MODULE 8: 1.7.

Transportation vehicles, net

Analyzing Financial Statements and Creating accumulated depreciation
Projections 2. Long term Investments
2.1. Investment in associates
Financial Plan 2.2. Investments in bond
 capital investment and source of funding in the 3. Intangible Assets
operation of the business. 3.1. Goodwill
 Idetermine whether an entrepreneur ideas are 3.2. Patent, net amortization
feasible to be able to create a successful one. 3.3. Trademark,
 It also helps know and compare the costs and 3.4. Copyright
benefits over time 3.5. Leasehold rights
 3.6. Computer software
Projected Income Statement Liabilities current obligation of an enterprise coming from
 Baltazar (2015), the proponent of project must the past events. These include accounts payable, salaries,
prepare projected financial statements for a taxes and bonds, notes and mortgage payables.
period of three (3) or five (5) years. 2 Categories of Liabilities:
It shows the revenues, cost of goods sold, cost of 1.Current Liabilities - economic obligations that are
sale, operating expenses which is categorized into two payable within one year or normal operating cycle
types: whichever is shorter.
a.Marketing/ distribution expenses Examples of Current Liabilities:
b. administrative/ office expenses 1. Trade accounts and notes payable
Other income and expenses, financing costs, 2. Accrued expense payable such as accrued
income taxes and the bottom line figure, the net profit after salaries. These are expense already incurred but
tax or the net loss. not yet paid.
3. Unearned Income or Revenue (income already
Projected Balance Sheet shows the financial situation of received in advance but no yet earned)
the enterprise as of the given period of time. It presents the 4. Income tax payable
total assets together with total liabilities 5. Withholding tax payable
6. SSS premium payable
Assets include cash, receivables, inventory, equipment, 7. Pag- IBIG premium payable
property, investments 8. Phil Health premium payable
2 Categories:
a.Current Assets: the shorter one which provides 2. Non- current liabilities. Economic obligations that is
economic benefits for a period of one year or the normal payable within one year.
operating cycle. Examples:
Liquidity is the ability of asset to be easily converted into 1. Long- term Bank loan payable
cash and pay to its short – term obligations on time. 2. Bonds payable
Examples:
1. Cash and cash equivalents 3 Significant Parts of the Statement of Cash flow:
2. Marketable securities, net allowance for bad 1. Operating Activities
debts 1.1. Sources of Cash
3. Short- term Notes/ receivable 1.1.1. Cash sales / cash service revenues
4. Other non- trade receivables such as advances to 1.1.2. Collection from trade accounts and note receivable
employees 1.2. Uses of Cash
5. Accounts receivables, net allowance for bad debts 1.2.1. Cash payment for operating expenses
6. Inventories 1.2.2. Cash payment for purchases of merchandise or raw
7. Prepaid expenses materials
b. Non- current assets 1.2.3. Cash payment for trade accounts and notes payable
Examples:
1. Property, plant and equipment 2.Financing Activities:
1.1. Land 2.1. Source of Cash
1.2. Building, net of accumulated 2.1.1. Cash investment by the owner
depreciation 2.1.2. Proceeds from the issuance of shares
1.3. Land improvements, net of 2.1.3. Proceeds from bank loans
accumulated depreciation 2.2. Uses of Cash
1.4. Office equipment, net accumulated 2.2.1. Cash withdrawal by the owner
depreciation 2.2.2. Payment of cash dividends
1.5. Office furniture and fixtures, net 2.2.3. Purchase of treasury shares for cash
accumulated depreciation
1.6. Store equipment, net accumulated
depreciation

3. Investing Activities
3.1. Sources of cash
3.1.1. proceeds from the sale of property, plant and
equipment
3.1.2. Proceeds from the sale investment
Financial Analysis
 computation of ratio, break-even analysis
capital recover analysis, net present value
computation and sensitivity analysis.
Liquidity Ratio: measures the ability of the
enterprise to pay short- term obligations
Categories of Liquidity Ratio
1.Current ratio:short- term debt paying ability
2. Acid- test ratio: - immediate short- term debt
paying ability
3. Net working capital: amount to meet current
debts and carry sufficient inventories
Profitability Ratio:- measures the health of financial
conditions and effective management.
Categories of Profitability Ratio:
1.Gross Profit: margin between selling price and
cost of sales
2. Profit Margin: Net income generated by each
peso sales
3. Return on Total Assets: measures the profitability
of the assets
4. Return of Equity: profitability of the owner/
shareholders’ investment
5. Assets Turnover: measures how efficiently assets
are used to generate sales
3.Solvency Ratio: ability of the enterprise to pay its
long- term obligations as they are due. It includes:
1.Debt to total assets: percentage of total assets
provided by creditors
2. Debt to equity: level of borrowing relative to
funds used to finance the enterprise
3. Times Interest Earned: ability to meet interest
payments as they become due
4.Activity Ratio: measures the liquidity ratio of the
enterprise.
1.Accounts Receivable Turnover: the liquidity of
receivables
2. Average Collection Period: liquidity of
receivables and collection success
3. Inventory Turnover: liquidity of inventory
4. Average Days of Inventory: liquidity of
inventory and inventory management.
Breakeven Analysis:
 where the enterprise will not earn a profit
nor incur a net loss. important for an
enterprise to have a knowledge on this so
that he/ she can decide whether to introduce
new product, change sales prices on
established products or enter a new market
areas. It is important to determine the two
costs for this.
1.Variable cost: cost that change in total relative to
the movement with the level of production which
may include direct materials, direct labor, cost of
goods sold, sales commission, freight- out for a
merchandiser and gasoline. These are expenses that
change every month. Examples: cost of goods sold,
cost of labor, marketing and customer service. They
are directly related to the sales of products
2. Fixed Cost: cost that are constant in relation to the
movement of the level of production. Examples:
depreciation of buildings and equipment, rent,
insurance, property taxes and salaries. Expenses that
remain the same every month. Example: rent of
buildings, internet, insurance
Capital Recovery: number of years investment may
be recovered. The shorter the number of years the
better for the firm.
Sensitivity Analysis: identify the effect of adverse
changes in critical variables such as volume and sales
price of the product, the interest rate on borrowing
related to capital assets, capital costs and even
operating expenses.
Financial Statements: Money is the most important
resources of any business organization. It is needed to
sustain activities of business.
GOOD FINANCIAL MANAGEMENT CAN:
1.Financing priorities are established in accordance
with organizational objectives.
2. Spending is planned and controlled in the line with
established priorities.
3. Adequate funding is available when it is needed,
now and in the future.
4. Funds are obtained and used efficiently.
Developing Financial Plan:
Three Steps Involved in Financial Planning:
1.Establishing Objectives: Financial Planning
should be clear and specific to determine the cost
and budget of the business. Objectives should be
realistic. Available resources are human, material, and
financial plans.
2.Budgeting: estimated or projected program of
expenses and incomes over a specified future
period. Incomes come from estimated sales while
expenses are based on both fixed and variable costs
of operations of the business like salaries, rentals,
materials, taxed payments of water, electricity and
others.
3. Identifying sources of funds: four primary types
of financing business enterprise
a.income from sales
b. owner’s money and sale of shares of stock
c. borrowing from friends, relatives and financial
institutions and issuing bonds
d. sales of some property of the enterprise as a last
resort.
Basic Accounting Equation
Double – entry accounting requires a credit
entry to offset every debit entry for all bookkeeping
or accounting transactions.
Balance Sheet
The balance sheet is composed of three basic
parts: assets, liabilities and capital.
Assets = Liabilities + Capital
It is an accounting report of the assets,
liabilities and capital of the company. It is a formal
statement of financial conditions of a company.
1.Assets:
1.1. Current Assets:items that can easily be used in
cash or sold during a normal operating cycle.
a.Cash may be on hand and/or in bank. It may be
local or foreign currency immediately available for
use in the company’ operation.
b. Marketable securities also known as “temporary
investments”
c. Accounts Receivable these are open accounts
supported by promissory notes. It is also termed as
customer’s account, trade debtors and trade account
receivables.
d. Notes Receivables: open accounts supported by
formal written promises to pay.
e. Inventories in manufacturing concerns. stocks of
raw materials, stocks in- process or finished products
which have been altered or converted into “other
forms” before being made available for sale.
 Finished goods, which are complete
products which are ready for sale
 Goods (work) in- process which are partially
completed products requiring further
processing before being made available for
sale
 Raw materials those that are yet to be
processed in the company’s operational
activities
 Factory or Manufacturing supplies just like
raw materials, these are not physically part
of the manufacturer process. Example
packaging, wrapper of chips, boxes and
others.
f. Notes receivables are open accounts supported by
formal written to promises to pay.
1.2. Investments: tangible and intangible assets
which are purchased which future benefits is/are
expected. Examples include purchase of machineries
and merchandise.
1.3. Fixed Assets assets which are permanent in
nature and are used in the company’s business
operations and are not intended for sale. Examples
are land, buildings, machineries.
1.4. Intangible Assets: long- lived assets with no
form of physical characteristics whose values could
be traced in the form of rights, privileges or
“competitive advantages” they give to the company.
Examples: patents, lease holdings
1.5. Other assets- of which the most common are:
a. Organizational costs which are expenses incurred
in the forming , organizing or establishment of a
business. It can be in this form:
 Legal (registration) fees
 Promotional or underwriting fees
 Incorporation fees
 Cost of printing of certificates of ownership
(stocks) and other printed requirements of
the company
 Cost of service rendered that helped in the
formation of organization or establishment
of the business.
b. Deferred charges are the costs that are neither
inventories prepaid expenses, plant and equipment
nor intangible which represent benefits for some
future periods and are amortized over their periods
benefitted.
Examples:
 Plant management cost
 Deferred pension costs
 Research and development costs
 Organization costs
2.Liabilites
2.1. Current Liabilities obligations incurred by the
company which are payable on a relative shortened
(not more than a year) or normal operating cycle and
whose payment requires the use of current assets or
the creation of “other” current liabilities.
 Accounts payable refers to indebtedness
representing large accounts or result of a
trade with sources/ suppliers
 Notes payable are obligations evidenced by
a formal written promise to pay.
 Dividend payable are the unpaid dividends
declared by the company
  Accrued expenses are obligations for
expenses already made but not yet made.
 Income tax payables are liabilities for
income tax payments computed form the
current period.
 Customers’ Accounts with credit balances
are obligations incurred as result of advance
payments by customers for the company’s
products either in the form of undelivered
items, overpayments, returns, allowances
and errors.
2.2.Long- term liabilities obligations which will
mature from a minimum of one year or beyond
normal operating cycle.
 Bonds payable are formal promises made to
pay a specified amount of money at a
specified future date.
 Premiums or bond payable is the unpaid
balances of bonds purchased in excess of
their face values.
2.3. Other long term Liabilities may be in the form
of pensions which retirement benefits are given to the
retired employees of the company.
2.4. Deferred Revenues: income received by the
company but which it did not yet earn. Examples:
 Long- term leasehold advances
 Fees received in advance for long term
service
 Deferred gross profit on installment sales
3.Stockholders’ Equity and Owners Capital
a.Stockholders Equity: residual interest of the
owners on the assets of the company measured by the
excess of assets over liabilities
b. Paid- In Capital: represents the investments
actually paid by the company’s stockholders. can be
retained earnings from stock dividends, gifts and
others.
c. Capital Stocks: portions of paid- in capital
representing the total stated value of the shares of
stocks issued by the company.
d. Treasury Stocks: company’s own stocks
e. Retained earnings: cumulative balance of periodic
earnings, dividend distribution prior period
adjustments.
STRATEGIES TO MAXIMIZE PROFITS
Market Entrenchment
to maintain and improve the existing market
standing. There is a strong likelihood of competitive
pressure if the firm is financially doing well or
satisfactory. Firms can minimize competitive
vulnerability by either adopting market share
protection strategy for short term or repositioning
strategy for long- term.
Market Share Protection Strategy
To attain high profit, company must have a
definite product- market choice. In terms of product,
company can either offer basic but acceptable good
product or offer more features for those clients with
superior needs.
Low cost producers can price their products
lower than competition, it is because of the
economies of scale. It can ensure that no competition
can offer the same product at a cheaper price without
being affected financially.
In differentiation, company can charge
reasonable premium price because of it distinct
features that are of quality and valued by its
customers.
Market Expansion:
costly strategy. Just like repositioning
strategy, company must have the financial resources
to supply in demand, it can be from additional capital
borrowing or thru borrowing. As sales increase assets
like inventories and delivery logistics must also
expand.
TWO ALTERNATIVE DIRECTION IN MARKET
EXPANSION
1.Multinational Strategy:
Redefining market boundaries from
domestic to worldwide. Example of this is Jollibee.
They embarked their business on a multinational
strategy. They target at least half of total revenues to
venture business outside the Philippines.
Examples:
a. Oishi is an known brand of snacks in China
under the name Liwayway China Co. Ltd.
And named later as Liwayway Marketing
Corporation.
b. Bench started its clothing store in 1987 but
expanded outside the Philippines.
2.Product Full Line Strategy:
Firms can also offer a complete line of
products targeting a broader market base.
Example:
1.SM has expanded from a shoe store to a department
store to one- stop shopping complex which offers
everything middle class can afford.
Volume Improvement
he objective of this is to increase asset
turnover through this, considering that every
incremental sake will contribute to the attainment of
better returns.
TWO BASIC MARKETING STRATEGIES:
1.Sales Stimulation Strategy
integrated promotions strategy of advertising sales
promotions and selling, firms can improve volume.
Example: 1.Payment for purchase of plant, equipment and property.
a.Coca cola spent billions of pesos to increase 2. Proceeds from selling the above
demand for soft drinks which includes the launch of 3. Payment for a new investment
4. Proceeds from selling an investment
Coke Zero which targets those who want soda due to
Cash Flow from Financing Activities
sugar content. Financing Activities: are how business finances itself.
2.System Selling Distribution Example:
-selling related and complementary products to the same 1. Extra money the owners provide into the
customers. business.
Example: 2. Money the business borrows.
a.Fast Food chains like Jollibee or Mc Donald’s try to cross 3. Money others borrowed from the business they
– sell related products like French fries to go with burgers pay back.
to increase average checks. 4. Money the owners take out of the business.
Business Expenses: Net Operating Cash Flow: amount of cash that a business
 Cost of goods has after paying all the bills, Cash flow forecast will help
 Commissions/ discounts the entrepreneur measure and monitor how the business is
 Variable and fixed expenses operating.
Balance Sheet:- shows that financial status of the business
Profit Earned from sales increases through the on a given day. It is normally completed at the end of the
following situations: month of financial year. Profit and loss statement cash flow
1.The number of customers statement completes the Balance Sheet.
2. The volume of goods or services existing customers buy. Profit and loss statement-It is also called Income
3. The sales price Statement. summary of income and expenses for your
To Increase sales, objectives include: business over a period of time.normally prepared at regular
1.To ensure that many potential customers know about intervals.
business details and what have to offer. Cash Flow Statement- summary of money coming into
2. Ensure existing customers are happy with the product or and going out of the business for a set time period.
service and want to buy more of it. Cash Flow from Operating Activities
3. Review sales price regularly to ensure covering all Operating Activities that are day- to – day results of buying
related costs and still making a profit. and selling of goods and services. This includes:
Cash Flow Statement- summary of money coming into 1. Receipts from income
and going out of the business for a set time period. It is 2. Payment for expenses and employees
prepared monthly at the end of the financial year. 3. Funding of debtors
Cash Flow from Operating Activities: 4. Funding to and from suppliers
Operating Activities: day- to day results of buying and 5. Stock movements
selling of goods and services. This include: Cash Flow from Investing Activities
1. Receipt from income Investing Activities include investment in future business
2. Payments for expenses and employees activities.
3. Funding of debtors Examples:
4. Funding to and from suppliers 1. Payment for purchase of plant, equipment and
5. Stock movements property
Cash Flow from Investing Activities 2. Proceeds from selling the above
include investments in future business activities. 3. Payment for a new investment
Examples of this are buying and selling fixed assets. This 4. Proceeds from selling an investment.
includes:
Example of Simple Balance Sheet Grant’s Coffee and Milk Tea Shop Trial Balance
Account Debit (Php) Credit
Cash 32, 800.00
Accounts Receivable 30,00.00
Inventory 39,800.00
Leasehold Improvements 50,000.00
Accounts payable 49,000.00
Long- term liabilities 99,500.00
Revenues 11,100.00
Cost of goods sold 15,000.00
Rent 5,000.00
Supplies expenses 6,000.00
Wages 6,000.00
Electricity, water, others 2,000.00
Total 159,600.00 159,600.00

Bank Account Statement

Assets = debit balance

Liabilities= credit balance
Expenses= debit balance
Equity= credit balance
Revenue= credit balance