Financial Statements – are structed representation of the financial  Liabilities – a liability is a present obligation of the entity

position and financial performance of an entity. The objective of arising from past events, the settlement of which is expected
financial statements is to provide information about the financial to result in an outflow from the entity of resources
position, financial performance and cash flows of an entity that is embodying economic benefits.
useful of a wide range of users in making economic decisions.  Equity – equity is the residual interest in the assets of the
Financial statements also show the results of the management’s entity after deducting all its liabilities.
stewardship of the resources entrusted to it. To meet this objective,
financial statements provide information about an entity’s: The balance sheet and accounting equation
a. Assets; A=L+E
b. Liabilities; CA & NCA = CL & NCL + E
c. Equity’
d. Income and expenses, including gains and losses; Current assets – an entity shall classify an asset as current when…
e. Contributions by and distributions to owners in their capacity  it expects to realize the asset, or intends to sell or consume it,
as owners; and in its normal operating cycle
f. Cash flows  it holds the asset primarily for the purpose of trading
 it expects to realize the asset within twelve months after the
This information, along with other information in the notes, assists reporting period; or
users of financial statements in predicting  the assets are cash or a cash equivalent unless the asset is
restricted from being exchanged or used settle a liability for
A complete set of financial statements comprises: at least 12 months after the reporting period.
a. A statement of financial position as at the end of the period Cash
b. A statement of comprehensive income for the period
 Accounts Receivable
c. A statement of changes in equity for the period
 Inventories
d. A statement of cash flows for the period
e. Notes, comprising a summary of significant accounting  Prepaid expenses (depends on the classification)
policies and other explanatory information and  Marketable equity securities
f. A statement of financial position as the beginning of the  Office and store supplies
earliest comparative period when an entity applies an
accounting policy retrospectively or makes a retrospective Noncurrent assets – all other assets (that are not current) shall be
restatement of items in its financial statements, or when it classified as noncurrent assets
reclassifies items in its financial statements.  Land
 Land improvements – depreciable
Balance sheet elements  Building
 Assets – an asset is a recourse controlled by the entity as a  Equipment
result of past events and from which economic benefits are  Machineries
expected to flow to the entity

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  Intangible assets – assets that are not seen, patent, copyright,
trademark
 Investments in equity securities – paupahan
 Investment property
 Investment in an associate – holding stocks from other
companies (20% or higher)
Current liabilities -an entity shall classify a liability as current
when…
 it expects to settles the liability in its normal operating cycle;
 it holds the liability primarily for the purpose of trading;
 the liability is due to be settles within twelve months after
the reporting period; or
 it does not have an unconditional right to defer settlement of
the liability for at least 12 months after the reporting period.
 Trade accounts payable
 Short-term notes payable
 Salaries payable
 Rent payable
 Utilities payable
 Current income tax payable
Noncurrent liabilities – all other liabilities (that are not current) shall
be classified as noncurrent liabilities
 Bonds payable
 Long-term notes payable
Income statement – reports the company’s financial performance
through presenting the entity’s revenue, gains, expenses and losses
for the period ended.
Elements of Financial Performance
1. Income – increases in economic benefits during the
accounting period in the form of inflows or enhancements of
assets or decreases of liabilities that result in increases in
equity, other than those relating to contributing from equity
participants.
2. Expense – decreases in economic benefits during the
accounting period in the form of outflows or depletions of
assets or incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to equity
participants.
Income encompasses both revenue and gains.
 Revenue arises in the course or ordinary regular activities.
 Gains are other items represents increases in economic
benefits but does not regularly arise in ordinary business
operations. For example, gain on sale of assets*.
*A merchandising company who sells their
inventory earn sales revenue. If that company, however,
decided to sell their equipment at a higher price that its
carrying value, it’s a gain on sale of equipment.
Expenses encompasses both expenses and losses.
 Expenses are decreases in economic benefits due to, for
example, salaries, rent, and depreciation.
 Losses do not arise in regular business operations such as
loss from firs, loss from disasters, or loss from sale of assets.
Income statement vs Statement of comprehensive income
Income statement presents the results of the entity’s
operations and financial performance through the reporting of the
entity’s revenues and expenses.
A statement of comprehensive income presents the entity’s
net income, alongside the effects of other comprehensive income
leading to comprehensive income.
An entity has a choice on presenting the statement of comprehensive
income
a. Two-statement format
b. Single-statement format
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Forms of business organizations Cash outflows
Sole proprietorship  Payments to suppliers
Partnership  Payment of operating expenses like salaries, rent, utilities,
Corporation and taxes
 Payment for interest expense
Statement of changes in equity  Charity contributions
For a sole proprietorship type of business, the Statement of changes  Cash refund to customers
in equity includes the following items:
 Capital balance at the start of the accounting period. Investing activities (noncurrent assets activities)
 Any additional investments and contributions by the owner. Cash inflows
 Net income enjoyed or net loss suffered by the company  Cash proceeds from selling productive assets like property,
 Any withdrawals by the owner. plant and equipment
 Capital balance at the end of the accounting period (adjusted  Cash proceeds from selling investments in equity securities
capital balance) of other companies
Cash outflows
Beginning capital + Additional investments + Net Income – Net Loss  Payments for the purchase of productive assets like property,
– withdrawals = Ending Capital plant and equipment
 Payments to acquire investments in equity securities
Statement of Cash Flows
Activities related to cash flows Financing activities (noncurrent liabilities and equity activities0
 Operating activities – activities of an entity related to their Cash inflows
main revenue generating activities of providing goods and  Cash investments by the owner
services. (Income Statement, Balance sheet current assets,  Cash proceeds from issuance of share capital
balance sheet current liabilities)  Cash proceeds from long-term borrowing
 Investing activities – activities of an entity related to sale and Cash outflows
purchase of long-term assets and other investments. (Balance  Cash withdrawals by the owner
sheet noncurrent assets)
 Payments of cash dividends to shareholders
 Financing activities – activities of an entity related to
 Payment of long-term borrowing
acquisition of funding for the use of the entity. (Balance
sheet noncurrent liabilities and equity)
SCF Indirect Method
The indirect method of statement of cash flows is prepared in the
Operating activities (net income activities)
following manner:
Cash inflows
 The presentation of cash flows from operating activities
 Cash received from sales and service revenue
starts with net income, adjusted with non-cash expenses and
 Collection of accounts receivable changes in working capital
 Refunds from suppliers

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  The presentation of cash flows from investing and financing
activities works the same was as that of the direct method
Direct method SCF – user-friendly
Indirect method SCF – accountant-friendly
SCF Indirect Method: Operating Activities
Net Income
Non-cash expenses (depreciation)
Operating income before working capital changes
Decrease in current assets (other than cash)
(Increase in current assets (other than cash))
Increase in current liabilities
(Decrease in current liabilities)
Net cash flow from operating activities
Flow of FS Preparation
1. Income Statement
2. Statement of Changes in Equity (capital statement)
3. Balance Sheet (ALE)
4. Statement of Cash Flows (cash in balance sheet)
Financial Statements Analysis
The objective of accounting is to provide information that will be
helpful in decision-making. Truly enough, financial statements are to
provide information about the entity’s financial position, financial
performance, and cash flows.
1. Horizontal Analysis
2. Vertical Analysis
3. Analysis through ratio interpretation
Horizontal Analysis is the method of comparing and analyzing
financial results of different accounting periods in each financial
statement account and element.
1. Change in amount (current year less prior year)
2. Percentage change (amount change over base year)
Vertical Analysis (Common size analysis)
Vertical analysis is the method of analyzing financial results
expressing each financial statement account and element as a
component of a base.
(Assets over total assets) (Liabilities over Total Liabilities and
Capital)
Income Statement – base is the net sales
Ratio Analysis – a quantitative analysis technique applied by an
entity to be able to assess the company’s liquidity, solvency,
profitability and operational efficiency through scrutiny of account
balances reported in the balance sheet and income statement.
Liquidity Ratios – determines whether an entity can be able to pay
for current liabilities as they become due with the use of current
assets.

It is important for the owners and managers of the entity to be able to Current Ratio answers the question: Can the company pay for their
evaluate the results of all their businesses activities. This analysis can current liabilities with current assets?
help them:
 Confirm past expectations Current Assets
Current Ratio=
 Evaluate present financial results Current Liabilities
 Predict future outcomes
Acid Test Ratio answers the question: Can the company pay for their
Three ways of FS analysis current liabilities with quick assets?

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Some Samples of quick assets are cash and cash equivalents, trade Remember: If it is more than 1, then debt has more weight than the
and other receivables and marketable equity securities. equity. If it is equal to 1, debt is equal to equity. Rising debt ratio
means the company resorts to more debt and more interest expense.
Quick Assets Falling debt ratio means that the company is shifting more to equity
Acid Test Ratio= financing.
Current Liabilities

Cash Ratio answers the question: Can the company’s cash pay for Time Interest Earned Ratio answers the question: How many times
their current liabilities? can an entity pay for the interest expenses with their operating
income?
TotalCash Earnings before interest ∧taxes
Cash Ratio= Time Interest Earned Ratio=
Current Liabilities Interest Expense

Remember: If the current assets, quick assets and total cash are
greater than the total liabilities, the company can pay for their
liabilities. We can say that if it is greater than 1, then the company is
capable.
Solvency Ratios determine whether an entity has more ownership
rather than debts. It is also called leverage ratios. These ratios
involve comparisons of debts, asset, equity and interest.
Debt Ratio answers the question: How much of the assets are
financed by debt?
Total Liabilities
Debt Ratio=
Total Assets
Remember: If it is more than 1, then debt has more weight than the
equity. If it is equal to 1, debt is equal to equity.
Debt to Equity Ratio answers this question: Which has more weight?
Debt or equity?
Total Liabilities
Debt ¿ Equity Ratio= ' Cost of Goods Sold
Shareholde r s Equity
Remember: The higher the TIE ratio, the better. It shows how the
company is able to meet its interest obligation with the income that it
earns.
Efficiency Ratios measures how well does an entity utilizes their
assets and resources to generate income.
Asset turnover Ratio answers the question: How many times can
entity generate sales with their total asset resources?
Net Sales
Asset Turnover Ratio=
Average Total Assets
Remember: The higher the asset turnover ratio, the better. It shows
how the company is able to generate sales from their resources.
Inventory Turnover Ratio answers the question: How many times
can an entity sell their inventories and have it replaced within a
period?
Inventory Turnover Ratio=
Average Inventory

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Remember: A low turnover might mean weak sales and excess
inventory. A high turnover might mean strong sales and insufficient
inventory.
Day Sales in Inventory answers the question: How many days does
an entity holds on their inventory before a sales transaction?
365 days
Days Sales∈Inventory=
Inventory Turnover
Accounts Receivable Turnover Ratio answers the question: How
many times can an entity their receivables to cash for a certain
period?
Remember: Gross profit ratio represents the amount of gross profit
for every P1.00 sale.
Returns on Assets answers the question: How much income was
“returned” in the usage of assets to generate profit?
Net Income
Return on Assets=
Total Assets
Remember: The higher the return, the better.
Return in Equity answers the question: How much income was
“returned” in the usage of equity to generate profit?

Net credit sales Net Income

Accountsreceivable Turnover Ratio= Return on Equity=
Average Accounts Receivable Shareholde r ' s Equity
Remember: A low turnover signals weak collection efforts. A high turnover
Remember: The higher the return, the better.
signals strong collection effort.

Days in Receivables answers the question: How many days does an entity wait
for a receivable to become cash?
365 days
Days∈ Receivables=
AT Turnover
Profitability Ratios measures how well an entity generate income
that relates to their revenues, operating costs, assets and capital.
Gross Profit Ration answers the question: How mush gross profit
does the company makes after considering cost of goods that were
sold?
Bank Transactions
What is cash?
Cash includes currency or cash items on hands, such as cash items
awaiting deposit and cash in the working funds, as well as peso or
foreign currency deposits in the bank which are unrestricted and
immediately available for use in the current operation.
Components of Cash Items
1. Cash on hand (undeposited cash collections)
2. Cash in Bank (unrestricted as to withdrawal)
3. Cash in working funds (change fund, dividend fund, payroll
fund, petty cash fund)

Gross Profit Types of Bank Accounts

Gross Profit Ratio= 1. Savings account is a basic type of account maintained in the
Net Sales
bank that allows the account owner to deposit money and

6
 entrust the money in the bank to keep it safe. The bank
allows withdrawals of the fund and pays interest.
2. Checking account is a type of account maintained in the
bank that also allows the owner to deposit and withdraw
money, but also allows writing of checks to use the money
deposited. It sometimes has a higher maintaining balance
than a savings account.
3. A time deposit is an interest-bearing bank account that has a
pre-set date of maturity. The money remains in the account
for the fixed term in order to earn the stated interest rate.
Time deposits generally pay slightly higher rate of interest
than a regular savings account. The long time to maturity,
the higher the interest payment will be.
What is a check?
Check is an instrument that is written, dated and signed by the issuer
that commands a bank to pay a specific amount of money to the
holder of the check.
 Payor – person writing the check
 Payee – person holding the check for encashment
Checks can be encashed or deposited.
What is a bank statement?
A bank statement is a summary of all financial transactions an
account holder or entity had in the bank during a specific period. A
typical bank statement will show you all deposits and withdrawals in
the account.
Sources of details about cash-in-bank
 Cash-in-bank ledger account of the entity
 Bank statement issued by the bank
Bank Statement
 Credit – increase in entity’s cash
 Debit – decrease in entity’s cash
Ledger
 Debit – increase in cash
 Credit – decrease in cash
Bank Reconciliation Statement
A bank reconciliation statement is prepared by an entity to reconcile
the cash-in-bank account balance in the entity’s book vs the balance
as reported by the bank in the bank statement.
Bank balance reconciling items
1. Deposits in transits – cash has been received by an entity and
was recorded in the cash-in-bank account balance as a
deposit. However, this deposit that has been sent the bank is
not yet processed and posted by the bank, thus not reflecting
in the bank statement. (+)
2. Outstanding checks – checks that the company had issued
and was recorded as a credit entry in the entity’s cash-in-
bank account. However, these checks were not yet presented
for payment and has not yet cleared from the bank account
from which it is draw. (-)
3. Bank error – erroneous debits and credits by the bank in the
entity’s account. (+) (-)
Ledger (book) balance reconciling items
1. Credit memos – items credited by the bank to the bank
account of the entity not yet recorded by the firm in their
books. These includes notes receivable collected by the bank
in behalf of the entity and interest earned in putting their
cask in the bank. (+)
2. Debit memos – items charged against the company’s bank
account not yet recorded in the company’s leger. These
includes NSF (not sufficient funds) check which are checks
deposited but were returned by the bank because the source
account has insufficient balance. It also includes bank
service charges. (-)
3. Book errors – erroneous debits and credits of cash in the
entity’s ledger. (+) (-)
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 1. Police power – the power of the state to enact law for
Adjusted balance method promotion of public safety and
Bank Balance order, public Book Balance health,
Deposit in transit public morals, Credit memos educations,
(Outstanding Checks) and general (Debit memos) welfare.
Bank Errors (+) (-) 2. Power of Eminent Bank Errors (+) (-) Domain –
Adjusted Balance the power of the Adjusted Balance state to
take private property
Bank-to-book method for public purposes upon payment of a just compensation.
Bank Balance 3. Power of Taxation – the power of the state to exact
Deposit in transit proportional contribution from its people to cover the cost of
(Outstanding Checks) government expenditures.
Bank Errors (+) (-)
What is taxation?
(Collections by the bank)
Taxation is the inherent power of the state to demand contributions
(Interest earned)
for public purposes.
Service charge
Taxes are enforced proportional contributions from persons and
NSF Checks
property levied by the lawmaking body of the state by virtue of its
Book error sovereignty for the support of the government and all public needs.
Ledger Balance
Republic Act no. 10963 – Tax reform for acceleration and Inclusion
Book-to-Bank method (TRAIN) – amending numerous sections of Republic Act No. 8424,
Book Balance National Internal Revenue Code of 1997
Collections by the bank
Interest earned Essential Characteristics of Taxes
(NSF Checks)  Enforced contribution
Book Errors (+) (-)  Generally payable in money.
(Deposit in transit)  Proportional in character.
Outstanding checks  Levied on persons or property.
Bank error (+) (-)  Levied by the state that has jurisdiction over the person or
Bank balance property.
 Levied by the lawmaking body of the state.
 Levied for public purpose or purposes.
Basic Taxation Principles
 Commonly required to be paid at regular periods or intervals.
Powers of the State

8
Capitals Gains Tax is a tax imposed on the gains presumed to have
been realized by the seller from the sale, exchange, or other
disposition of capital assets located in the Philippines.
Documentary Stamp Tac is a tax on documents, instruments, loan
agreements, and papers evidencing the acceptance, assignment, sale
or transfer of an obligation, rights, or property incident thereto.
Donor’s Tax is a tax on a donation or gift, and is imposed on the
gratuitous transfer of property between two or more persons who are
living at the time of the transfer.
Estate tax is a tax on the right of the deceased person to transmit
his/her estate to his/her lawful heirs and beneficiaries at the time of
death and on certain transfers which are made by law as equivalent to
testamentary disposition.
Percentage Tax is a business tax imposed on persons or entities who
sell or lease goods, properties or services in the course of trade or
business whose gross annual sales or receipts.
Value-added Tax is a business tax imposed and collected from the
seller in the course of trade or business on evert sale of properties
(real or personal) lease of goods or properties (real or personal) or
vendors of tax services. It is an indirect tax; thus, it can be passed on
to the buyer.
Income Tax is a tax on all yearly profits arising from property,
profession, trades or offices or as a tax on a person’s income and
profits.
 Individual Income Tax
 Corporate Income Tax
Withholding tax in compensation is the tax withheld from
individuals receiving purely compensation income.
What is a compensation?
Compensation or wages refers to all remuneration for services
performed by an employee for his employer under an employer-
employee relationship.
Withholding Tax in Compensation
Individuals earning compensation income should pay taxes to the
government.
 The total compensation and wages earned by an individual is
calculated annually and thus a person is liable to pay for an
annual tax on the earnings for the whole year.
 However, individuals earn (and are paid of) their salaries on
a daily, weekly, semi-monthly or month basis. These
salaries, when received by employees, are already net of
taxes.
 These taxes are being withheld by their employers and their
employers are the ones to remit it to the BIR. Individually
need not to go to the BIR monthly to pay their taxes.
 The monthly taxes paid by the individual (through the
employers) should equal with the annual taxes calculated
when the total annual compensation is considered.
 If tax withheld is greater than annual due, there is tax refund.
 If tax withheld is lesser than annual tax due, there is still tax
payable.
Payroll is a calculation of all employee’s compensation, statutory
contributions, taxes, deductions and net payment for a certain time
period. The formal document to present payroll is called a payroll
register.
Pay slip is a document that explains the components of an
individual’s pay for a certain time period. It is a “personal” version
of a payroll register.