FABM 2

ALWAYS REMEMBER: ASSETS = LIABILITIES + EQUITY

EXPANDED VERSION:
Noncurrent Assets + Current Assets = Noncurrent Liabilities + Current Liabilities + Owner’s Equity + (I - E)

Types of Journal Entries

1.) Regular Entries – general journal
2.) Adjusting Entries – to adjust accounts
3.) Correcting Entries – done when there’s an entry that is incorrectly recorded
4.) Closing Entries – made at the end of a period
5.) Reversing Entries
a. To re-open nominal accounts
b. Made if statements are prepared for the month/semester/quarter ended
c. Not needed if it’s for the year ended
d. Made at the beginning of the period

Interim – Financial Reports made within a year

- better to improve the decision making of financial characters
- not required at the beginning of the period

Comparative Financial Statement

Note:
If amounts in current year is bigger than in base year, there is an increase.
If you look into it in another way, when you take their differences, (Current - Base) if the
answer is a positive number, there’s an increase. If it’s a negative number, there’s a decrease.
Example:

Assets Change
Current Assets 2022 2021
Cash ₱ 1,200,000.00 ₱ 1,100,000.00 100,000 (Increase)
Accounts Receivable 630,000.00 600,000.00 30,000 (Increase)
Less: Allowance for Bad Debts 30,000.00 25,000.00 5,000 (Increase)
Prepaid Expenses 75,000.00 70,000.00 5,000 (Increase)
Inventory 150,000.00 180,000.00 30,000 (Decrease)
Total Current Assets ₱ 2,025,000.00 ₱ 1,925,000.00

Tip: Immediately Current – Base = Positive [Increase]

indicate if the change
is an increase or Current – Base = Negative [Decrease]
decrease.
In the Cash Flow Statement, how do we know if there is a change in the monetary amounts in
the Financing Cash Flow? (For reference, refer to Quiz 1 and the paper sir gave us)
Example:
Net Income (₱ 105,500)

Period 1 Period 2 Change

Capital ₱ 1,651,000.00 ₱ 1,543,000.00 (108,000.00)

May include: (For 2 nd

Period)
Ameer, Capital
Net loss 1,651,000.00
108,000.00
Drawings 1,543,000.00

Additional Investments

Ameer Merchandising Business

Net Income – Change in
Cash Flow Statement Capital
(105,500) – (108,000)
For the Period Ended

Financing Cash Flow

Add: Additional Investment -
Increases in Noncurrent Liabilities -
Less: Capital Drawing ₱ 2,500
Decrease in Noncurrent Liabilities -
Net Financing Cash Inflow (Outflow) (₱ 2,500)

In preparing financial statements for:

a. First Sem Only – Monetary amounts are as given in the Trial Balance
b. Second Sem Only – Difference of monetary amounts for the 2 periods
c. Entire Year - Monetary amounts are as given in the Trial Balance
 Financial Statement Analysis
Financial Statement Analysis

 Process of interpreting or giving means to the financial statements

 Involves a careful selection of data from financial statements in order to assess the firm’s
past performance, present condition, and future business operations.
 Designed to assess the consequences of management’s past decision regarding these
activities
a. Investing – “Were the resources used effectively?”
b. Operating – “Does the profitability of the company meet expectation?”
c. Financing – “Were financing choice made prudently?”
Objectives of Financial Analysis:

 For the users to be able to evaluate the

o Financial performance
o Financial position
 To apply analytical tools and techniques to financial statements to obtain useful
information to aid in decision making

Intracompany – comparisons WITHIN a company

Intercompany – comparisons WITH OTHER companies
Industry Average – compare your company to all companies within your industry

Uses of FSA:

 External
o Trade Creditors – focuses on the liquidity of the firm
o Bond holders – focused on the long-term cash flow of the firm
o Shareholders – to determine the profitability and long-term wealth of the firm
o Governate – to determine the overall industry health
o Employees – to determine if the company can provide additional benefits
 Internal
o Plan – asses the current financial performance and evaluating potential firm
operation
o Control – return on investments
o Understand – understanding how suppliers and funds analyze the firm

Requirements in conducting FSA:

 Understand the individual  Understand the nature of the industry in which

organizational factors the organization works
 Business Strategies  Understanding the overall state of the economy
 Objectives may also have an impact on the performance
  Values of the organization
Steps in Financial Statement Analysis:
1.) Objective establishment (Define Purpose)
2.) Collect Data
3.) Process the data
4.) Conduct analysis on processed data and interpret the result
5.) Develop recommendations
6.) Follow up or review

Types of Financial Statement Analysis:

1.) Horizontal Analysis
 Analyze how the accounts change during the 2 periods
 For different years
 All accounts in Base Year are 100%
Reminder: Always check if
 Trend – increased/decreased to the description is increase
 Change in Percentage – increased/decreased by to/by or decrease to/by.
2.) Vertical Analysis
 To analyze the composition of the financial statement
 A.K.A. Common Size
 Within the same year
 Income Statement ~ Sales = 100%
 Balance Sheet ~ Total Assets or Total Liabilities and Capital = 100%
3.) Ratio Analysis
 Combination of Horizontal and Vertical Analysis

Possible na lumabas sa exam:

ABC Corporation’s trend analysis showed that total sales and cost of sales increased by 20%
and 30% respectively in 2021. The company’s common size financial statement revealed that
during 2020, gross profit was 40% of sales. Total gross profit in 2021 amounted to ₱ 420,000.
Required:
1.) What is the percentage increase in gross profit in 2021? This is income statement
2.) How much is the gross profit in 2020?
3.) How much was total sales during 2020?
4.) How much is the total cost of sales in 2021?
Cost of Sales 2021 is 78%
Horizontal Vertical Horizonta Vertical
l because Cost of Sales 2020 is
2021 2020 60%. Since it increased by 30%,
and 30% of 60% is 18, 78% is
Total Sales 120% 100%` 100% 100%
130% of 60%. (Sana gets niyo T_T)
Less: Cost of Sales 78% 60%
Gross Profit ₱ 420,000 40%
 2021 2020
Total Sales 120% (1) ₱1,200,000 (3) ₱1,000,000 100%
Less: Cost of Sales 78% (2) ₱ 780,000 (4) ₱ 600,000 60%
Gross Profit 42% = ₱ 420,000 (5) ₱ 400,000 40%

420,000 This
1. =1,000,000 is
0.42
100
%
1,000,000 ×1.2=1,200,000

2. 1,000,000 ×0.78=78 0,000

420,000
3. =1,000,000
0.42
4. (3) – (5)
5. 1,000,000 ×0.4=400,000

Ratio Analysis
Liquidity Ratios – How easy is the asset convertible to cash?
- Focuses on liquid resources
Leverage/Long-Range Solvency Ratios
- Focuses on structure of finance sources, debt and equity