ACCOUNTANT

USERS OF FINANCIAL STATEMENTS

- Investors / Owners
- Management
- Employees
- Creditors
- Customers
- Government
CONSERVATISM / PRUDENCE
Anticipation of all losses and
PRINCIPLES AND CONCEPTS expenses but defers recognition of
gains or profits until they are realized.

ACCRUAL ACCOUNTING
Revenues are recognized when earned
regardless of when received and
expenses are recognized when
incurred regardless of when paid.

MATCHING PRINCIPLE
Costs and expenses incurred in earning a
revenue should be reported in the same
period.

PRINCIPLES AND CONCEPTS

THE USE OF JUDGMENT AND

ESTIMATES Financial statements
represent a combination of matters of fact
and matters of estimate. Judgment is used
in making reasonable estimates.
 Custody and Administration of Public Funds
PRINCIPLES AND CONCEPTS
PRINCIPAL FINANCIAL STATEMENTS
TIME PERIOD PRINCIPLE
The indefinite life of an entity is BALANCE SHEET /
subdivided into time periods which are
STATEMENT OF FINANCIAL POSITION
usually of equal length.
- A report of the resources owned by the
INTERNATIONAL FINANCIAL company and claims on these
REPORTING STANDARDS / resources
PHILIPPINE FINANCIAL REPORTING - A ‘snapshot’ of the firm’s financial condition
STANDARDS - Basic Sections: Assets
Liabilities
Capital or Equity

THE PRINCIPAL FINANCIAL

STATEMENTS AND THE OBJECTIVES
OF THE FIRM
- Financial statements are the firm’s
report card to its various stakeholders
- Stakeholders’ (Financial) Interest
Profitability
Liquidity / Solvency
Stability
BALANCE SHEET
BALANCE SHEET
(ASSETS = LIABILITIES + EQUITY)
- Assets are economic resources owned and
used by the business in conducting its
operations and are expected to provide
future benefits
- Liabilities are economic obligations of an
enterprise on these resources
- Capital or Equity represents the investment
of a business’ owners
 CURRENT ASSETS

CASH AND CASH EQUIVALENTS

- Must be readily available for the payment of
BALANCE SHEET current obligations and must be free from
any contractual restriction that limits its
BALANCE SHEET CLASSIFICATION use in satisfying debts
- Consists of coin, currency, and available
funds on deposit at the bank
- Current Assets
- Cash equivalents are short term, highly
liquid investments that are both (a) readily
- Noncurrent Assets convertible to known amounts of cash and
Investments (b) so near maturity that they represent
Property, Plant and Equipment insignificant risk of changes in interest
Intangibles rates
Other Assets
CURRENT ASSETS
BALANCE SHEET CLASSIFICATION CURRENT

ASSETS TRADING SECURITIES

- Are debt and equity securities purchased
- Assets or resources which are reasonably expected with the intent of selling them in the near
to be realized in cash or sold or consumed during the future
normal operating cycle
- Trading involves frequent buying and
selling of securities, generally for the
- Cash, Trading Securities,
purpose of generating profits on short-
- Receivables, Inventories, Prepaid Assets term differences in price

CURRENT ASSETS

RECEIVABLES
- Are presented at net realizable value on
 balance sheet date; i.e., the amount
expected to be received in cash
NONCURRENT ASSETS
CURRENT ASSETS INVENTORIES
- Are items of tangible property which are
(a) held for sale in the ordinary
course of business (b) in the
PROPERTY, PLANT AND EQUIPMENT
- Property ordinarily not subject to
depreciation or depletion, such as land
used as plant site
- Property subject to depreciation or
amortization such as building,
machinery, equipment, furniture,
improvements to leased facilities,
bookplates and breeding animals
process of production for such sale
(c) currently consumed in the
production of goods or services to be
available for sale
NONCURRENT ASSETS
(INVESTMENTS)
- Assets that are not directly identified
with the operating activities of the
company or assets not involved in the
sale or production of goods and
services
(PROPERTY, PLANT AND EQUIPMENT)
- Include all tangible assets with an
estimated useful life beyond one year,
are used in the conduct of business,
and are not intended for sale in the
ordinary course of business
- Property subject to depletion, such as
timber, oil and mining lands and leases
NONCURRENT ASSETS
(INTANGIBLES)
- Relatively long-lived assets without
physical characteristics, whose value NONCURRENT ASSETS
lies in rights, privileges, and (OTHER ASSETS)
competitive advantages which they - a balance sheet caption under which are
give the owner listed non-current items which cannot
be appropriately be included in the
- Patent, Goodwill, Franchise, Copyright, usual asset categories
Licenses, Trademark, Secret Processes,
etc.

OR EQUITY

CORPORATION
PROPERTY, PLANT AND EQUIPMENT
- A Corporation is an artificial being created
- Depreciation is a systematic means of
by operation of law, having the right of
allocating the cost of a long-lived asset
succession and the powers, attributes,
over its useful life. It requires an
and properties expressly authorized by
estimate of the asset’s useful life and
law or incident to its existence.
salvage value. Accumulated
depreciation represents the total amount
of cost that has already been charged to Corporation Code of the Philippines
income.
- Acceptable methods of depreciation are:
(1) straight-line, (2) units of output, (3)
sum-of-the years’ digits
 STOCKHOLDERS’ EQUITY
- Common Stock / Ordinary Share
- Preferred Stock / Preference Share
CAPITAL OR EQUITY - Dividends (cash, stock, property)
- Treasury Stock / Treasury Share
- Retained Earnings

CAPITAL OR EQUITY
CAPITAL OR EQUITY
COMMON STOCK

- Right to Vote
- Right to Receive Dividends
- Share in the assets upon liquidation
PREFERRED STOCK
- Preferred shares of stock issued by any corporation
may be given preference in the distribution of the
assets of the corporation in case of liquidation and in
the distribution of dividends, or such other
preferences as may be stated in the Articles of
Incorporation

Corporation Code of the Philippines

 of outstanding stock held by them.

Corporation Code of the Philippines

CAPITAL OR EQUITY
POWER TO DECLARE DIVIDENDS
- The Board of directors of a stock
corporation may declare dividends out
of unrestricted retained earnings which
shall be payable in cash, in property, or
in stock to all stockholders on the basis
CAPITAL OR EQUITY
STOCK DIVIDENDS
- Additional issuances of stock to
stockholders - A stock dividend does not
give rise to any change in either the
enterprise’s assets or its shareholder’s
proportionate interests therein

CAPITAL OR EQUITY

TREASURY SHARES
- Shares of stock which have been issued
and fully paid for, but subsequently
reacquired by the issuing corporation by
purchase, redemption, donation or
through some other lawful means.
 CAPITAL OR EQUITY

RETAINED EARNINGS
- Accumulation of profits less losses and dividends
PRINCIPAL FINANCIAL STATEMENTS
Unrestricted – portion which is free and can
INCOME STATEMENT / PROFIT OR LOSS
be declared as dividends to the
STATEMENT / STATEMENT OF
stockholders
COMPREHENSIVE INCOME
Restricted – portion which is restricted and
not available for dividend declaration
Revenues – Expenses = Net Income (loss)

- A report of the results of operations of a

company for a given period bounded by two
balance sheet dates

PRINCIPAL FINANCIAL STATEMENTS

INCOME STATEMENT

Revenues
- increases in assets or decreases in
liabilities due to earnings process
- revenue is recognized when (1) realized or
realizable and (2) earned
PRINCIPAL FINANCIAL STATEMENTS contribution to revenue
INCOME STATEMENT

Expenses
ACCOUNTING CONCEPTS
- decreases in assets or increases in (Income Statement)
liabilities due to earnings process
- expenses are recognized when the work Revenues P XXX Less: Cost of
(service) or product actually makes its Goods Sold XXX Gross Profit P
 XXX Operating Expenses they pay to numbers, the temperature
General & Administrative (XXX) chart of their business.”
Selling Expenses (XXX) EBIT P
XXX Other expenses (XXX) EBT P - Harold Geneen
XXX Income Taxes (XXX) Net
Income (Loss) P XXX ====

COMMON SIZE AND TREND ANALYSIS

Common Size Analysis looks at the

percentage distribution of the
components of some financial
aggregate , to detect structural
differences.
For the balance sheet, this involves
expressing each balance sheet item as a
FINANCIAL STATEMENT
percentage of total assets For the income
ANALYSIS
statement, it involves expressing all
income statement items as a
“The difference between well-managed
percentage of net sales Trend Analysis
companies and not-so-well-managed looks at financial statement items over
companies is the degree of attention several periods
INDEPENDENT AUDITORS’ REPORT

Unqualified Opinion – an auditor

concludes that the financial statements
are presented fairly , in all material
respects, in accordance with the
applicable financial reporting
framework

Qualified Opinion
Adverse Opinion
Disclaimer of Opinion
CASH FLOW ANALYSIS CASH FLOW ANALYSIS
I had always thought it fine to show a jet Quoth the Banker, “Watch Cash Flow”
black bottom line,
But the banker sounded a resounding, Once upon a midnight dreary as I pondered
“No, weak and weary
Your receivables are high, mounting upward Over many a quaint and curious volume of
toward the sky; accounting lore,
Write-offs loom. What matters is cash Seeking gimmicks (without scruple) to
flow.” squeeze through some new tax
He repeated, “Watch cash flow.” loophole, Suddenly I heard a knock
upon my door,
Then I tried to tell the story of our lovely Only this, and nothing more.
inventory
Which, though large, is full of most Then I felt a queasy tingling and I heard the
delightful stuff. cash a-jingling
But the banker saw its growth, and with a As a fearsome banker entered whom I’d often
mighty oath seen before.
He waved his arms and shouted, “Stop! His face was money-green and in his eyes
Enough! there could be seen
Pay the interest, and don’t give me any Dollar-signs that seemed to glitter as he
guff!” reckoned up the score.
“Cash flow,’ the banker said, and nothing
more.
CASH FLOW ANALYSIS He quivered, and his teeth began to
gnash.

Next I looked for non-cash items which could
add ad infinitum
To replace the ever-outward outflow of
cash
But to keep my statement black I’d held
depreciation back,
And my banker said that I’d done
something rash.
When I asked him for a loan, he responded,
with a groan,
That the interest rate would be just prime
plus eight,
And to guarantee my purity he’d insist on
some security –
All my assets plus the scalp upon my
pate.
Only this, a standard rate.

12

CASH FLOW ANALYSIS

Though my bottom line is black, I am flat upon my back,

My cash flows out and customers pay slow.
The growth of my receivables is almost unbelievable; Herbert S. Bailey, Jr.
The result is certain – unremitting woe!
And I hear the banker utter an ominous low mutter,
END
“Watch cash flow.”
Exercise Sheet
I. Property, Plant and Equipment
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Depreciation
Assume that ABC Company acquires a machine for P 296,000. It expects the machine to last six
years and to operate for 30,000 hours during that time. Estimated salvage value is P 26,000 at
the end of the machine’s useful life. Calculate the depreciation charge for each of the first three
years using each of the following methods – Straight Line, Sum of the Years’ digits, the Units of
Production method with the following operating times: 1 st year, 4,500 hours, 2nd year, 5,000
hours, 3rd year 5,500 hours.
II. Retained Earnings
Oil Company manufactures a diversified line of chemical products. Its sales tend to vary with
changes in the business cycle. Selected data from its financial statements for four recent years
appear below (amounts in million pesos):
Year 1 Year 2 Year 3 Year 4
Retained Earnings, beg. 499 XX 388 238
Net Income (13) 9 XX 91
Dividends Paid (51) (56) (58) (XX)
Retained Earnings, end. XX 388 238 269
• Compute the missing amounts for each year
• What is the likely reason for the variations in net income and net loss?
• Why might Oil continue to pay dividends, given the variability in earnings?
III. Balance Sheet
Moulton Corporation engaged in the following seven transactions during December, Year 12 in
preparation for opening the business on January 1, Year 13.
(1) Issued for cash 80,000 shares of $ 10 par value common stock
(2) Acquired for cash land costing $ 50,000 and a building costing $ 450,000. The building
has an estimated useful life of 25 years beginning on January 1, Year 13.
(3) Purchased merchandise inventory costing $ 280,000 on account from various suppliers.
(4) Paid for inventory purchased in (3) with an original invoice price of $ 250,000 in time to
take advantage of a 2% discount for prompt payment. The firm treats discounts taken as
a reduction in the cost of inventories. The firm has not yet paid for the remaining $ 30,000
of purchases on account.
(5) Paid $ 12,000 for a one-year insurance policy on the land and building. The insurance
coverage begins January 1, Year 13.
(6) Borrowed $ 300,000 from a bank on December 31, Year 12. The loan bears interest at an
annual rate of 8% and is due in 5 years. The interest is payable on January 1 of each
year, beginning January 1, Year 14, and the $ 300,000 amount borrowed is due on
December 31, Year 17.
(7) Acquired equipment on December 31 costing $ 80,000 and signed a 6% note payable to
supplier. The note is due on June 30, Year 13. The equipment has an estimated useful
life of 5 years.
Prepare a balance sheet as of December 31, Year 12.

1
IV. Income Statement and Balance Sheet
Moulton opened for business on January 1, Year 13. It uses the accrual basis of accounting.
Transactions and events during Year 13 were as follows:
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(1) During Year 13: Purchased inventory on account costing $ 1,100,000 from various
suppliers.
(2) During Year 13: Sold merchandise to customers for $ 2,000,000 on account.
(3) During Year 13: The cost of merchandise sold to customers totalled $ 1,200,000.
(4) During Year 13: Collected $ 1,400,000 from customers for sales made previously on
account.
(5) During Year 13: Paid merchandise suppliers $ 950,000 for purchases made previously on
account.
(6) During Year 13: Paid various suppliers of selling and administrative services $ 625,000.
The firm consumed all of the benefits of these services during Year 13.
(7) June 30, Year 13: Repaid the note payable to a supplier with interest (see transaction #7)
(8) December 31, Year 13: Recognized interest on long-term bank loan (see transaction #6)
(9) December 31, Year 13: Recognized insurance expense for Year 13 (see transaction #5)
(10)December 31, Year 13: Recognized depreciation expense for Year 13 (see transaction
#2 and #7)
(11)December 31, Year 13: Recognized income tax expense and income tax payable for
Year 13. Assume that the income tax rate is 40%.
Prepare an income statement for the year ended December 31, Year 13.
Prepare a balance sheet as of December 31, Year 13.
XYZ COMPANY
Balance Sheet / Statement of Financial Position
December 31, 2020
ASSETS
Current Assets
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Cash and Cash Equivalents XXX
Trading Securities / Short-Term Investments XXX
Receivables XXX
Inventories (Finished Goods, Work-in-Process,
Raw Materials, Factory Supplies) XXX
Prepaid Assets XXX
Total Current Assets XXX
Non-Current Assets
Investments XXX
Property, Plant and Equipment (Fixed Assets)
Land XXX
Building XXX
Less: Accumulated
Depreciation XXX XXX
Other Fixed Assets XXX
Less: Accumulated
Depreciation XXX XXX XXX
Intangibles XXX
Other Assets XXX
TOTAL ASSETS XXX
====
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable XXX
Note Payable XXX
Accrued Expenses XXX
Other Current Liabilities XXX
Total Current Liabilities XXX
Non-Current (Long-Term) Liabilities XXX
TOTAL LIABILITIES XXX
Equity
Preferred Stock/Preference Shares XXX
Common Stock/Ordinary Shares XXX
Retained Earnings XXX
Treasury Stock/Treasury Shares (XXX) XXX
TOTAL LIABILITIES AND EQUITY XXX
====
ASSETS = LIABILITIES + EQUITY

XYZ COMPANY
Income Statement / Profit and Loss Statement / Statement of Comprehensive Income
For the Year Ended December 31, 2020

Revenues / Net Sales XXX

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Less: Cost of Goods Sold (Direct Materials, Labor, Overhead) XXX
Gross Profit XXX
Less: Operating Expenses
General and Administrative
Office Salaries XXX
Office Supplies XXX
Depreciation (Office Fixed Assets) XXX
Utilities on Office Space XXX XXX
Selling Expenses
Marketing XXX
Commissions XXX
Sales Salaries XXX
Depreciation (Store Fixed Assets) XXX
Utilities on Store Space XXX
Delivery XXX XXX XXX
EBIT / Operating Income XXX
Other Income (Expenses)
Gain on sale of fixed assets XXX
Interest Income XXX
Interest expense (XXX) XXX
Earnings Before Tax XXX
Tax XXX
NET INCOME XXX
====
NET INCOME (NET LOSS) = REVENUES – EXPENSES