University of Batangas

College of Business and Accountancy

 FINANCIAL MANAGEMENT
 It involves financial planning, asset
management, and fund raising decisions to
enhance the value of the business.
The most popular and acceptable definition of
financial management as given by S.C. Kuchal
is that “Financial Management deals with
procurement of funds and their effective
utilization in the business”.
 Financial management is an integral part of
overall management. It is concerned with
the duties of the FINANCIAL
MANAGERS in the business firm.
The goal of financial management could be synonymous to the goals of the
enterprise.

WHAT IS THAT GOAL?

“ To yield the HIGHEST POSSIBLE PROFIT FOR THE FIRM”

…..If we accept this answer, then

the company would be evaluating
each decision that make based
on the amount of income flowing
into the company.
In this case, the HIGHEST INCOME generating proposal would be the best choice.

However…….

While this approach may be simple and highly desirable, it does have some serious
DRAWBACKS OR DISADVANTAGES.
The First Drawback:

Changes in profit may also mean changes in risk. An enterprise with an earnings
per share ( EPS ) of say P150/ share may be less acceptable if its EPS would be
P175/share.

But deeper consideration of this would lead you to think that INTRINSIC RISK or
the risk that goes with those two alternatives increase.
The First Drawback:

Changes in profit may also mean changes in risk. An enterprise with an

earnings per share ( EPS ) of say P150/ share may be less acceptable if its EPS
would be P175/share.

But deeper consideration of this would lead you to think that INTRINSIC RISK or
the risk that goes with those two alternatives increase.
The Second Drawback:

The second drawback of MAXIMIZING PROFIT APPROACH is that it does

not fully take into account the timing when the profit/gain would be received.

Consider the matrix below :

Which is a better choice ?? Company ABC or Company XYZ????

COMPANY 2014 2015 Total

Earnings
Nico Corp Ordinary 300 450 750
Shares
Riel Corp. Ordinary 450 300 750
Shares
If the company’s framework of mind is merely maximizing profit, one may say that
they can invest in either Nico or Riel Corporation since the yield is the same.

However, Riel Corporation is definitely a better choice.

WhY???

Because, Riel Corporation’s benefits occur earlier. This means that you company
can reinvest the P150/share ( P450-P300) difference in earnings a year earlier than
if you chose to invest in Nico Corporation.
The Last Drawback:

The last drawback that one may experience using the MAXIMIZING
PROFIT APPROACH as the main goal of the company is the accurate
measuring of the key ingredients in this approach, which is PROFIT.

Why??

The reason is because, this is virtually impossible to achieve.

Why?
There are various economic and accounting definitions for profit.
Economic phenomena like inflation and deflation and foreign exchange
transaction variables complicate the matter.
If yielding the highest profit is not the primordial goal of financial
management or of the company, then what is ? The goal of Financial
management could be categorized as follows:

 MAXIMIZATION of the Value of the Firm ( Valuation Approach )

 MAXIMIZATION of Shareholders Wealth
 Social Responsibility and Ethical Behaviour
1. VALUATION APPROACH

The definitive gauge of performance is not the INCOME yielded but more
so how the YIELD are VALUED by the owners of the company.

What does this mean??

This means that the main goal of financial management is to maximize not
PROFIT alone, but the maximization of the overall value of the firm.
 Therefore in considering investment proposals or decisions, the financial
manager should not only consider profit, he/she must also consider
among other things the :

 Risk attached to the investment proposal or the company’s operation

 Time design as to when and how the profits will flow into the
company. ( Consider the example of Nico and Riel Corporation)
 The Quality and Reliability of the profits reported by the Firm.

A wise financial manager should, therefore, take into

consideration the impact of all these to the company’s overall
valuation. If a decision brings about a status quo or augments
the firms overall value, then the decision is acceptable
2. Maximization of Shareholders’ Wealth
It is the expansive goal of the firm. Managers have no direct
control of the market value of the firm’s stocks. The market value of stocks
may not be necessarily be high even if the company proves to be
profitable and stable.

Observe the data of NICO Corporation:

Year Shares Year end Net

Outstanding Income
Year 2010 100,000 P500,000
Year 2011 200,000 P600,000

You own 100 shares of Nico Corporation

 ANALYSIS :

EPS = Net Income/ Shares Outstanding

Year Percentage of Share of Net Income Earnings per Share
Ownership
Year 2010 100 shs/ 100,000 1% x P500,000 = P500,000/100,000 shs
shares = 1% P5,000 = P5/sh

Year 2011 100 shs/ 200,000 .5% x P600,000 = P600,000/200,000 shs

shares = .5% P3,000 = P3/sh

Interpretation : The company-wide profit increased by Conclusion : Since profits increased by P100,000,
P100,000 in 2011. Your share of net income decreasedyour share of net income decreased by P2,000 and the
by P 2,000. The EPS decreased by P2/share in 2011. company’s EPS diminished by P2/share, we can
Furthermore you suffered with other shareholders an therefore infer two things. First, that profit maximization
earning dilution despite the increase in total corporate does not necessarily mean stock value maximization.
profit And lastly, considering other things being constant, if
the company is truly concerned with the welfare of its
shareholders, it should focus on EPS rather than on
total company profits.
3. Social Responsibility and Ethical Behaviour

It is an issue to be considered. Can one reconcile the need of

the firm for wealth maximization and the need of the firm to be socially
responsible?

In most cases they can be reconciled. The firm by using measures that
would maximize wealth and company market value would be able to draw
more capital, help diminish unemployment and give services to the
community. However, this is not always the case. Salary distribution,
hiring practices, product safety, minority training, anti-pollution
measures, pricing of products sold may sometimes be inconsistent with
maximizing company value.
Financial management involves the prudent allotment and spreading of
company funds to current assets and non-current assets. An effective and
efficient Financial management entail the creation of a well-balanced
blend of financing activities and to formulate the suitable dividend policy
that is coherent with the firms business objectives.

Some of the general functions are :

Cash management, Inventory Management, Credit Management,

Disbursement Management, and Others
Responsibilities :

1.Forecasting and Planning

2. Making Crucial Investment and Financing Decision
3. Coordinating and Controlling
4. Trading in Financial markets
5. Risk Management
 Investment Risk
 Liquidity Risk
 Interest rate Risk
 Inflation Risk
 Purchasing Power Risk
 Management Risk
 “The first stage in the life
cycle of a business is
ORGANIZATION”
To engage in business, the options are :

1.) To buy or invest in an EXISTING BUSINESS

2.) To create a NEW BUSINESS

There are three basic forms of business organizations :
The oldest, most common, and
simplest form of business
1. Sole Proprietorship
organization. This is a form of
business entity where there is
only one owner.

This exists when two or more

persons combine their resources
2. Partnership to conduct business, earn profit,
and distribute among themselves
the results of operations.

This is a legal business entity

created by the government. It is
3. Corporation considered as separate and
distinct from its owners and
executives.
1. Sole Proprietorship
ADVANTAGES
Simplicity in decision making
( Overall control over the
business )
Easy and inexpensive to form
Subject to few government
regulations
DISADVANTAGES
Difficulty to come up with a
sizable amount of capital
The proprietor has unlimited
personal liability for the
payable or financial
obligations of the firm
The life of the company is
limited to the life of the
proprietor
1. Partnership

ADVANTAGES
Low cost and ease of
formation
Partners share responsibilities,
profit, and losses
Partners share time
commitment
DISADVANTAGES
Unlimited liability and limited
life
Difficulty of transferring
ownership since this would
lead to dissolution of the
partnership
Difficulty of amassing a large
amount of capital
1. Corporation

ADVANTAGES DISADVANTAGES
Unlimited life Complicated structures
Ease of transferability of Requires more time and
ownership money
Limited liability Higher overall taxes for the
business
The most common reasons for business failures include the following :

1.Bad or improper management practices

2. Poorly focused and executed marketing or inadequate marketing
3. Poor location
4. Failure to invest in new products and efficient technology

5. LACK OF ADEQUATE FINANCING!

Typically, partnerships are considered general or better known as unlimited
liability partnerships. This was discussed previously. However another type of
partnership exists, the LIMITED LIABILITY PARTNERSHIP (LLP).
Under this type, the partnership is composed of at least one general partner
and the rest are limited partners.

In this scenario, the limited partners do not have control in the company
operations. AS the name indicates, the limited partners are liable only for the
amount of their investments. This specific characteristics makes the LLP a
hybrid because although the firm is a partnership, it has the benefit of a
corporation-like firm where the owners are not obliged to pay debts with their
personal properties.
Whenever a person or group of persons ( principal ) employs another person
or group of persons ( agency ), to render service/s and at the same time
delegates decision-making authority to the agent, an agency relationship
exists. In Financial Management parlance agency relationships exists between
the 1.) company’s shareholders and managers, and between 2.) creditors
and owners.
 We know that a shareholder’s primary goal is wealth maximization. There
could be a conflict of interest if the manager is also a partial owner of the same
firm.

The manager’s primary goal is to maximize the size of the firm, and by doing
so he stabilizes job security for himself and for all the employees of the firm,
and ultimately, increase his position, status, perquisites, and salary,thus the
shareholder’s primary goal of wealth maximization might be set aside. It can be
argued that since there are mangers owning a small portion of the corporate
share they are hungry for salary increases and perquisites at the cost of
shareholders are not managers.
1. Stockholders versus Managers
•If the manager owns less than 100% of the firm's common stock, a potential agency
problem between managers and stockholders exists.
•Managers, at times, may make decisions that have the potential to be in conflict with the
best interests of the shareholders. For example, managers may grow their firm to escape
a takeover attempt to increase their own job security. However, a takeover may be in the
shareholders' best interest.

2. Stockholders versus Creditors

•Creditors decide to loan money to a corporation based on the riskiness of the company,
its capital structure and its potential capital structure. All of these factors will affect the
company's potential cash flow, which is the main concern of creditors.
•Stockholders, however, have control of such decisions through the managers.
•Since stockholders will make decisions based on their best interest, a potential agency
problem exists between the stockholders and creditors. For example, managers could
borrow money to repurchase shares to lower the corporation's share base and increase
shareholder return. Stockholders will benefit; however, creditors will be concerned given
the increase in debt that would affect future cash flows.
There are means by which managers can be persuaded to maximize the
company’s stock price or maximize wealth and act for the shareholders’ best
interest. HOWEVER, this would entail costs.

The COSTS could come in terms of audit costs which is geared towards
monitoring managerial actions, and restructuring the company that would
regulate undesirable managerial actions, The more control measures
employed by management gearing towards stock holders’ benefits, the higher
would be the agency cost.

It is crucial, that the amount of costs to be spent in assuring the managerial

actions are for the benefit of shareholders, be viewed and assessed just like
any other investment decision made by the company. Make sure that agency
costs should not exceed the return or yield that the company will gain from
implementing the control measures.
There are number of ways to encourage managers to perform for the interest of
shareholders. Some of them are :

1.Provide Performance-based Incentive Plans

• Provide managers with executive stock options ( privilege to acquire the
company’s share at a fixed price)
• Give Performance shares as incentives (based on achieving company goals)
• Criteria for effective performance :
• High EPS
• High Return on Assets
• High Return on Equity
• Economic Value Added ( derived by subtracting the cost of all capital (interest
expense among other things) from the net income after tax. If the EVA is
positive, the company is adding or making added value for shareholders. In
other words the higher the EVA, the more wealth is being created by
management for its shareholder. Negative EVA means management is ruining
value.
1. Straight Involvement by Shareholders ( Institutional ) – owns by institutions
2. Takeovers - Managers of the firm acquired by the shareholders are
terminated
CHAPTER II

Financial Statements Based on Philippine

Accounting Standards (PAS) # 1
Learning Objectives :

 Know and explain the definition and components

of the financial statements;
 Know and explain the relationship of the
components of financial statements; and
 Prepare the basic financial statements
Accounting is coined as the “language of Finance”

 The reason for this is its inherent nature of providing

financial information through the formal reports prepared by
accountants.

These formal reports are called….

“ FINANCIAL STATEMENTS”
According to PAS # 1, an accomplished collection of
financial statements would include the following :

 Statement of Financial Position ( Balance Sheet )

 Income Statement
 Statement of Comprehensive Income
 Statement of Change in Equity
 Statement of Cash Flows
 Notes to the Financial Statements
According to PAS # 1, an accomplished collection of
financial statements would include the following :

 Statement of Financial Position ( Balance Sheet )

 Income Statement (Profit and Loss Statement)
 Statement of Comprehensive Income
 Statement of Change in Equity
 Statement of Cash Flows
 Notes to the Financial Statements
The same PAS made changes in the titles of financial
statements in order to mirror their specific functions.

 The income statement presents the report on income and

expenses
 The statement of cash flows presents the movement of cash
to and from the company
 The balance sheet’s name is changed to statement of
financial position, because the word balance sheet does not
reflect what is found in the statement
OBJECTIVE OF FINANCIAL STATEMENT

The financial statement’s foremost objective is to provide

information concerning the financial position, performance
and cash flows of a company needed by various users in
making sound economic decisions.
1. STATEMENT OF FINANCIAL POSITION

It consists of the three elements making up the financial

position :

ASSETS
LIABILITIES
EQUITY
 “It shows what the company owes,what the company
owns, and what is left over”
Remember :
The basic accounting equation may be expressed as :
ASSETS = LIABILITIES + OWNERS EQUITY
a. ASSETS

 Assets are resources controlled by the entity as a result of past

transactions and events from which future economic benefits are
expected to flow in the entity
Two Classifications of Assets :
1. Current Assets ( less than a year to turn into cash)
 Assets are considered to be current :
1. When it is cash or cash equivalent
2. When the company intends to hold the asset for the purpose of trading it
3. When the company expects to realize the asset within 12 months
4. When the company expects to realize the asset or intends to sell or use it within the entity’s
normal operating cycl

2. Non-Current Assets ( more than a year to turn into cash)

 It take the residual definition. If the asset does not fall under the current asset then it
must be non-current.
b. LIABILITIES

 These are the present obligations of the from past transactions

or events, the payment of which is expected to result in an outflow
of economic resources or assets.
Two Classifications of Liabilities :
1.Current Liabilities ( can be paid in less than a year)
 Liabilities are considered to be current :
1. When the firm is expected to pay the liability within its normal operating cycle
2. When the firm holds the liability primarily for the purpose of trading
3. When the liability can be paid within 12 months

2. Non-Current Liabilities ( can be paid in more than a year)

 It take the residual definition. If the liabilities does not fall under the current liabilities
then it must be non-current.
c. Shareholders Equity and its Components

 It is the excess of the firm’s assets over the firm’s liabilities

Three Components of Shareholders equity:
1. Share Capital
 It consists of the issuance of the company’s own share at their par or stated value.
2. Reserves
It consists of issuance of the company’s own share above par/stated value or additional
paid in capital or sometimes called premium on share capital

2. Retained Earnings
This consists of among other things, the ACCUMULATED EARNINGS of the
company, prior period adjustment for errors, dividends declared/paid, effect of changes in
accounting policy and appropriated retained earnings.
INCOME STATEMENT AND ITS FORMS

This presents the result of the firm’s operation or performance

for a given time. Elements found in the statement consist of
REVENUE/SALES and EXPENSES
INCOME STATEMENT AND ITS FORMS

This presents the result of the firm’s operation or performance

for a given time. Elements found in the statement consist of
REVENUE/SALES and EXPENSES
STATEMENT OF COMPREHENSIVE INCOME

 It consists of gains and losses that are not included in the income
statement but are found in the equity section of the STATEMENT
OF FINANCIAL POSITION or more clearly at the STATEMENT
OF CHANGES IN EQUITY.

 You might ask, if these are gains or losses why then are they
not found in the income statement? Why are they found in the
equity section of the SFP?
 Statement of Comprehensive Income can be presented separately or
can be presented as an extension of the income statement.
STATEMENT OF RETAINED EARNINGS

 The results of the current year’s operation bring about changes in

the company’s retained earnings. These changes are disclosed in
the STATEMENT OF RETAINED EARNINGS. This statement
link the income statement results ot the SFP.

It is however important to note that this statement is NO

LONGER required to be prepared separately. This is because
the STATEMENT OF CHANGES IN EQUITY includes the
components of the statement of retained earnings.
STATEMENT OF CHANGES IN EQUITY

The developments or changes that occur in the shareholders’

equity are presented in the statement of changes in equity.

 The total or net comprehensive income

 Effects brought about by the changes in accounting policies or
correction of errors
 Investment transactions of owners and dividend paid to owners
 The beginning balance of each component in the statement of
changes in equity and the movements under them that brought
about the ending balances.
STATEMENT OF CASH FLOW

The summary of the OPERATING, INVESTING, AND

FINANCING activities of the firm is presented in the statement of
cash flows. This statement reconciles the beginning and ending
balances of cash and cash equivalents in the SFP.

 Cash flows refer to the movement of cash.

Cash inflow – receipts of cash (collection)

Cash outflow – disbursement of cash (payment)
Cash flow from OPERATING EXPENSES

 These are activities related in the generation of the PRINCIPAL

REVENUE of the firm.
 Principal revenue means the main source of revenue or income for
the company.

Example of cash flow from operating activities :

 Selling Activities ( Cash sales is a source of CASH INFLOW)

 Cash receipts from rental fees, service fee, professional fees, legal fees, tuition
fee, etc. ( CASH INFLOW)
 Cash used to pay Salaries, utilities, purchases, payables ( CASH OUTFLOW)
 Cash receipts or disbursement from securities kept by the company for dealing
or trading, They are like merchandise held for sale
( CASH INFLOW OR CASH OUTFLOW)
Cash flow from INVESTING ACTIVITIES

 These are cash flows from PURCHASING OR SELLING long

term assets and other long term investment.
 Sale or purchase wherein non-operating assets (assets other than
inventory) are involved.

Example of cash flows from investing activities :

 Cash disbursement used to buy buildings, plants, equipment, furniture,
and other assets ( CASH OUTFLOW)
 Cash receipts or payments from derivative transaction like future
contracts, options, swaps, and others.
( CASH INFLOW OR CASH OUTFLOW)
 Cash receipts or payments from selling or buying equity securities or
shares or debt instruments like bonds of other companies for shortterm or
long term purposes
( CASH INFLOW OR CASH OUTFLOW)
Cash flow from FINACING ACTIVITIES

 These are the company’s cash inflows or outflows involving

owners (equity financing) and creditors (debt financing).
 The borrowings fall under NON-TRADED PAYABLES

Example of cash flows from financing activities :

a. Cash receipts from issuance of the company’s ordinary shares and
preferred shares ( CASH INFLOW)
b. Cash disbursement used to pay acquisition of treasury shares or
redeemable preferred shares ( CASH OUTFLOW)
c. Cash receipts from issuing the company’s bonds or notes. (CASH
INFLOW)
d. Cash receipts from short term or long term loans payable, bank
payables, or mortgage payable ( CASH INFLOW )
e. Cash receipts used to pay bank loan and other forms of borrowings (
CASH INFLOW )
NOTES TO FINANCIAL STATEMENTS

 It is an auditor’s report. It includes information that are not

found on the face of the financial statements and have bearing
in interpreting the financial statements.
The notes to financial statements may include :

 Corporate/ Company information

 Basis of Preparing the Financial Statements and the
Statement of Compliance
 Summary of Significant Accounting Policies

( See Examples in the Book)

Quiz no. 1

Identification :

1.It is an auditor’s report.

2.This financial statement shows what the company owns, what it owes, and
what is left over
3.This financial statement measures the performance of the business
4.The basic accounting equation can be expressed as ___________.
5.A component of Statement of Owners Equity that shows the accumulated
earnings of the company
6. Obligations of a company which can be paid in less than a year
7. Resources of a company which can be turned into cash in a year or less
8. It is the decrease in the value of fixed assets
9. It is coined as the “ language of finance”
10. Formal reports that provide financial information to the company
Quiz no. 1

Enumeration:

11 – 15 Various users of Financial Statements

16 – 18 Three activities that show the movement of cash in a company
19 – 20 The two movement of cash in a company
 University of Batangas
College of Business and Accountancy
The preparation of the financial statements is not an end in itself
but is a beginning of a more important process.
The main purpose of financial statements is to guide USERS in
making informed, prudent, or sound economic decisions.
However, prior to making decisions, an essential process must
be done, that is TO MAKE THOROUGH ANALYSES of the
INFORMATION found in the financial statements.
There are many ways by which analyses can be done. Two of
them are :

 LONGITUDINAL EVALUATION OF THE FINANCIAL

DATA
 Involves horizontal comparison/contrast of the financial data
involving at least two periods
 ANALYSIS OF FINANCIAL RATIOS

 It can be pointed out that the analysis need not be on a PERIOD

TO PERIOD basis only, but could also involve COMPANY TO
COMPANY financial data analysis.
A credible financial statement analysis is a by-product of a good
kin analytic mind and the application of thorough research skills.

RESEARCH is important to account for and explain the results of

the analyst’s computations. This person is called the RESEARCH
ANALYST.

As analyst , you must be able to account for the increase and

decrease of items, which in your judgment is considered to be
salient. This means that you must be able to explain why these
increases/decreases occurred.
OBJECTIVES OF FINANCIAL STATEMENT ANALYSES

1) PROFITABILITY
 It refers to the ability of the firm to yield a sufficient amount of return
on company sales assets and invested capital. It also refers to the firm’s
ability to generate earnings vis-à-vis its expenses and other relevant costs
incurred during a specific period of time.

2) LIQUIDITY AND STABILITY

 Liquidity is also referred to as WORKING CAPITAL POSITION or
SHORT-TERM FINANCIAL POSITION. It is the ability of the firm to meet
or pay its current or short term maturing obligations.
OBJECTIVES OF FINANCIAL STATEMENT ANALYSES

3.) ASSET UTILIZATION OR ACTIVITY

 This pertains to how efficient the company is in managing its
resources. It also refers to the firm’s speed or pace in turning over
accounts receivable, inventory, and long term assets. This reveals the
frequency of the firm in selling its products or in collecting its
receivables. IN so far as fixed or long term assets are concern, it reveals
how the company uses their fixed assets to yield revenue.

4.) DEBT-UTILIZATION OR LEVERAGE

 This pertains to the overall debt status of the company, It measures
the degree of how the firm is financed. The debt is evaluated using
other variables like assets, equity, and earning power.
LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS

The primary purpose of financial statement analysis is to examine the

present, as well as the past, financial position (SFP), and results of
operations ( income statement ) of the firm in order to determine the
best suitable estimate and predict the future state and performance of
the company.

The inherent limitations are the following :

 It failure to consider changes in the purchasing power, inconsistencies

as well as dissimilarities in the accounting principles, policies, and
procedures used by firms in the industry
 It failure to consider changes in the purchasing power of currencies.
LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS

 The age of the financial statement is a limitation. The older it gets, the
less reliable it becomes, thus, considered as a risk management tool.

Failure to reads and understand the information in the Notes to the

financial statements my obscure in evaluating the degree of risk

 Financial statements that have not undergone external auditing

procedures may or may not conform with the Generally Accepted
Accounting Principles (GAAP) and standards thus, usage of theses
financial statements may lead to erroneous analysis, and ultimately
erroneous decisions
LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS

 Financial statements that have not undergone external auditing

procedures may prove to be inaccurate or worse, fraudulent hence, do
not fairly present the company’s financial condition. Financial
measurements from the analysis of these companies are not dependable
and not conclusive

 Audited statement do not guarantee accuract.

PRACTICAL STEPS PROPOSED IN ANALYZING FINANCIAL
STATEMENTS

1.Determine which of the following objectives, just discussed, would be

the coverage of the analysis. Is it to evaluate PROFITABILITY?
LIQUIDITY? ASSET ACTIVITY/ OR DEBT-UTILIZATION? Or All
of them?

2. The analysis may cover not only the subject firm but could involve
other firms belonging to the same industry. It would be wise to learn
about the RETROSPECTIVE, current, as well as the prospective
conditions of the industry. Other external variables that may have
significant effect on the industry may also be considered. This may
include economic and political variables.
PRACTICAL STEPS PROPOSED IN ANALYZING FINANCIAL
STATEMENTS

3. Get to know the firm you are analysing. Know their mission and
vision. Know their strategic plans. Know their current status in the
industry. Know their financial projections.

4.ASSESS/ ANALYZE the financial statements. One may employ the

following methods :

 Horizontal analysis – also known as dynamic measure or trend ratios.

This involves the comparison and measurement of financial statements of
two or more periods.
 Vertical analysis – also known as static measure or structural ratios. This
includes comparison of financial data for only one period. It involves
comparing and establishing the relationship of the components of the
financial statements.
PRACTICAL STEPS PROPOSED IN ANALYZING FINANCIAL
STATEMENTS

5. After finishing the “dirty” work of computing the trends and ratios,
comes the more important task. INTERPRET the results of the
computations and ratios.

6. Draw conclusions from the interpretations made in step 5. The

conclusions must take into consideration the objectives you have set up
in step number 1.
HORIZONTAL ANALYSIS OF COMPARATIVE STATEMENTS

In the field of accounting , it has been a requirement by the GAAP to

present comparative financial statements for the current year and the
previous year. For obvious reasons, this would facilitate comparison
of the company’s financial position and results of operation. This serves
as a sound start for analysing financial statements by horizontal
analysis.

In horizontal analysis, the balance of the accounts, in the financial

statements of the previous years is subtracted from the current year.
This would result to a CHANGE, either GROWTH or REDUCTION.
HORIZONTAL ANALYSIS OF COMPARATIVE STATEMENTS

The percentage of changes is computed as follows :

Percentage of Change = Amount of Growth , reduction or

change
/ X 100
Amount in the base year or
previous year
HORIZONTAL ANALYSIS OF COMPARATIVE STATEMENTS

Example :
HORIZONTAL ANALYSIS

a b c = a-b d = c/b x 100

Increase or decrease
2015 2014 Amount Percent

Cash 106,789.00 102,375.00 4,414.00 4.31%

Accounts Receivable 327,611.00 277,467.00 50,144.00 18.07%
Inventory 334,863.00 297,654.00 37,209.00 12.50%

a = current year
b = base year or previous year
c = amount of current year - amount of base year ( to get the increase or
decrease)
d = amount of increase or decrease / amount of base year or previous year x 100
(to get the percentage of increase or decrease)
HORIZONTAL ANALYSIS OF COMPARATIVE STATEMENTS

Example :
HORIZONTAL ANALYSIS

a b c = a-b d = c/b x 100

Increase or decrease
2015 2014 Amount Percent

Cash 106,789.00 102,375.00 4,414.00 4.31%

Accounts Receivable 327,611.00 277,467.00 50,144.00 18.07%
Inventory 334,863.00 297,654.00 37,209.00 12.50%

a = current year
b = base year or previous year
c = amount of current year - amount of base year ( to get the increase or
decrease)
d = amount of increase or decrease / amount of base year or previous year x 100
(to get the percentage of increase or decrease)
HORIZONTAL ANALYSIS OF COMPARATIVE STATEMENTS

Based on Sample Financial Statement of Riel Corporation, we can

have the following analyses, interpretations, and conclusions:

Liquidity and Solvency : To measure liquidity you can focus more

closely on the working capital items of the SFP.

Stability or LongTerm Financial Position : You can focus your

analysis by considering the capital structure.

Profitability and Operating Efficiency : Focus on income statement.

VERTICAL ANALYSIS USING COMMON SIZE STATEMENTS

Vertical analysis uses percentages/ratios that present the relationship of

the different accounts or items in the financial statements. The analyst
chooses a base figure or amount equal to 100 percent and calculates
each item’s percentage. For the SFL the base used is the total assets,
and for the income statement the net sales or revenue is the base. In
essence, vertical analysis presents the relative size of an account or item
in proportion to the whole ( which is the base ).

The common size statements are sometimes called component

percentage or 100 percent statements.
VERTICAL ANALYSIS USING COMMON SIZE STATEMENTS

Through the common size statements, management can have a better

understanding of the changes to total assets (for SFP) or net sales/net
operating revenue (for income statement) that have transpired from one
period to the next. This statement also aids management to assess their
financial position as well as the results of operation by comparing their
statements with other companies belonging in the same industry.
TREND ANALYSIS

A more longitudinal and a modification of the horizontal and vertical

analysis is the trend analysis.

 Under this method, the percentage changes are determined for several
successive periods instead of the typical two-year period horizontal
analysis
 This method is more thorough than the garden-variety- two period
horizontal analysis because it presents a view in the –long-run of the
company’s progression or regression as the case maybe.
 In computing the trend, the base period (oldest year) amounts are
written as 100%. The percentage relationship of each account in the
statement is then computed by dividing each amount by the base year
figure
 2011 2012 2013 2014 2015

Assets

Current Assets
Cash and Cash Equivalent 57,000.00 119,000.00 120,000.00 150,000.00 168,000.00

Assets

Current Assets
Cash and Cash Equivalent 100% 209% 211% 263% 295%

2011 - ( 57,000/57,000) = 100 %

2012 - ( 119,000/ 57,000) = 209%
2013 - ( 120,000/57,000) = 211%
2014 = (150,000/57,000) = 263%
2015 = ( 168,000/57000) = 295%
 University of Batangas
College of Business and Accountancy
 In order for a business entity to thrive in a highly competitive
environment, it is essential that a financial manager must be able
to PLAN AHEAD.
“FAILURE to PLAN is PLANNING to FAIL”
 Management must be flexible and make
adjustments in the company before relevant
events.

Relevant events : Inflation, Deflation, Recession, or New

Competition
To maximize the entity’s operation, meticulous
and thorough planning is indispensable.

Planning entails the creation of both short-range and long-

range objectives as well as seasonal financial targets
The financial targets or objectives are the bases
for developing the company’s financial plans
 Said financial plans shall function as a beacon
that would guide company operations.

The plans serve as a control mechanism or barometer to which

results of operations shall be measured.
The financial plan will also serve as guides in taking corrective
measures when needed.
CORPORATE PLANNING

 It is a formal , systematic, managerial process, that is

organized by responsibility, time and information to
assure that strategic planning, project planning, and
operational planning are carried out regularly to enable
top management to direct and control the future of the
company.
Three forms of Corporate Planning:

1. Strategic Planning
2. Project Planning
3. Operational Planning
1. Strategic Planning
This involves the creation of strategies that are aimed
in maximizing the entity’s future position taking into
consideration the various elements and factors that may
pervade the company’s internal and external environment.
A strategy is a design that integrates the corporate
objectives, policies and programs, in a well-developed
unified whole.
The company’s strategic plans serve as a control
measure that systematically distributes the scarce resources
of the entity in order to assure the best means of achieving
corporate objectives.
 The process of Strategic Planning involves
the TOWS:

 THREATS
 OPPORTUNITIES
 WEAKNESSES
 STRENGHTS
2. PROJECT PLANNING

It is sometimes called as CAPEX PLANNING. It

entails detailed plan involving acquisition of new
property, plant, equipment, creation of new
product, modification or acquisition of new
systems, and acquisition of new entities.
3. OPERATIONAL PLANNING

This is much concerned on how to efficiently and

effectively utilize the entity’s resources to achieve the
company’s short term and long term objectives set up during
strategic planning.
The Short term and long term plans are broken
down into the differential functional areas of management
( operations, marketing, finance, research, etc.)
Financial planning refers to the process of determining the best uses of the
financial resources of an organization to attain its pre-determined objectives, and
the procurement of the required funds at the least cost.
In planning the best uses of a firm’s resources, the different steps
followed are based on the following questions :

1. WHERE ARE WE NOW??? • This requires analysis of current

financial statements of a company
namely, its balance sheet, income
statement, and cash flow statement.
This is done to detect areas of
strengths and weaknesses as
indicated in the measures of liquidity,
solvency, profitability, and stability.
(Determine financial situation)
2. HOW DID WE GET HERE??? • This requires an interpretation of
historical data which may reveal the
cases of current stability or difficulty
as sufficiency or insufficiency of fund
inflows from operation, inability to
plough back earnings by declaring
higher portion annual net income as
dividends, and unprofitable
operations of some sub - units

(Evaluate financial goals; Assess Risk)

3. WHERE DO WE WANT TO GO??? • The different alternatives are
evaluated and the best choices made
considering the projected outcomes.
This requires financial projections
such as estimates of cash flows,
revenue, cost and expenses and the
resulting financial ratios

(Create, Implement, review, and revise

plans)
• The BUDGET is a form statement of
a plan presented in quantitative terms
usually in monetary.
• It involves quantifying of the plans in
terms of monetary value
• Usually prepared for one year
• The firms formed budget serves as a
barometer to which the results of the
daily operations of the company are
matched, coordinated, evaluated and
controlled.  REASONS FOR BUDGETING

o Planning
o Coordination ( synchronize)
o Control ( budget vs. actual results)
• A rolling budget may also
be done when a company
makes new budgets on a
monthly or quarterly basis.
• A budget manual may be composed of the following :

o Objectives
o Definition of Authority
o Responsibilities and duties of persons involved in
preparing the budget
o Procedures of budgetary control
o Time schedule for preparing the budget
o Form of Schedules
o Procedures in obtaining budget approval
o Form and nature of performance report
o Advantages of budgetary control
The different functional areas or sub-units of the firm have their
own budget, these budget are fused to form one company-wide
budget referred to as MASTER BUDGET.

A TYPICAL MASTER BUDGET SHOULD CONTAIN THE

FOLLOWING :

1.Operations Budget/Profit Plan ( revenue, expenses, profit_

2. Financial Resources Budget ( cash )
3. Capital Expenditures Budget (acquisitions, modifications)
4. Budgeted Financial Ratios (budgeted financial statements)
1. Formulation of the corporate objectives, plans, policies and assumptions,
which will give direction in the formulation of the budget estimates. This is
done by top management.

2. Establish or estimate sales projection or targeted sales. This will serve as a

basis in determining the targeted number of units (volume) to be sold.

3. Individual budget from different functional areas as well as sub units or

responsibility centers ( production , marketing, research, others) are
prepared based on the planned volume of units to be sold.

4. Consolidation of the individual budgets is done to create a draft master

budget. The corporate planning department can do this.

5. Revision of the preliminary drafted master budget is done to come up with

the final draft subject to approval of top management

6. Approval and dissemination of final master budget to department heads or

supervisors.
1. Establish or estimate sales projection or targeted sales. The sales
budget is considered as the cornerstone of budgeting.
2. Create the production budget schedule, which includes the raw materials
costs, direct labor costs, and overhead. This will help you determine the
gross profit.
3. Create the schedule for selling, administrative, and other expenses
4. Compute for the net income by preparing the pro-forma income statement
5. Create the pro-forma cash budget schedule where the estimated cash
receipts and estimated cash disbursements are presented.
6. From the pro forma income statement and cash budget schedule you can
now create the pro-forma statement of financial position
1) Sales Trend Analysis – under this method the product life cycle is used in
making the forecast
2) Sales Force Composite Method – under this method each salesman
estimates the sales in his particular territory.
3) Executive Opinion Method – under this method, the views of a number of
top executives are culled to arrive at estimated sales
4) Industry Trend Analysis – under this method the relationship between the
expected industry sales and the company sales in terms of market share is
determined
5) Correlation Analysis Method – scientific means of forecasting sales using
regression analysis
6) Multiple Approach Method – combination o the various methods
 It is important to mention that sales and income generation may not
necessarily mean that there is sufficient cash on hand to meet the financial
debts of the entity

Credit sales or charge sales generate revenue, however this transaction

does not generate immediate cash.

Because of this, we need to translate the pro-forma income statement into cash
flows. This can be done by dividing the budgeted income statement into smaller
time frames in order to appreciate the monthly trend of net cash flows.

The net cash flow is the difference between cash inflow and cash outflow.
Composed of detailed presentation of revenues, expenses, and
net profit. This takes form of the pro-forma or budgeted income
statement. The formation of this budgeted income statement
came about by the infusion of the different budgets on :

a.Sales
b. Production Volume
c. Cost of raw materials
d. No. of raw materials units to be purchased
e. Cost of direct labor
f. Factory overhead
g. Inventory levels
h. Cost of Good Sold
i. Selling Expenses
j. Administrative Expenses
k. Financing Charges
STEP 1 :

a. SALES BUDGET– it is the starting point of a company budget. It shows

an estimate of sales in units and dollars or peso for each major
subdivision of sales.

Example :

Estimate Sales :

Assumed Projected Sales of DVD and Blue Players ( first 6 months of 2016)

DVD Blue Ray Total

Estimated sales 300 units 600 units
volume
Estimated sales P2,000 P3,000
price per unit
Sales Revenue P600,000 P1,800,000 P2,400,000
STEP 2 :

a. PRODUCTION BUDGET– it is an estimate of the quantity of products that

should be produced in accordance with the sales budget.

Example :
Estimate production :
DVD Blue Ray Total
a. Assumed Stock of Beginning Inventory
Beginning Inventory 26 units 54 units
Cost per unit P1,067 P1,714
Total Cost P27,742 P92,556 P120,298
Desired Ending Inventory 30 units 60 units 90 units
(10% of estimated sales
volume-see previous table)
 b. Computation of the Estimated number of units to be produce

DVD Blue Ray Total

Estimated Sales Volume(+) 300 units 600 units

Desired Ending Inventory 30 units 60 units

(+)
Less: Beginning Invetory 26 units 54 units
(-)
Estimated Units to be 304 units 606 units
produced

Estimated Units to be produced = Estimated Sales + Desired Ending

Inventory – Beginning Inventory
After computing the estimated number of units to be produced, we now
compute for the COST of the estimated number of units to be produced

DVD Blue Ray

Raw material cost/unit P567 P629
Direct labor cost/ unit 867 1,214
Overhead cost/ unit 200 243
Total production cost/ unit P1,634 P2,086
 Computation of Estimated Production Costs

DVD Blue Ray

Total Production Cost/ unit P1,634 P2,086 Table 4
Multiplied by estimated units 304 units 606 units Table 3
to be produced
Total production cost P496,736 P1,264,116 P1,760,852

Total production Cost = Total Production Cost per unit x Estimated

units to be produced
After computing the production cost, we now compute the Cost of Goods Sold and Gross
Profit. We assume further that FIFO ( First IN First Out) is used in costing the company’s
inventory.

DVD Blue Ray

Sales Revenue P600,000 1,800,00 P2,400,000
Less : Cost of Good Sold :
Beginning Inventory (see Table 2) 27,742 92,556 120,928

Ending Inventory ( remainder)

DVD : 300 units – 26 units

= 274 units x P 1,634/unit 447,716
(see table 4)

Blue Ray : 600 units – 54 units

= 546 units x P2,086 1,138,956 1,586,672

Cost of Good Sold 475,458 1,231,512 1,706,970

Gross Profit P124,542 P568,488 693,030
 Computation of the cost of ending inventory

Beginning Inventory ( Table 2 ) P120,298

Production Costs ( Table 5 ) 1,760,852
Total Goods Available for Sale 1,881,150
( Beg. Inventory + Production Cost)

Less: Cost of Good Sold ( table 6) 1,706,970

Ending Inventory 174,180
STEP 3 :
You may now create a pro-forma financial statement , the income statement, using the accounts/amount
from previous computations :

INCOME STATEMENT
Sales 2,400,000
Less : Cost of Good Sold 1,706,970
Gross Profit 693,030
Less: Selling and Administrative Expenses( Assumed Figures) 350,000

Net Income before finance charges 343,030

Less: interest expenses( assumed figure ) 12,000
Net income before taxes 331,0130
Less: Income Tax ( 35%) 115,861
Net income after tax 215,169
Cash Dividends ( Assumed ) 15,000
Net income/ increase in retained earnings 200,169
The time value of money analysis is also called the discounted cash
flow analysis (DCFA).

Some of the situations that financial managers are tasked to do using

his/her skill in TVMA are :

1.Evaluating new project proposals which would entail cash inflow and
cash outflow
2. Assessing whether or not the company would need to acquire or merely
lease an equipment it may need for operation
3. Managing and valuing cash funds like sinking funds and bond
redemptions funds, pension funds, and employee benefits
4. Managing and valuing receivables specifically for banks having long-
term loan receivables handle
5. Managing an valuing long-term obligations like bond payable where
refunding a bond issued is concerned.
 Future Value
 Present Value
 Future Value of Ordinary Annuity
 Future Value of Annuity Due
 Present Value of Ordinary Annuity
 Present Value of Annuity Due
 The amount to which a cash flow or series
of cash flows will grow over a given
period when compounded at a given
interest rate. – Brigham, 2011
 It is the amount of money that will grow to
at some point in the future. –Cabrera, 2011
 FV = PV(1+i)n
 PV = Present Value / Principal
 I = interest rate
 n = Number of periods / term
 Compounding is the arithmetic process of
determining the final value of cash flow
or series of cash flows when compounded
interest is applied. – Brigham, 2011
 Simple Interest occurs when interest is
not earned on interest. – Brigham, 2011
 Compound Interest occurs when interest
is earned on prior periods’ interest. –
Brigham, 2011
 Mr. Lopez invest P10,000 at 5% annual
rate for 2 years. How much will be the
Maturity value?

 0 1 2

Periods
PV = 10,000 FV = ?

 F = P(1+rt)
 = P10,000(1.1)
 = P11,000
 Mr. Lopez invest P10,000 compounded at
5% annual rate for 2 years. How much will
be the Maturity value?
0 1 2

PV = P10,000 FV= ?
 FV= PV(1+i)n
 PV = Present Value
 i = interest rate
 N= number of years / time
0 1 2

PV=P10,000 P10,500 P11,025

 PV = 10,000
 i = .05
 N= 2

 FV= PV(1+i) FV = PV(1+i)

 =P10,000(1+.05) = P10,500(1.05)
 = P10,500 = P11,025

 FV = PV(1+i)n
 = P10,000(1.0250)
 =P 11,025 the maturity value after 2 years
 FV= PV(1+i)n
 PV = P10,000
 i = .05
 N= 2
 FV = P10,000(1.10250)
= P11,025
 The value today of a future cash flow or series of cash
flows. –Brigham, 2011
 It is the amount of money today that is equivalent to a
given amount to be received or paid in the future. –
Cabrera, 2011
 it is just a reverse of the future value, in a way that instead
of compounding the money forward into the future, we
discount it back to the present.
 PV = F V

(1+i)n
 FV = Future Value
 i = interest rate
 n = number of years
 Suppose you need P50,000.00 to buy laptop next year.
You can earn 10% on your money by putting it on the
bank. How much do you have to put up today?
0 1

PV =? FV = $50,000
 PV= FV
(1+i)n
 = P50,000
(1+.10)1
 = P45,454.545 the amount needed to invest today
 Suppose you need P50,000.00 to buy
laptop next year. You can earn 10% on
your money by putting in on the bank. How
much do you have to put up today? (table
2)
 PV= FV
(1+i)n
 FV = P50,000 i=.10 n=1
 PV = P50,000 (.090909)
=P45,454.5
 FUND
MANAGEMENT

CHAPTER 7
 To some people, the term cash management conjures up images
of placing in cash a bank for safe keeping. Interestingly enough,
the field of cash management has broadened considerably. Cash
concepts and techniques are applied to a wide range of activities
and situations outside the cash parlance alone. As it goes
beyond, cash becomes more important than just merely receiving
and placing it in a bank and disbursing it. There are lot of good
reasons why one has to manage cash well.
 1. First, it is the core of the business operation, regardless of what
type and form of business they re into.
 A. Sole Proprietorship

 B. Partnership

 C. Corporation

While the types of business organization are:

a. Service Concern

b. Trading Concern

c. Manufacturing Concern

2. Second, it is the asset that is most susceptible to theft and abuse

thus, may cause many business failures. and;
3. Lastly, this can be a good source of additional income aside from
normal operation. Just make sure that when you manage the fund,
your focus is on maximizing earnings while minimizing the risk.
 Cash on hand
 Cash in Bank
a. Savings account
b. Demand deposit
c. Combo Account
 Cash Fund
a. Petty Cash
b. Change Fund
c. Dividend Fund.
 Cash Equivalent
a. If the term is three months less, such instrument is classified as
cash equivalent
b. If the term is more than three months but within one year, such
investments are classified as short term or temporary investment
and should be presented as separate current asset; and
 If the term is more than one year, such investment is classified
as non-current or long-term investment. However, if such
investment will be mature within a year, then this will be
considered as current asset.
Normally Banks have the following products.
1.Overnight placements
2.Weekly time deposit
3.Monthly time deposit or 30-day time deposits
4.60 days, 90 days, 180 days, one year, 2 years, 3 years etc
5.Trusts
Government Securities
1.Treasury Bills
2.Treasury Notes
3.Treasury warrant
4.Treasury Bond
1. Cash flow Liquidity Cash & cash equivalents Gauges the firms ability
Ratio + Trading Securities + to pay current financial
Cash Flow from obligations by
Operating considering cash and
Activities/Current other cash equivalents.
liabilities

2. Days Cash Average Cash Indicates the ability of the

Balance/Cash Operating firm to pay the average
Cost/ 365 days or 360 daily cash obligations.
days
 Those investments that the company made long terms, one year maturity and
onwards, are no longer included in the above ratio and thus makes sense.
 The breakdown of the cash and cash equivalents must have been:

1. Cash on hand
2. Cash fund
3. Cash in banks
4. Investments with less than one year maturity
There is one more that you have to learn in cash in banks and shown in the
balance sheet. This does not include cash in bank with negative balances as
these banks with negative balances will be shown as part of current liabilities
not assets. Best practices of the some companies whom we have aged for
many years.
Company 1
1. All collections will be deposited in one account to control purposes. The
account is a combo account with Security Bank Corporation. The combo
account of the bank is very convenient because it is documented with a
passbook, which will show the deposits made and the ckecks that cleared for
the day.
2. We maintained a Daily Cash Position Report (DCPR). The DCPR will show how
much the collection were still undeposited and how much of the checks issued
were still unreleased as well as how much were not yet encashed. Checks not
yet encashed at the bank are what we call outstanding ckecks.
3. Excess cash will be placed in an overnight time deposit.
4. Should there be any excess cash, it wil, be placed in a weekly time deposit
yhen monthly, and to some extent long term placement.
II.How do we value cash?

 Cash is valued at face value. For cash

denominated in foreign currency, like the
US dollar, Japanese yen,etc. this should
be converted to current rate. If the deposit
is placed in a bank having financial
difficulty, the face value should be written
down to estimated realizable value.
III. How do we document cash?
Documenting cash is essential for it is in this way that we are
assured that our cash is properly documented with evidence to support
the transactions as it is entered in the books of accounts.
1.Provincial Receipt
a) Normally, this receipt is issued by collectors,. Whether cash or check
collection. This provincial receipt should be surrendered by the collector to
the office cashier every day.
b) This receipt will also be issued by the office cashier in case of check
payments. This is so bacause check payments require 3 clearing days with
bankin g system.

Ideally, this provisional receipt must be in triplicate.

a. The original must be given to the person paying.
b. The duplicate must given to the cashier together with the collectors
remittance form.
c. The triplicate will be left in the booklet for reference. When the booklet is fully
used up, this booklet will be surrendered to the office for safekeeping and
reference for audit purposes only.
2.Official Receipt
a. This receipt is issued by the office cashier in case of cash
payments.
b. This will be issued whenever the collector remits the cash
collection to the office cashier.
c. This will also be issued for check collections for which a
provisional receipt was issued having passed the three-day
clearing period.

Ideally, this official receipt must be in triplicate.

a. The original must be given to the person paying
b. The duplicate must be given to ythe accounting
department for recording.
c. The triplicate will be left in the booklet is fully used up, this
booklet will be surrendered to the accounting department
for filing and for audit purposes only.
Sales Invoice
a. The original must be given to the customer.
b. The duplicate must be given to the accounting
department for recording.
c. The triplicate will be left in the booklet for the
cashier’s copy. When the booklet is fully used up,
this booklet will be surrendered to the accounting
department for filing and for audit purposes only.
Daily Collectors Remittance form
a. The original copy together with the duplicate will
be submitted to the office cashier
b. The duplicate copy will be copy furnished without
the duplicate copy of the provisional receipt to
the accounting department for recording
purposes and audit purposes.
1. What are the information necessary so that the various cocerns of
the control aspects could be addressed:
a. Date
b. Serial number
c. Is it thru manual operation or mechanical operation
d. Purpose

2. How big will these forms be

3.Filing
4.Distribution
5.The resposible employees who will handle it.

After knowing the environment of cash, we can

now establish the control mechanism so that this
portion of the company’s asset will not be abused.
These are the ff.control measures so that will not be
abused.
1.The VP for Finance should establish the
policy on cash handling.
2. From the policy established, the head of
the accounting department should
prepare the procedure.
3. The implementation of the procedure is
subject to the review and audit by the
internal audit group or department so that
continuous improvement on the control
mechanism may be done to address the
continuous and fast changing technology
of the company.
Collectors collect the Customers, as an alternative,
receivable of the company may pay directly to the office

The Cashier receives the money

from collectors and customers

The Junior Accountant

will journalize the receipt Depository Bank
transactions

The General Accountant will

The accounting supervisor will record the transaction. He will
check the entry and later on receive the bank statement and
check the bank reconciliation prepare the bank
statement reconciliation
POLICY ON CASH HANDLNG
 The company should adopt the imprest system of handling cash

 The company should maintain the combo account for easier tracking of
banking transaction
 The company should place its money in various banking companies so as to
distribute the risk involve in banking.
 The following bank signatories will be observed

a. If the amount of the disbursement is 50,000 and below he ff. will be the check
categories;
The Comptroller or head of the accounting department and to be
countersigned by Treasurer or VP Finance
b. If the amount of the disbursement is more than 50,000 the ff. will be check
signatories;
the Comptroller or head of the accounting department and o be
countersigned by the treasurer or the president.
 Official receipts can only be issued when
cash is received.
 All Funds should be kept and maintained
by the office fund custodian. For the petty
cash fund, the custodian should request
replenishment once the fund is at least
40% used to avoid disruption of operations
due to insufficiency of the fund.
 The cashier upon receiving cash from the customer or the
company collector will issue an official receipt
 The cashier will also issue an official receipt to check deposits
that are already cleared in the banking system.
 The cashier will deposit the cash collector 12noon of the
current day intact within the day and money collections after
12noon will be deposited intact the ff. banking day.
 The cashier will then prepare the daily cash position report.
 The official receipt issued together with the validated deposit
slip and the original copy of the daily cash position report will
then be forwarded to the accounting department for file and
the preparation of the appropriate accounting entries and
eventually entry in the books account.
 LAPPING- Case of misappropriating a collection from one
customer and concealing this defalcation by applying a subsequent
collection made from another customer. This involves series of
postponements of entries on collection of a receivable and is made
possible because of poor internal control.
 KITTING- Happens when a check drawn from one depository bank
and deposited in another depository bank at the end of the month
year. There will be no entries made on this drawing and depositing.
As a result, the cash in a depository bank increases to cover the
shoratge while on the other depository bank, it has not yet posted
the check deposited to other bank.
 FRAUDULENT DOCUMENTS AND EVIDENCE. Some
employees will make documents and pieces of evidence which are
not really true.
 Managing cash means control and direction. Without your in-depth
knowledge of the cash environment. With the fast phase changing
technology, each company must be competitive and ready to address
the barrier that will come across the operating firing line. The
resources, cash and equipment must be placed in its proper
perspective so that the company is ready to attack its competitor with
high degree of ethical standards of doing business.
Some good practices in managing cash:
 Establishing good relationship with the bank officer. This is a key to
getting better interest rates time deposits.
a. Overnight placement. Just place your excess money during the
day to an overnight placement and terminate it the following day. In
such case, you have maximized the earning potential of the
company’s money.
b. One week time deposit placement. The reason for this is that the
excess money could earn more while waiting for releasing of check
payments to creditors and payees.
c. enter into a 30-day short term investment- depending on the cash needs of the
company. Under this classification, you could either get a treasury bill or
treasury warrant or a treasury note. There are two basic differences between a
time deposit and that of the government notes:
1. The time deposit is a product of the bank and the liability is the bank while the
government securities are government product coursed thru the banking system
eventual selling and are the liabilities of the government.
2. The time deposit is covered by the Philippine deposit insurance coverage of
250,000 while the government notes are covered and backed up by the
Philippine Government.
3. The interest of a time deposit can be received at the date of maturity while the
interest from government securities can be received at the date of placement.
d. If we have any excess cash, while waiting for bigger investment yield, we can
place it in a ling term investment in time deposit that will yield bigger interest
and assured of a steady rate return of our money.
e. If we have found a good permanent investment that will make better yield, then
you can pre terminate and invest it in that higher yielding investment portfolio.
 Identifying the various books where these cash transactions were recorded in
comparison with the various reports prepared.
 Routine audit procedures to countercheck the books and reports there is the
employee’s duties, so that there will be no overlapping of functions and strict
adherence to company’s policies and procedures.
 The presentation of strategic planning(more than 1-3 year planning)

 The preparation of a medium-term development plan( 3-5 years planning)

 The preparation of a long term development plan.(more than 5 year planning an

consider the future of the company in carrying its mission/vision)
The last three practices require a detailed study and therefore it must be done
thoroughly by having more meetings and conferences until we are able to make
one.
Maintaining good relationship with the bank could benefit the company in many
ways.
BILL PURCHASE- Is a form of discounting, but again if have a good liason with
the bank officer this can be waived. Bills purchased would ony mean that the
bank can make your check deposit good as cash deposit so you can use it
immediately for your options.
EARMARKING- Is an old term used many yeasr back. Now the new term used
in the banking system is confirmation of deposit. When you have doubts on
the dated check you are holding on whether it is funded or not you may call
your bank and ask it to confirm the check. Your bank will then confirm your
check deposit with the bank of the payor so you will be assured that the check
deposit will not bounce.
BOUNCING CHECK- Means that the time check you received was not funded
and therefore will not be cleared in the banking system.
The increased knowledge and the fast phased changing technology makes our
generation a little comfortable in managing our cash.
The Security bank and trust company for
example is offering the DIGI Banker. This
product offers the company direct access
to their account with the bank. So instead
of asking our staff to queue in the bank
daily, we can make transfer in the comfort
office.
Cash, as an account title, must be known and used in an oredrly
manner.
 In managing cash, you have to learn the different bank accounts
to open and funds to set up. In this way, you will maximize the
various advantages of these things and minimize the risks of
mishandling cash.
 In managing cash, documents are must because accounting is
object
 In managing cash, people should be oriented about its role in
the account. Their duties and responsibilities are vital for the
achievement of the company’s goal of minimizing risk and
maximizing opportunities
 In managing cash, the company should have good
representation with banking and financing companies so that it
can get the best investment opportunities.
Chapter 8
 Cash

Receivable

Inventory
 Sole proprietorship- owned by one person only and
owner is called proprietor or proprietress
 Partnership- owned by two or more person and the
name of the owners are partners.
 Corporation- owned by five or more persons and the
owner is called corporator. If the corporation is a stock
corporation, the owner is called stockholder or
shareholder. If the corporation is a non-stock
corporation, the owner is called member.
Service concern- those that render
services to earn income
Trading concern- those that sell
merchandise to earn income
Manufacturing concern- those that
convert raw materials into finish
product.
 Supplies(the same control mechanism with
that of the service concern
 Merchandise inventory- those items that the
company purchased and intended for sale to
its customers.
 Raw materials inventory- these are the
materials, which the company purchased and is
for use in the production
 Work in process inventory- these are the
partially finished products at the end of the
month.
 Finished goods inventory- these are products
already finished, ready to be sold to customers.
Beginning inventory Purchases

Goods available
For sale

Ending Inventory Cost of goods sold

(Balance sheet) (Income Statement)
 Under-stocking – this is a serious problem as this can result in the
the following:
Missed deliveries
Lost sales
Unsatisfied customers
Production bottlenecks and worst, work stoppage
 Overstocking- these are the possible effect of this:
Holding cost might be too high
Funds could have been used for a more productive venture thus
improving operating performance
 Timing of order
 Size of order
To effectively manage the inventory one must have the following:
 A system to keep track of the inventory on hand and on order
 A reliable forecast of demand
 Knowledge of lead time
 Reasonable estimates of inventory holding cost, ordering cost
and shortage cost
 Classification system for inventory
The Supplier
The accredited supplier of choice
must be objectively selected by the
committee so that quality raw materials
can be easily procured.
The Freight charges
F.O.B destination- this contract says that the
supplier will deliver the merchandise inventory
from the supplier’s warehouse free of charge.
F.O.B shipping point- this contract says the
supplier will deliver the merchandise inventory
from the supplier’s warehouse to the shipping
point only.
 C.I.F- This means Cost, Insurance, Freight-
Under this agreement, the buyer will pay the
lump sum amount of cost of goods to the
dock next to alongside.
 Ex-ship- A seller who delivers the goods ex-
ship bear all expenses and risks of loss until
the goods are unloaded at the time title and
risk of loss pass to the buyer
 Cost of goods Suggest the number of
Merchandise times average inventory
turnover sold/Average was disposed of during
merchandise that accounting period.
It also signifies the over
inventory or under investment of
the firm in their
inventories

Cost of goods sold 2,208,520

Average merchandise Inventory 316,259
Inventory Turnover 6.98 times or 7
times
Number of Days 365 days or 360
in Inventory days Inventory
Turnover
Indicates the number
of days by which
inventories are used
or sold. Implies the
firm’s efficiency in
consuming or selling
inventories

No. of days in a year 365

days
Divided by inventory turnover 7
times

Therefore the number of days in inventory is 52.14 days or

roughly 52 days
Those merchandise owned by the business enterprise and are
for sale.
The merchandise inventory, end is that merchandise that was left
unsold at the end of the year and this is reflected in the balance sheet of
the company.
Merchandise not owned by the business enterprise but in its
physical possession.
Goods on Consignment. This is a marketing strategy wherein
another company will display its product for sale in another company.
Although the merchandise is in the possession of the consignee and for
sale by the consignee in his store, the ownership of the merchandise is
still with consignor if unsold at the end of the accounting period.
Purchase Commitment
Purchase commitments are obligations of the company to
procure merchandise inventory in the future which are already
fixed by a contract as far as the price and quantity are concerned.
Cost of goods Sold
Merchandise inventory, beginning- This is the merchandise
inventory, end of the last accounting period and the same time the
merchandise inventory, beginning for this period.
Purchases- This is the account discussed earlier.
 Freight in- This the freight charges recognized by the
company resulting from the freight agreement of FOB
Shipping Point
 Purchase Discount- This is the discount availed of by
company by paying early.
 Purchase Returns and allowances- This is the account
for our purchases which we have returned to our
supplier for whatever reason.
 Purchaser- this is the staff that procures the inventory.
 Warehouseman- This is the staff that received the merchandise and
safekeeping it at the warehouse, and issues to the store whenever there
is a need or when the customer is ordering it.
 Stock card clerk- This is the staff, usually an accounting clerk, who
records the receipt and issuances made by the warehouseman.
 Bookkeeper- This is the staff that records the purchases made by the
purchaser and as received by the warehouseman.
 Auditor- This is the staff that checks the inventory in the warehouse,
the documents that supports the purchases, the books where these
transactions were recorded and later summarized in the financial
statement
 Accounting Forms are internal forms
used by a business organization. These forms
are intended in order to have a consistent
application of various transactions and in
return can attain comparability of our
financial figures in the future.
 LIFO- This inventory method is used
because of the changed behavior of the
consuming public.
LOANS AND RECEIVABLE
MANAGEMENT
 PAS 39 DEFINES LOANS AND RECEIVABLE AS ‘NON-
DERIVATIVE FINANCIAL ASSET WITH FIXED OR
DETERMINABLE PAYMENTS THAT ARE QUOTED IN AN
ACTIVE MARKET’. RECEIVABLES ARE FINANCIAL ASSETS
THAT REPRESENTS A CONTRACTUAL RIGHT TO RECEIVE
CASH OR OTHER FINANCIAL ASSET FROM ANOTHER
ENTITY OR CUSTOMER.
 TRADE RECEIVABLE- THIS IS NORMALLY SUPPORTED BY A
CREDIT INVOICE ISSUED BY THE COMPANY AND HAS
CREDIT TERMS. THE CREDIT TERMS STATED IN THE INVOICE
ARE THE BASIS OF THE ACCOUNTING DEPARTMENT ON
WHETHER CUSTOMER’S ACCOUNT IS NOT YET DUE OR PAST
DUE ALREADY. THIS WILL ALSO BE THE BASIS FOR
RECOGNIZING AN IMPAIRMENT LOSS ARISING FROM
RECEIVABLE ACCOUNT.
 NOTES RECEIVABLE- THIS IS SUPPORTED BY A FORMAL
PROMISE TO PAY IN THE FORM OF A NOTE.

 LOANS RECEIVABLE- THIS IS RECEIBABLE ARISING FROM

BANKS AND OTHER FINANCIAL INSTITUTION.
 TRADE DISCOUNT- A DISCOUNT THAT IS NOT RECORDED IN THE
BOOKS OF ACCOUNTS. THIS IS THE DISCOUNT GRANTED TO A
CUSTOMER BECAUSE OF THE BULK ORDER THAT THEY MADE. THIS
IS NORMALLY EXPRESSED IN TERMS OF PERCENTAGE AND WILL
ENCOURAGE OUR CUSTOMERS TO BUY IN COMMERCIAL QUALITY.
REMEMBER THE MORE OUR CUSTOMER BUY THE BIGGER THE
DISCOUNT THAT THEY GET.
 CASH DISCOUNT- THIS IS THE DISCOUNT RECORDED IN THE BOOKS.
THIS IS THE KIND OF DISCOUNT THAT YOU CAN SEE IN YOUR
INCOME STATEMENT IN O ORDER FOR YOU TO COME UP WITH NET
SALES. THIS WILL ENCOURAGE OUR CUSTOMERS TO PAY ON TIME
BECAUSE IF THEY PAY EARLY OR WITHIN THE CREDIT TERMS THEY
CAN AVAIL OF THE DISCOUNTS
 SALES RETURN-THESE ARE THE GOODS WHICH THE CUSTOMERS HAVE
PHYSICALLY RETURNED. THIS MAY BE A MATTER OF WRONG SHIPMENT OR
WRONG DELIVERIES OF MERCHANDISE, THUS THE MERCHANDISE WERE
PHYSICALLY RETURNED TO THE COMPANY OR A SUB-STANDARD MERCHANDISE
WERE DELIVERED TO THEM.
 SALES ALLOWANCES-THESE ARE THE GOODS WHICH WERE DELIVERED TO
CUSTOMERS BUT DEFECTIVE. FOR THIS REASON THE COMPANY AGREES TO
REDUCE THE RECEIVABLE ACCOUNT FROM THESE CUSTOMERS BY GRANTING A
SALES ALLOWANCE. INSTEAD OF PHYSICALLY RETURNING THE MERCHANDISE
THE CUSTOMERS AGREES TO ACCEPT DELIVERY AT REDUCE PRICES.
 THE FORMULA:

TOTAL CREDIT SALES/AVERAGE ACCOUNTS

RECEIVABLE
 CREDIT AND INVESTIGATION PERSONNEL-
EVALUATORS OF THE CUSTOMERS CREDIT
FACILITY. NORMALLY, THESES ARE THE STAFF
THAT WILL GO AND INSPECT THE SITE OF THE
BUSINESS APPLYING FOR A CREDIT FACILITY AND
CHECK IF THE BUSINESS IS REALLY THERE AND
EVEN OBSERVE HOW TRANSACTIONS WERE
PERFECTED DURING THE DAY. THEY WILL ALSO
ASK THE FINANCIAL STATEMENT OF THE COMPANY
APPLYING FOR SAID CREDIT FACILITY AND
ANALYZE LATER ON THEIR PAYING CAPABILITIES.
IN THIS WAY, RISK OF UNCOLLECTED RECEIVABLES
IS MINIMIZED.
 THE SALES REPRESENTATIVE- THESE ARE THE
PERSONNEL THAT SELL THE PRODUCTS OF THE COMPANY.
THEY ARE THE ONES THAT HAVE FACE TO FACE CONTRACT
WITH THE CUSTOMERS AND MOTIVATE THEM TO MAXIMIZE
THEIR CREDIT FACILITY. THESE ARE THE TIMES WHEN THE
SALES REPRESENTATIVES HAVE VESTED INTEREST AND
COULD EXTEND CREDIT BEYOND THE MEANS OF THE
CUSTOMERS.
 THE COLLECTORS-THESE ARE THE PERSONNEL THAT
COLLECT THE ACCOUNTS FROM THE CUSTOMERS. JUST
LIKE WITH THE SALES REPRESENTATIVES, COLLECTORS
ARE TO BE TRAINED ALSO. THEY SHOULD BE PUNCTUAL IN
COLLECTING THE RECEIVABLE.
 THE CASHIERS-THESE ARE THE PERSONNEL THAT RECEIVE
MONEY FROM THE CUSTOMERS WHO MADE THE PAYMENT
AT THE OFFICE AND THE MONEY COLLECTED BY THE
COLLECTORS.
 THE BOOKKEPPERS-THESE ARE THE PERSONNEL THAT
RECORDS THE MONEY RECEIPTS RECEIVED BY THE CASHIER
AND THE COLLECTOR. THE RECORDING WILL BE BASED ON
THE RECEIPT ISSUED BY CASHIER AND THE COLLECTORS.
THE BOOKKEPER WILL ASLO CHECK ON THE VALIDATED
DEPOSIT SLIP AS EVIDENCE.
 THE AUDITOR-THIS IS THE STAFF THAT CHECKS THE
ACTIVITIES RELATED TO RECEIVABLES. SUCH OBSERVATION
MUST BE PROPERLY REPORTED TO THE MANAGEMENT SO
THAT IT COULD ACT IMMEDIATELY.
 PLEDGING- THIS IS A WAY WHEREIN OUR COMPANY CAN OBTAIN CASH
USING THE COMPANY’S RECEIVABLE AS A PLEDGE OR A COLLATERAL
SECURITY FOR SUCH LOAN PAYMENT. WITH THE NEW LOAN, BUSINESSES
ARE USING ITS LEVERAGE IN ORDER TO MAKE MORE BUSINESS
TRANSACTIONS THEREBY ENHANCING ITS OPERATING SURPLUS.
 ASSIGNMENT- THIS IS A FORMAL TYPE OF PLEDGING SINCE SPECIFIC
ACCOUNTS RECEIVABLES WILL SERVE AS COLLATERAL. ASSIGNMENT
COULD EITHER BE ON NON-NOTIFICATION OR ON NOTIFICATION BASIS.
UNDER THIS TECHNIQUE , THERE ARE TWO PARTIES CONCERENED IN THIS
AGREEMENT AND THEY ARE
a. ASSIGNEE THE LENDER
b. ASSIGNOR THE BORROWER
 FACTORING- UNDER THIS METHOD THE COMPANY IS ACTUALLY
SELLING ITS ACCOUNT RECEIVABLE TO A FACTOR.

FACTORING COULD EITHER BE

A.CASUAL FACTORING- IS A CASUAL SELLING OF ASSETS WHEREIN
THE DIFFERENCES BETWEEN THE SELLING PRICE AND THE BOOK
VALUE OF THE ASSETS SOLD REPRESENTS GAIN OR LOSS.
B.AS A CONTINUING AGREEMENT- THIS ARRAGEMENT WOULD MEAN
THAT THE FACTOR ASSUMES THE CREDIT FUNCTION AS WELL THE
COLLECTION FUNCTION OF THE COMPANY.
C.CREDIT CARDS- CUSTOMERS MAY USE THEIR CREDIT CARDS IN
PURCHASING VARIOUS MERCHANDISE FROM THE COMPANY.
Thank you