FABM 2 1

Statement of Financial Position/ Balance Sheet

Statement of Financial Position
- Balance Sheet; a statement that gives the
financial condition of a business in a given date
3 Elements:
Assets = Liabilities + Owner’s Equity
*Note: Debit should always be equal to credit*
Classification of Accounts:
*Note: if the given transaction/account is silent then it
is current. *
Classification of Assets
 Current Asset
- Assets that can be realized in less than/ in a
year after the year-end date
 Cash > Cash Equivalent
 Marketable Securities > Interest Receivable
 Advance to employee > Accrued Income
 Merchandise Inventory > Prepaid Expenses
 Supplies > Short-term investments
 Inventories > Account Receivable
 Notes Receivable > Allowance for Bad Debts
 Non-Current Asset
- Assets that can be realized one year after the
year-end date
 Intangible assets > Long-term investments
 Property, Plant & Equipment (land, building,
equipment, furniture & fixture)
 Notes Receivable
 Accumulated Depreciation
 Contra-Asset
- Deducted from a related asset account
- To reflect the realizable value
 Accumulated Depreciation
- Assumed cost of use of the property, plant &
equipment
*Note: Gain on sale & Less on Sale*
Ex: Building- Accumulated Depreciation= Carrying Value
 Non- Current Liabilities
- Do not fall due (paid, recognize as revenue)
within one year after the year-end date
 Notes Payable > Loan Payable
 Mortgage Payable (if the collateral was given)
 Bonds Payable
Equity
- Residual amount after deducting liabilities from
assets
- Increased by a capital contribution of the owner
& net income
- Decreased by the owner’s withdrawals & net
loss
*Note: Asset- if the investment is in another company
Capital- if the investment is within the company*
Owner’s Equity is described as:
 Owner’s Capital (Sole/ Solo Proprietorship)
 Partner’s Capital (Partnership)
 Shareholder’s Equity (corporation)
*Note: these accounts have normal credit balances. *
 Drawing
- Amount taken by the owner of the business
- Closed the capital account
Forms of Balance Sheet:
 Report Form
- Accounts are listed in a straight column
(common from)
 Account Form
- Accounts are listed assets on the left, liabilities
and owner’s equity on the right

 Allowance for Bad Debts

- Losses due to uncontrolled accounts
Ex: Accounts Receivable- All. For Bad Debts= Net
Realizable Value

Classification of Liabilities
 Current Liabilities
- Fall due (paid) within one year after the year-
end date
 Notes Payable > Accounts Payable
 Unearned Revenue > Accrued expense
 Utilities Payable > Salaries Payable
 Loan Payable
 FABM 2 2

Statement of Comprehensive Income/ Income
Statement
Statement of Comprehensive Income
- Income Statement; result of operations in an
accounting period
- Composed of income & cost/ expenses
Approaches in the Preparation of SCI
*Total Goods Available for Sale = Cost of Purchase +
Beginning Inventory *
*Cost of Goods Sold = Total Goods Avail. For Sale –
Ending Inventory *
*Gross Profit = Net Sales – Cost of Goods Sold *
 Operating Expenses
> Distribution/ Selling Expenses
- Incurred from selling of merchandise

- salaries of sales personnel

- expenses incurred in promotion or advertising
the product
- commission on sales
- store supplies
- utilities used in the store
- depreciation expense of assets used in the
store
- freight out/delivery cost/transportation cost
 Single-Step Approach
> General/ Administrative Expenses
- Directly deducts expenses in the gross income - expenses necessary in the conduct of
from services managerial activities
- The nature of expense method
 Income Accounts - salaries of the office personnel
- Service Income - Other Income - office supplies
 Expenses Accounts - office utilities
- Salaries & Wages - Bad Debt - depreciation expense of office assets
- Supplies - Interest - bad debts expense
- Insurance - Depreciation
- Other Expenses > Other Expenses
- expenses not connected to the operation of
the business
 Multi-Step Approach
- The series of steps needed in the computation - loss on sale of assets
of net income - discount loss
- Cost of sales method
> Interest Expense/ Finance Cost
- amount charged to a borrowed money
 Income Accounts
- Sales *Operating Expenses = Add all expenses *
-Contra Sales Accounts *Net Income = Gross Profit – Operating Expenses *
- Other Income

*Net Sales = Sales - Sales Return & Allowances – Sales

Discount *

 Cost of Sales/ Cost of Goods Sold

- Cost of merchandise sold by the business

- Merchandise Inventory
-Beginning Inventory
-Ending Inventory
- Purchase
-Contra Purchases Accounts
- Freight-In

*Net Purchases = Purchase – Purchase Return &

Allowances – Purchase Discount *
*Cost of Purchase = Net Purchase + Freight-In *

Statement of Changes in Equity
Equity
- Business: represents the value that would be
returned to a company’s shareholders if all the
assets were liquidated and all the company's
debts were paid off.
- Economics: fairness in the overall distribution of
income & wealth
Statement of Changes in Equity
- it shows the changes in the Capital or Owner's
Equity as a result of additional investments or
withdrawals by the owner, plus or minus the
net income or net loss for the year.
Accounts under SCI:
 Original Investment
 Additional Investment
 Capital
 Drawing
 Income Summary (Net Income/ Net Loss)
FABM 2 3
Cash Flow Statement
Cash Flow Statement
- Shows the cash receipts (inflow) and
disbursement (outflow) for an accounting
period
Components of Cash Flow Statement:
 Operating Activities
- arising from the normal operations of the
business.
 Collection from customer
 Received royalties, fees, or commission
 Payment of employees’ salaries
 Payment of other operation expenses
 Investing Activities
- Result from acquisition & disposal of non-
current assets
 Sale of property and equipment
 Sale of investment in debt or equity security
 Purchase of property and equipment
 Purchase of investment in debt or equity
security
 Financing Activities
- activities usually arise from changes in non-
current liabilities and owner’s equity of a
business organization.
 Investment by the owners
 Proceeds of borrowed money
 Cash withdrawals of the owners
 Payment of the principal balance of borrowed
money
Steps in preparing Cash Flow Statement
1. Write the heading at the center of the page
2. List all operating activities from inflow to
outflow
3. List all investing activities from inflow to outflow
4. List all financing activities from inflow to
outflow
5. Add the beginning cash balance to get the cash
balance for the month
 FABM 2 4

Analysis & Interpretation on Financial Statements

Phases of analyzing financial statements

 Computation Phase
- Involves looking for differences, percentages, or
ratios
 Interpretation Phase
- provides meaningful and relevant decisions
based on the results of the computation

Methods used to give financial figures for analysis

 Horizontal Analysis/ Comparative Analysis
- compares the same account in the financial
statement of two periods (current and past year
- management analyzes the statement of
financial position and statement of
comprehensive income’s increase and decrease
in accounts
Steps:
1. Prepare the financial statements for 2
consecutive periods
2. Deduct the current year from the base year,
determine whether it increase/ decrease
3. Compute the percentage of increase or
decrease by using the formula below:
% of change = current year- base year x 100
base year

 Vertical Analysis
- shows a relationship among the elements of a
financial statement where each item is
represented in a percentage.
 Statement of Comprehensive Income
- Helps the management analyze the components
of to the overall sales

Steps:
1. Prepare the financial statements for 2
consecutive periods
2. Add a column on each year of comparison
3. Express each component account as a
percentage of the total assets, liabilities and
owners (for SFP) or to the Net sales (for SCI).

% of cash = total amount of an account x 100

total ass, lia, oe/ net sales

 Financial Ratios
- used to compare a company’s current financial
position and performance to be able to identify Horizontal Analysis
their strengths and weakness.

Interpretation:
Statement of Financial Position
1. Total assets increased by 42% due to the
purchase of PPE which reflects a 66% increase.
However, current assets have only 2% growth
compared to noncurrent assets which may
indicate that liquidity is very small.
2. Total liabilities increased by 38% due to a 50%
increase in non-current liabilities. It reflects that
PPE could have been financed by a loan. The
owner’s equity, on the other hand, increased
58% from the previous year. This may be due to
additional investments made by the owner to
the business.
Interpretation:
Statement of Comprehensive Income
- Almost all accounts in the SCI increased. It could
be because of increased PPE from the SFP that
could have boost the selling process. It’s
understood that with greater sales, COGS are
parallel, as well as operating expenses and
taxes. It is noticeable that interest decreased by
8% which could mean that loans acquired by
the business may have longer period payments.
FABM 2 5
Interpretation:
Statement of Financial Position
1. The current asset of 2019 is 27% of the total
assets. However, comparing from 2018, current
assets are more liquid at 37%.
2. Of the total liabilities and OE, 76% is the total
liabilities and 24% is the owner’s equity. This
could be the result of investing through loans
than the owners making the additional
investment
Interpretation:
Statement of Comprehensive Income
- Net income is 27% from net sales. Of all the
expenses deducted after gross profit, income
tax comprises the biggest percentage at 12%.
The company should spread the impact of
incurring expenses by getting better sales
performance.
Bank
Account
Bank Account
- Record of a client in a bank
- To deposit & withdraw money
Types of Bank Account:
 FABM 2 6

 Savings Account
- For safekeeping money  Cash Deposit Slip
- Withdrawal can be done anytime, interest  Check Deposit Slip
gained is modest
- evidence by a passbook *Top Bank in the Philippines according to Bangko
 Checking Account Sentral ng Pilipinas: Landbank, BDO, and BPI*
- Called the current account
- Eases payment by issuing a check to the payee  Withdrawal Slip
- Evidence by a checkbook - Used to withdraw amount from their account
 Time Deposit - Used for passbook savings account
- Called the certificate of deposit
- Interest gains higher & fixed at a certain percent

Bank Documents

 Check
- Issued by a person for their payment
- Payor (drawer/ owner)
- Payee (recipient)
- Drawee (a bank where the check can be
deposited)
- “Cheque” spelling used in Canada & England

 Cross Check
- Have two parallel lines on the upper left of the
check
- Cannot be encashed over the counter, should
be deposited to the payee’s account
 Stale Check
- The issue date is past 6 months/ 180 days from
the date if issuance
 Post Dated Check
- Issued at a future date
- Will only encash when the date beccomes
current

1. Account Number
2. Account Name
3. Check Number
4. Payee Name
5. Amount in Figures
6. Amount in Words
7. Signature of the account holder

Bank Definition Parts

Document
 Deposit Slip
- Where currency & checks to be deposited are Check an instrument •Account Number
listed separately issued by a person •Account Name
- Detailed record of the deposit to the depositor for his/her •Check Number
& the bank payment in the •Payee Name
 FABM 2 7

purchase of goods •Amount in Figures

or services. •Amount in Words
•Signature of the
account holder

Deposit Slip used when a client • Account Name 

deposits money • Account Number 
into his/her • Types of Account 
account. • Currency 
• Date of Deposit 
• Amount
Deposited

Withdrawal used when a client • Account Number 

Slip withdraws amount • Account Name 
from his/her • Date of
account. Withdrawal 
• Types of Account 
• Currency 
• Amount to be
withdrawn
• Name and
signature of
depositor and
representative
 FABM 2 8

Analysis & Interpretation of Financial Statements:
Liquidity
Financial Statement Analysis
- to measure the entity’s financial position and
performance. It provides information on the
following areas: liquidity, solvency, structure,
and profitability.
Working Capital = current assets – current liabilities
- if there is enough asset to pay all current
liabilities
 Solvency
- To settle non-current liabilities & interest
related to the liabilities

 Financial Ratios Debt Ratio = total liabilities

- can be used to compare a company’s current Total assets
financial position and performance with past
years and identify its strengths and weaknesses - Assets that are being financed with debt

Ratio Analysis Equity Ratio = total equity

- expresses the relationship (percentage, rate/ a Total assets
simple proportion) among selected items of
financial statement data. The relationship is - How effectively they fund asset requirements
expressed in terms of a without using debt

 Liquidity Debt-to-Equity Ratio = total liabilities

- To settle/pay current liabilities as they fall due Total equity

Current Ratio = Current Assets - shows the proportions of equity and debt a
Current Liabilities company is using to finance its assets and it

- company's ability to pay short term obligations  Profitability

or those due within one year
Quick Ratio = Cash+ Short-term Invest. + Curr. Acc. Rec.
Current Liabilities
- company to pay its current liabilities when they
come due with only quick assets
Receivable Turnover = Net credit sales
Average trade receivable
Average trade receivable = beg.acc.rec. + end.acc.rec.
2
- company’s accounts receivable to cash. It
measures how many times the company
collected its accounts receivable from its
customers.
- measures the operating performance as a
return on its investment.
Gross Profit Ratio = gross profit
Net sales
- shows the relationship between gross profit and
total net sales revenue
Operating Profit Margin = operating income
Net sales
- expenses. It simply shows the operating income
for every net sale.
Net Profit Margin = net income
Net sales

Ave. Cllection Period = 360 days - It measures the percentage of net income
Trade receivable turnover earned from net sales after deducting all

- how many days it takes to collect its receivables Return on assets = net income
Average total assets
Inventory Turnover = cost of goods sold Average total assets = beg. Assets + end. Assets
average inventory 2
Average Inventory = beg.inven. + end.inven
2 - How profitable a company is relative to its
assets
- to evaluate the liquidity of company’s inventory
 Market Value Valuation
Average Sales Period = 360 days - measures the company’s potential for future
Inventory turnover earnings, dividend earnings, and stock price
growth.
- tell you the number of days it took a company
to sell its inventory during the recent year. Keep