SH1725

Transactions in flow of funds:

1. Stockholders give cash to ABC Corporation.
2. ABC Corporation borrows from banks.
3. Suppliers give raw materials to be paid later.
4. The company invests in land, building, machinery, equipment, furniture, fixtures, and
vehicles.
5. To acquire finished goods, the company needs to
a. pay cash for power and supply
b. pay cash for labor
6. These two along with the processing of raw materials make up the work-in-process
inventory.
7. When the goods are completed, they become finished goods inventory.
8. Accountant concocts depreciation assuming that land, building, machinery, equipment,
furniture, fixtures, and vehicles would last a certain number of years.
9. Fixed assets, depreciation of factory goes to work-in-process inventory.
10. Depreciation of the head office and machinery and equipment at the head office will go to
operating expenses. Other operating expenses include salaries, supplies, electricity, and
other expenses the company pays.
11. Finished goods when sold become a cost of goods sold.
12. ABC Corporation pays in cash non-operating expenses (interest expenses and other
financial charges owed to the banks).
13. The company pays taxes.
14. Sales of revenues are earned from customers.
15. Unpaid sales from customers who avail credit become accounts receivable.
16. When these customers finally pay, a number of accounts receivable transforms back into
cash.
17. Investments in marketable securities might cause the company to have non-operating
income which comes back in the form of cash.
18. ABC Corporation may manage the cash in different ways like paying of principals to the
banks. But as an agreement between the company and stockholders, the stockholders will
get a portion or even all of the profits and pay dividends.

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 SH1725

Transactions in Construction of Financial Statements:

1. ABC Corporation sources ₱10,000 cash from stockholder’s equity.
2. The company gets ₱20,000 worth long-term loans from the banks.
3. The company borrows additional ₱5,000 worth short-term debt from the bank.
4. The company buys in cash ₱10,000 worth of inventory of merchandise and goods.
5. The company buys in cash ₱10,000 worth of machinery and equipment.
6. Money worth ₱5,000 is spent for pre-operating expenses to organize the company.
7. Inventory worth ₱5,000 is sold and is summarized in a profit or loss under stockholder’s
equity.
8. Customer buys goods for ₱10,000 but does not pay in cash.
9. Stockholders pay ₱5,000 cash for operating expense.
10. The company pays ₱1,000 of its short-term debt.

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 SH1725

Assets Liabilities
Accounts Supplier’s
Cash Receivable Credit Accrued Expenses
Use Source Use Source Use Source Use Source

Balance Balance

Fixed Short Term Long Term

Inventory Assets Debt Debt
Use Source Use Source Use Source Use Source

Balance Balance Balance Balance

Stockholder’s
Other Assets Equity
Use Source Use Source

Balance

Total Total
Assets Liabilities

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 SH1725

Vertical Analysis
Formulas Percentage Ratio
Sales 𝑆𝑆
Cost of Goods Sold 𝐶𝐶
Gross Profit 𝐺𝐺𝐺𝐺 = 𝑆𝑆 − 𝐶𝐶
Operating Expenses
Salaries and Wages 𝑥𝑥1
Employee’s Benefits 𝑥𝑥2 Express each Express each
⋮ ⋮ data as data as
Miscellaneous 𝑥𝑥𝑛𝑛 percentage of percentage of
Total Operating Expenses 𝑂𝑂𝑂𝑂 = 𝑥𝑥1 + 𝑥𝑥2 + ⋯ + 𝑥𝑥𝑛𝑛 sales (in sales (in
Operating Profit 𝑂𝑂𝑂𝑂 = 𝐺𝐺𝐺𝐺 − 𝑂𝑂𝑂𝑂 percent form) decimal form)
Add: Non-Operating Income 𝑁𝑁𝑁𝑁
Less: Non-Operating Expenses 𝑁𝑁𝑁𝑁
Net Profit before Taxes 𝑁𝑁𝑃𝑃𝑇𝑇 = 𝑂𝑂𝑂𝑂 + 𝑁𝑁𝑁𝑁 − 𝑁𝑁𝑁𝑁
Taxes 𝑇𝑇
Net Profit before Taxes 𝑁𝑁𝑁𝑁 = 𝑁𝑁𝑃𝑃𝑇𝑇 − 𝑇𝑇

Horizontal Analysis
Percentage Growth
Year 1 Year 2 Year 1 – Year 2
𝑆𝑆2 − 𝑆𝑆1
Sales 𝑆𝑆1 𝑆𝑆2 𝑃𝑃𝑆𝑆 = � � × 100%
𝑆𝑆1
⋮ ⋮ ⋮

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 SH1725

Percentage Ratio
Sales ₱2,000,000 100.00% 1
Cost of Goods Sold 1,200,000 60 0.6
Gross Profit __________
Operating Expenses
Salaries and Wages 100,000
Employee’s Benefits 20,000
Sales Commissions 50,000
Rental Expenses 50,000
Advertising 50,000
Professional Fees 30,000
Travel and Transportation 20,000
Representation Allowance 20,000
Training and Education 50,000
Light, Water, and Power 50,000
Office Supplies 30,000
Depreciation 30,000
Miscellaneous 20,000
Total Operating Expenses __________
Operating Profit __________
Add: Non-Operating Income 20,000
Less: Non-Operating Expenses 100,000
Net Profit before Taxes __________
Taxes 60,000
Net Profit before Taxes __________

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