12

Fundamentals of
Accountancy, Business
and Management 2
Quarter 1 - Module
Week 5

SCHOOLS DIVISION OF SURIGAO CITY

 Page 2

FABM2 - WEEK 5
First Edition, 2020

Republic Act 8293, section 176 states that: No copyright shall subsist in any work of the
Government of the Philippines. However, prior approval of the government agency or office
wherein the work is created shall be necessary for exploitation of such work for profit. Such
agency or office may, among other things, impose as a condition the payment of royalties.

Borrowed materials (i.e., songs, stories, poems, pictures, photos, brand names, trademarks, etc.)
included in this book are owned by their respective copyright holders. Every effort has been
exerted to locate and seek permission to use these materials from their respective copyright
owners. The publisher and authors do not represent nor claim ownership over them.

Development Team of the Self Learning Module

Writer: Kurt-Airion H. Sumaylo

Editor:
Reviewers:
Layout Artist:
Management Team:

Printed in the Philippines by ______________________________

For the learner:

Welcome to the Fundamentals of Accountancy, Business and Management 2 – Grade 12
Modular Distance Learning (MDL) Self-Learning Module on the Statement of Comprehensive
Income (SCI) of a Merchandising Business!

This module was designed to provide you with fun and meaningful opportunities for guided
and independent learning at your own pace and time. You will be enabled to process the
contents of the learning resource while being an active learner.

Writer: KURT-AIRION H. SUMAYLO

School/Station: CARAGA REGIONAL SCIENCE HIGH SCHOOL
Division: Surigao City
Email Address: kurtairionsumaylo1981@gmail.com
 Page 3

The Preparation of Cash Flow Statement and

WEEK
Analysis and Interpretation of Financial
5 Statements: Liquidity

Name : ____________________________________________ Section : _______________

Objectives

A. Determine the process in preparing cash flow statement

B. Prepare a cash flow statement

C. Appreciate the importance of preparing cash flow statement

D. Define the liquidity measurement level

E. Identify the different ratios under liquidity measurement level

F. Reflect on the importance of these ratios in business operation

What I know?

Directions: Write “”T” if the statement is true and “F” if the statement is false. Write your answers in
the space provided before each number.

___1. A business will never fail even if they do not know how to manage their cash inflows and
outflows.

___2. The item Cash at the end of the period should be balanced with the cash presented in the
statement of financial position.

___3. In cash flow statement, cash and non-cash transactions were analyzed and classified into
operating, investing, and financing.

___4. The beginning balance of cash is deducted to the item net increase in cash and cash
equivalents to arrive at the ending balance.

Writer: KURT-AIRION H. SUMAYLO

School/Station: CARAGA REGIONAL SCIENCE HIGH SCHOOL
Division: Surigao City
Email Address: kurtairionsumaylo1981@gmail.com
 Page 4

___5. After determining the net effects of the operating, financing, and investing activities, they are
aggregated.

Lesson
Preparing the Cash Flow Statement

1. Determine the heading

The heading of the statement includes the company name, title of the statement, and the
period covered by the statement. Below is the heading of the cash flow statement:

ABC COMPANY
CASH FLOW STATEMENT
FOR THE PERIOD ENDED DECEMBER 31, 2019
(Heading)

2. Analyze the cash transaction.

Below is the cash T-account of ABC Company. Each transaction was analyzed in succeeding
tables.

Debits Amounts Nature Classification Reason

Dec. 1 2,000,000 receipts from customers operating affects net income
Dec. 15 600,000 long term loan from a bank financing affects non-current
liability
Dec. 20 200,000 additional investment from financing affects equity
owner

Credits Amounts Nature Classification Reason

Dec. 5 1,400,000 Payments to Suppliers and operating affects net income
Employees
Dec. 9 300,000 Cash - 0001
Purchases of Property and investing affects non-current
Equipment
Dec. 1 2,000,000 Dec. 5 liability
1,400,000
Dec. 19 160,000 Withdrawals by owner financing
Dec.9 affects
300,000 equity
Dec. 15 600,000 Dec. 19 160,000
Dec. 20 200,000
2,800,000 1,860,000
940,000

(Cash T-account)

Writer: KURT-AIRION H. SUMAYLO

School/Station: CARAGA REGIONAL SCIENCE HIGH SCHOOL
Division: Surigao City
Email Address: kurtairionsumaylo1981@gmail.com
 Page 5

Cash flows from Operating Activities

Receipts from Customers P 2,000,000
Payments to Suppliers and Employees (1,400,000)
Net Cash generated by Operating Activities P 600,000
(Operating Activities Section)

4. Prepare the investing activities section.

Based on the analysis, purchases of property and equipment is the only investing activity.

Cash flows from Investing Activities

Purchases of Property and Equipment (P 300,000)
Net Cash used in Investing Activities (P 300,000)
(Investing Activities Section)

5. Prepare the financing activities section.

Based on the analysis, long term loan from a bank, additional investment from owner and
withdrawals by owner.

Cash flows from Financing Activities

Long term loan from a bank P 600,000
Additional investment from owner 200,000
Withdrawals by owner (160,000)
Net cash generated by Financing Activities P 640,000
(Financing Activities Section)

6. Analyze the cash transaction.

After determining the net effects of the operating, financing, and investing activities, they are
now aggregated.

Net increase in cash and cash equivalents P 940,000

Cash, January 1, 2019 200,000
Cash, December 31, 2019 P 1,140,000

(The Ending Balance)

Then, the beginning balance of cash is added to the item above (net increase in cash and cash
equivalents) to arrive at the ending balance.

Below is the complete cash flow statement. Notice that the item Cash at the end of the period
should be balanced with the cash presented in the statement of financial position.

ABC COMPANY
CASH FLOW STATEMENT

Writer: KURT-AIRION H. SUMAYLO

School/Station: CARAGA REGIONAL SCIENCE HIGH SCHOOL
Division: Surigao City
Email Address: kurtairionsumaylo1981@gmail.com
 Page 6

FOR THE YEAR ENDED DECEMBER 31, 2019

Cash flows from Operating Activities

Receipts from Customers P 2,000,000
Payments to Suppliers and Employees (1,400,000)
Net Cash generated by Operating Activities P 600,000
Cash flows from Investing Activities
Purchases of Property and Equipment (P 300,000)
Net Cash used in Investing Activities (P 300,000)
Cash flows from Financing Activities
Long term loan from a bank P 600,000
Additional investment from owner 200,000
Withdrawals by owner (160,000)
Net cash generated by Financing Activities P 640,000
Net increase in cash and cash equivalents P 940,000
Cash, January 1, 2019 200,000
Cash, December 31, 2019 P 1,140,000

(The Cash Flow Statement)

Do you think it is enough that only the accountant can prepare the different financial
statements?

How can we maximize the relevance of such documents?

Analysis and Interpretation of Financial Statements: Liquidity

Financial statement (FS) analysis is the process of evaluating risks, performances, financial
health and future prospects of a business by subjecting financial statement data to computational and
analytical techniques with the objective of making economic decisions (White et.al 1998 as cited by
Monfero et.al 2016, 64).

This lesson will focus on financial ratios; particularly, liquidity ratios.

The ratio analysis expresses the relationship among selected items of financial statement data.
The relationship is expressed in terms of a percentage, a rate, or a simple proportion (Weygandtet.al.
2013 as cited by Monfero et al. 2016, 81).

Liquidity pertains to the company’s ability to meet its currently maturing obligations. In
short, it is the capability to pay for short-term debts. These would require a good amount of cash and
other liquid assets such as accounts receivable, inventory, trading securities, and prepaid assets.

These ratios are very important to the short term creditors of a company. These ratios would
determine if the borrowing company is in a position to pay the borrowed principal and interest when
they fall due.

Writer: KURT-AIRION H. SUMAYLO

School/Station: CARAGA REGIONAL SCIENCE HIGH SCHOOL
Division: Surigao City
Email Address: kurtairionsumaylo1981@gmail.com
 Page 7

A good liquidity position would encourage banks or financial institutions to lend while a bad
liquidity position may scare off potential creditors. Different ratios under liquidity ratio are:

a. Working capital

The liquidity capital is the difference between current assets and current liabilities. This is
one of the simplest liquidity ratios. A positive working capital is preferred because it would mean
that there is enough current assets to pay all of the current liabilities at the current period.

On the other hand, a negative working capital is to be avoided because it would mean that the
company would surely default on some of its liabilities.

b. Current ratio

The current ratio is a liquidity ratio that measures a company's ability to pay short-term
obligations or those due within one year. It tells investors and analysts how a company can maximize
the current assets on its balance sheet to satisfy its current debt and other payables.

c. Acid test ratio

The acid test ratio is a liquidity ratio that measures the ability of a company to pay its current
liabilities when they come due with only quick assets. Quick assets are current assets that can be
converted to cash within 90 days or in the short-term. Cash, cash equivalents, short-term investments
or marketable securities, and current accounts receivable are considered quick assets.

It is a more strict variation of the current ratio formula. It removes inventory and prepaid
expenses from the numerator component.

d. Account receivable turnover ratio

This ratio measures the frequency of conversion of the company’s accounts receivable to
cash. It measures how many times the company collected its accounts receivable from its customers.

Accounts receivable turnover is the number of times per year that a business collects its
average accounts receivable. The ratio is used to evaluate the ability of a company to efficiently issue
credit to its customers and collect funds from them in a timely manner.

e. Average collection period

The average collection period is a measure of how many days it takes a firm, on average, to
collect its receivables. It indicates the efficiency of the collection process and the lower it is the
shorter the cash cycle of the business is, which has a positive impact on its profitability.

f. Inventory turnover ratio

The inventory turnover ratio is an activity ratio and a tool to evaluate the liquidity of
company’s inventory. It measures how many times a company has sold and replaced its inventory
during a certain period of time.

g. Average days in inventory

Writer: KURT-AIRION H. SUMAYLO

School/Station: CARAGA REGIONAL SCIENCE HIGH SCHOOL
Division: Surigao City
Email Address: kurtairionsumaylo1981@gmail.com
 Page 8

The financial ratio days' sales in inventory tell you the number of days it took a company to
sell its inventory during the recent year. Keep in mind that a company's inventory will change
throughout the year, and its sales will fluctuate as well. Therefore, you should view this as an average
from the past.

h. Number of days in operating cycle

The number of days in operating cycle are the measures on how long it would take for the company to
transform its inventory back to cash. This is the combination of the average collection period and the
average age of inventory. The goal is to always have a shorter number of days of operating cycle. A

shorter number would indicate that the company would have additional cash at an earlier time.

Activity

Activity 1
Directions: The following are the balances of ABC Company for the period which ended on
December 31, 2018. Determine whether it will affect the operating, investing or financing activity in
the cash flow statement. Write your answers in the space provided below.

Cash Balance, December 1 Php 270,000

Cash received from the customers for services rendered 425,000
Cash payment to suppliers 45,000
Salaries paid to employees 25,000
Payment for rent 20,000
Cash payment for the purchase of machinery 50,000
Cash received due to bank loan 250,000
Cash payment for short-term borrowings 50,000

Operating Investing Financing

Writer: KURT-AIRION H. SUMAYLO

School/Station: CARAGA REGIONAL SCIENCE HIGH SCHOOL
Division: Surigao City
Email Address: kurtairionsumaylo1981@gmail.com
 Page 9

Activity 2:

Directions: From the balances of ABC Company given above, solve the given problems and show the
solutions.

a. Compute for the net cash flow generated by/used in operating activities.
b. Compute for the net cash flow generated by/used in investing activities.
c. Compute for the net cash flow generated by/used in financing activities.

Activity 3:

Directions: Prepare the cash flow statement of ABC Company.

Generalization
Liquidity refers to the ease with which an asset, or security, can be converted into ready cash
without affecting its market price. Cash is the most liquid of assets while tangible items are less
liquid. The two main types of liquidity include market liquidity and accounting liquidity.

Post-test
A. Directions: Encircle the letter of the best answer.

1. The cash flow statement provides information about the cash and non-cash account of the
business entity. Cash flows are categorized into operating, investing, and financing activities.
a. Both statements are correct.
b. Both statements are wrong.
c. First statement is correct and the second statement is wrong.
d. First statement is wrong and the second statement is correct.

2. Cash payment for short-term borrowings is categorized under ______

a. Operating activities
b. Investing activities
c. Financing activities
d. None of the above
3. The heading of the cash flow statement includes the name of the owner of the business
enterprise. The heading also includes the contact number of the business enterprise.
a. Both statements are correct.
b. Both statements are wrong.
c. First statement is correct and the second statement is wrong.
d. First statement is wrong and the second statement is correct.
Writer: KURT-AIRION H. SUMAYLO
School/Station: CARAGA REGIONAL SCIENCE HIGH SCHOOL
Division: Surigao City
Email Address: kurtairionsumaylo1981@gmail.com
 Page 10

4. Which of the following reduces the cash balances of a business?

a. Cash inflow from interest income
b. Cash inflow form dividend income
c. Cash outflow to acquire fixed assets
d. All of the above

5. The following are included in the cash flow statement except for ______.
a. Heading
b. Operating
c. Investing
d. Lending
e.
B. Directions: Write the word True if the statement is correct, if it is wrong, change the underlined
word with the correct answer.

1. Through financial ratios, the relationship between two or more components of financial
statements can be measured.

2. A good liquidity position would encourage banks or financial institutions to lend while a bad
liquidity position may scare off potential creditors.

3. A negative working capital is preferred because it would mean that there is enough current
assets to pay all of the current liabilities at the current period.

4. The inventory turnover ratio tells you the number of days it took a company to sell its
inventory during a recent year. Financial ratio days’ sales in inventory.

5. The average days in inventory ratio measures how many times a company has sold and
replaced its inventory during a certain period of time.

References:

Licuanan P. (2016). Teaching Guide for Senior High School

Writer: KURT-AIRION H. SUMAYLO

School/Station: CARAGA REGIONAL SCIENCE HIGH SCHOOL
Division: Surigao City
Email Address: kurtairionsumaylo1981@gmail.com
 Page 11

Fundamentals of Accountancy, Business and

Management 1
Specialized Subject I ACADEMIC – ABM
Published by the Commission on Higher Education,

Accountingtheory(n.d) Retrieved from http://accountingtheory.weebly.com/nature-

and-scope-of-accounting

Writer: KURT-AIRION H. SUMAYLO

School/Station: CARAGA REGIONAL SCIENCE HIGH SCHOOL
Division: Surigao City
Email Address: kurtairionsumaylo1981@gmail.com