FUNDAMENTALS OF ACCOUNTANCY, Current Assets and Noncurrent Assets

BUSINESS AND MANAGEMENT 2 Current Assets Noncurrent Assets

 Readily convertible into
cash.
LESSON 1: Statement of Financial Position (SFP)  Assets that cannot be
 Cash, Accounts
realized.
Receivable, Notes
Statement of Financial Position  Property, Plant, Equipment,
Receivable, Inventory,
Machine, Furniture and
 Also known as Balance Sheet. Prepaid Expense, Prepaid
Fixtures, Equipment.
 Reports the resources available for the company to use, Rent, Short-term
obligations that the company is required to settle and the Investments, Supplies.
equity that belongs to the owners of the company.
Current Liabilities and Noncurrent Liabilities

Explanation: A set of financial statement is presented anually Current Liabilities
to the investors to provide them with information about the  Liabilities that fall due to
company’s financial results and financial position. within one year from
reporting date.
Purpose of Statement of Financial Position  Accounts Payable,
 To present true information about the company asset, Accrued Expense,
liabilities and equity. It helps to reveal the financial position Unearned Income, Notes
of the company as at a particular date. Payable, Taxes Payable,
Unearned Income,
Advantages of Statament of Financial Position Dividends Payable.
Noncurrent Liabilities
 Liabilities that do not fall
due to within one year from
the reporting date.
 Loans Payable, Long-Term
Loans Payable, Bonds
Payable, Mortgage
Payable.

1. It provides information about the financial position of the

company.
2. It helps in ratio analysis.
3. The statement of a current period can be compared with the
last year’s statement to track the company’s performance.
4. Investors get information about the company’s financial
health, and based on this statement, they can make their
investment decisions.
5. It also helps determine the company’s liquidity by providing
data about the current assets available with the company
for settling its current liabilities.
Elements of Statement of Financial Position
LESSON 2: Statement of Comprehensive Income
Statement of Comprehensive Income
 Short for ”Statement of Profit or loss and other
comprehensive income”.
 2nd component of a complete set of financial statements.
 Shows the information on an entity’s financial performance
during the period.
 It shows the following: Profit or loss; Other comprehensive
income; and comprehensive income.

Asset Note: The Income Statement (or statement of profit or loss)

 These are the resources that are owned by the shows only the profit or loss, while the ”Statement of profit or
company and are acquired or generated with equity loss and other comprehensive income” shows profit or loss and
fund or outside borrowings. ”other comprehensive income”.
Liabilities
 Refer to the amounts owned by the company towards
The standards require entities to present a “Statement of profit
outside parties. (i.e. amounts owned to parties other
than shareholders in their capacity as a shareholder). or loss and other comprehensive income.” Meaning, presenting
Equity an income statement alone without “other comprehensive
income” is prohibited.
 Representes the amount belonging to the
shareholders of the company.
However, the standards allow the presentation of an income
statement together with the statement of comprehensive
The SFP reports the total assets, total liabilities, and total
income. This is called the “two-statement presentation”.
owner’s equity of the business.

ACCOUNTING EQUATION Single-statement vs. Two-statement Presentation

ASSETS = LIABILITIES + OWNER’S EQUITY
1. Single-Statement Presentation
There are two acceptable formats of Statement of Financial ABC Co.
Position: Statement of Comprehensive Income
For the period ended December 31, 2022
Account Form
 Follows the general ledger T-Account format. Assets Income ₱ 1,000
on the left and liabilities and equity on the right. Expenses (600)
Report Form Profit for the year 400
 Like a simple listing – assets are listed first, followed Other Comprehensive Income 50
by liabilities, and finally the equity. Vertical Sequence Comprehensive Income for the year ₱450
2. Two-Statement Presentation  Expenses are classified and presented according to
their function as part of cost of sales or, for example,
a. First of two statements – ”income statement” the cost of distribution or administrative activities.
ABC Co.  Cost of sales is presented seperately from other
Statement of Comprehensive Income expenses.
For the period ended December 31, 2022  Multi-step approach

Income ₱ 1,000
Expenses (600)
Profit for the year 400
b. Second of two statement
ABC Co.
Statement of Comprehensive Income
For the period ended December 31, 2022
Profit for the year ₱ 400
Other Comprehensive Income 50
Comprehensive Income for the year ₱450
Element of Statement of Comprehensive Income
1. Income
 Increases in economic benefits duting the period in the
form of increases in assets, decreseases in liabilities,
that result in increases in equity.
 It includes both revenue and gains.
a. Revenue – arises in the course of the ordinary
activities of a business, e.g., sales and service
fees.
 Service fees refer to the revenue earned by
a service business from rendering services.
 Sales Revenue refer to the revenue earned
by a merchandising business from selling
goods.
b. Gains – represent other items that meet the
definition of income and may or may not arise in
the course of the ordinary activites of an entity.
2. Expenses
 Are decreaes in economic benefits during the period in
the form of decreases in assets, or increases in
liabiltiies, that result in decreases in equity.
 It includes both expenses and losess.
a. Expenses – arise in the course of the ordinary
activities of a business.
b. Losses – represent other items that meet the
definition of expenses and may or may not arise in
the course of the ordinary activites of an entity.
The following are the major categories of expenses under
the function of expense method:
1. Cost of Sales (or Cost of Goods Sold) AE
2. Distribution costs (or Selling Expenses) AE
3. Administrative Expenses (or General and
administrative expenses)
4. Other expenses AE
5. Interest expenses (or Finance cost)
6. Income tax expense AE
sales related
Distribution costs (or Selling expenses) – are costs
attributable to selling activities.
Example: freight-out or delivery expenses, sales
commissions, advertising, salaries of sales personnel,
depreciation on delivery equipment, rent pertaining to space
occupied by the sales department, and the like.
non-sales
Administrative Expenses – is a residual category of expenses,
meaning an expense that does not qualify for classification
under the other categories. (i,e., numbers 1,2 and 4 to 6) is
included in this category.
Examples: insurance, taxes and licenses (except income
tax expense), salaries of non-sales personnel, depreciation
of assets not used by the sales department, rent pertaining
to office space, and the like.
Other Expenses – include losses, like casualty losses and
losses on sale of properties.
Income Tax Expense – includes taxes on income. Other taxes
are presented in the administrative expenses category under the
”taxes and licenses” account.
”Bad debt expense”
 Classified as administrative expenses. This is because
credit granting is an administrative function and
normally result from poor credit policies or decisions.
 If material, the amount of bad bad debts shall be
presented seperately and not included in the
categories of expenses.
Cost of Goods Sold
 It is presented seperately.

Note: If income is greather than expenses, the difference is Loss on Sale of Equipment
profit. But if income is less expenses, the difference is loss.  Presented under the ”Other expenses” category.
than  Material amounts of losses shall be presented
Presentation of Expenses seperately.

1. Nature of Expense Method Interest Expense

 Expenses are presented according to their nature (for  It is presented seperately.
example, depreciation, purchases of materials,
transport costs, employee benefits, advertising cots, Net Purchases is computed as follows:
etc.) cost Purchases ₱200,000
 Single-step approach Freight-in 10,000
2. Function of Expense Method Purchase Returns (5,000)
Purchase Discounts (7,000)
Net Purchases ₱198,000
Change in Inventory is the difference between the beggining
inventory and ending inventory.
Inventory, beg. ₱50,000
Inventory, end 80,000
Change in inventory - increase (₱ 30,000)
 An increase in inventory is deduction.
 A decrease in inventory is addition.
Note: The treatment for ”Net Purchases” and ”Change in
Inventory” are necessary so that ”Cost of Goods Sold” is
properly reflected on the single-step statement of
comprehensive income.
LESSON 3: Statement of Changes in Equity
Statement of Changes in Equity
 Provides information on the change or movement in
”Owners Equity” during the period.
 It is also called as ”Statement of Retained Earnings” or
”Statement of Owner’s Equity”.
Transaction that cause changes in owner’s equity
 Additional investement or contributions made by the owner.
 Withdrawals or drawings from the business by the owner in
form of cash.
 Earning or profit by the business.
 Incurrence of loss by the business.
Parts of Statement of Changes in Equity
Heading
Increases
to Equity
Decreases to Equity
Forms of Business Organization
Sole Proprietorship
 Also called as Single Proprietorship.
 A business structure owned by an individual who
generally has full control and authority over the
business.
Partnership
 2 or more people find themselves to contribute money,
property, or industry to a common fund with the
intention of dividing the profits among themselves.
Corporation
 This form of business organization is larger than the
partnership.
 It is an artificial being created by operation of law,
having the right to succession and the powers, attributs
and properties expressly authorized by law.
 It is run by the Board of Directors who are appointed or
elected by the shareholders.
LESSON 4: Statement of Cash Flows
Statement of Cash Flows
 Also known as Cash Flow Statement.
 Provides information on the sources and utilization of
cash during the period. pagpasok ng pera sa company
 It provides information on cash inflows and cash
outflows during the period.
paglabas ng pera sa company
Presentation of Statement of Cash Flows
1. Operating Activities
 Cash flows from operating activities result primarily
from transactions that affect Income and Expenses.
receipts
a. Cash receipys from the sale of goods and the
rendering of services.
b. Cash receipts from interest income.
c. Cash payments for purchases of inventory.
d. Cash payments for expenses.
2. Investing Activities
 Cash flows from investing activities result primarily
non-
from the acquisition and disposal of long-term assets current
and other investments, like property, plant, and assets
equipment.
 a. Cash payments for the acquisition of property, plant, Guidelines: Indirect Method
and equipment.
b. Cash receipts from sales of property, plant, and 1. Non-cash Expenses
equipment.  Depreciation expense is added to accrual profit
because depreciation decreases accrual basis profit
3. Financing Activities but does not affect cash.
 Cash flows from financing activities result primarily  Losses on sale of property, plant, and equipment are
from transactions with the owner and the borrowings. added to accrual basis profit because losses on sale
of PPE decrease accrual basis profit but they pertain
to investing activities.
Remeber the following:
2. Non-cash Income
Type of Activity Nature of Transactions  Gains on sale of property, plant, and equipment are
 Affect INCOME and deducted from accrual basis profit because gains on
1. Operating Activities sale of PPE increase accrual basis profit but they
EXPENSES.
pertain to investing activities.
 Acquisition and disposal of
2. Investing Activities
PPE.
3. Increases in operating current assets, except cash (e.g.,
 Investment and Drawings by
accounts receivable, trade notes receivable, inventory, and
3. Financing Activities OWNER and LOAN
prepayments) are deducted from accrual basis profit.
transactions.
4. Decreases in operating current assets, except cash, (e.g.,
accounts receivable, trade notes receivable, inventory, and
Note: Only those transactions that affect cash are included in prepayments) are added to accrual basis profit.
the statement of cash flows. Transactions do not affect cash are
exluded from the statement of cash flows. 5. Increases in operating current liabilities (e.g., accounts
payable, trade notes payable, accrued expenses, and
Repoting Cash Flows from Operating Activities unearned income) are added to accrual basis profit.

1. Direct Method 6. Decreases in operating current liabilities (e.g., accounts

 Shows each major class of gross cash receipts and payable, trade notes payable, accrued expenses, and
gross cash payments. unearned income) are deducted from accrual basis profit.

Cash flows from operating activities: Note: Under the Indirect Method, the ”net cash flows from
Cash receipts from sale of goods ₱xx operating activities” is computed by adjusting the accrual
Cash paid for purchases of inventory (xx) basis profit or loss as follows:
Cash paid for salaries expense (xx)
Cash paid for utilities expense (xx) 1. Non-cash expenses – added
Cash paid for interest expense (xx) 2. Non-cash income – deducted
Net cash from Operating Activities ₱xx 3. Increases in operating current assets – deducted
(inverse relationship)
4. Increases in operating current liabiltiies – added (direct
relationship)
2. Indirect Method
 Adjust accrual basis profit or loss for the effects of
changes in operating assets and liabilities and effects
of non-cash items.
Reporting cash flows from Investing and Financing
Activities
Cash flows from operating activities:  Cash inflows and outflows from Investing activities and
Profit (loss) ₱xx Financing activities are reported on the basis of major
Non-cash items: classes of gross cash receipts and gross cashn payments
Depreciation xx (similar to the direct method of presenting cash flows from
Gain on sale of equipment (xx) operating activities).
Total xx
Changes in operatinf assets and liabilties:
Increase in accounts receivable (xx) LESSON 5: Analysis and Interpretation of Financial
Decrease in inventory xx Statement
Increase in prepaid assets (xx)
Increase in accounts payable xx
Decrease in salaries payable (xx) Horizontal Analysis
Net cash from Operating Activities ₱xx  Is the comparison of financial information over two or
more reporting periods.
 The purpose is to analyze changes in amounts are
unusually high or low, which may entail investigation of
the reason for the unusual change.
Steps in Horizontal Analysis Formula:
Inventory Turnover = Cost of Goods Sold/ Average
1. Compute for the change in the amounts in a baseline year Inventory
(earlier period) and a later period.
2. Divide the change by the amount in the baseline year. Where:
Average Inventory = Inventory, beg. + Inventory, end/2
Vertical Analysis
 Involves the analysis of the financial statements of one b. Days of Inventory (Average sale period) – is the
reporting period. It is a proportional analysis whereby measure of the number of days inventory is held before
each
eac amount in the financial statements is shown as a it is sold.
percentage of another item.
Formula:
 For example, each amount in the balance sheet is
Days of Inventory
stated as a percentage of total assets; each amount in
= 365 days in a year/Inventory Turnover
the income statement is stated as a percentage of
gross sales. Financial statements stated in
c. Accounts Receivable Turnover – is a measure of the
this manner are also called “common-size financial
number of times accounts receivable have been
statements”.
collected during a period.
Financial Ratio Analysis
Formula:
 Involves the computation of percetanges, fractions, or
Accounts Receivable Turnover
proportions using certain formulas.
= Credit Sales/Average Accounts Reveivable
 This is designed to emphasize the meaningful
relationships between finanial data. Where:
Average Accounts Receivable
Finanial ratios are broadly classfied into the following:
= Accounts Receivable, beg. + Accounts Receivable,
end/2
1. Liquidity Ratios
2. Activity Ratios (Asset Management Ratios) d. Days of Receivable (Average Collection Period) – is
3. Leverage Ratios (Debt Management Ratios) a measure of the average time to collect a receivable.
4. Profitability Ratios
Formula:
Liquidity Ratios Days of Receivable = 365 days in a year/Receivable
 Provide a measure of the ability of a business to pay turnover
its liabilities.

a. Current Ratio – is the most commonly used ratio in Leverage Ratios (Debt Management Ratios)
measuring the ability of a busienss to pay its short-term  Provide a measure of the extent a business uses debt
debts. financing or ”leverage”.
Formula: a. Debt ratio (Debt-to-asset-ratio) – measures the
Current Ratio = Current Assets/Current Liabiltiies proportion of assets finance through debt.
b. Quick ratio (Acid-test Ratio) – a much stricter ratio Formula:
used to measure the ability of a business to pay its Debt Ratio = Total Liabilities/Total Assets
short-term debts.
b. Equity ratio – measures the proportion assets
Formula: financed through equity.
Quick (Acid-test) Ratio =
”Quick Assets” Formula:
(Cash + Marketable Securities + Accounts Receivable Net) Equity Ratio = Total Equity/Total Assets
Current Liabilities
c. Debt-to-equity ratio – indicates how much debt is
c. Working Capital – similar to current ratio but used to finance the assets relative to the amount
measures the ability of a business to pay its short- pertaining to the owner(s).
term debts by the excess or deficiency of current
assets over current liabilities. Formula:
Debt-to-equity ratio = Total Liabilities/Total Equity
Formula: Current Assets – Current Liabilities

Profitability Ratios
Activity Ratios (Asset Management Ratios)  Provide a measure of the performance of a business in
 Provide a measure of the ability of a business to pay terms of its ability to generate profit from its resources.
its liabilities. how efficient a business is utilizing its resources.
a. Gross profit ratio– shows the relationship between
a. Inventory Turnover – is a measure of the number of sales and cost of good sold.
times inventory is sold and replenished during a period.
Formula:
Gross profit ratio = Gross Profit/Net Sales
 b. Net profit ratio – measures the profitability after
considering all income and expensees.
Formula:
Net profit ratio = Profit for the year/Net Sales
c. Return on assets – measures the profit generated in
relation to the total resources available to the
business.
Formula:
Return on assets = Profit for the year/Total Assets
Return
d. Retun on equity – measures the profit generated in
relation to the resources invested by (or attributed to)
the owner(s) of the business.
Formula:
Return on equity = Profit for the year/Total Equity
ADDITIONAL:
1. Considered to have favorable financial standing from the
perspective of the creditors.
- A business with high equity ratio.
2. When the owner of the business prefers to have high
leverage in order to improve the expected return on their
investments, as a finance officer, you should compute for.
- Debt Ratio
3. Measures the overall operating results of an entity. This
consider all income recognized and all expenses inccured
during the period.
- Net Profit Margin
4. The restatement of financial statement items using a
common denominator or reference item that allows one to
identify trends and major differences; an example is an
income statement in which all items are expressed as
percent of revenue.
- Common Size Analysis
5. Expresses each item in a financial statement as
percentage of the same base amount.
- Vertical Analysis
6. If current assets are 270,000 and total assets are 810,000,
what percentage of total assets are current assets?
- Current Assets/Total Assets x 100
- 33.33%
7. Another term for trend analysis is ___.
- Horizontal Analysis
8. If a company has sales of $110 in 2012 and $154 in 2013,
the percentage increase in sales from 2012 – 2013 is?
- Current Year/Previous Year/ Previous Year
- 40%
9. Each amount on a financial statement is compared with its
corresponding amount on the previous statement
- Horizontal Analysis
10. Each dollar amount on a financial statament is also stated
as a percentage of a base amount on the same statement.
- Vertical Analysis
11. The percentage analysis of increases and decreases in
individual items in comparative financial statement is
called:
- Horizontal Analysis
12. The percent of property, plant, and equipment of total
assets is an example of:
- Vertical Analysis
13. Generally is the most useful in analyzing companies of
different sizes?
- Common Sized Analysis
14. ______ gives diagnosis of the profitability and financial
position.
- Analysis of financial statements.
15. Comparative statement are a form of ____.
- Horizontal Analysis
16. In trend percentage the base year is the ______.
- First Year
17. Trend analysis is significant for ____.
- Forecasting and budgeting
18. When financial statements for a number of years are
reviewed and analysed, the analysis is known as ____.
- Horizontal Analysis
19. If current liabilities are 550,000 and current assets are
190,000, what is the current ratio?
- 0.35
20. If current liabilties are 123,456 and current assets are
100,000, what is the current ratio?
- 0.81
21. If current liabilties are 111,111 and current assets are
222,222, what is the current ratio?
- 2.0
22. If current liabilities are 356,789 and current assets are
200,000 , what is the current ratio?
- 0.56
23. If current liabilties are 78,000 and current assets are
180,000, what is the current ratio?
- 2.31
24. If current liabilties are 178,000 and current assets are
200,000, what is the current ratio?
- 1.12
25. The ability of a company to pay long term obligation when
they are due.
- Solvency
26. Measure the long term income or operating success of a
company for a given period of time.
- Profitability Ratio
27. For vertical analysis purposes, a base item on a balance
sheet is ____.
- Total assets
28. For a vertical analysis purposes, the base item on an
income statement is ____.
 - Net sales

29. What does liquidity mean?

- The company’s ability to pay its short-term
obligations.

30. How do you find Working Capital?

- Current Assets – Current Liabilities