Business

 current assets – to be realized

into cash within one accounting
period.
Includes cash, the amount

Finance
receivable, inventories, and
prepaid expenses.
 Non-current – cannot be
realized into cash within one
Handouts 1: Business accounting period.
Includes long-term investment,
Finance land, property, equipment, land
Balance Sheet - financial position of copyrights, franchise, etc.
the company within an accounting Liabilities - obligations owed to
period. someone by the business.
 current - must be paid within a
Elements of Statement of year.
Includes accounts payable,
Financial Position
notes bank, accrued expenses,
1. Assets
unreal income
2. Liability
 non-current – to be paid for
3. Equity
more than a year and has a
Contra asset accounts are presented in
long deadline.
the SFP as a deduction to a particular
Includes loans payable,
asset.
mortgage, etc.
These are Allowance for Doubtful
Equity - left after paying the liabilities.
Accounts and Accumulated
 capital - investment by the
Depreciation.
owner to start- up a business in
 Allowance for Doubtful
the form of cash or
Accounts, a contra-asset for
Accounts Receivable, is an  other assets.
allowance made by the  withdrawal - drawing for
business for estimated personal use
uncollectible accounts.
 Accumulated Depreciation is an Assets = liabilities + equity
account that represents the
depreciation of Fixed Assets Forms of Statement of Financial
(except for Land) due to its Position
usual wear and tear. Report Form - vertical presentation of
SFP wherein Assets come first,
Classification of Assets, followed by the Liabilities and then the
Liabilities, and Equity Equity.
Assets - owned and controlled by the Account Form - horizontal
company presentation of SFP wherein the Assets
are presented on the left side while the
Liabilities and the Equity are on the
right side of the
Balance Sheet.
FABM 2
Lesson 2: Statement of
Comprehensive Income
Statement Of Comprehensive Income
(SCI) – helps in determining if the
profit is increasing or decreasing in an
accounting period.
Elements of Statement of
Comprehensive Income
1. Net Sales (Sales less Sales returns
and Sales discount)
I. Sale – this is the amount of
revenue that the company was
able to generate from selling
products
II. Sales returns – returns of
customers or allowances for
such returns.
III. Sales discount - Also known as
a cash discount and is awarded
to customers who pay earlier or
before the deadline.
2. Cost of Goods Sold – this account
represents the actual cost of
merchandise that the company was
able to sell during the year.
I. Beginning inventory – this is the
amount of inventory at the
beginning of the accounting
period and the amount of
ending inventory from the
previous period.
II. Net Cost of Purchases (Net
Purchases + Freight In)
a. Net Purchases = Purchases –
(Purchase discount and
purchase returns)
b. Purchases – the amount of
goods bought during the
current accounting period
c. Purchase discount – account
used to record early payments
by the company to the
suppliers of merchandise.
d. Purchase returns – account
used to record merchandise
returned by the company to
their suppliers.
e. Freight In –used to record
transportation costs of
merchandise purchased by the
company and recorded when
goods are transported into the
company.
III. Cost of Good available for Sale
– add Beginning inventory and
Net cost of Purchases
IV. Ending inventory – the amount
of inventory presented in the
Statement of Financial Position.
This is the total cost of
inventory unsold at the end of
the accounting cycle.
3. Selling Expenses – these expenses
are those that are directly related to
the main purpose of a merchandising
business such as the sale and delivery
of merchandise. However, this does
not include the cost of goods sold and
contra revenue accounts.
4. General and Administrative
Expenses – these expenses are not
directly related to the merchandising
function of the company but are
necessary for the business to operate
NOTES:
effectively.
Formulas in SCI
Net Sales = sales - (sales returns +
Sales discount)
Cost of Goods sold = (Beginning
inventory + Net cost of purchase) -
ending inventory
Net cost of purchase = (net purchase +
freight in)
Net purchase = purchase - (purchase
discount + purchase returns)
Gross profit = (sales - cost of goods
sold)
Cost of Goods available for sale =
(beginning inventory + net cost of
purchase)
Net Income = gross profit - (selling +
general & administrative expenses)
 Sales returns and sales
discounts are called Contra
Revenue Account because it is
on the opposite side of the
sales account.
 The sales account is on the
credit side while the reductions
to sales accounts are on the
debit side. This is “contrary” to
the normal balance of the sales
or revenue accounts.
 Purchase returns and purchase
discounts are called Contra
Purchase Account that is
credited as being “contrary” to
the balance of the purchase
account.
 Sales (benta); Cost of Goods
Sold (puhunan sa benta)
 Net Purchase does not include
Freight-in while Net Cost of
Purchase includes Freight-in.
 Selling expenses include sales
commissions, delivery
expenses, and advertising
expenses.
 General and Administrative
expenses include utilities &
rent for home office, and
salaries of admin personnel.

FABM 2
Lesson 3: Statement of
Changes in Equity
Statement of Changes in Equity -
shows the changes in capital amounts
due to contribution, withdrawal, net
income, or loss.
Equity/Capital – it is equal to total
assets minus total liabilities.
Different parts of the Statement
of Changes in Equity
I. Heading
o Name of the Company
o Name of the Statement
o Date of preparation (emphasis
on the wording – “for the”)
II. Increase in Equity
o Net income for the year
o Additional investment
III. Decrease in Equity
o Net loss for the year
o Withdrawals by owner
Statement of Changes in
Owner’s Equity for Single/Sole
Proprietorship
A sole proprietorship’s capital is
affected by four items: owner’s
contributions, owner’s withdrawals,
income, and expenses.
Steps in Preparing a Statement
of Changes in the Owner’s
Equity
STEP 1: Gather the needed
information.
STEP 2: Prepare the Heading
STEP 3: Report Capital at the beginning
period.
STEP 4: Add additional contributions.
STEP 5: Add net income
STEP 6: Deduct owner’s withdrawals.
STEP 7: Compute the ending capital
balance.
Components of Statement of
Changes in Equity
Initial Investment - refers to the very
first investment of the owner in the
company.
Additional Investment - increases the
owner’s equity by adding investments
by the owner.
Withdrawals - Decreases the owner’s
equity by withdrawing assets by the
owner.
Distribution of Income – When a
company is organized as a corporation,
owners (called shareholders)
do not decrease equity by way of
withdrawal. Instead, the corporation
distributes the income to the
shareholders based on the shares that
they have (percentage of ownership of
the company).
Ending Capital = (beginning
capital + increase) – decrease

FABM 2
Lesson 4: Cash Flow
Statement
Cash Flow Statement - shows the
inflow and outflow of cash of a
business from operating, investing, and
financing during an accounting period.
Three Major Parts of Cash Flow
Statement
Operating Activities – these are
generally the cash effects of
transactions and other events that
enter the determination of profit or
loss. It usually involves day–to–day
transactions, providing service, and
delivering goods. Include cash receipts
from goods sold, payments to
employees, taxes, and payments to
suppliers. These activities can be found
on a company's financial statements
and in particular the income statement
and cash flow statement.
Investing activities - include making
and collecting loans, activities like
acquiring and disposing of investments
in debt or equity securities and
obtaining and selling property and
equipment.
Financing activities - are the net
amount of funding a company
generates in a given period of time to
finance its business usually including
obtaining resources from owners and
creditors. Hence, cash activities under
this section deal with debt and equity.
The approach in Cash Flow
Statement
 Direct method - if the net cash
is from operating inflows minus
operating outflows.
 Indirect method - net cash is
from adjusting profit for
income and expenses.
Net Cash Flow (increase or
decrease)
The net amount of change in
cash whether it is an increase or
decrease for the current period
brought by operating, investing, and
financing activities.
Beginning Balance - balance at the
beginning of the accounting period
Ending Balance - balance at the end of
the accounting period
Ending Balance = (Beginning balance +
net change in cash)
Cash flow statements should only
include cash transactions and the net
income/loss of the company that can
contain non–cash transactions such as
depreciation.
Changes in current assets and
liabilities are included if they are
related to revenues and expenses
which were included in the net
income/loss even if they were non-
cash transactions or they affected cash
but were not part of the net
income/loss (accrual, prepaid,
unearned).

FABM 2
Lesson 1: Analysis and
Interpretation of Financial
Statements
Measurement Levels (Liquidity,
Solvency, Stability, and
Profitability)
Liquidity - the company’s ability to pay
debts that are coming due /short-term
debt.
Current Ratio - the ratio of current
assets to current liabilities, meaning
the firm’s ability to pay its current
debt.
Current Assets
Current Ratio ¿
Current Liabilities
Quick Ratio – also called Acid Test
Ratio. It is a stricter measure of
liquidity. It does not consider all the
current assets, only those that are easy
to liquidate such as cash, cash
equivalent, short-term investments, or
marketable securities, and accounts
receivable are referred to as quick
assets.
Quick assets – current assets that can
be converted into cash within 90 days
or a shorter period.
Quick Assets
Quick Ratio ¿
Current Liabilities
Working Capital Ratio – pertains to
the business’s ability to pay its current
liabilities with the use of its current
assets. There are four examples of
changes that can affect the working
capital:
Current Assets increase = increase in
working capital
Current Assets decrease = decrease in
working capital
Current Liabilities increase = decrease
in working capital
Current Liabilities decrease = increase
in working capital
Working Capital Ratio = Current
Assets – Current Liabilities
Solvency - pertains to the company’s
capacity to pay long term debts or
liabilities.
Debt to Asset Ratio - it pertains to the
ratio of total debt to total assets. It
shows a company’s ability to pay off its
liabilities with its assets.
Total Liabilitites
Debt to Asset Ratio ¿
Total Assets
Debt to Equity Ratio - it pertains to the
ratio of total debt to owner’s equity/
shareholder’s equity.
Total Liability
Debt to Equity Ratio ¿
Total Equity
Equity Ratio – pertains to the ratio of
the business assets that are financed
by capital. A high ratio shows a high
level of capital.
Total Equity
Equity Ratio ¿
Tota Asstes
Stability – a long term counter part of
liquidity or the company’s ability to be
structural firm and can support its
long-term debts by its equity.
Interest Cover Ratio – it shows how
many times a business interest on its
loans / credits are covered by its
operating profit. The higher multiple
the better.
 Operating Profit Sales Discount (SD)
Interest Cover Ratio ¿
Interest Expense
Sales Return (SR)
Profitability – the company’s ability to Inventory (I)
convert its sales into cash flow and Operating Profit (OP)
profit.
Gross Margin Ratio – it is the ratio of
Gross Profit (GP)
gross profit to sales. (Gross Profit = Operating Expense (OE)
Sales – Cost of Goods Sold) Net Income (NI)
Gross Margin
Gross Margin Ratio ¿ Interest (i)
Net Sales
Operating Margin Ratio – it is the ratio Tax (T)
of operating profits to sales. Ave. Total Assets (Ave. TA)
(Operating Profit = Gross Profit – Ave. Total Equity (Ave. TE)
Operating Expense)
Operating Profit Beginning Balance (BB)
OMR ¿
Net Sales Ending Balance (EB)
Net Income Margin Ratio – it is the GM
ratio of net income margin to sales. GMR ¿ NS
Also referred to as Profit Margin Ratio. GM = NS – I
It measures how much net profit is
produced at a certain level of sales.
NS = S – (SD + SR)
OP
(Net Income = Operating Profit – OMR ¿ NS
Interest & Taxes)
Net Income OP = GP – OE
NIMR =
Net Sales NI = OP – (i + T)
Return on Assets – it is the ratio that ¿
measures the peso value of income ROA ¿ Ave . TA
generated by using business assets. BB+ EB
Net Sales
Ave. TA ¿ 2
ROA ¿ ¿
Ave . Total Asssets ROE ¿ Ave . TE
Return on Equity – measures the
BB+ EB
return (net income) generated by the Ave. TE 2
owner’s capital invested in the
business. Similar to ROA, the
denominator of ROE may also be total
equity or average equity.
Net Sales
ROE ¿
Ave . Total Equity

NOTES:
Gross Margin (GM)
Net Sales (NS)
Sales (S)