Topic 2

Foundation of
Management Accounting

CCMAC
CO
Manageri
al
Accounti
ng

to your 2ND Module

Modulmodule!

This module is a
combination of
synchronous &
asynchronous
learning
and will last for 3
weeks
Pretest will be given
via
Google Form in
asynchronous test
C_Overview

Yves A. Mortillero, CPA, Erp

Course Coach

No part of this module may be reproduced

in any form without prior permission in
writing from the Instructor.
 FOUNDATION OF FINANCIAL MANAGEMENT
Topic 2 OUTLINE

MODULE DURATION 

I. Synchronous Meeting and Asynchronous Learning For asynchronous learning inquiries, you may reach me through the
messenger group or may send an email to mortilleroyvescdm@gmail.com
II. For asynchronous learning inquiries, you may reach me through email (mortilleroyvescdm@gmail.com)

LEARNING OBJECTIVES

After completing this module, you are expected to:

I. Develop knowledge in the different financial analysis and techniques
II. Apply the different techniques for decision making
III. Appreciate the usefulness of the different financial techniques

INPUT INFORMATION 

Module 2      
  

LEARNING ACTIVITIES

1. Group discussion during a synchronous meeting

2. Asynchronous Learning
Individual activity:

OL & NOL Students: 

Evaluate the company’s financial position and results of operations using the Comparative Statement Analysis, for
Golden Garments Inc., found in page 12 of this module?
Compute the trend percentages for the Statements of Financial Position and Income Statement and evaluate
company’s short-term solvency, long term financial position and profitability using the percentages , page 15.

Collaborative activity:

OL & NOL Students: 

ASSESSMENT/EVALUATION

I. Synchronous Test with a time limit.

A long test link will be provided through our group chat. This is a synchronous test with a time limit.

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 II. Asynchronous Learning

ASSIGNMENT

    Collaborative Work (Progressive Final Project): Use the Group Collaboration Learning Portfolio.

Progressive Requirement:

Deadline: 

LEARNING RESOURCES

Management Accounting , 2014 by Ma. Elenita Balatbat Cabrera , BBA MBA CPA CMA

Disclaimer: The contents of this module was taken entirely from the official text reference. It was just re written, presented to cope
with the change of time due to the COVID 19 Pandemic which affected the World in AY 2020.
It is not the intention of the Coach to take any credits from this module presentation.

Online resources:


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 Foundations of Management Accounting
MODULE 2

INTRODUCTION

Financial statements and their accompanying notes contains a wealth of useful information regarding the financial position of a
company, success of its operations, the policies and strategies of management, and insight into its future performance. A financial
statements users can find answers to the following sample questions through analysis of the data presented therein together with
other data gathered by corporate financial reporting.

 How well does the company compete in its operating environment?

 Would an investment generate attractive returns?
 Should existing investment holdings be continued or liquidated?
 Will cash flows be sufficient to meet interest and principal payments?

Basic Financial Statements

 Statement of Financial Position (Balance Sheet) – which shows the financial position – assets, liabilities and owners equity of
the firm on a particular date such as at the end of quarter or year.
 Income or earnings statement (Profit or Loss) – which represents the results of operation –revenues, expenses, net profit or
loss, for accounting period.
 Statement of changes in Equity - which summarizes the changers in a company’s equity for a period of time (generally one
year)
 Cash Flow Statement – which provides information about the cash inflows and outflows from operating, financing and
investing activities during an accounting period.

Conceptual Framework for the Preparation and Presentation of Financial Statements

Accountants prepare financial statements by applying a set of standards or rules referred to as financial reporting standards. Consistent
application of these standards permits comparisons between companies and between years of a single company. Financial reporting
standards allow for significant latitude in how certain transactions should be accounted for, meaning that professional judgment is
particularly important.

Qualitative Characteristics of Accounting Information

In order to justify providing accounting information, the benefits which may be derived from the use of this information must exceed the
costs of providing the data. There are several cost of providing information, including: (1) costs of collecting, processing, and
disseminating; (2) cost of auditing; (3) costs associated with dangers of litigation and loss of competitive advantage; and (4) cost to the

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user for analysis and interpretation. Also, there are benefits to the preparers of the information as well as to the users. These benefits
include improved access to capital markets and favorable impact on public relations.

THE STATEMENT OF FINANCIAL POSITION

The statement of financial position shows the financial condition or financial position of a company on a particular date. The statement
is a summary of what the firm owns (assets) and what the firm owns to outsiders (liabilities)and to internal owners (Stockholder’s
Equity).

Illustrative statement of Financial Position (Table 2.1)

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THE INCOME STATEMENT

Regardless of the perspective of the financial statement users – investors, creditor employees, competitor, supplier, regulator– it is
essential to understand and analyze the earnings statement. But it is also important that the analyst realizes that a company’s report of
earnings and other information presented on the income statement are not complete nor exact barometer of financial performance. The
income statement is one of many pieces of a financial statement package.

Earnings are measured on an accrual rather than a cash basis, which means that income reported on the income statement is not the
same as cash generated during the accounting period.

The income statement comes in two basic formats and with considerable variation in detail presented. The earnings statement in a
multiple-step format, provides several intermediate profit measures – gross profit, operating profit, and earnings before income tax-prior
to the amount of net earnings for the period. The single step version of the income statement groups all items of revenue, then deducts
all categories of expenses to arrive at a figure for net income.

Table 2.2

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THE STATEMENT OF CHANGES IN EQUITY

As prescribed in PAS I, an enterprise should present as a separate component of financial statements, along with the traditional
financial statement showing:

 The net profit or loss for the period

 Items of income (including gain) and expense (Including loss) which are recognized in equity, as required by his standard, and
the total of these items;
 The cumulative effect of changes in accounting policy and the correction of fundamental errors;
 capital transactions and distribution with/to owners of the enterprise;
 the balance of accumulated profit or loss at the beginning of the period and at the statement of financial position date, and the
movement for the period; and
 a reconciliation between the carrying amounts of class of equity capital, share premium and each reserve at the beginning and
the end of the period

Table 2.3

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THE CASH FLOW STATEMENT

The Cash Flow Statement, required by the PAS 7, provides information about cash inflows and outflows during an accounting period
segregated according to operating activities, investing activities and financing activities.

An enterprise should report cash flows from operating activities using either:

 Direct Method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or
 Indirect method, where net income or loss is adjusted for effects of transactions of a non cash nature, any deferrals or
accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or
financing cash flows.

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Table 2.4

Cash Flows from Operating Activities

These include cash effects of transactions and other events that enter into the determination of income such as delivery or production
of goods for sale, providing services, operating expenses and other income and expenses.

Operating activities are principal revenue- producing activities of an enterprise and include delivering or producing goods for sale and
providing services. In general, cash flows that relate to, or are the corollary of, items reported in the income statement are operating
cash flows.

Cash Flows from Investing Activities

These includes cash effects of transactions involving acquiring and selling or otherwise disposing of (a) securities that are not cash
equivalents and (b) productive assets that are expected to benefit for long periods of time; and lending and collecting on loans.

Cash Flows from Financing Activities

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These include cash effects of transactions involving borrowing from creditors and repaying the principal; and obtaining resources from
owners and providing them with a return on the investment.

Financing activities include obtaining resources from and returning resources to owners as well as obtaining resources through
borrowings (short or long term) and repayments of amounts borrowed.

Financial Statement Analysis – Part 1

Financial Statement analysis involves careful selection of data from financial statements for the primary purpose of forecasting the
financial health of the company. This is accomplished by examining trends in key financial data, comparing financial data across
companies, and analyzing key financial ratios. Another important aspect of financial analysis is the comparison of actual financial
conditions with expected financial conditions/ Expected conditions may be represented by (1) predetermined standards (2) past
performance, or (3) competitors’ performance or industry average..

Objectives of Financial Statement Analysis:

Managers, investors, and lenders analyze financial statements to identity an organization’s financial strengths and weaknesses.

1. They tell what has happened during a particular period of time, most users are concerned about what will happen in the future.
2. Current shareholders or owners, concerned about their investment income as well as about the company’s overall profitability,
stability and sound capital structure.
3. Potential investors are interested in “sold” companies, one whose financial statements indicate stable earnings and dividends
with limited or moderate growth.
4. Short term creditors are interested in a firm’s short run liquidity, its ability to pay current obligations as they mature.
5. Long term creditors are concerned about the long term security of their interest income and the company’s ability to maintain
successful earnings and cash flows to meet continuing financial commitments.

General Approach to Financial Statement Analysis:

A general approach to financial statement analysis will be based on each analytical situation and it should be tailored to meet the
specific user objectives:

 Background study and evaluation of firm industry, economy, and outlook.

Since economic developments and the actions of competitors affect the ability of any business enterprise to perform
successfully, it is necessary to start analysis of a firm’s financial statements with an evaluation of the environment in which the
firm conducts business.

 Short term solvency analysis

This refers to the analysis of the company’s ability to meet near-term demand for cash and normal operating requirements.
Some of the indications that a company enjoys a satisfactory short term solvency position are:

a. Favorable credit position

b. Satisfactory proportion of cash to the requirements of the current volume
c. Ability to pay current debts in the regular course of business
d. Ability to extend more credit to customers
e. Ability to replenish inventory promptly

 Capital structure and long term solvency analysis

This pertains to the evaluation in the amount and proportion of debt in a firm’s capital structure to assess its ability to service
debt. This will also cover the analysis of the use of financial leverage to maximize the returns to the owners. A company is
generally considered enjoying a satisfactory long-term financial position if it is able to:

a. Maintain as well balanced relationship between borrowed funds and equity

b. Effectively employ borrowed funds and equity
c. Declare satisfactory amount of dividends to shareholders
d. Withstand adverse business conditions

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 e. Engage in research and development to provide new products or improve old products, methods or processes.
f. Meet their commitment to borrowers and owners.

 Operating Efficiency and portfolio analysis

This involves the evaluation of how well assets have been employed by management in terms of generating revenue and
maximizing return on such resources. Some indicators of managerial efficiency in the use of the resources are:

a. Ability to earn a satisfactory return on its investment of borrowed funds and equity
b. Ability to control operating cost with reasonable limits
c. Optimum level of investment in assets

Steps in Financial Statement Analysis:

In analyzing financial statement the following steps may be fallowed.

1. Establish objectives of the analysis

2. Study the industry in which firm operate and relate industry climate to current and projected economic development.

3. Develop knowledge of the firm and the quality of management.

4. Evaluate financial statement using any of the techniques below

a. Horizontal Analysis of comparative Statement (Increase decrease method)

b. Trend Percentage

. c. Common size financial statements

d. Financial ratios

The major areas that may be covered in the analysis are:

a. Short term solvency

b. Capital structure and long-term solvency
c. Operating efficiency and profitability
d. Segmented analysis (when relevant)

5.Summarize findings based on analysis and reach conclusions about firm relevant to the established objectives.

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Limitations of Financial Statement Analysis

These limitations are:

1. Information derived by the analysis are not absolute measures of performance in any and all of the areas of business
operations. They are only indicators of degrees of profitability and financial strength of the firm.
2. Limitations inherent in the accounting data the analyst works with. These are brought about by among others: (a)
variation and lack of consistency in the application of accounting principles, policies and procedures, (b) too-
condensed presentation of data, and (c) failure to reflect change in purchasing power.
3. Limitations of the performance measures or tolls and techniques used in the analysis. Quantitative measurement are
not absolute measures but should be interpreted relative to the nature of the business and in the light of past, current
and future operations.
4. Analyst should be alert to the potential for management to influence the outcome of financial statements in order to
appeal to creditors, investors, and others.

Horizontal Analysis of Comparative Statements (Increase-Decrease Method):

A good place to begin in financial statement analysis is to put statements in comparative form. Significant changes in financial data are
easier to see when financial amounts for two or more years are placed side by side in adjacent columns. Year to year comparisons for
the same company are useful especially if reported changes are expressed in percentages, The study of percentage changes in
comparative statements are called horizontal analysis. Computing a percentage change in comparative statements requires 2 steps,
namely:

1. Compute the peso amount of the change from the base (earlier) period to the later period, and
2. Divide the peso amount of change by the base-period amount. This is not done however, if the base year figure is
negative or zero.

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Figure 2.5 ( Source : Management Accounting 2014 by: Elenita Balabat Cabrera, BBA,MBA CPA,CMA)

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Required:

Evaluate the company’s financial position and results of operations using the Comparative Statement Analysis

Trend Percentages

Trend percentages are index numbers showing relative changes in financial data resulting with the passage of time. Trend percentages
state several years’ financial data in terms of a base year.

Purpose:

Information on how a company currently stands in relation to the past can be readily obtained by converting certain selected data into
percentages. Trend percentages or relatives to the base year emphasize changes in the financial and operating data between specific
dates or periods and make possible a horizontal analysis and study of comparative financial data.

Computation and Evaluation:

1. In the comparative statements that choose to be used as the base and convert the amount of each item to
100%. The base year may be the earliest year involved in the comparison, the latest year or any intervening
year. Generally the base year should be representative of the normal operating activity of the firm.
2. Compute the percentage relationship that each statement item bears to the same item in the base year by
simply dividing each value by the base year.
3. Compare the trend of related financial and operating data as to form an opinion as to whether favorable or
unfavorable tendencies are reflected by the data.

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Figure 2.6 Financial Activities using trend percentages (Management Accounting 2014 by Ma. Elenita Balatbat Cabrera )

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