OBJECTIVES

1 2 3 4
Become
Compute Apply and
Review the familiar with
Basic interpret
Basics of the contents
Financial Financial
Accounting of Financial
Ratios Ratios
Statements
COURSE OUTLINE:

1 The Basics of Accounting

2 Financial Statements

3 Financial Ratios

4 Financial Statement Analysis

PART 1 Review the
Basics
WHAT IS ACCOUNTING?
 ACCOUNTING
• the art of recording, classifying, and
summarizing in a significant manner
and in terms of money, transactions
and events which are, in part at least
of financial character, and interpreting
the results thereof. (American Institute of
Certified Public Accountants (AICPA))
Accounting is the process of
identifying, measuring and
communicating economic information to
permit informed judgment and decision
by users of the information. (American
Accounting Association)
Types of Business Organizations:
According to Ownership:

1. Single or Sole Proprietorship – owned by only one

person. Owner is usually the manager of the business
2. Partnership – has two or more owners/business
partners. The owners called “partners” agree on the
capital contributions, management of the firm,
distribution of profits and losses, et al.
3. Corporation – an artificial being created by operation
of law, having the right of succession, and the powers,
attributes, and properties expressly authorized by law
or incident to its existence
Types of Business Organizations:
According to Nature of Business:

1. Service Entity – deals with the rendering of services

to customers such as tailoring, barbershop, accounting
services, et al.
2. Trading or Merchandising Entity – deals with the
buying of goods and selling the same goods in the
same form for profit such as department stores,
grocery stores, et al.
3. Manufacturing Entity – engaged in the purchasing of
raw materials and processing/converting these into
finished products (re: textile manufacturing, canned
foods processing et al.)
 IMPORTANT POINTS

❖ Accounting is about QUANTITATIVE information.

❖ Financial data that we RECORD in the accounting

books.

❖ Information is likely FINANCIAL IN NATURE.

❖ Expressed in terms of MONEY

❖ Information is USEFUL IN DECISION MAKING.

Overview of Financial Accounting
Past
Financial
Transactions and
Accounting
Other Economic
Process
Events

Financial Decision
Statements Makers
The Financial Accounting Process

• Categorize past transactions and events

• Measure attributes of those
transactions and events
• Record and summarize the
measurements
• The end result of the accounting process is
the preparation of the following financial
statements:

o Balance Sheet
o Income Statement
o Statement of Cash Flows
o Statement of Changes in Equity
 “Accounting is the
Language of Business.”
▪ Identify
▪ Measure
▪ Record
▪ Communicate
 ACCOUNTING EQUATION

ASSETS = LIABILITIES + EQUITY

DEBIT & CREDIT of Accounting
DEBIT CREDIT

Assets = Liabilities +
Equity
Elements of Accounting
Assets – are economic resources controlled by the
entity as a result of past transactions or events and
from which future economic benefits are expected
to flow to the enterprise

Liabilities – are present obligations of the

enterprise arising from past transactions or events, the
settlement of which is expected to results in an outflow
from the entity of resources embodying economic
benefits

Equity – is the residual interest in the assets of an

entity after deducting all of its liabilities
ASSETS
- are generally categorized as current or
non-current.

Current assets – assets that are sold, collected,

or consumed within one (1) year from cut-off
period.
• Cash on Hand • Loans Receivable
• Cash In Bank • Allowance for Bad Debts
• Petty Cash Fund (contra asset account)
• Marketing Fund • Advances to Employees
• Marketable Securities • Inventories
• Accounts Receivable • Prepaid Expenses
• Unused Supplies
• Cash – currency or demand deposits

• Short-term investments – debt or equity investments

for which a ready market exists an which will mature or
that the management intends to sell within one year or
the operating cycle. Short-term investments are valued
at market value.

• Accounts receivable – amounts owed to the firm by its

customers for goods and services delivered. A/R are
valued at net realizable value; that is, the estimated
amount that will be collected.
• Notes receivable – amounts owed, usually by
customers, which will not be collected within the typical
collection period. Interest is charge on notes receivable.
Notes receivable are carried at net realizable value.

• Inventory – represents raw material or products that will

be consumed or sold in the normal course of business.

• Prepaid expenses – services paid for but not yet

used. Examples of prepaid expenses would be rent or
insurance for future accounting periods that is paid for
in the current period. Prepaid expenses are valued at
their original (historical) costs.
Non-current Assets – assets that have
expected life of longer than one (1) year.
• Land
• Building
• Building Improvements
• Machineries
• Furniture and Fixtures
• Equipment
• Delivery Trucks
• Leasehold Improvements
• Accumulated Depreciation (contra-asset account)
• Property, plant, and equipment (PPE)
▪ Land – real estate upon which the firm’s building sit.
Land is valued at its historical cost as it is not
depreciated.
▪ Plant (building) – represents the buildings that
house the firm’s production or selling activities. Plant
is valued at historical cost less accumulated
depreciation. Accumulated depreciation is the total
of all previously recorded depreciation expense on
assets still in service.
▪ Equipment – machinery and fixtures used to
produce or sell inventory. Equipment is
valued at historical cost less accumulated
depreciation
• Intangible Assets – assets without physical
substance held for use in the production or supply of
goods and services, for rental to others or for
administrative purposes, such as:
✓ Goodwill
✓ Franchise
✓ Patent
✓ Copyright
✓ Trademark

• Investments – assets held by an enterprise for

earning income by way of dividends, interest, and
rentals, for capital appreciation, or for other
benefits to the investing enterprise.
Liabilities
- are financial obligations that must
be met/paid in the future;
- are categorized either as current
or non- current;
Current Liabilities – those that will be paid
within one (1) year from cut-off period
• Accounts Payable
• Accrued Expenses Payable
• Accrued Interest Payable
• Notes Payable
• Loans Payable (currently due portion)
• Unearned Income
• Income Taxes Payable
• Accounts payable – amounts owed to suppliers
for goods or services received but not yet paid for.
• Wages, rent, and other payables – amount owed
to employees, landlord, etc., for services used but yet
paid for.
• Notes payable – amounts owed creditors within
a year, usually with explicit interest expense.
• Dividends payable – owed for dividends declared
but not yet paid.
• Current portion of long-term debt – portion of
long-term debt that must be paid within the year.
Non-current liabilities – amounts owed to
creditors that are due beyond one (1) year from
cut-off date
• Bonds Payable
• Long-term Loans Payable (due portion beyond
one year)
• Deferred Tax Liabilities
• Pension Benefit Payables
• Post Retirement Payable
Equity – owners’ investment and the total
earnings retained since the beginning of the
business

• Owners Capital (for Single Proprietorship)

• Personal Drawing
• Paid-up Capital (for Corporation)
• Additional Paid-in Capital (APIC)
• Treasury Stocks
• Retained Earnings
• Dividends
• Contributed capital (paid-in-capital) – amount of the
stockholders’ investment in the firm’s equity securities.
▪ Common stock – valued at par stated value.
▪ Other paid-in-capital – excess of the shareholders’
investment over the stock’s par value.
• Retained earnings – total net income less the
amount distributed to the owners as dividends from
the beginning of business.
o Retained earnings is just an accounting amount; it
does not represent cash.
o Each period, net income can be paid out as dividends
or retained as additional investment in the firm. This
‘retained’ amount is added to retained earnings.
o If dividends are greater than net income, the retained
earnings amount is reduced by the excess paid out as
dividends.
 Elements of Accounting
Revenues – the gross inflow of economic
benefits during the period arising in the course of
ordinary activities of an enterprise when those
inflows result in increases in equity, other than those
relating to contributions from the owners

Expenses – the gross outflow of economic

benefits during the period in the course of ordinary
activities when those outflows result in decreases in
equity, other than those relating to distributions to the
owners
DEBIT & CREDIT of Accounting

DEBIT CREDIT

Expenses Revenues
EXAMPLES OF REVENUES
• Sales from Trading
• Sales from Manufacturing
• Service Fees
• Service Income
• Interest Income
• Rent Income
• Dividend Income
• Miscellaneous Income
MAJOR CLASSIFICATION OF EXPENSES
• Selling Expenses
• General Expenses
• Administrative Expenses
• Operating Expenses
• Other Expenses
 EXAMPLES OF EXPENSES
• Salaries and Wages
• Employees Compensation
• Rentals
• Supplies Used
• Advertisement
• Power, Light and Water
• Utilities
• Repairs and Maintenance
• Security Services
• Janitorial Services
• Transportation and Travelling
 EXAMPLES OF EXPENSES
• Taxes and Licenses
• Repairs and Maintenance
• Fuel, Oil and Lubricants
• Depreciation
• Bad Debts
• Insurance
• Representation
• Business Development Expense
• Transportation and Travel Expenses
• Documentary Stamps Used
• Interest Expense
• Miscellaneous Expense
 ACTIVITY 1

Classify the account either as an Asset, Liability,

Equity, Revenue or Expense.
• Accrued Taxes Payable
• Retained Earnings
• Accounts Receivable
• Stationary and Supplies Used
• Accounts Payable
• Sales Revenue
• Merchandise Inventory
• Accumulated Depreciation
• Dividends
• Allowance for Bad Debts
• Cash In Bank
• Land
• Investments
• Paid-up capital
• Depreciation
• Accrued Interest Receivable
• Bad Debts
• Unused Office Supplies
• Utilities paid
• Furniture and Fixtures
• Personal Drawings
• Retained Earnings
• Intangibles
• Prepaid Insurance
• Advance Rental Payment
• Employee Salaries
• Professional Fees
• Store Rentals
• Accrued Interest Payable
• Additional Paid-in Capital
• Unearned Rental Income
• Unused Office Supplies
• Petty Cash Fund
• Marketable Securities
ACTIVITY 2

• Identify the effect of the following

transactions on the accounting equation
Assets = Liabilities + Equity
• Stockholder invested cash in the corporation
• Purchased supplies on credit from supplier
• Proprietor invested commercial land for business
• Availed short term loan from the bank
• Paid in cash 90-day interest due of bank loan
• Year-end provision for income tax due payable to BIR
on April 15 of the following year
• Received cash sales from the customer
• Received cash dividend from the stock investment
• Paid the advertisement placed in local newspaper
• Constructed commercial store financed thru a 3- year
term loan
• Purchased land for business expansion with down
payment in cash and balance payable in one year
• Paid salaries of the guards for their services for the
month of December of the current year
• Sales on credit to valued customers
• Booked allowance for long overdue clients with 50%
chance of collections
• Depreciation of the equipment used in the business
• Received cash for professional services rendered by the
firm to the client
• Paid in cash the annual principal and interest
amortization due to their loan with the Bank
• Proprietor withdrew cash for personal use
PART 2 Financial
Statements
 FINANCIAL STATEMENTS
➢ Are written reports that QUANTIFY
the FINANCIAL STRENGTH,
PERFORMANCE and LIQUIDITY of a
company.

➢ These financial reports reflect the financial

effects of business transactions and
events on the entity.
General Purpose of Financial Statements:
• To provide information about the results of
operations, financial position, changes in equity
and cash flows of an organization

• To provide stakeholders with information useful in

making economic decisions
 Users of Financial Statements

• Owners – decide whether to maintain,

increase, decrease or dispose the business
• Management – make financial decisions
• Prospective Investors – acquire
ownership or not
• Creditors – assess if borrower is capable to
pay the financial obligations or not
• Government – regulate business operation
and basis of taxation
 TYPES OF FINANCIAL
STATEMENTS

Statement of Statement of
Statement of Statement of
Comprehensive
Financial Position Changes in
(Balance Sheet) Income (Income Cash Flows
Statement) Equity

Assets: Revenue: Capital

Cash Flows
Sales Beginning
Current from:
Receipts
Non-Current Retained
Discounts
Liabilities: Cost: Operating Earnings
Activities Net Income
Current Cost of Sales
Cost of Services Withdrawal
Non-Current Dividends Paid
Cost of Goods Sold Financing
Capital or Gross Margin
Activities
Equity: Operating Expenses
Interest Expenses
Net Income Income Tax Expenses Investing
Investment NET INCOME Activities
Withdrawal
 Balance Sheet

Assets = Liabilities + Equity

• Assets are valuable resources that the firm
owns.
• Liabilities are obligations to convey
something of value in the future.
• Owners' equity is a residual amount,
calculated by subtracting liabilities from assets.
 THE BALANCE SHEET

• A snapshot of the company’s financial

position
• Summarizes the company’s assets, liabilities
and owner’s equity at a specific point in time
• Uses the word “as of” then followed by the cut-
off date (Example: as of December 31, 2023)
Presentation of Balance Sheet accounts
• Assets – listed in order of liquidity, from
most liquid to least liquid;

• Liabilities – listed in order of when they

become due;

• Equity – presented with contributed capital or

paid-in-capital first, and retained earnings last
(for corporations);
 XYZ COMPANY
STATEMENT OF FINANCIAL POSITION
AS OF 31 DECEMBER 2023
Assets Liabilities
Current Liabilities
Current Assets Accounts Payable 2,000
Cash 160,000 Income Tax Payable 500
Accounts Receivable 65,000 Notes Payable - Current 1,000
Inventories 36,000 Total Current Liabilities 3,500
Total Current Assets 261,000
Non-Current Liabilities
Notes Payable 5,000
Non-current Assets
Land 500,000 Total Liabilities 8,500
Building 700,000
Furniture & Fix. 100,000 Owner’s Equity
Service Vehicle 300,000 Beginning Capital 1,643,000
Total PPE 1,600,000 Add: Net Income 150,000
Less: Accumulated Dep. 55,000 Investments 5,000
Total Non-Current Assets 1,545,000 Less: Withdrawals 500
Ending Capital 1,797,500

Total Assets 1,806,000 Total Liab. & Equity 1,806,000

 XYZ COMPANY
STATEMENT OF FINANCIAL POSITION
AS OF 31 DECEMBER 2023
Assets Liabilities
Current Liabilities
Accounts Payable 2,000
Current Assets Income Tax Payable 500
Cash 160,000 Notes Payable - Current 1,000
Accounts Receivable 65,000 Total Current Liabilities 3,500
Inventories 36,000
Non-Current Liabilities
Total Current Assets 261,000 Notes Payable 5,000

Non-current Assets Total Liabilities 8,500

Land 500,000 Stockholders’ Equity
Building 700,000
Furniture & Fix. 100,000 Common Shares (P100 par value, 16,430 shares issued
Service Vehicle 300,000 and outstanding) 1,643,000
Additional Paid in Capital 5,000
Total PPE 1,600,000 Retained Earnings 150,000
Less: Accumulated Dep. 55,000 Treasury Shares (500)
Total Non-Current Assets 1,545,000 Total Stockholders’ Equity 1,797,500

Total Assets 1,806,000 Total Liabilities and Equity 1,806,000

 ACTIVITY 3

Prepare a simplified balance sheet

 XYZ COMPANY
Trial Balance
January 31, 2024
ACCOUNT TITLES DEBIT CREDIT
Cash 5,046,400.00
Petty Cash Fund 3,000.00
Accrued Interest Receivable 24,833.00
Notes Receivable 5,500,000.00
Prepaid Insurance 11,000.00
Furniture, Fixtures and Equipment 100,000.00
Accumulated Depreciation 2,778.00
Accounts Payable 70,000.00
Unearned Rental Income 400,000.00
Capital Stock 10,000,000.00
Rental Income 200,000.00
Interest Income 49,833.00
Salaries and Wages 22,000.00
Supplies Used 5,300.00
Telephone 1,300.00
Representation 1,500.00
Transportation and Travelling 3,500.00
Depreciation Expense 2,778.00
Insurance Expense 1,000.00
TOTALS 10,722,611.00 10,722,611.00
 Income
Statement
The Income Statement

• Summarizes the firm's revenues and expenses for a

period of time.
• Uses the word “For The Year (Period) Ended”
For Example:
For the Year Ended December 31, 2021
 The Income Statement
• Revenues are inflows of assets from providing goods
and services to customers.
• Expenses are the costs incurred to generate
revenues.
• If revenues exceed expenses, then the result is net
income.
• If expenses exceed revenues, then the result is a net
loss.
 Income Statement Definitions
▪ Gross sales or revenues – total sales (cash and credit)
during an accounting period. Net sales or net revenues are the
gross amount less returns, allowances, and discounts.
▪ Cost of goods sold (COGS) – cost of sales for goods sold
during the period; that is, the cost of the merchandise (paid for
or the cost to manufacture)
▪ Operating expenses – costs of operating a business but do not
include cost of good sold. Examples include maintenance, selling,
and general and administrative expenses. Operating expenses
are sometimes referred to as SG&A (selling, general and
administrative).
▪ Other revenues and expenses – non-operating items.
Examples include interest expense and interest income.
▪ Income taxes – provision for the income taxes for reporting
purposes.
 XYZ COMPANY
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2023
Revenues, net 2,000,000
Less: Cost of Sales
Beg. Inventory 350,000
Add: Purchases 1,086,000
Total Goods Available for Sale 1,436,000
Less: Ending Inventory 36,000
Cost of Sales 1,400,000
Gross Profit/Margin 600,000
Less: Expenses
Selling and Marketing Expenses 34,140
Administrative Expenses 280,000
General Expenses 80,000
Depreciation 55,000
Total Expenses 449,140
Net Income Before Interest and Tax 150,860
Less: Finance Cost 360
Net Income After Interest 150,500
Less: Provision for Income Tax 500
NET INCOME 150,000
 ACTIVITY 4

Prepare a simplified income statement

 XYZ COMPANY
Trial Balance
January 31, 2024
ACCOUNT TITLES DEBIT CREDIT
Cash 5,046,400.00
Petty Cash Fund 3,000.00
Accrued Interest Receivable 24,833.00
Notes Receivable 5,500,000.00
Prepaid Insurance 11,000.00
Furniture, Fixtures and Equipment 100,000.00
Accumulated Depreciation 2,778.00
Accounts Payable 70,000.00
Unearned Rental Income 400,000.00
Capital Stock 10,000,000.00
Rental Income 200,000.00
Interest Income 49,833.00
Salaries and Wages 22,000.00
Supplies Used 5,300.00
Telephone 1,300.00
Representation 1,500.00
Transportation and Travelling 3,500.00
Depreciation Expense 2,778.00
Insurance Expense 1,000.00
TOTALS 10,722,611.00 10,722,611.00
 Cash Flows

The Statement of Cash Flows

• The statement of cash flows summarizes the firm's

inflows and outflows of cash over a period of time.

• A formal statement that summarizes the operating,

investing and financing activities of an enterprise.

• Shows the movement of cash (receipts and

disbursements) for one whole period, generally one (1)
year
Purpose of Cash Flows
• To provide relevant information about cash
receipts and cash payments of an enterprise
during a period.
• To help users of the financial statements
assess:
➢ the enterprise’s ability to generate positive
future cash flows
➢ the enterprise’s ability to meet its
obligations, its ability to pay dividends,
and its need for external financing
The Statement of Cash Flows
o Operating activities—deal with the company's
operations; represents changes in the working capital
accounts (e.g. Accounts receivable, inventory, and
accounts payable) and all items that flow through the
income statements
o Financing activities—deal with the company's long-
term debt activities and activities involving
shareholders; represents acquiring and dispensing
ownership funds and borrowings
o Investing activities—deal with the company's long-
term asset transactions; represents the purchase or
sale of productive assets (physical assets and
investments) for cash.
 STATEMENT OF CASH FLOW
FOR THE YEAR ENDED 31 DECEMBER 2023
CASH FLOW FROM OPERATING ACTIVITIES
Net Income 150,000
Add: Adjustment for:
Depreciation 55,000
Interest Expense 360
(Increase) Decrease in Accounts Receivable (65,000)
(Increase) Decrease in Inventory (36,000)
Increase (Decrease) in Accounts Payable 2,000
Increase (Decrease) in Income Tax Payable 500
Net Cash Flow from OPERATING ACTIVITIES 106,860
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds of Notes payable 6,000
Initial Cash Investment 43,000
Additional Cash Investment 5,000
Capital Withdrawal/Drawings (500)
Net Cash Flow from FINANCING ACTIVITIES 53,500
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of Fixed Assets -
Proceeds From Sale/Disposed Assets -
Net Cash Flow from INVESTING ACTIVITIES -
Net Increase in Cash 160,360
Add: Cash Balance Beg. -
Cash Balance Before Debt Servicing 160,360
Less: Debt Servicing
Principal -
Interest 360
Total 360
Cash Balance, Ending 160,000
 Changes in Equity

Statement of Changes in Equity

Movement in shareholders' equity over an accounting

period comprises the following elements:
o Net profit or loss during the accounting period
attributable to shareholders
o Increase or decrease in share capital reserves
o Dividend payments to shareholders
o Gains and losses recognized directly in equity
o Effect of changes in accounting policies
o Effect of correction of prior period error
 XYZ COMPANY
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2023

Particulars Capital Net Total

Income
Balance as of 31 December 2022 1,643,000 1,643,000
Net Income for the year ended 31 December 2023 150,000 150,000
Additional Investment 5,000 5,000
Personal Withdrawal (500) (500)
Balance as of 31 December 2023 1,647,500 150,000 1,797,500
Distinguishing Between Financial
Statements
• The balance sheet reports its components as
of one moment in time.
• The income statement and the statement
of cash flows cover a period of time.
Notes to the Financial Statements

• A set of financial statements normally is

accompanied by several notes, disclosing
information useful in interpreting the
statements.
• Users should view these notes as an integral
part of the financial statement.
• Clarify and expand upon the material presented in the
body of the statements.
 Auditor’s Report

• A document containing the auditor’s opinion on whether

a company’s financial statements comply with the
Generally Accepted Accounting Principles (GAAP) and
are free from material misstatement

• Financial statements are generally prepared by the

management and are reviewed by the auditors

• External auditor’s reports are signed by Certified Public

Accountants (CPAs) or partners of accredited auditing
firms
PART 3 Financial
Ratios
FINANCIAL RATIOS:
• Ratios compare one thing to another.
• Ratios establish a relationship or correlation.
ADVANTAGES OF RATIOS LIMITATIONS OF RATIOS
• Ratios don’t tell too much about
• It simplifies the FS. a consolidated statement of
• It helps in comparing companies of multi-national corporations
different size with each other. • Ratios are no substitute for
• It highlights important information insight, judgement, and
in simple form quickly. objective thinking.
• A user can judge a company by • Ratios should always be
just looking at few numbers compared to those of other
instead of reading the whole FS. firms in the same industry
LIMITATIONS OF RATIOS

• Ratio analysis explains relationships between

past information while users are more concerned
about current and future information.
• Remember that ratios are ballpark estimates.
• Ratios cannot consistently provide complete,
detailed and accurate data.
COMMON TYPES OF FINANCIAL RATIOS

• Common Size Ratios – expressed as a percentage of a

base; one of the most useful ways for the owner of
a business to look at the company’s financial
statements; can be developed from both balance sheet
and income statement items; creating a common size
makes it easier to analyze a company’s financial
statements over time
 STATEMENT OF FINANCIAL POSITION
AS OF 31 DECEMBER 2023
Current Assets % Current Liabilities %
Cash 1,000 11% Accounts Payable 500 5%
Marketable Securities 500 5% Income Tax Payable 10 0.10%
Accounts Receivable 1,500 16% Notes Payable 2,000 21%
Inventory 3,000 32% Total Current Liabilities 2,510 26%
Total Current Assets 6,000 63% Total Liabilities 2,510 26%

Non-Current Assets Owner’s Equity

Land 1,500 16% Capital Beginning 6,140 67%
Building 10,000 105% Add: Net Income 800 8%
Less: Acc. Depn (8,000) (84%) Investments 100 1%
Total Non-Current Assets 3,500 37% Less: Withdrawals (50) (0.52%)
Capital Ending 6,990 74%
Total Assets 9,500 100% Total Liab & Owners Equity 9,500 100%
 STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2023
Revenues, net 51,550 100% Less: Expenses
Selling and Marketing 2,140 4%
Expenses
Less: Cost of Sales Administrative Expenses 2,000 4%
Beg. Inventory 5,000 10% General Expenses 3,000 6%
Depreciation 2,000 4%
Add: Purchases 39,240 76%
Total Expenses 9,140 18%
Total Goods Available 44,240 86% Net Income Before Interest 1,170 2%
for Sale and Tax

Less: Ending Inventory 3,000 6% Less: Interest Expense

Net Income After Interest Exp. 810 2%
Cost of Sales 41,240 80%
Less: Provision for Income Tax 10 0.02%
Gross Profit/Margin 10,310 20%
NET INCOME 800 2%
ACTIVITY 5
Assets
Current Assets
Cash 2,000
Accounts Receivable 3,000
Inventories 4,000
Total Current Assets 9,000
Land 2,500
Building, net 3,000
Total Non-Current Assets 5,500
Total Assets 14,500
Current Liabilities
Accounts Payable 1,500
Income Tax Payable 20
Notes Payable 3,000
Total Current Liabilities 4,520
Owner’s Equity
Capital Beginning 8,430
Add: Net Income 1,100
Investments 500
Less: Withdrawal 50
Capital Ending 9,980
Total Liab & Owners Equity 14,500
Revenues, net 50,710

Less: Cost of Sales

Beg. Inventory 9,000
Add: Purchases 35,240
Total Goods Available for Sale 44,240
Less: Ending Inventory 4,000
Cost of Sales 40,240
Gross Profit/Margin 10,470
Less: Operating Expenses
Selling and Marketing Expenses 2,140
Administrative Expenses 2,000
General Expenses 3,000
Depreciation 2,000
Total Expenses 9,140
Net Income Before Interest and Tax 1,330
Less: Interest Expense 210
Net Income After Interest Exp. 1,120
Less: Provision for Income Tax 20
NET INCOME 1,100
LIQUIDITY RATIOS
✓ Measure the amount of cash or investments that can
be converted to cash in order to pay expenses,
bills and obligations as they come due.

RATIO FORMULA
1. Current Ratio Current Assets
Current Liabilities

2. Quick Ratio Cash + Marketable Securities

+ Receivables
Current Liabilities
CURRENT RATIO
Measures the ability of the company to meet short-term
obligations.
RATIO FORMULA RULE OF THUMB
Current Ratio Current Assets 2:1
Current Liabilities

➢ This means that for every P1.00 liability, how many

current assets are available to pay its liability.
➢ A low current ratio may indicate lack of cash to pay off debt
and take advantage of discounts.
➢ A high current ratio is generally better. It means that the
company has cash or safe investments that could be use in the
business. Note: Remember “current “means one (1) year or
less.
QUICK RATIO (ACID TEST)
Provides a stricter definition of the company's ability to
make payments on current obligations.
RATIO FORMULA RULE OF THUMB
Quick Ratio Cash + Marketable 1:1
Securities +Receivables
Current Liabilities

➢ If quick ratio is higher, the company may have been

keeping too much cash on hand or have a poor collection
program for accounts receivable.
➢ If quick ratio is lower, it may indicate that the company
relies too heavily on inventory to meet its obligations.
LIQUIDITY RATIOS
RATIO FORMULA
1. Current Ratio Current Assets
Current Liabilities
2. Quick Ratio Cash + Marketable Secuties + Receivables
Current Liabilities
Assets
Current Assets
Cash CURRENT RATIO
1,000
Marketable Securities 500 6,000 / 2,510 = 2.39 : 1
Accounts Receivable 1,500
Inventories 3,000 QUICK RATIO
Total Current Assets 6,000
(1,000 + 500 + 1,500) / 2,510
Liabilities
Current Liabilities = 1.20 :1
Accounts Payable 500
Notes Payable 2,010
Total Current Liabilities 2,510
SOLVENCY RATIOS:

✓ Measure the stability of a company and its ability to

repay debt
✓ Provide strong indication of the financial health and
viability of the business
SOLVENCY RATIOS:
RATIO FORMULA MEANING
Debt to Total Liabilities Indicates the relative mix of the
equity Total Equity company's investor-supplied capital.
ratio A company is generally considered
safer if it has a low debt to equity
ratio.

Debt ratio Total Liabilities Measures the portion of a

company's assets that is provided
Total Assets by borrowing or owners.

Debt Cash before Debts Refers to the amount of cash flow

Service paid / available to meet annual interest
Cover and principal payments on debt.
Debts paid
It refers to a ratio used by bank
loan officers in determining debt
servicing ability.
 RATIO FORMULA
Debt to Equity Ratio Total Liabilities
Total Equity
Assets Owner’s Equity
Current Assets Capital Beginning 6,140
Cash 1,000 Add: Net Income 800
Accounts Receivable 2,000 Investments 100
Inventories 3,000 Less: Withdrawal 50
Total Current Assets 6,000 Capital Ending 6,990

Land 1,500 Total Liab & Owners Equity 9,500

Building 2,000
Total Non-Current Assets 3,500
Debt to Equity Ratio
Total Assets 9,500
2,510 / 6,990 = 36%
Current Liabilities
Accounts Payable 500
Income Tax Payable 10
Notes Payable 2,000
Total Current Liabilities 2,510
 RATIO FORMULA
Debt Ratio Total Liabilities
Total Assets
Assets Owner’s Equity
Current Assets Capital Beginning 6,140
Cash 1,000 Add: Net Income 800
Accounts Receivable 2,000 Investments 100
Inventories 3,000 Less: Withdrawal 50
Total Current Assets 6,000 Capital Ending 6,990

Land 1,500 Total Liab. & Owners Equity 9,500

Building 2,000
Total Non-Current Assets 3,500
Debt Ratio
Total Assets 9,500
Debt: 2,510 / 9,500 = 26%
Current Liabilities Equity: 6,990 / 9,500 = 74%
Accounts Payable 500 26 : 74
Income Tax Payable 10
Notes Payable 2,000
Total Current Liabilities 2,510
 RATIO FORMULA
Debt Service Cover Cash Balance before total debts paid /
Debts paid
Assets Owner’s Equity
Current Assets Capital Beginning 6,140
Cash 1,000 Add: Net Income 800
Accounts Receivable 2,000 Investments 100
Inventories 3,000 Less: Withdrawal 50
Total Current Assets 6,000 Capital Ending 6,990

Land 1,500 Total Liab & Owners Equity 9,500

Building 2,000
Total Non-Current Assets 3,500
Debt Service Cover
Total Assets 9,500
1,000 + 360* = 1,360**
Current Liabilities 1,360 / 360 = 3.78x
Accounts Payable 500 * Assume to be amount of debt for payment
Income Tax Payable 10 ** Assume to be amount of cash before debt
Notes Payable 2,000 servicing
Total Current Liabilities 2,510
PROFITABILITY RATIOS:
Provide information about management's performance in
using the resources of the small business.
RATIO FORMULA MEANING
Return on Sales Net Income Measures the overall
Net Sales profitability of the
company or how much is
being brought to the
bottom line
Return on Assets Net Income Indicates how effectively
Total Assets the company is deploying
its assets

Return on Equity Net Income Indicates how well the

Total Equity company is utilizing its
equity investment
Assets Revenues, net 51,550
Current Assets
Cash 1,000 Less: Cost of Sales
Accounts Receivable 1,000 Beg. Inventory 5,000
Inventories 4,000 Add: Purchases 39,240
Total Current Assets 6,000 Total Goods Available for Sale 44,240
Less: Ending Inventory 3,000
Land 1,500
Cost of Sales 41,240
Building, net 2,000
Total Non-Current Assets 3,500
Gross Profit/Margin 10,310
Total Assets 9,500
Current Liabilities
Less: Operating Expenses
Accounts Payable 500
Selling and Marketing Expenses 2,140
Income Tax Payable 10
Administrative Expenses 2,000
Notes Payable 2,000
General Expenses 3,000
Total Current Liabilities 2,510
Depreciation 2,000
Owner’s Equity Total Expenses 9,140
Capital Beginning 6,140 Net Income Before Interest and Tax 1,170
Add: Net Income 800 Less: Interest Expense 360
Investments 100 Net Income After Interest Exp. 810
Less: Withdrawal 50 Less: Provision for Income Tax 10
Capital Ending 6,990
Total Liab & Owners Equity 9,500 NET INCOME 800
PROFITABILITY RATIOS:

RATIO FORMULA RESULT

Return on Sales Net Income 800 / 51,550 = 1.55%
Net Sales

Return on Assets Net Income 800 / 9,500 = 8.42%

Total Assets

Return on Equity Net Income 800 / 6,990 = 11.44%

Total Equity
EFFICIENCY RATIOS:
✓ These ratios show how quickly the company is collecting
money for its credit sales or how many times inventory turns
over in a given time period.
RATIO FORMULA MEANING
Inventory Turnover Cost of Goods Sold Shows how efficiently the
Rate Average Inventory company is managing its
production, warehousing, and
distribution of product,
considering its volume of sales.
Days In Inventory 360 days Shows how many days on the
Invty. Turnover Rate average, inventory is being held.
Receivable Turnover Net Sales Gives a measure of how quickly
rate Aver. Accts. Receivable credit sales are turned into cash

Days In 360 days Shows how many days on the

Receivable Receivable Turnover average, receivables are collected
Rate
EFFICIENCY RATIOS:

RATIO FORMULA MEANING

Operating Cycle Days In Inventory + Shows the total number of
Days In Receivable days in one (1) business cycle

Business Turnover 360 days Shows how many times the

Operating Cycle business completed its
business cycle in one (1) year
EFFICIENCY RATIOS
RATIO FORMULA EXAMPLE
Inventory Turnover Cost of Goods Sold 41,240/4,000 = 10.31 or 10x
Rate Average Inventory

Days In Inventory 360 days 360/10 = 36 days

Inventory Turnover Rate

Receivable Net Sales 51,550/1,000 = 51.55 or 52x

Turnover rate Average Accts. Receivable

Days In 360 days 360/52 = 7 days

Receivable Receivable Turnover Rate

Operating Cycle Days In Inventory + Days In 36 days + 7 days = 43 days

Receivable
Business Turnover 360 days 360/43 = 8.37 or 8x
Operating Cycle
Assets Revenues, net 51,550
Current Assets
Cash 1,000 Less: Cost of Sales
Accounts Receivable 1,000 Beg. Inventory 5,000
Inventories 4,000 Add: Purchases 39,240
Total Current Assets 6,000 Total Goods Available for Sale 44,240
Less: Ending Inventory 3,000
Land 1,500
Cost of Sales 41,240
Building, net 2,000
Total Non-Current Assets 3,500
Gross Profit/Margin 10,310
Total Assets 9,500
Current Liabilities
Less: Expenses
Accounts Payable 500
Selling and Marketing Expenses 2,140
Income Tax Payable 10
Administrative Expenses 2,000
Notes Payable 2,000
General Expenses 3,000
Total Current Liabilities 2,510
Depreciation 2,000
Owner’s Equity Total Expenses 9,140
Capital Beginning 6,140 Net Income Before Interest and Tax 1,170
Add: Net Income 800 Less: Interest Expense 360
Investments 100
Less: Withdrawal 50 Net Income After Interest Exp. 810
Capital Ending 6,990 Less: Provision for Income Tax 10

Total Liab & Owners Equity 9,500 NET INCOME 800

 FORMULA: = (Beg. Inventory + Ending Inventory)/2
Average Inventory
Inventory Turnover = Cost of Sales / Average Inventory
Days Inventory = 360 days/Inventory Turnover
Average Receivable = (Beg. AR + Ending AR)/2
Receivable Turnover = Revenues / Average Receivable
Days Receivable = 360 days/Receivable Turnover
Operating Cycle = Days Inventory + Days AR
Turnover Rate = 360 days/Operating Cycle
UNDERSTANDING MORE OF
THE FINANCIAL RATIOS
ACTIVITY 6
ACTIVITY 7:
XYZ Company, owned and managed by Mr. Xavier Y. Zuñiga is
applying for a loan. He submitted his year-end Financial Statement
and you are tasked to evaluate his business based on the Financial
Ratios used by the Bank.

Required: Compute for the following:

1. Common Size Ratios: Fill-up the percentages
2. Liquidity Ratios: Current Ratio, Quick Ratio
3. Solvency Ratios: Debt to Equity Ratio, Debt Ratio and Debt Service
Cover
4. Profitability Ratios: Return on Sales, Assets, and Equity
5. Efficiency Ratios: Inventory Turnover, Days In Inventory,
Receivable Turnover, and Days In Receivable, Operating Cycle and
Business Turnover
 XYZ COMPANY
STATEMENT OF FINANCIAL POSITION
AS OF 31 DECEMBER 2023
Assets Liabilities
Current Liabilities
Current Assets Accounts Payable 912,000
Cash 760,000 Income Tax Payable 557,276
Accounts Receivable 1,265,000 Notes Payable – Current 1,000,000
Inventories 1,436,000 Total Current Liabilities 2,469,276
Total Current Assets 3,461,000
Non-Current Liabilities
Notes Payable 4,000,000
Non-current Assets
Land 2,000,000 Total Liabilities 6,469,276
Building 5,000,000
Furniture & Fixtures 2,000,000 Owner’s Equity
Service Vehicle 1,900,000 Beginning Capital 5,947,890
Total PPE 10,900,000 Add: Net Income 1,293,584
Less: Accumulated Dep. 200,250 Investments 500,000
Total Non-Current Assets 10,699,750 Less: Withdrawals 50,000
Total Assets 14,160,750 Ending Capital 7,691,474
Total Liab. & Equity 14,160,750
 XYZ COMPANY
STATEMENT OF FINANCIAL POSITION
AS OF 31 DECEMBER 2023
Common
Assets Common
Liabilities Size Ratio
Size Ratio Current Liabilities Percentages
Percentages Accounts Payable 912,000
Current Assets
Cash 760,000 Income Tax Payable 557,276
Accounts Receivable 1,265,000 Notes Payable – Current 1,000,000
Inventories 1,436,000 Total Current Liabilities 2,469,276
Total Current Assets 3,461,000
Non-Current Liabilities
Notes Payable 4,000,000
Non-current Assets
Land 2,000,000 Total Liabilities 6,469,276
Building 5,000,000
Furniture & Fixtures 2,000,000 Owner’s Equity
Service Vehicle 1,900,000 Beginning Capital 5,947,890
Total PPE 10,900,000 Add: Net Income 1,293,584
Less: Accumulated Dep. 200,250 Investments 500,000
Total Non-Current Assets 10,699,750 Less: Withdrawals 50,000
Total Assets 14,160,750 Ending Capital 7,691,474
Total Liab. & Equity 14,160,750
 XYZ COMPANY
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2023
Revenues, net 12,000,000
Less: Cost of Sales
Beg. Inventory 350,000
Add: Purchases 9,486,000
Total Goods Available for Sale 9,836,000
Less: Ending Inventory 1,436,000
Cost of Sales 8,400,000
Gross Profit/Margin 3,600,000
Less: Expenses
Selling and Marketing Expenses 223,890
Administrative Expenses 645,000
General Expenses 380,000
Depreciation 200,250
Total Expenses 1,449,140
Net Income Before Interest and Tax 2,150,860
Less: Interest Expense 300,000
Net Income After Interest Expense 1,850,860
Less: Provision for Income Tax 557,276
NET INCOME 1,293,584
 XYZ COMPANY
STATEMENT OF COMPREHENSIVE INCOME Common
Size Ratio
FOR THE YEAR ENDED 31 DECEMBER 2023 Percentages

Revenues, net 12,000,000

Less: Cost of Sales
Beg. Inventory 350,000
Add: Purchases 9,486,000
Total Goods Available for Sale 9,836,000
Less: Ending Inventory 1,436,000
Cost of Sales 8,400,000
Gross Profit/Margin 3,600,000
Less: Expenses
Selling and Marketing Expenses 223,890
Administrative Expenses 645,000
General Expenses 380,000
Depreciation 200,250
Total Expenses 1,449,140
Net Income Before Interest and Tax 2,150,860
Less: Interest Expense 300,000
Net Income After Interest Expense 1,850,860
Less: Provision for Income Tax 557,276
NET INCOME 1,293,584
 XYZ COMPANY
STATEMENT OF CASH FLOW
FOR THE YEAR ENDED 31 DECEMBER 2023
CASH FLOW FROM OPERATING ACTIVITIES
Net Income 1,293,584
Add: Adjustment :
Depreciation 200,250
Interest Expense/Finance Cost 300,000
(Increase) Decrease in Accounts Receivable (1,265,000)
(Increase) Decrease in Inventory (1,436,000)
Increase (Decrease) in Accounts Payable 912,000
Increase (Decrease) in Income Tax Payable 557,276
Net Cash Flow from OPERATING ACTIVITIES 562,110
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds of Notes payable 5,000,000
Initial Cash Investment 5,947,890
Additional Cash Investment 500,000
Capital Withdrawal (50,000)
Net Cash Flow from FINANCING ACTIVITIES 11,397,890
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of Fixed Assets (10,900,000)
Net Cash Flow from INVESTING ACTIVITIES (10,900,000)
NET CASH INCREASE 1,060,000
Add: Cash Balance Beg. -
Total Cash Before Debt Servicing 1,060,000
Less: Debt Servicing:
Principal -
Interest 300,000
Total 300,000
Cash Balance End 760,000
 XYZ COMPANY
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2023
Particulars Capital Net Total
Income
Beginning Balance December 31, 2022 5,947,890 5,947,890
Net Income for the year ended 31 December 2023 1,293,584 1,293,584
Additional Investment 500,000 500,000
Personal Withdrawal (50,000) (50,000)
Balance as of 31 December 2023 6,397,890 1,293,584 7,691,474
 LIQUIDITY RATIOS
RATIO FORMULA
1. Current Ratio Current Assets
Current Liabilities
2. Quick Ratio Cash + Marketable Secuties + Receivables
Current Liabilities

CURRENT RATIO

QUICK RATIO
 SOLVENCY RATIOS
RATIO FORMULA
Debt Ratio Total Liabilities
Total Assets

Debt Ratio

RATIO FORMULA
Debt to Equity Ratio Total Debt
Total Equity

Debt to Equity Ratio

 SOLVENCY RATIOS
RATIO FORMULA
Debt Service Cover Cash Balance before total debts paid
Debts Paid

Debt Service Cover

PROFITABILITY RATIOS
RATIO FORMULA RESULT
Return on Sales Net Income
Net Sales
Return on Assets Net Income
Total Assets
Return on Net Income
Investment Owner’s Equity
EFFICIENCY RATIOS
RATIO FORMULA RESULT
Inventory Cost of Goods
Sold/Average Inventory
Turnover Rate
Days In Inventory 360 days / Inventory
Turnover Rate

Receivable Net Sales/Average

Accounts Receivable
Turnover rate
Days Receivable 360 days / Receivable
Turnover Rate
Outstanding
Operating Cycle Day’s Inventory + Day’s
Receivable

Business Turnover 360 days / Operating Cycle

 Financial
PART 4 Statement
Analysis
 FINANCIAL STATEMENT ANALYSIS

• Process of examination of the past and current

financial data to evaluate a company’s performance
and financial position

• Helps diagnose profitability and financial soundness of

a business
• Helps users asses viability, stability, and
profitability of the company
• Helps users reliably forecast future
performance of a business
• Helps assess future risks
• Helps estimate potential benefits
 FS analysis diagnose the following PARAMETERS

• Profitability – ability to earn income and sustain the growth

both on the short term and long term perspective.

• Solvency – ability of the company to pay obligations to

creditors and third parties both for short term and long term
perspective

• Liquidity – ability of the company to maintain positive

cash flows while paying immediate obligations.

• Stability – ability to remain in the business in the long run

without having to sustain significant losses in the day
to day operations.
WHAT TO CONSIDER:

1. Know your objectives: to evaluate profitability, liquidity, asset

activity, debt utilization or all of them
2. Determine if the analysis will cover only the subject firm or
will include other firms belonging in the same industry.
3. Learn about the past, current and prospective conditions of the
industry (e.g, new laws or mandates, average prices, market
values of commodities)
4. Know the firm which is the subject of your analysis; e.g.
mission and vision, strategic plans, current status in the
industry
5. Review and assess the firm’s financial statements
6. Interpret the computed financial ratios
7. Draw conclusions in consideration of the objectives of the
financial statement analysis set in item 1
STEPS IN FS ANALYSIS
1. Collect the company’s financial statements from the
last three (3) years including Interim FS, if applicable,
which include the following:
a. Balance Sheet
b. Income Statement
c. Statement of Cash Flow
d. Statement of Changes in Equity
e. Notes to Financial Statements
f. BIR Filed Income Tax Returns
STEPS IN FS ANALYSIS:
2. Review the Notes to Financial Statements

➢ these notes may have information that could be

important in your analysis of the business
3. Prepare a FS spreadsheet and compute for
financial ratios

➢ Analyze and scan the spreadsheet and to look

for large movements in specific items
from one year to the next.

➢ “Eyeball Analysis”
STEPS IN FS ANALYSIS:
4. Compute for financial ratios
➢ Common Size Ratios
➢ Liquidity Ratios
➢ Solvency Ratios
➢ Profitability Ratios
➢ Efficiency Ratios
5. Examine and Analyze Balance Sheet and Income
Statement
➢ See if there are large changes in the company’s
assets, liabilities and equity
➢ Identify trends over time
STEPS IN FS ANALYSIS:

6. Evaluate the company’s Owner’s Equity or Stockholder’s

Equity and Statement of Changes in Equity.
➢ Has the company issued new shares? or
bought some back? Has the retained earnings
account been growing or shrinking?
7. Analyze the company’s Cash Flow Statement
➢ Determine where are the sources of cash? or
Where did the cash go? Check for large items that
affect the cash inflow and outflow of the business.
STEPS IN FS ANALYSIS:

8. Review the dividend payout, if any.

➢ The dividend payout measures the percentage of a
company’s net income given to stockholders in the form
of dividends.
9. After gathering all of the data, cross refer and/or validate or
ask the client, to have deeper understanding of the
meaning of the company’s number and how they impact
performance and growth.
Thank you for listening!