Fundamentals of Accountancy, Business, and Management 02 by Mai ✴♡

ELEMENTS OF A STATEMENT OF ✩ ACCRUED EXPENSES - unpaid

FINANCIAL POSITION
★ Statement of Financial Position is also
known as the Balance Sheet which is the
summary of a company's resources,
obligations, and details of ownership.
It is a report based on the accounting
equation: Assets = Liabilities + Owners’ Equity.
★ ASSETS are resources with future benefits
which are within the company’s control.
✩ CASH - money owned by company
that are readily available to be spent on the
activities. It can be Cash on-hand (kept in the
premises of the business) or Cash in Bank (kept
for deposit or account checks).
✩ CASH EQUIVALENTS - are not
immediately available for use since it will
become cash within the next 90 days.
✩ RECEIVABLES - the company’s right
to claim or collect payment.
✩ NOTES RECEIVABLE - a legal
document of evidenced by promissory notes.
✩ INVENTORY - cost of merchandise
intended to be sold in normal course of
business.
✩ SUPPLIES - items that are to be
used on day-by-day activities of the company.
✩ PREPAID EXPENSES - advance
payment of future expenses. Expenses are
only recorded when purchased goods and
services are used.
✩ PROPERTY, PLANT, AND
EQUIPMENT - long term assets that are used
in operations of the company.
✩ INTANGIBLE ASSETS - similar to
PPE. For more than a year, these assets will be
used in the business. Ex: Brand & Trademark.
expenses of the company as of the cut-off date
of the SFP. Kinds: Salaries Payable, Utilities
Payable, Rent Payable, and Interest Payable.
✩ UNEARNED INCOME - a liability
payable in goods or services. Settled by the
delivery of goods or rendering of services.
✩ LONG-TERM LIABILITIES - due
dates falling more than one year from the date
of SFP.
★ EQUITY is the net assets of the business. It
is composed of the owner’s investments and
the accumulated net income of the company.
SFP has two acceptable formats:
✩ ACCOUNT FORM format, the assets
are on the left side and liabilities and equity
are on the right.
Company Name
Statement of Financial Position
As of Month/Date/Year
✩ REPORT FORM format, assets are
listed first followed by liabilities and third is
the equity account.
Company Name
Statement of Financial Position
As of Month/Date/Year

★ LIABILITIES are obligations of company

✩ PAYABLES - obligation to pay. It may
be Accounts Payable (to the suppliers of
inventories) or Notes Payable (evidenced by a
promissory note.
Fundamentals of Accountancy, Business, and Management 02 by Mai ✴♡

MULTI-STEP FORMAT OF PREPARATION OF

ELEMENTS OF A STATEMENT OF
COMPREHENSIVE INCOME
★ Statement of Comprehensive Income
has two sections: the income (increases the
assets and/or reduces the liabilities) and
expense (decreases the assets and/or increases
the liabilities, leading to a decrease in equity).
STATEMENT OF COMPREHENSIVE INCOME
A single-step SCI is commonly used by service
companies while the multi-step format is
commonly used by merchandising companies.
Company Name
Statement of Comprehensive Income
For the Year/Month Ended

REVENUE
✩ SERVICE INCOME - from the
rendering of services. Ex: Rental Income,
Professional Fee, and Tuition Fee Revenue.
✩ SALES - from selling of good. In
cases when goods are returned, it is under the
account name Sales Returns and Allowances. In
cases when suppliers give discounts to their
customers, the account title will be Sales
Discount. Both of these are Contra-Sales
✩ Net Sales is the difference between Sales
accounts.
Less Sales returns and Sales discount.
✩ Gross Profit is the difference between
EXPENSES
Sales less Cost of Goods Sold.
✩ COST OF GOODS SOLD (COST OF
✩ Net Income/Net Loss is the difference
SALES) - gathers the expense of the goods
between gross profit, less general and
sold. Includes inventory, shipping, and
administrative expenses less selling expenses
transportation expenses. This cost of shipping
(or operating expenses). If positive, it is net
is called Freight In.
income, when it is negative, it is a net loss.
Cost of products bought for resale uses
✩ Operating Expense refers to all other
the Purchases account. Two contra-Purchase
expenses related to the operation of the
accounts: Purchase Returns and Allowances
business.
and Purchase Discount.

Computation of Cost of Goods Sold

Fundamentals of Accountancy, Business, and Management 02 by Mai ✴♡
STATEMENT OF CHANGES IN EQUITY
★ Statement of Changes in Equity is a
report that reflects all the changes, whether
increases or decreases the owner’s interest in
the company during the period. It is prepared
prior to the preparation of the Statement of
Financial Position to be able to obtain the
ending balance of the equity to be used in the
SFP.
✩ SINGLE/SOLE PROPRIETORSHIP - it
is owned by only one person.
✩ PARTNERSHIP - owned by two or
more persons. Changes in the capital account
of each partner are reflected in the report. The
net income divided between partners is not
all the time equal, instead it will be based on
partners agreement and usually based on
their invested capital.
✩ CORPORATION - instead of using
owners, in the heading, it uses shareholders’
which denotes that it is a corporation.
Single/Sole Proprietorship
Partnership
Corporation
THE CASH FLOW STATEMENT (CFS)
★ CFS provides an analysis of inflows and
outflows of cash from/to operating, investing,
and financing activities. This statement shows
cash transactions only.
Cash flow is important in every corner of
every establishment and business; it
contributes to the sustainability and
performance of each industry and institution.
★ The Three Major Parts of CFS
✩ OPERATING - directly related to
main revenue-producing activities of company
such as cash from customers and cash paid to
suppliers/employees.
Examples:
- Cash paid for salaries or interest or
taxes or utilities.
- Cash received for services rendered.
- Cash paid for insurance on equipment.
✩ INVESTING - related to purchase or
sale of non-current assets (land, building,
equipment, furniture and fixture)
Examples:
- Cash received from sale of building.
- Cash received for interest on a note
receivable.
- Cash paid to acquire a new truck.
- Cash paid out to acquire a building.
- Cash paid to acquire equity securities.
✩ FINANCING - related to changes in
equity and borrowings
Examples:
- Cash loaned out to a customer in the
form of a long term note.
- Cash received from a debt for
representing payments of principal.
- Cash received from borrowings.
- Cash received from investments by the
owner.
Fundamentals of Accountancy, Business, and Management 02 by Mai ✴♡
★ CFS has two methods:
✩ DIRECT METHOD
a. Heading
i. Name of the Company
ii. Name of the Statement
iii. Date “for the” dapat
b. Sample of the Direct Method
i. First part is Operating activities
ii. Second part is Investing activities
iii. Third part is Financing activities
✩ INDIRECT METHOD
a. Heading
i. Name of the Company
ii. Name of the Statement
iii. Date “for the” dapat
b. Sample of the Indirect Method
i. First part is Operating activities
⋆ non-cash expenses are added back
while non-cash revenues are deducted.
⋆ gain/loss on sale of non-current assets
are deducted/added back because the
cash transaction is recorded under
investing activities.
ii. Changes in current assets and
current liabilities are either added or
deducted
1. increase in current assets - deducted to
net income
⋆ accounts receivable - increases
revenue which increases net income
but is not a cash transaction
⋆ prepaid expense - decreases cash but
does not change the net income
2. decrease in current assets - added to
net income
⋆ accounts receivable - increases cash
but does not change the net income
⋆ prepaid expense - increases expenses
which decreases net income but is not
a cash transaction
3. increase in current liabilities - added to
net income
⋆ accounts payable - increases
expenses which decreases net income
but is not a cash transaction
⋆ unearned income - increases cash but
does not change the net income
4. decrease in current liabilities -
deducted to net income
⋆ accounts payable - decreases cash but
does change the net income
⋆ unearned income - increases revenue
which increases net income but is not a
cash transaction
ANALYSIS OF FINANCIAL STATEMENT
★ the analysis helps the user make informed
decisions or judgments rather than rely on
guesses and intuition in the process of
decision making by effectively and
systematically using the financial data.
Fundamentals of Accountancy, Business, and Management 02 by Mai ✴♡

★ two phases involved: ✩ TREND ANALYSIS compares three,

four or five years’ financial statements. this is
✩ FIRST PHASE - compute the to determine the trends in the industry
differences, percentages, or rations 𝐶ℎ𝑜𝑠𝑒𝑛 𝑌𝑒𝑎𝑟
Formula: Percentage = 𝐵𝑎𝑠𝑒 𝑌𝑒𝑎𝑟
𝑥 100%
✩ SECOND PHASE - interpret the
results of the figures from the first phase

★ types of analysis

✩ HORIZONTAL ANALYSIS compares

the same account of two periods (current and
past year) determining the amount of changes
and computing its percentage change using
the base year as comparison
Formulas: Amount = Current Year - Base Year
Percentage = CY - BY
BY

✩ VERTICAL ANALYSIS shows the

relationship of each part to the whole in a
single financial statement. in the balance
sheet, each item is expressed as a percentage
of the total assets or total liabilities and
owner's equity. in the income statement, each
item is prescribed as a percentage of net sales.
Formulas: In balance sheet, ✩ FINANCIAL RATIO ANALYSIS
𝐴𝑚𝑜𝑢𝑛𝑡 𝑖𝑛 𝑌𝑒𝑎𝑟 describes the significant relationship between
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝑥 100%
𝐴𝑚𝑜𝑢𝑛𝑡 𝑖𝑛 𝑌𝑒𝑎𝑟 the numbers presented in the financial
𝑥 100%
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 & 𝑂𝐸 statement. ratios can be expressed either as a
In income statement, rate, percentage, or a proportion.
𝐴𝑚𝑜𝑢𝑛𝑡 𝑖𝑛 𝑌𝑒𝑎𝑟
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝑥 100%
Liquidity Ratio - calculates the company’s
current or quick assets against its outstanding
liabilities. a high ratio means the company has
low risk of defaulting payments.
Formulas:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
⋆ Current ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
⋆ Quick ratio =
𝐶𝑎𝑠ℎ + 𝑆ℎ𝑜𝑟𝑡 𝑇𝑒𝑟𝑚 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 + 𝑇𝑟𝑎𝑑𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
⋆ Receivable Turnover = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑟𝑎𝑑𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝐵𝑒𝑔. 𝑇𝑟𝑎𝑑𝑒 𝑅. + 𝐸𝑛𝑑. 𝑡𝑟𝑎𝑑𝑒 𝑅.
⋆ Average Trade Receivables = 2

⋆ Avg collection period turnover =

360 𝑑𝑎𝑦𝑠
𝑇𝑟𝑎𝑑𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
⋆ Avg collection period = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝑆𝑎𝑙𝑒𝑠
𝐴𝑛𝑛𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
⋆ Average Daily Sales = 360 𝑑𝑎𝑦𝑠
Fundamentals of Accountancy, Business, and Management 02 by Mai ✴♡

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑

⋆ Inventory Turnover = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
⋆ Average Inventory = 2
360 𝑑𝑎𝑦𝑠
⋆ Average sales period = 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
⋆ Working Capital = Current Assets - Current Liabilities

Solvency Ratio - also called leverage ratios,

measure a company’s ability to pay its
maturing long-term debts while sustaining
operations indefinitely.
Formulas:
⋆ Debt ratio = Total Liabilities - Total Assets
⋆ Equity ratio = 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 ✩ CHECKING ACCOUNT - otherwise
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 called current account. is money placed in a
⋆ Debt to equity ratio = 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
bank where the interest, if there is any, is lower
𝐼𝑛𝑐𝑜𝑚𝑒 𝐵𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑇𝑎𝑥𝑒𝑠
⋆ Times interest earned = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 than that of savings account it carries the
convenience of withdrawals through checks. a
Profitability Ratio - measure a company’s check book is issued by the bank to the
overall efficiency and performance based on depositor which can be used by the depositor
its ability to generate profit from operations as payment for certain goods and services. the
relative to its available assets and resources. amount of the check is drawn against the
Formulas: account.
⋆ Gross profit ratio = 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒
⋆ Operating profit margin = 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
⋆ Net profit margin = 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
⋆ Return on assets = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝐴𝑠𝑠𝑒𝑡𝑠 𝐵𝑒𝑔. 𝑜𝑓 𝑌𝑒𝑎𝑟 + 𝐴𝑠𝑠𝑒𝑡𝑠 𝐸𝑛𝑑. 𝑌𝑒𝑎𝑟
⋆ Average Total Assets = 2

TYPES OF BANK ACCOUNTS

★ a bank account is a record of clients set up

by the bank. before opening a bank account, a
client must fill up an information sheet
containing details: name, address, contact
number, date of birth, occupation family
details if any

★ Types Of Bank Account

✩ SAVINGS ACCOUNT - money placed

in a bank for safe keeping. evidenced by a pass
book issued by the bank with an account
number. it records all deposits and
withdrawals made by the client. automatic
close if no transaction in 3 months.
Fundamentals of Accountancy, Business, and Management 02 by Mai ✴♡

STALE CHECK is a check wherein the issue

✩ TIME DEPOSIT - otherwise called
certificate of deposit is a money placed in a
bank but unlikely a saving deposit, the
interest is fixed although higher. it has a
holding period or maturity date and there is
penalty if the fund is withdrawn prematurely
or before maturity date. this is evidenced by
certificate of time deposit.
date or the date of the check is past six
months or 180 days or more. not accepted by
the bank for deposits.
POST-DATED CHECK is a check dated at a
future date. this is not accepted by the bank
for deposit but can be as soon as the date
becomes current.

CASHIER'S CHECK is a secure payment

instrument issued by a bank or credit union.

TRAVELER'S CHECK issued by financial

institutions such as American Express.
generally used by people when travelling
foreign countries.

★ Bank Documents
PERSONAL'S CHECK a printed form that you
can write an amount of money on and sign in
✩ THE DEPOSIT SLIP - used by blank
order to make payment from your own bank
client or depositor if they want ro put money
account.
in the bank for safekeeping. it shows: deposit
date, depositor's name, depositor's account
Parties involved in transaction uses check:
number, and amount of check. the bank teller
1. DRAWER - the person who makes the
verifies the amount before recording in the
check
bank book.
2. PAYEE - recipient of the money
Example: The BDO Blue "Cash Transaction Slip"
3. DRAWEE - the bank or financial
institution where the cheque can be
✩ THE WITHDRAWAL SLIP - used by
presented for payment.
bank client if they want to withdraw or get
cash from their bank account. it shows:
★ a bank statement is a statement of the
withdrawal date, client's name, client's
depositor showing the movement of the
account number, and the amount
account. contains all transactions and may
Example: The BDO Red "Withdrawal Slip"
also indicate bank charges that were deducted
by the bank automatically.
✩ THE CHECK - issued by a person in
payment for goods and services acquired. is a
written order directing the person's bank to
pay a certain amount of money to be drawn
against the person's checking account upon
the bank's certification that the person's
signature on the check is authentic and that
the person has sufficient funds in his/her
checking account to cover the amount.
Fundamentals of Accountancy, Business, and Management 02 by Mai ✴♡
A sample of Debit Transactions:
1. BANK SERVICE CHARGE - monthly fee
charge by the bank for service (ex. cost
of printing checks, etc.)
2. NSF (Not Sufficient Fund) - a debit
memorandum when a deposited check
from a customer "bounces" because of
insufficient funds. nowadays, bank
refer to this as DAIF (Drawn Against
Insufficient Fund) or DAUD (Drawn
Against Uncleared Deposits)
A sample of Credit Transactions:
1. COLLECTION of cash proceeds from
notes receivables
2. INTEREST INCOME earned by the
deposit
★ Bank Reconciliation
as part of control, the bank statement received
from the bank is compared with the
accounting records of the business. together
with the bank statements, the bank will
include the copies of checks cleared or paid by
the bank for the particular month.
REVIEW QUIZ QUESTIONS
WHAT IS ASSETS?
- Something The Company Owns
WHAT ARE THE TWO TYPES OF ASSETS?
- Current Assets and Non Current Asset
ASSET WHEREIN IT EXPECTS TO REALISE
AND CONSUME WITHIN THE ACCOUNTING
PERIOD?
- Current Asset
WHAT ARE THE TWO TYPES OF
LIABILITIES?
- Short Term/Current Liabilities and Long
Term/Non-Current Liabilities
A LIABILITY WHEREIN IT
EXPECTS TO SETTLE THE LIABILITY
WITHIN THE ACCOUNTING PERIOD?
- Current Liabilities
WHAT IS OWNER'S EQUITY?
- Is an owner's investment in asset after
deducting liabilities
IS THE RESIDUAL INTEREST
OF ASSETS OVER THE LIABILITY?
- Owners Equity
IS AN EXAMPLE OF FINANCIAL RATIOS
AVAILABILITY OF CASH OVER THE LONG
TERM FINANCIAL OBLIGATION.
- Liquidity Ratio
IS A DEPOSIT ACCOUNT DESIGNED TO
SAFEKEEP MONEY BUT CAN'T ISSUE A
CHECK
- Savings Account
IS A LOW-RISK INVESTMENT WITH HIGHER
INTEREST RATES.
- Time Deposit Account
IS A TYPE OF DEPOSIT ACCOUNT THAT
ALLOW QUICK ACCESS TO YOUR FUNDS BY
ISSUING CHEQUES.
- Checking Account
IS A TYPE OF CHEQUES ISSUES IN PAYMENT
OF LOANS OR CREDIT UNIONS.
- Cashier's Check
REPRESENTS ALL THE COST THAT GO INTO
PROVIDING A SERVICE OR PRODUCT TO A
CUSTOMER.
- Cost of Goods Available for Sale
IS THE TOTAL MONETARY VALUE OF ITEMS
THAT ARE IN STOCK AND READY TO USE
OR SELL AT THE START OF THE
ACCOUNTING PERIOD?
- Merchandise Inventory Beginning
Fundamentals of Accountancy, Business, and Management 02 by Mai ✴♡

DECREASE TO OWNER'S EQUITY BY

IS THE VALUE OF GOODS STILL AVAILABLE WITHDRAWING ASSETS BY THE OWNER.
FOR SALE AND HELD BY A COMPANY AT - Withdrawals for Personal Use
THE END OF AN ACCOUNTING PERIOD
- Merchandise Inventory Ending STATEMENT OF COMPREHENSIVE INCOME
FORMULAS
THE MONEY YOU HAVE LEFT AFTER
PAYING FOR BUSINESS EXPENSES.
- Net Income/Net Profit

THE AMOUNT OF MONEY YOU BRING

HOME AFTER TAXES AND DEDUCTIONS
ARE TAKEN OUT OF YOUR PAYCHECK.
- Net Income/Net Loss

PROVIDES AN ANALYSIS OF INFLOWS AND Sales +

OUTFLOWS OF CASH FROM VARIOUS Less: Sales Returns and Allowances (-)
BUSINESS ACTIVITIES. Sales Discounts (-)
- Cash Flow Statement/Statement of Cash Net Sales xx
Flow
Purchases +
ACTIVITIES DIRECTLY RELATED TO MAIN Less: Purchase R and A (-)
REVENUE-PRODUCING ACTIVITIES. Purchase Discounts (-)
- Operating Activities Net Purchases xx

ACTIVITIES RELATED TO PURCHASE OR Net Purchases +

SALE OF PROPERTY. Add: Freight In +
- Investing Activities Delivered Cost of Purchase xx

ACTIVITIES RELATED TO CASH Merchandise Inventory, Beginning +

TRANSACTIONS TO CHANGES IN EQUITY Add: Delivered Cost of Purchase +
AND BORROWINGS Goods Available for Sale xx
- Financing Activities
Goods Available for Sale +
ALL INCREASE AND DECREASE TO Less: Merchandise Inventory, Ending (-)
OWNER'S INTEREST ON COMPANY DURING Cost of Sales or Cost of Goods Sold xx
THE PERIOD.
- Statement of Changes In Equity Net Sales +
Less: Cost of Sales or COGS (-)
THE VERY FIRST INVESTMENT OF THE Gross Profit xx
OWNER OF THE COMPANY.
- Initial Investment Gross Profit +
Less: Operating Expenses (-)
AN INCREASE TO OWNER'S EQUITY BY Net Profit or Net Loss xx
ADDING INVESTMENT BY THE OWNER.
- Additional Investment