Joselito ‘Joe’ Florendo

Deputy Director for Administration

SEARCA

Former Vice-President for Planning & Finance University of the Philippines, System

How much is 2 + 2?

ENGINEER MATHEMATICIAN

1
 PHYSICIST LOGICIAN

SOCIAL WORKER ATTORNEY

 USERS OF FINANCIAL STATEMENTS
Investors / Owners

Management

ACCOUNTANT Employees

Creditors

Customers

Government 10

PRINCIPLES AND CONCEPTS

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

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.

MATCHING PRINCIPLE CONSERVATISM / PRUDENCE

Costs and expenses incurred in earning a revenue should Anticipation of all losses and expenses but defers
be reported in the same period. recognition of gains or profits until they are realized.
11 12
 THE PRINCIPAL FINANCIAL STATEMENTS AND
PRINCIPLES AND CONCEPTS
THE OBJECTIVES OF THE FIRM
TIME PERIOD PRINCIPLE
The indefinite life of an entity is subdivided into time - Financial statements are the firm’s report card to its
periods which are usually of equal length. various stakeholders

ERNATIONAL FINANCIAL REPORTING STANDARDS / PHILIPPINE FINANCIAL REPORTING STANDARDS

- Stakeholders’ (Financial) Interest
Profitability
Liquidity / Solvency
Stability
Custody and Administration of Public Funds
13 14

PRINCIPAL FINANCIAL STATEMENTS BALANCE SHEET

BALANCE SHEET / BALANCE SHEET
STATEMENT OF FINANCIAL POSITION (ASSETS = LIABILITIES + EQUITY)
- A report of the resources owned by the company and claims - Assets are economic resources owned and used by the
on business in conducting its operations and are expected to
these resources provide future benefits
- A ‘snapshot’ of the firm’s financial condition - Liabilities are economic obligations of an enterprise on
- Basic Sections: Assets these resources
Liabilities - Capital or Equity represents the investment of a business’
Capital or Equity owners

15 16

4
 BALANCE SHEET BALANCE SHEET CLASSIFICATION
BALANCE SHEET CLASSIFICATION
CURRENT ASSETS
- Current Assets
- Assets or resources which are reasonably expected to
be realized in cash or sold or consumed during the
- Noncurrent Assets normal operating cycle
Investments
Property, Plant and Equipment - Cash, Trading Securities,
Intangibles - Receivables, Inventories, Prepaid Assets
Other Assets

17 18

CURRENT ASSETS CURRENT ASSETS

CASH AND CASH EQUIVALENTS
- Must be readily available for the payment of current TRADING SECURITIES
obligations and must be free from any contractual - Are debt and equity securities purchased with the
restriction that limits its use in satisfying debts intent of selling them in the near future
- Consists of coin, currency, and available funds on deposit
at the bank
- Trading involves frequent buying and selling of
securities, generally for the purpose of generating
- Cash equivalents are short term, highly liquid investments
that are both (a) readily convertible to known amounts of profits on short-term differences in price
cash and (b) so near maturity that they represent
insignificant risk of changes in interest rates

19 20

5
 CURRENT ASSETS CURRENT ASSETS

RECEIVABLES INVENTORIES
- Are presented at net realizable value on balance - Are items of tangible property which are
sheet date; i.e., the amount expected to be (a) held for sale in the ordinary course of business
received in cash (b) in the process of production for such sale
(c) currently consumed in the production of goods or
services to be available for sale

21 22

NONCURRENT ASSETS NONCURRENT ASSETS

(INVESTMENTS) (PROPERTY, PLANT AND EQUIPMENT)

- Assets that are not directly identified with the - Include all tangible assets with an estimated
operating activities of the company or assets useful life beyond one year, are used in the
not involved in the sale or production of goods conduct of business, and are not intended for
and services sale in the ordinary course of business

23 24

6
 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
- Property subject to depletion, such as timber, oil and
mining lands and leases
PROPERTY, PLANT AND EQUIPMENT
- Depreciation is a systematic means of allocating
the cost of a long-lived asset over its useful life.
It requires an estimate of the asset’s useful life
and salvage value. Accumulated depreciation
represents the total amount of cost that has
already been charged to income.
- Acceptable methods of depreciation are: (1)
straight-line, (2) units of output, (3) sum-of-the-
years’ digits
25
NO E
N T
C S
U
R (
R I
E N
N T
T A
N
A G
S I
S B
7
 PROPERTY, PLANT AND EQUIPMENT PROPERTY, PLANT AND EQUIPMENT
- Property ordinarily not subject to depreciation or - Depreciation is a systematic means of allocating
depletion, such as land used as plant site
the cost of a long-lived asset over its useful life.
- Property subject to depreciation or amortization such It requires an estimate of the asset’s useful life
L NO R
E - Patent,
N
S Goodwill,
Franchise, C A
) Copyright, U S
- Relativel License R S
y long- s, E
lived Tradem R
assets ark, E T
without Secret N S
physical Proces )
ses, T
characte
etc. - a
ristics,
whose A balance
S sheet
value
caption
lies in S under
rights, E which
privilege
s, and T are
S listed
competiti
non-
ve
current
advanta ( items
ges O which
which
they give T cannot
H be
the
appropri
owner E ately be
8
 PROPERTY, PLANT AND EQUIPMENT PROPERTY, PLANT AND EQUIPMENT
- Property ordinarily not subject to depreciation or - Depreciation is a systematic means of allocating
depletion, such as land used as plant site
the cost of a long-lived asset over its useful life.
- Property subject to depreciation or amortization such It requires an estimate of the asset’s useful life
inclu usual
ded asset
in categ
the ories

2
7

2
8

9
 LIABILITIES CAPITAL OR EQUITY
3 Forms of Business Organizations
Economic obligations of an enterprise that are
recognized and measured in conformity with
generally accepted accounting principles - Sole Proprietorship
- Partnership
- Classified as either current or noncurrent / long- - Corporation
term

29

CA operation of
PIT law, having
the right of
AL succession
OR and the
EQ powers,
UIT attributes, and
Y properties
expressly
CORPORATION authorized by
law or incident
to its
- A existence.
Corporation
is an artificial Corporation Code of the Philippines

being
created by
8
 LIABILITIES CAPITAL OR EQUITY
C STOCKHOLD
ERS’ EQUITY
A
- Common
P Stock /
I Ordinary
T Share
A - Preferred
L Stock /
Preference
O Share
R - Dividends
E (cash, stock,
Q property)
U - Treasury
I Stock /
Treasury
T Share
Y - Retained
Earnings

3
1

3
2

9
 CAPITAL OR EQUITY CAPITAL OR EQUITY
COMMON STOCK
PREFERRED STOCK
- Preferred shares of stock issued by any
- Right to Vote
corporation may be given preference in the
- Right to Receive Dividends distribution of the assets of the corporation in
- Share in the assets upon liquidation 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

33

C
A POWER TO
PI DECLARE
T DIVIDENDS
A - The Board of
L directors of a
stock
O
corporation
R may declare
E dividends out
Q of unrestricted
UI retained
earnings
T which shall be
Y
9
 CAPITAL OR EQUITY CAPITAL OR EQUITY
pay es not or its
able
CA give rise shareholder
in PIT to any ’s
cas AL change in proportionat
h, in OR either the e interests
pro EQ enterprise therein
pert ’s assets
y, or
UI
in TY 35

stoc
k to
all STOCK
DIVIDE
stoc
NDS
khol
ders - Addi
on tiona
the l
basi issu
ance
s of
s of
outs
stoc
tand k to
ing stoc
stoc khol
k ders
held
- A
by
sto
the
ck
m.
div
Corporation Code of the
ide
Philippines
nd
do
10
 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.
37
RETAINED EARNINGS
- Accumulation of profits less losses and dividends
Unrestricted – portion which is free and can be
declared as dividends to the stockholders
Restricted – portion which is restricted and
not
available for dividend declaration
38

PRINCIPAL FINANCIAL STATEMENTS PRINCIPAL FINANCIAL STATEMENTS

INCOME STATEMENT / PROFIT OR LOSS
INCOME STATEMENT
STATEMENT / STATEMENT OF
COMPREHENSIVE INCOME
Revenues
- increases in assets or decreases in liabilities due to
Revenues – Expenses = Net Income (loss) earnings process
- revenue is recognized when (1) realized or realizable and
(2) earned
- A report of the results of operations of a company for
a given period bounded by two balance sheet dates
39 40
 PRINCIPAL FINANCIAL STATEMENTS ACCOUNTING CONCEPTS
(Income Statement)
INCOME STATEMENT
Revenues P XXX
Less: Cost of Goods Sold XXX
Expenses Gross Profit P XXX
Operating Expenses
- decreases in assets or increases in liabilities due to General & Administrative (XXX)
earnings process Selling Expenses (XXX)
- expenses are recognized when the work (service) or EBIT P XXX
product actually makes its contribution to revenue Other expenses (XXX)
EBT P XXX
Income Taxes (XXX)
Net Income (Loss) P XXX
====
41 42

FINANCIAL pay to numbers,

the temperature
STATEMEN chart of their
T business.”
ANALYSIS - Harold Geneen

“The difference
between well-
managed
companies and
not-so-well-
managed
companies is
the degree of
attention they
11
PRINCIPAL FINANCIAL STATEMENTS ACCOUNTING CONCEPTS
(Income Statement)
INCOME STATEMENT
sheet,
this 43

COMMON involves
expressi
SIZE AND ng each
TREND balance
sheet
ANALYSIS item as a
percenta
Common ge of
Size total
Analys assets
is For the
looks income
at the stateme
percen nt, it
tage involves
distribu expressi
tion of ng all
the income
compo stateme
nents nt items
of as a
some percenta
financi ge of net
al sales
aggreg Trend
ate , to Analysi
detect s looks
structu
at
ral
financial
differe
nces. stateme
nt items
For the over
balanc several
e
periods

12
INDEPENDENT AUDITORS’ REPORT CASH FLOW ANALYSIS
Quoth the Banker, “Watch Cash Flow”

Unqualified Opinion – an auditor concludes that the Once upon a midnight dreary as I pondered weak and weary
financial statements are presented fairly , in all Over many a quaint and curious volume of accounting lore,

material respects, in accordance with the Seeking gimmicks (without scruple) to squeeze through some new tax loophole,
Suddenly I heard a knock upon my door,
applicable financial reporting framework Only this, and nothing more.

Then I felt a queasy tingling and I heard the cash a-jingling

Qualified Opinion As a fearsome banker entered whom I’d often seen before.
His face was money-green and in his eyes there could be seen

Adverse Opinion Dollar-signs that seemed to glitter as he reckoned up the score.

“Cash flow,’ the banker said, and nothing more.

Disclaimer of Opinion
4
5

4
6

C AN
A AL
S YS
H IS
I had
always

F thought
it fine to
show a

L jet
black
bottom

O line,
But the

W banker
sound
ed a
resoun
ding,
“No,
Your

12
INDEPENDENT AUDITORS’ REPORT CASH FLOW ANALYSIS
Quoth the Banker, “Watch Cash Flow”
r atters is uff the
e cash . interest
, and
c flow.” Bu don’t
ei He t give
v repeated, th me any
“Watch guff!”
a e
cash
bl flow.” ba
e nk
s er
a Th sa
r en w
e
I its
hi
tri gr
g
ed ow
h,
to th,
m
tell an
o
th d
u
e wit
nt
st h
in
g or a
u y mi
p of gh
w ou ty
a r oa
r lov th
d ely He
to inv wa
w en ve
a tor d
r y his
d W ar
th hic m
e h, s
s th an
k ou d
y; gh sh
W lar ou
rit ge te
e
, is d,
-
full “St
of
of op
fs
m !
lo
os En
o
t ou
m
de gh
.
lig !
W
h htf P
ul a
at y
m st

13
INDEPENDENT AUDITORS’ REPORT CASH FLOW ANALYSIS
Quoth the Banker, “Watch Cash Flow”

C
o
u
l a t

A o
o
d f
l

S k
e i
o
w

H
d n
f
i o
f n f
o i

F r t
u c
L n
m a
s

O o
n T
h
B

W -
c
o u
t
a
s r
h e
A
t
p o
l

N i
t
a
c k

A e
m
e e
e

L s
t
p

Y
h
w e m

S
h y
i
c e

I h v
e
s
t
S c
r
-
a
t
o o e
u u m
l t e
N
d w n
e
a t
x
r
t
a d
d b
d l
I

14
INDEPENDENT AUDITORS’ REPORT
a k
c e
k r
I s
’ a
d i
d
CASH FLOW ANALYSIS
Quoth the Banker, “Watch Cash Flow”
v h
e i
r
e m
d
,
f
a o
n r
d

h h a
i
e t
s
l h
d a l
t
t o
e
e a
d t n
h
e I ,
p ’
r d b
e
e h
g
c a e
i d n
a o
t n t r
i e o e
o s
n g p
s n o
o a n
s
b m h d
a e . e
c t d
k h W ,
, i h
n e
g n w
A i
n t
d r I h
a
s
m h a a
y . s
H k
e e g
b d r
a q o
n u a
i

15
INDEPENDENT AUDITORS’ REPORT CASH FLOW ANALYSIS
Quoth the Banker, “Watch Cash Flow”
n i o
, m m
e u
e p
s o
T e n
c
h p u
a l r m
t u i y
t
s y
p
t – a
A t
h e e
l
e i l .
g O
h n
m l
i t y y
n ,
t A
n a t
e s
d h
r s i
e t e s
o t ,
s s
t g
u a
a p
r l
r a u s
a n s t
t t a
e n
e e t d
h a
m e r
y d
w
o p s
u c r
u
r a a
l i l t
d t p e
y .

h
b e
e ’
d
4
7
i
j n
s 4
u i 8
s s
t t

o
n
p
s
r
16
 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;
The result is certain – unremitting woe!
And I hear the banker utter an ominous low mutter,
END
“Watch cash flow.”

Herbert S. Bailey, Jr.

49 50

13
 Exercise Sheet

I. Property, Plant and Equipment

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, 2 nd 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:

(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.

2
 XYZ COMPANY
Balance Sheet / Statement of Financial Position
December 31, 2020

ASSETS
Current Assets

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

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