets are classified and described as follows:
(1) Fixed Assets: These include those properties that will not be converted
into cash or transformed into saleable form. Buildings, land, machinery,
equipment, furniture, and fixtures, which are used in the production of
goods, are considered as fixed assets.
(2) Current or Liquid Assets: These are items of value which include cash,
accounts receivable within a short time or at least within the present
accounting period, raw materials, goods in the process of production, and
finished goods ready for sale.
(3) Prepaid Expense: These are assets in the form of money paid for certain
materials not yet delivered or services not yet rendered to the company.
The advance payment for insurance or rental are prepaid expenses until
the term for which they were paid has expired. In certain cases the
company may order and pay for its materials well in advance of delivery
 date of the same, in which case the amount paid is considered an asset
until delivery is made.
(4) Intangible Assets: Assets in this classification have no physical
substance. Principal examples are goodwill, leaseholds,
copyrights, patents, franchises, licenses, and trademarks. Accounting for an
10

intangible asset is rendered somewhat difficult because the lack of physical

substance makes evidence of its existence more elusive, may make its value
debatable, and its useful life may be questionable. The inclusion of intangible
assets on the balance sheet is justified only when there is good evidence that
the future earnings will be obtained from these assets.
A copyright is an exclusive right granted by the government to protect the
production and sale of literary or artistic works for a period of 50 years or
during the lifetime of the author.
A patent is an exclusive right granted by the government for the
manufacture, use, and sale of a specific product. When a company acquires a
patent or copyright by purchase from the owner, the purchase price is
classified as an asset.
TYPES OF LIABILITIES
The different types of liabilities and their descriptions are as follows:
(1) Fixed Liabilities: These are liabilities, which are not due for payment until
sometime in the future, usually after a period exceeding one year.
(2) Current Liabilities: These are liabilities, which mature within a short time,
usually a year.
(3) Prepaid Income: These are liabilities representing income which have
been paid to the enterprise, but for which the goods have not been
delivered or any service rendered to the payer.
TYPES OF OWNERSHIP OR PROPRIETORSHIP
Ownership may also be classified into several forms, as follows:
(1) For an individual ownership or sole proprietorship, the ownership will be in
the capital account of the sole owner.
(2) For a partnership, the ownership will be in the capital account of the
partner.
(3) For a corporation, the ownership vested in the shares of common and
preferred stock of the persons who have invested in them.
FUNDAMENTAL EQUATION OF ACCOUNTING
The fundamental equation of accounting is:
ASSETS = EQUITIES
11
Since EQUITIES = LIABILITIES + OWNERSHIP
The fundamental equation of accounting may also be written as:
ASSETS = LIABILITIES + OWNERSHIP
In other words, the sum total of the things of value possessed by the
enterprise equals the sum total of the claims against the enterprise, which
consist of the claims of persons aside from the owners and the claims of the
owners themselves against the enterprise.
THE BALANCE SHEET
The balance sheet is a financial summary showing the relationship among
assets, liabilities, and ownership in the corporation on a specific date. It is
considered to be the most important financial statement of any enterprise and
is conceded to be the goal of all accounting activity. Basically, it enumerates
the nature and amount of the assets, liabilities, and ownership in the
company.
BALANCE SHEET
Name of Company
Date
ASSETS:
Current Assets:
Cash on hand and in banks ……………………..
Notes and Accounts Receivable:
Notes receivable, customers…………
Accounts receivable, customers……..
Other receivables (give details)………
Less: Reserve for bad debts………….
Inventories (goods and materials on hand)………. ________
Total Current Assets………………………
Fixed Assets:
Land……………………………………………….
Buildings or manufacturing plant……….
Less: Reserve for depreciation…..
Properties other than buildings………….
Less: Reserve for depreciation….. ________
Total Fixed Assets……….
Prepaid Expenses:
These include amounts paid in
advance for insurance, rental, interest,
supplies, etc……….. ________
Total Prepaid Expenses………….
Other Assets:
Sinking funds……………………………………
Investment in securities such as bonds, etc……..
Goodwill………………………………………...
Patents, franchises, licenses……………………..
Other intangibles (give details)………………….
Miscellaneous (give details)…………………….. _________
Total of Other Assets…………….
TOTAL ASSETS………...
LIABILITIES
Current Liabilities:
Notes payable…………………………………….
Accounts payable………………………………...
Accrued expenses (taxes, wages,
Interest, etc.)…………………….…
Declared and unpaid dividends……………………
Other current liabilities (give details)……………...
Total Current Liabilities…………… _________
Fixed Liabilities:
Mortgages payable………………………………….
Indebtedness in the form of bonds………………….
Reserve for expansion………………………………
Other long-term liabilities (give details)…………… _________
Total Fixed Liabilities………………
Prepaid Income:
Advance payment on orders from the company……
Other income paid in advance to the company……..
_________
Total Prepaid Income……………….
TOTAL LIABILITIES…………….
OWNERSHIP OR PROPRIETORSHIP
Preferred Shares……………………………………
Common Shares……………………………………
Undivided surplus (Retained Earnings)……………. _________
TOTAL OWNERSHIP……………..
TOTAL: LIABILITIES + OWNERSHIP…………………..

THE PROFIT AND LOSS STATEMENT

A profit and loss statement is a summary of the income and
expenses of an individual or company for a given period. Profit results from an
excess of income over expenses. A loss is indicated if the expenses exceed
the income for the given period. The profit and loss statement is conceded to
be next in importance to the balance sheet.
SAMPLE OF A PROFIT AND LOSS STATEMENT
PROFIT AND LOSS STATEMENT
Name of Company
For the year ending December 31, 20___
INCOME FROM SALES:
Gross Sales…………………………………………………
13
Less: Returns and allowances………………………………
Net Sales……………………………………………
COST OF GOODS SOLD:
Merchandise inventory at beginning of year………………..
Purchases and freight………………………………………..
Less: Purchases returns and allowances…………………….
Cost of merchandise available for sale………………
Merchandise inventory at year end…………………..
Cost of goods sold……………………………………………
GROSS PROFIT………………………………………………..

OPERATING EXPENSES
Selling Expenses:
Sale salaries and commissions……………………….
Advertising…………………………………………..
Other selling expenses (depreciation of sales equipment, bad debts,
delivery expense, insurance on sales
equipments, etc.)…………………………… ________
Total selling expenses………………………………
General and Administrative Expenses:
Office salaries………………………………………
Other expenses (rent, telephone, light, taxes, insurance,
Depreciation, office supplies used, etc.)…… ________
Total Operating Expenses…………………………..
NET OPERATING PROFIT……………………………………………
NON-OPERATING INCOME AND EXPENSES
Non-operating income (interest, rent, etc)…………………..
Non-operating expenses (interest, sales, discounts, etc)……. _
NET PROFIT…………………………………………………..

FUNDAMENTALS OF ACCOUNTING
Cost Accounting is the process of determining the actual cost of
manufacturing a product or of rendering a service. A good knowledge in cost
14
accounting for an engineer engaged in manufacturing would indicate ways
and means whereby cost may be reduced, thus maximizing profit. In this
instance, an engineer would be more valuable to management.

COMPARISON BETWEEN COST ACCOUNTING AND GENERAL

ACCOUNTING
General accounting provides a historical account of all business
transactions that will make it possible to prepare a balance sheet and a profit
and loss statement for an enterprise at any time, which enable the
management to determine the status of the
enterprise at that time. On the other hand, cost accounting supplements the
information obtained by general accounting as follows:
(1) To provide a detailed record of production costs in order to enable
management better control of costs.
(2) To make it possible to determine the unit costs of goods partly or fully
manufactured.
(3) To provide a continuous record of the inventories of raw materials, goods
in the process of production, and finished goods.
METHODS OF COST ACCOUNTING
The three methods of cost accounting are:
(1) Post-Mortem Cost Accounting. In this method, costs are accurately
determined after they have occurred. A complete record of all costs
expended in producing a product or of rendering a service is kept. From
these data, the unit cost of the product may easily be determined by
 dividing the total cost of production for a certain product by the total
number of units manufactured.
(2) Method of Predicted Costs. In this method, costs are predicted or
estimated in advance of actual production. This method requires
considerable experience on the part of management in order that the
predicted costs will be accurate. This method is commonly used in
determining the profit possibilities of a projected enterprise.

15
(3) Method of Standard Costs. This method is a refinement of the method of
predicted costs. In this method, all costs are predetermined with as much
accuracy as possible. The details of
production are carefully analyzed and standard costs are set up which those
in actual production will have to follow as closely as
possible. Any deviation from the standard costs will require a thorough
study to determine the cause or causes of such deviation.
In standard cost accounting, three basic standards must be made: (1) for
materials, (2) for direct labor, and (3) for overhead. The engineer must
determine the quantity and the type of materials that go into the production of
each unit. For direct labor, the direct labor time as well as the standard wage
rate must be determined. The determination of the standards for overhead is
usually the most difficult to set up for they involve all other possible costs not
included in the materials and direct labor costs.
ELEMENTS OF COST
From the standpoint of the economist, the three elements of production
are land, labor, and capital. However, from the viewpoint of management, it is
known that every finished product has an actual cost consisting of the
following:
(1) The cost of materials used in production.
(2) The cost of direct labor employed in production, and
(3) Other expenses not included in materials and direct labor, which are
grouped under the name overhead expenses or burden.
Hence, from the standpoint of management, the three elements of cost are
materials, labor, and overhead.
MATERIALS
Materials used in manufacturing are classified as either direct materials
or indirect materials. Direct materials are those, which are, used in the
finished product itself, while indirect materials are those materials used in
production but which do not go into the finished product.
LABOR
Like materials, labor is also classified into direct labor or indirect labor.
Direct labor is the actual work applied directly to the manufacture of the
16
product. Indirect labor is that work necessary for the operation of the factory,
but which cannot be identified with one particular process or product
manufactured.
PRIME COST
This is defined as:
Prime Cost = Direct Materials Cost + Direct Labor Cost
Note that the equation above does not include the overhead cost. Prime
cost is often used in comparing the costs of different manufacturers and also
as the basis for the distribution of overhead
expenses to jobs or processes.
PRODUCTION COST
This is defined as total cost of producing a product. It may be expressed
as:
Production Cost = Direct Materials Cost + Direct Labor Cost + Overhead
Cost
It may also be expressed as:
Production Cost = Prime Cost + Overhead Cost
INVENTORY MATERIALS
The two types of inventory of materials are called physical inventory and
perpetual inventory. Physical inventory consists of the actual counting or
determination of the actual quantity of materials on hand as of a given date.
Perpetual inventory however, consists of the preparation of inventory cards
and their being kept up-to-date for each type of equipment or material used or
issued, and for the products completed or in the process of manufacture.
Exercises:
 1. The Balance Sheet of Allied Company is as follows:
Assets
Cash ------------------------------------------P10,000
Receivables -------------------------------- 12,000
Inventory---------------------------------------7,000
Capital expenditures---------------------- 20,000
Total ----------------------- P49,000
Payables -----------------------------------------P17,000
17
Notes Due --------------------------------------- 6,000
Long Term Debt--------------------------------3,000
Owner’s equity----------------------------------23,000
Total -------------------P49,000
What is its acid test ratio?
Cash + accounts receivable
Acid test ratio = -------------------------------------
Total amount liabilities
10,000 + 12, 000
= ----------------------------------------
17,000 + 6,000 + 3000
= 0.846

2. As of December 31, 2003 the balances in the ledger accounts of the

Eagle Manufacturing Co. were as follows:
Franchise ------------------------------------------------ 50,000
Inventories of goods and materials ------------------------ 132,840
Notes and Accounts payable ------------------------------- 85,490
Land ( original cost) ----------------------------------------- 150,000
Mortgages payable ------------------------------------------- 200,000
Declared and unpaid dividends------------------------------ 85,450
Cash On Hand and in the banks ---------------------------- ?
Notes and Accounts receivable ----------------------------- 87,630
Common Shares ---------------------------------------------- 300,000
Reserve for Expansion -------------------------------------- 112,500
Reserve for depreciation on buildings and plant ------- 42,870
 Reserve for depreciation on equipment ------------------ 76,190
PREPAID EXPENSES ------------------------------------------ 24,370
Buildings and Plant( original cost) -------------------------- 361,910
Equipment ------------------------------------------------------ 250,000
Preferred Shares ----------------------------------------------- 200,000
Undivided surplus ---------------------------------------------150,000
Accrued expenses (taxes, wages etc.) -------------------- 21,290
Advance Payment on orders from the company -------- 45,620
18
Determine the amount for “Cash On Hand and In the Banks” and
prepare a balance sheet.

Solution
EAGLE MANUFACTURING CO.
BALANCE SHEET
AS OF DECEMBER 31,2003

ASSETS

Current Assets
Cash On Hand and in the banks ----------------------X
Notes and Accounts receivable ------------------------87,630
Inventories of goods and materials -------------------132,840
Total Current Assets 220,470 + X
Fixed Assets
Land ( original cost) ------------------------------------ 150,000
Buil2dings and Plant( original cost) ----------361,910
Less reserve for depreciation----------------------42,870
319,040
Equipment ---------------------------------------- 250,000
Less reserve for depreciation on equipment --76,190
173,810
Total Fixed Assets 642,850
Prepaid expenses ----------------------------------------------------24,370
Other Assets

Franchises ----------------------------------------------------50,000
Total Assets 937,690 + X

LIABILITIES AND OWNERSHIP

LIABILITIES
Current Liabilities
Notes and Accounts payable ------------------------------- 85,490
 Declared and unpaid dividends----------------------------- 85,450
Accrued expenses (taxes, wages etc.) ------------------- 21,290

Total Current Liabilities 192,230

Fixed Liabilities
Mortgages payable ------------------------------------------- 200,000
Reserve for Expansion -------------------------------------- 112,500
Total Fixed Assets 312,500
Prepaid Income
Advance Payment on orders from the company ----------- 45,620
___________
Total Liabilities 550,350

19
OWNERSHIP
Common Shares ---------------------------------------------- 300,000
Preferred Shares ----------------------------------------------- 200,000

Undivided surplus ---------------------------------------------150,000

Total Ownership 650,000
Assets = Liabilities + Ownership
937,690 + X = 550,350 + 650,000
X = P262,660

3. . The Following Data were taken from a balance sheet of an electric

company as of December 31,2001. Prepare the Profit and Loss Statement for
the year 2001.
Gross Sales ------------------------------------------ 74,131
Bad Debts -------------------------------------------- 3,682
Salaries and Wages --------------------------------- 19,360
Advertising and social representation ------------ 3,562
Supplies and Postage ------------------------------- 793
Taxes and Insurance -------------------------------- 5,202
Depreciation of machinery ------------------------ 3,245
Depreciation of Distribution and Buildings ------- 2,503
Interest earned and other income --------------------5,460
Income Taxes ------------------------------------------- 1,462
Fuel oil and lubricants --------------------------------- 8,720
Repairs --------------------------------------------------- 7,320
Solution:
Income: Gross Sales ------------------------------------------ 74,131
Interest earned and other income --------------------5,460
Gross Income 79,591
Less: Bad Debts -------------------------------------------- 3,682
Net Income 75,909
Expenses: Salaries and Wages --------------------------------- 19,360
Advertising and social representation ------------ 3,562
Supplies and Postage ------------------------------- 793
Taxes and Insurance -------------------------------- 5,202
Depreciation of machinery ------------------------ 3,245
 Depreciation of Distribution and Buildings ------- 2,503
Income Taxes ------------------------------------------- 1,462
Fuel oil and lubricants --------------------------------- 8,720
Repairs --------------------------------------------------- 7,320

Total Expenses 52,167

Profit = Net Income – Total Expenses =
= 75,909 - 52,167 = P23, 742

3. Given the following:

Cash --------------------------------P41,012
Notes payable ------------------- 2,500
Accrued taxes ------------------- 2,950
20
Accounts receivable ---------- 30,300
Prepaid insurance ------------- 2,150
Accounts payable --------------11,500
Furniture and fixtures--------- 52,125
Reserve for depreciation-----21,000

Determine the ownership ( P88,637 )

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