Lesson # 3 Statement of Changes in Equity (SCE)

Most Essential Learning competencies

The learner prepares an SCE for a single proprietorship

STATEMENT OF CHANGES IN EQUITY

a. Revenues – service income, sales

b. Expenses – salaries expense, depreciation expense

c. Income – revenues less expenses (amount found at the bottom of the SCI)

d. Assets – inventories, prepaid expenses, property, plant and equipment

e. Liabilities – accounts payable, unearned income, long-term debt,

STATEMENT OF CHANGES IN EQUITY – All changes, whether increases or decreases to the owner’s
interest on the company during the period are reported here. This statement is prepared prior to 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 –An entity whose assets, liabilities, income and expenses are centered or
owned by only one person
PARTNERSHIP – An entity whose assets, liabilities, income and expenses are centered or owned by two or
more persons
CORPORATION – An entity whose assets, liabilities, income and expenses are centered or owned by itself
being a legally separate entity from its owners. Owners are called shareholders or stockholders of the company

Initial Investment – The very first investment of the owner to the company.
Additional Investment – Increases to owner’s equity by adding investments by the owner

Withdrawals –Decreases to owner’s equity by withdrawing assets by the owner

 Different parts of the Statement of Changes in Equity
a. Heading
i. Name of the Company
ii. Name of the Statement
iii. Date of preparation (emphasis on the wording – “for the”)
b. Increases to Equity
i. Net income for the year
ii. Additional investment
c. Decreases to Equity
i. Net loss for the year
ii. Withdrawals by the owner
Company can earn a lot, have numerous assets and yet have very small equities. This is a common mistake of
most people. They focus on increasing their income (salary) and assets (house, car, appliances) but at the same
time they also increase their liabilities (buying using loans, debts). This results to low levels or even negative
amounts of equity over their properties.
The importance of taking note of how much equity do owners have over the company assets or even over their
own personal belongings.
Quiz # 5
1. Which form of business organization puts the least risk on its owners?
2. Which form of business organization is owned by only one person?
3. Increases in owner’s equity without additional investment
4. Decreases to owner’s equity apart from net effect of revenues and expenses.
5. The very first investment of the owner to the company.
6. Beginning owner’s equity amounted to P 300,000. Net loss for the year totaled P 45,000. No
additional investments and withdrawals for the period. Compute for total increase in equity for the year.
7. Ending owner’s equity amounted to P70,000. Additional investments during the year amounted to
P30,000. Withdrawals totaled P50,000. Compute for the company’s net income for the year assuming
beginning equity is P10,000.
8. Owner, Juan invested an initial capital amounting P50,000 in order to put up his janitorial services
company. During the first year of operations (2016), the company had a loss of P25,000. Because of
this, Juan invested additional capital amounting to P50,000 in 2017. In the second year (2017), the
company had a net income of P100,000 and Juan withdrew P10,000 for personal use. Compute for the
ending capital balance of Juan for the year 2017.
9. Owner Juana invested P100,000 to start her laundry business. During the first year of operations
(2016), the company had a net income of P15,000. Juana invested additional P100,000 to grow the
business. In 2017, the business earned P50,000. As of December 31, 2017, Juana’s capital balance is
P200,000. How much is Juana’s withdrawal?
10. The following balances were retrieved from the records of Juan’s Janitorial Services for the year
ended December 31, 2016: (Prepare the Statement of Changes in Equity)
Capital, January 1, 2016 P 500,000
Withdrawals 100,000
Additional Investments 50,000
Net Loss 45,000
 Lesson # 4 Cash Flow Statement (CFS)
Most Essential Learning competencies

The learner…

1. discuss the components and structures of a CFS

2. prepare a CFS

Accrual - the accumulation or increase of something over time, especially payments or benefits.
Depreciation - is an accounting method of allocating the cost of a tangible or physical asset over its
useful life or life expectancy. 

a. Accrual – accrued income, accrued expense

b. Depreciation – equipment, furniture, building

CASH FLOW STATEMENT – Provides an analysis of inflows and/or outflows of cash from/to
operating, investing and financing activities (This statement shows cash transactions only compared to
the SCI which follows the accrual principle.

Importance: The CFS provides the net change in the cash balance of a company for a period. This helps
owners see if their revenues are actually translated to cash collections or if they have enough cash inflows
in order to pay any maturing liabilities.

a. Receipts from customers - derived from the following formula:

Ending Accounts Receivable = Beginning Accounts Receivable + Net Sales – Collections

Therefore: Collections (receipts from customers) = Beginning Accounts Receivable + Net Sales or Net Revenue –Ending
Accounts Receivable
b. Payments to Suppliers and Employees – derived from the following formula:

Ending Accounts Payable and Ending Accrued Salaries Expense = Beginning Accounts Payable + Beginning Accrued Salaries
Expense + Net Purchases + Salaries Expense - Payments

Therefore: Payments = Beginning Accounts Payable + Beginning Accrued Salaries Expense + Net Purchases + Salaries
Expense – Payments

Direct – The operating cash flow section of the CFS under the direct method would show each major
class of gross cash receipts and gross cash payments

Indirect – The operating cash flow section of the CFS under the indirect method will reconcile the net
income/loss of the company with the total cash flows generated/used in operating activities by adjusting
the net income/loss for effects of non-cash transactions

Emphasize that the two are only approaches and will yield the same amount of cash flow from operating activities. Note that
the Investing and Financing sections of the CFS are the same under the two approaches.

Different parts of the Cash Flow Statement

Operating Activities – Activities that are directly related to the main revenue-producing activities of the
company such as cash from customers and cash paid to suppliers/employees

Investing Activities – Cash transactions related to purchase or sale of non-current assets

Financing Activities – Cash transactions related to changes in equity and borrowings.

Net change in cash or net cash flow (increase/decrease) – The net amount of change in cash whether it
is an increase or decrease for the current period. The total change brought by operating, investing and
financing activities.

Beginning Cash Balance – The balance of the cash account at the beginning of the accounting period.

Ending Cash Balance – The balance of the cash account at the end of the accounting period computed
using the beginning balance plus the net change in cash for the current period.
a. Heading

i. Name of the Company

ii. Name of the Statement

iii. Date of preparation (emphasis on the wording – “for the”)

b. Sample of the Direct Method

i. First part is operating activities

ii. Second part is investing activities

iii. Third part is financing activities

How a company can earn a lot, have numerous assets and yet have very small equities.

Company can still have a high level of cash balance with net loss due to non-cash expenses such as depreciation and accrual
of expenses

Other important matters:

a. Discuss that without the CFS, the company cannot know if it can pay its upcoming liabilities or continue operations due to
some expenses having no credit terms, thus cash is needed before a transaction can occur.

b. Discuss the importance of the approach:

b. i. Direct approach provides information regarding the actual cash transactions generated/used in operations

b. ii. Indirect approach provides information regarding non-cash transactions during the year and shows the difference
between the net income/loss of the company and the cash generated/ used in operations

c. Discuss that knowing the cash flow of the company or the cash flow of their personal lives can help the learners reduce
unnecessary outflows and increase inflows to make sure that at the end of each period, the company or the learner can have a
net increase in cash.
Quiz # 6
1. Gain on sale of property and equipment is part of what activity in the CFS?
2. Changes in long term liabilities is part of what activity in the CFS?
3. Net income is part of which Approach in preparing the CFS?
4. Based on the given above, compute for the net change in cash for the year.
5. The accumulation or increase of something over time, especially payments or benefits.
6. It is an accounting method of allocating the cost of a tangible or physical asset over its useful life or life
expectancy. 
7. Provides an analysis of inflows and/or outflows of cash from/to operating, investing and financing
activities.
8. Cash transactions related to changes in equity and borrowings.
9. Cash transactions related to purchase or sale of non-current assets
10. Activities that are directly related to the main revenue-producing activities of the company such as cash
from customers and cash paid to suppliers/employees.

Quiz on the preparation of the CFS (either Direct or Indirect)

1. Identify which of the following transactions fall under operating, investing and financing activities:

a. Cash received from customers

b. Cash paid to suppliers

c. Cash paid to employees

d. Cash paid to purchase equipment (company does not sell equipment)

e. Cash received from sale of furniture (company’s main line of business is not related to furniture)

f. Depreciation expense

g. Sale of goods on credit

h. Purchase of goods on credit

i. Cash received from getting a loan from a bank

j. Cash paid to owners

2. Juana’s sari-sari store had the following transactions during the year:

a. Purchase of goods. Paid cash. 100,000

b. Sale of goods. Received cash. 150,000

c. Paid utilities 30,000

d. Paid rent 10,000

e. Sold equipment for cash 100,000

f. Owner withdraws investment 10,000

Compute for the net cash flow generated by/used in operating activities

Activity # 5
1. Prepare a Cash Flow Statement.
Juana’s sari-sari store had the following transactions during the year:
a. Purchase of goods. Paid cash. 100,000

b. Sale of goods. Received cash. 150,000

c. Paid utilities 30,000

d. Paid rent 10,000

e. Sold equipment for cash 100,000

f. Owner withdraws investment 10,000

2. Prepare the Cash Flow Statement of Teresa’s Delivery Services using the following:

Net Income 500,000

Depreciation expense 70,000

Gain on sale of property and equipment 10,000

Increase in trade and other receivables – net 250,000

Increase in trade and other payables 150,000

Amount of proceeds from sale of property and equipment 50,000

Paid loan from a bank 100,000

Cash, January 1, 2016 70,000