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Fundamentals of Accountancy,

Business and Management 2


(First Quarter)
JENNIFER D. AMORA, MBA, CPA

Bureau of Curriculum Development


December 2017
MANAGEMENT OF LEARNING

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


COURSE DESCRIPTION

Fundamentals of Accountancy, Business


and Management 1

This is an introductory course in accounting, business


and management data analysis that will develop
students’ appreciation of accounting as language of
business and an understanding of basic accounting
concepts and principles that will help them analyze
business transactions.

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


COVERAGE OF THE SESSION

• Statement of Financial Position


• Statement of Comprehensive Income
• Statement of Changes in Equity
• Cash Flow Statement
• Analysis and Interpretation of Financial Statements

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


COVERAGE OF THE SESSION

• Statement of Financial Position


• Statement of Comprehensive Income
• Statement of Changes in Equity
• Cash Flow Statement
• Analysis and Interpretation of Financial Statements

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


COVERAGE OF THE SESSION

• Statement of Financial Position


• Statement of Comprehensive Income
• Statement of Changes in Equity
• Cash Flow Statement
• Analysis and Interpretation of Financial Statements

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


STATEMENT OF FINANCIAL POSITION

formal statement showing the three elements


comprising financial position, namely assets,
liabilities and equity.

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


STATEMENT OF FINANCIAL POSITION

• REPORT FORM
• ACCOUNT FORM

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


COVERAGE OF THE SESSION

• Statement of Financial Position


• Statement of Comprehensive Income
• Statement of Changes in Equity
• Cash Flow Statement
• Analysis and Interpretation of Financial Statements

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


STATEMENT OF COMPREHENSIVE INCOME

is formal statement showing the financial performance of


an entity for a given period of time

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


COVERAGE OF THE SESSION

• Statement of Financial Position


• Statement of Comprehensive Income
• Statement of Changes in Equity
• Cash Flow Statement
• Analysis and Interpretation of Financial Statements

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


STATEMENT OF CHANGES IN EQUITY

shows the movements in the elements or


components of the shareholders equity

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


STATEMENT OF CHANGES IN EQUITY
SOLE PROPRIETORSHIP

Owner’s Equity, Beg xx


Add: Additional Investment xx
Profit xx
Total xx
Less: Withdrawal (xx)
Owner’s Equity, End xx

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


STATEMENT OF CHANGES IN EQUITY
PARTNERSHIP

A B TOTAL
Partners’ Equity, Beg xx xx xx
Add: Partner’s Share in Profit xx xx xx
Total xx xx xx
Less: Withdrawal (xx) (xx) (xx)
Partners’ Equity, Beg xx xx xx

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


STATEMENT OF CHANGES IN EQUITY
CORPORATION

Share Share Retained TOTA


Capital Premiums Earnings L
Balance, Beg xx xx xx xx
Add: Issuance of Additional Shares xx xx xx
Profit xx xx
Less: Dividends Declared and Paid (xx) (xx)
Balance, Beg xx xx xx xx

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


STATEMENT OF CHANGES IN EQUITY
COOPERATIVES

Subscribed Share Capital - Ordinary xx


Add: General Reserved Fund xx
Cooperative Education and Training Fund xx
Optional Fund xx
Community Development Fund xx
Members’ Equity xx

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


COVERAGE OF THE SESSION

• Statement of Financial Position


• Statement of Comprehensive Income
• Statement of Changes in Equity
• Cash Flow Statement
• Analysis and Interpretation of Financial Statements

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


STATEMENT OF CASH FLOWS

summarizes the operating, investing and financing


activities

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


STATEMENT OF CASH FLOWS

• TYPES OF ACTIVITIES
• OPERATING ACTIVITIES
• INVESTING ACTIVITIES
• FINANCING ACTIVITIES
• CASH FLOW CLASSIFICATION
• INFLOW
• OUTFLOW
• METHODS OF PRESENTING
• DIRECT
• INDIRECT

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


STATEMENT OF CASH FLOWS. ILLUSTRATION

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


COVERAGE OF THE SESSION

• Statement of Financial Position


• Statement of Comprehensive Income
• Statement of Changes in Equity
• Cash Flow Statement
• Analysis and Interpretation of Financial Statements

DEPARTMENT OF EDUCATION – BUREAU OF CURRICULUM DEVELOPMENT


Financial Statement
Analysis
TOPICS

• COMMON-SIZE ANALYSIS
• RATIO ANALYSIS
• LIQUIDITY RATIOS
• LEVERAGE RATIOS
• PROFITABILITY RATIOS
1 COMMON-SIZE ANALYSIS
• COMMON-SIZE ANALYSIS EXPRESSES LINE ITEMS OR ACCOUNTS IN THE
FINANCIAL STATEMENTS AS PERCENTAGES.
• THE TWO MAJOR FORMS OF COMMON-SIZE ANALYSIS ARE HORIZONTAL
ANALYSIS AND VERTICAL ANALYSIS.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
1 HORIZONTAL ANALYSIS
• ALSO CALLED TREND ANALYSIS, HORIZONTAL ANALYSIS
EXPRESSES A LINE ITEM AS A PERCENTAGE OF SOME
PRIOR-PERIOD AMOUNT.
• THIS APPROACH ALLOWS THE TREND OVER TIME TO BE
ASSESSED.
• IN HORIZONTAL ANALYSIS, LINE ITEMS ARE EXPRESSED AS
A PERCENTAGE OF A BASE PERIOD AMOUNT.
• THE BASE PERIOD CAN BE THE IMMEDIATELY PRECEDING
PERIOD, OR IT CAN BE A PERIOD FURTHER IN THE PAST.
HORIZONTAL ANALYSIS
1 VERTICAL ANALYSIS
• WHILE HORIZONTAL ANALYSIS INVOLVES RELATIONSHIPS AMONG
ITEMS OVER TIME, VERTICAL ANALYSIS IS CONCERNED WITH
RELATIONSHIPS AMONG ITEMS WITHIN A PARTICULAR TIME PERIOD.
• VERTICAL ANALYSIS EXPRESSES THE LINE ITEM AS A PERCENTAGE
OF SOME OTHER LINE ITEM FOR THE SAME PERIOD.
• WITH THIS APPROACH, WITHIN-PERIOD RELATIONSHIPS CAN BE
ASSESSED.
• LINE ITEMS ON INCOME STATEMENTS OFTEN ARE EXPRESSED AS
PERCENTAGES OF NET SALES. ITEMS ON THE BALANCE SHEET OFTEN
ARE EXPRESSED AS A PERCENTAGE OF TOTAL ASSETS.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
VERTICAL ANALYSIS
2 RATIO ANALYSIS
• RATIO ANALYSIS IS THE SECOND MAJOR
TECHNIQUE FOR FINANCIAL STATEMENT ANALYSIS.
• RATIOS ARE FRACTIONS OR PERCENTAGES
COMPUTED BY DIVIDING ONE ACCOUNT OR LINE-
ITEM AMOUNT BY ANOTHER.
• FOR EXAMPLE, OPERATING INCOME DIVIDED BY
SALES PRODUCES A RATIO THAT MEASURES THE
PROFIT MARGIN ON SALES.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2 STANDARDS FOR COMPARISON
• RATIOS BY THEMSELVES TELL LITTLE ABOUT THE FINANCIAL WELL-BEING OF
A COMPANY.
• FOR MEANINGFUL ANALYSIS, THE RATIOS SHOULD BE COMPARED WITH A
STANDARD.
• ONLY THROUGH COMPARISON CAN SOMEONE USING A FINANCIAL
STATEMENT ASSESS THE FINANCIAL HEALTH OF A COMPANY.
• TWO STANDARDS COMMONLY USED ARE THE PAST HISTORY OF THE
COMPANY AND INDUSTRIAL AVERAGES.
2 CLASSIFICATION OF RATIOS
• RATIOS GENERALLY ARE CLASSIFIED INTO ONE OF THREE
CATEGORIES: LIQUIDITY, BORROWING CAPACITY OR LEVERAGE,
AND PROFITABILITY.
• LIQUIDITY RATIOS MEASURE THE ABILITY OF A COMPANY TO MEET ITS
CURRENT OBLIGATIONS.
• LEVERAGE RATIOS MEASURE THE ABILITY OF A COMPANY TO MEET ITS
LONG- AND SHORT-TERM OBLIGATIONS. THESE RATIOS PROVIDE A
MEASURE OF THE DEGREE OF PROTECTION PROVIDED TO A COMPANY’S
CREDITORS.
• PROFITABILITY RATIOS MEASURE THE EARNING ABILITY OF A COMPANY.
THESE RATIOS ALLOW INVESTORS, CREDITORS, AND MANAGERS TO
EVALUATE THE EXTENT TO WHICH INVESTED FUNDS ARE BEING USED
EFFICIENTLY.
LIQUIDITY RATIOS
CLASSIFICATION OF RATIOS
3 CURRENT RATIO

• THE CURRENT RATIO IS A MEASURE OF THE ABILITY OF A COMPANY TO


PAY ITS SHORT-TERM LIABILITIES OUT OF SHORT-TERM ASSETS.
• THE CURRENT RATIO IS COMPUTED AS FOLLOWS:

• SINCE CURRENT LIABILITIES MUST BE PAID WITHIN AN OPERATING CYCLE


(USUALLY WITHIN A YEAR) AND CURRENT ASSETS CAN BE CONVERTED TO
CASH WITHIN AN OPERATING CYCLE, THE CURRENT RATIO PROVIDES A
DIRECT MEASURE OF THE ABILITY OF A COMPANY TO MEET ITS SHORT-
TERM OBLIGATIONS.
3 QUICK OR ACID-TEST RATIO
• THE QUICK OR ACID-TEST RATIO IS A MEASURE OF LIQUIDITY
THAT COMPARES ONLY THE MOST LIQUID ASSETS WITH
CURRENT LIABILITIES.
• EXCLUDED FROM THE QUICK RATIO ARE NON-LIQUID
CURRENT ASSETS SUCH AS INVENTORIES.
• THE NUMERATOR OF THE QUICK RATIO INCLUDES ONLY THE
MOST LIQUID ASSETS (CASH, MARKETABLE SECURITIES, AND
ACCOUNTS RECEIVABLE).
ACCOUNTS RECEIVABLE TURNOVER
3 RATIO
• THE EXTENT OF A COMPANY’S LIQUIDITY PROBLEM CAN BE FURTHER
INVESTIGATED BY EXAMINING THE LIQUIDITY OF ITS RECEIVABLES, OR HOW LONG
IT TAKES THE COMPANY TO TURN ITS RECEIVABLES INTO CASH.
• A LOW LIQUIDITY OF RECEIVABLES SIGNALS MORE DIFFICULTY SINCE THE QUICK
RATIO WOULD BE OVERSTATED.

• THE LIQUIDITY OF RECEIVABLES IS MEASURED BY THE ACCOUNTS RECEIVABLE


TURNOVER RATIO, COMPUTED AS FOLLOWS:

Average accounts receivable is defined as follows:


ACCOUNTS RECEIVABLE TURNOVER IN
3 DAYS
• THE ACCOUNTS RECEIVABLE TURNOVER RATIO CAN BE TAKEN FURTHER TO
DETERMINE THE NUMBER OF DAYS THE AVERAGE BALANCE OF ACCOUNTS
RECEIVABLE IS OUTSTANDING BEFORE BEING CONVERTED INTO CASH, WHICH
IS CALCULATED AS FOLLOWS:

• WHETHER THE RESULT IS GOOD OR BAD DEPENDS TO SOME EXTENT ON


WHAT OTHER COMPANIES IN THE INDUSTRY ARE EXPERIENCING.
• A LOW TURNOVER RATIO MAY SUGGEST A NEED TO MODIFY CREDIT AND
COLLECTION POLICIES TO SPEED UP THE CONVERSION OF RECEIVABLES TO
CASH.
3 INVENTORY TURNOVER RATIO
• INVENTORY TURNOVER IS ALSO AN IMPORTANT LIQUIDITY MEASURE. THE INVENTORY TURNOVER
RATIO AND AVERAGE INVENTORY IS COMPUTED AS FOLLOWS:

• THIS RATIO TELLS AN ANALYST HOW MANY TIMES THE AVERAGE INVENTORY TURNS
OVER, OR IS SOLD, DURING THE YEAR.
• A LOW TURNOVER RATIO MAY SIGNAL THE PRESENCE OF TOO MUCH INVENTORY OR
SLUGGISH SALES.
• THE NUMBER OF DAYS INVENTORY IS HELD BEFORE BEING SOLD CAN BE COMPUTED
AS:
365 ÷ INVENTORY TURNOVER RATIO = TURNOVER IN DAYS
LEVERAGE RATIOS
CLASSIFICATION OF RATIOS
4 TIMES-INTEREST-EARNED RATIO

• THE FIRST LEVERAGE RATIO USES THE INCOME STATEMENT TO


ASSESS A COMPANY’S ABILITY TO SERVICE ITS DEBT.
• THIS RATIO, CALLED THE TIMES-INTEREST-EARNED RATIO, IS
COMPUTED AS FOLLOWS:

• INCOME BEFORE TAXES MUST BE RECURRING INCOME; THUS,


UNUSUAL OR INFREQUENT ITEMS APPEARING ON THE INCOME
STATEMENT SHOULD BE EXCLUDED IN ORDER TO COMPUTE THE
RATIO.
• RECURRING INCOME IS USED BECAUSE IT IS THE INCOME THAT IS
AVAILABLE EACH YEAR TO COVER INTEREST PAYMENTS.
4 DEBT RATIO
• INVESTORS AND CREDITORS ARE THE TWO MAJOR SOURCES OF CAPITAL.
• AS PERCENTAGE OF ASSETS FINANCED BY CREDITORS INCREASES, THE
RISKINESS OF THE COMPANY INCREASES.
• THE DEBT RATIO MEASURES THIS PERCENTAGE AND IS COMPUTED AS
FOLLOWS:

• SINCE TOTAL LIABILITIES ARE COMPARED WITH TOTAL ASSETS, THE RATIO
MEASURES THE DEGREE OF PROTECTION AFFORDED TO CREDITORS IN CASE
OF INSOLVENCY.
• CREDITORS OFTEN IMPOSE RESTRICTIONS ON THE PERCENTAGE OF LIABILITIES
ALLOWED.
• IF THIS PERCENTAGE IS EXCEEDED, THE COMPANY IS IN DEFAULT, AND
FORECLOSURE CAN TAKE PLACE.
4 DEBT-TO-EQUITY RATIO
• ANOTHER RATIO USEFUL IN ASSESSING THE LEVERAGE USED BY A
COMPANY IS THE DEBT-TO-EQUITY RATIO.
• THIS RATIO COMPARES THE AMOUNT OF DEBT THAT IS FINANCED
BY STOCKHOLDERS AND IS CALCULATED AS FOLLOWS:

• CREDITORS WOULD LIKE THIS RATIO TO BE RELATIVELY LOW,


INDICATING THAT STOCKHOLDERS HAVE FINANCED MOST OF THE
ASSETS OF THE FIRM.
• STOCKHOLDERS, ON THE OTHER HAND, MAY WISH THIS RATIO TO
BE HIGHER BECAUSE THAT INDICATES THAT THE COMPANY IS MORE
HIGHLY LEVERAGED AND STOCKHOLDERS CAN REAP THE RETURN
OF THE CREDITORS’ FINANCING.
PROFITABILITY RATIOS
CLASSIFICATION OF RATIOS
5 PROFITABILITY RATIOS
• INVESTORS EARN A RETURN THROUGH THE RECEIPT OF DIVIDENDS AND
APPRECIATION OF THE MARKET VALUE OF THEIR STOCK.
• BOTH DIVIDENDS AND MARKET PRICE OF SHARES ARE RELATED TO THE
PROFITS GENERATED BY COMPANIES.
• SINCE THEY ARE THE SOURCE OF DEBT-SERVICING PAYMENTS, PROFITS
ALSO ARE OF CONCERN TO CREDITORS.
• MANAGERS ALSO HAVE A VESTED INTEREST IN PROFITS.
• BONUSES, PROMOTIONS, AND SALARY INCREASES OFTEN ARE TIED TO
REPORTED PROFITS.
• PROFITABILITY RATIOS, THEREFORE, ARE GIVEN PARTICULAR ATTENTION
BY BOTH INTERNAL AND EXTERNAL USERS OF FINANCIAL STATEMENTS.
5 RETURN ON SALES

• RETURN ON SALES IS THE PROFIT MARGIN ON SALES.


• IT REPRESENTS THE PERCENTAGE OF EACH SALES DOLLAR
THAT IS LEFT OVER AS NET INCOME AFTER ALL EXPENSES HAVE
BEEN SUBTRACTED.
• RETURN ON SALES IS ONE MEASURE OF THE EFFICIENCY OF
A FIRM AND IS COMPUTED AS FOLLOWS:
5 RETURN ON TOTAL ASSETS
• RETURN ON ASSETS MEASURES HOW EFFICIENTLY ASSETS ARE USED BY CALCULATING THE
RETURN ON TOTAL ASSETS USED TO GENERATE PROFITS.

• RETURN ON TOTAL ASSETS AND AVERAGE TOTAL ASSETS IS COMPUTED AS FOLLOWS:

• BY ADDING BACK THE AFTER-TAX COST OF INTEREST, THIS MEASURE REFLECTS ONLY HOW
THE ASSETS WERE EMPLOYED.

• IT DOES NOT CONSIDER THE MANNER IN WHICH THEY WERE FINANCED (INTEREST EXPENSE
IS A COST OF OBTAINING THE ASSETS, NOT A COST OF USING THEM).
RETURN ON COMMON STOCKHOLDERS’
5 EQUITY
• RETURN ON TOTAL ASSETS IS MEASURED WITHOUT REGARD TO THE
SOURCE OF INVESTED FUNDS.
• FOR COMMON STOCKHOLDERS, HOWEVER, THE RETURN THAT THEY
RECEIVE ON THEIR INVESTMENT IS OF PARAMOUNT IMPORTANCE.
• OF SPECIAL INTEREST TO COMMON STOCKHOLDERS IS HOW THEY ARE
BEING TREATED RELATIVE TO OTHER SUPPLIERS OF CAPITAL FUNDS.
• THE RETURN ON STOCKHOLDERS’ EQUITY PROVIDES A MEASURE THAT
CAN BE USED TO COMPARE AGAINST OTHER RETURN MEASURES (E.G.,
PREFERRED DIVIDEND RATES AND BOND RATES) AND IS COMPUTED AS
FOLLOWS:
FINANCIAL STATEMENT ANALYSIS. ILLUSTRATION
FINANCIAL STATEMENT ANALYSIS. ILLUSTRATION