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LESSON NUMBER 1

LESSON TITLE: INTRODUCTION TO ACCOUNTING AND BUSINESS

INTRODUCTION

Accounting has traditionally been limited to the accountant's financial record-keeping functions. However, in
today's rapidly changing business environment, accountants must reassess their roles and functions both within the
organization and in society. An accountant's role has evolved from that of a transaction recorder to that of a member who
provides relevant information to the decision-making team. Accounting today encompasses much more than bookkeeping
and financial report preparation. Accountants can now work in exciting new growth areas such as forensic accounting
(solving crimes such as computer hacking and the theft of large sums of money over the internet); e-commerce (creating
web-based payment systems); financial planning, environmental accounting, and so on. This realization arose as a result
of accounting's ability to provide the type of information that managers and other interested parties require in order to
make better decisions. This aspect of accounting has grown in importance to the point where it is now considered an
information system. It collects data and communicates economic information about the organization to a wide range of
users whose decisions and actions are related to its performance as an information system.

WHAT IS ACCOUNTING?

Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money,
transactions, and events which are, in part at least, of financial character, and interpreting the results thereof. The
American Institute of Certified Public Accountants (AICPA),1941

Accounting is the process of identifying, measuring, and communicating, economic information to permit
informed judgment and decision by the users of the information. American Accounting Association (AAA), 1966

Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature
about economic entities, that are intended to be useful in making economic decisions. Accounting Principles Board of
AICPA, 1970

Accounting can therefore be defined as the process of identifying, measuring, recording, and communicating the
economic information to permit informed judgment and decision by the users of the information.

NATURE OF ACCOUNTING

1. Accounting is an art: The word ‘art’ refers to the way of performing something. It is behavioral knowledge
involving certain creativity and skill that may help us to attain some specific objectives. Accounting is a
systematic method consisting of definite techniques and its proper application requires applied skill and expertise.
So, by nature accounting is an art.
2. Accounting is a process: A process refers to the method of performing any specific job step by step according to
the objectives, or target. Accounting is identified as a process as it performs the specific task of collecting,
processing, and communicating financial information. In doing so, it follows some definite steps like a collection
of data recording, classification summarization, finalization, and reporting.

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3. Accounting deals with financial information and transactions; Accounting records the financial transactions
and dates after classifying the same and finalizes their result for a definite period for conveying them to their
users. So, from start to end, at every stage, accounting deals with financial information. Only financial
information is its subject matter. It does not deal with non-monetary information or non-financial aspects.
4. Accounting is an information system: Accounting is recognized and characterized as a storehouse of
information. As a service function, it collects processes, and communicates financial information of any entity.
This discipline of knowledge has evolved to meet the need for financial information required by different
interested groups.

Types of Accounting Information Systems

 Manual System- Utilized paper-based journals (general and special) and ledgers (general and
subsidiary); rely on human processing so they are labor intensive and prone to errors.
 Computer-based Transaction System- replace paper records with computer records; maintain
accounting data separately from other operating data which means that accounting records are
kept separately from the records required for the expenditures, revenue, and conversion processes.
 Database System- embedded accounting data within the business events data on which they are
based.

HISTORY OF ACCOUNTING

Luca Pacioli is the Father of Accounting. Luca Pacioli (c.1447 – 1517) was the first person to publish detailed
material on the double-entry system of accounting. He was an Italian mathematician and Franciscan friar who also
collaborated with his friend Leonardo da Vinci (who also took maths lessons from Pacioli).
It is said that Luca Pacioli published works for the double-entry accounting system based on procedures in use by
Venetian merchants during the Italian Renaissance. Most of the accounting principles and cycles described by Luca are
still in use to this very day. His documentation includes journals, ledgers, year-end closing dates, trial balances, cost
accounting, accounting ethics, Rule 72 (developed 100 years earlier than Napier and Briggs), and extensive work on the
double-entry accounting system.
The first accounting book was written by Benedetto Cotrugli in Naples and the modern double entry bookkeeping
system could be traced from the book prepared in 1914 by an Italian mathematician, Fr. Luca Pacioli, entitled Suma de
Aritmetica.

In the Philippines, bookkeeping was introduced by the Spaniards and the bookkeeper was called Tenedor de Libro.
The accounting practice originated in the 1700s. However, it was only until March 17, 1923, that the government
recognized the accounting profession. It was formalized through Act No. 3105, which organized the Board of
Accountancy (BOA).

ACCOUNTING AS A BUSINESS LANGUAGE

Accounting is often referred to as the "language of business" because it is the language that managers use to
communicate the firm's financial and economic information to external parties such as shareholders and creditors. Nobody
in business can afford financial illiteracy. Whether you own a business, work as a manager, or are just starting out, you
need to understand financial information and be able to communicate with accountants, controllers, and financial
managers.

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SECTORS OF ACCOUNTING

 Public Practice

Public accountants offer professional services such as external audits, taxation, and consultancies to multiple
clients simultaneously. For accountants to be able to engage in public practice, they should earn a license as a Certified
Public Accountant (CPA).

 Commerce and Industry

Businesses and private companies employ accountants. Their work varies depending on their level, position, and
employer. The tasks of accountants in their sector include recording transactions, preparing financial reports and tax
returns, analyzing accountants, and managing cash.

 Academe

Accountants in this sector are the educators who impart knowledge of the profession by teaching aspiring future
accountants. With the increasing importance of accounting, especially for businesses, some universities and colleges now
offer basic accounting courses as an elective to students.

 Government

Government accountants are those employed by various agencies such as the Commission on Audit (COA), Bureau of
Internal Revenue (BIR), Local Government Units (LGUs), Banko Sentral ng Pilipinas (BSP), and Security and Exchange
Commission (SEC). Their tasks also vary depending on their agency and their level.

BRANCHES OF ACCOUNTING

 Financial Accounting- focuses on providing external users with useful information. It should be noted that
financial statements for external users should be in accordance with the Philippine Financial Reporting Standards
(PFRS).
 Management Accounting- also known as Managerial Accounting deals with the analysis and communication of
financial information to the managers of an organization to achieve internal goals and make well. Basically, this
branch is intended for internal users of financial information. Since information is intended for internal users, it is
not required in accordance with the Philippine Financial Reporting Standards (PFRS) and can be customized
based on the needs of the management.
 Government Accounting- refers to the process of recording and managing all of the financial transactions made
by the government. In the Philippines, the Commission on Audit (COA), under Constitution, promulgated the
New Government Accounting System (NGAS) to be used by all government agencies. Presidential Decree (PD)
No. 1445 defines government accounting as the “process of analyzing, classifying, summarizing, and
communicating all transactions involving the receipts and disbursement of government funds and properties, and
interpreting the result thereof.” In accordance with this definition, objectives were set to cover several areas of
government operations.
The objective of Government Accounting

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1. To produce relevant financial information about all transactions of the government

2. To serve as a basis for a future decision on operations
3. To serve as the control mechanism for receiving, allocating, and utilizing government funds and
properties
4. To come up with financial reports regarding the results of operations of various government agencies that
are for distribution to the public.
 AUDITING- a formal examination of an organization or individual accounts or financial situation. The term
audit is derived from the word “audire”, which means “to hear”. The most common type of audit is a financial
audit, wherein an independent external auditor evaluates an organization’s financial reports to ensure that they are
accurate and complete. Other types of audits: Internal audit, operational audit, compliance audit, information
systems audit, Forensic audit, tax audit, and special audit
 Tax Accounting- a structure of accounting methods focused on taxes rather than public financial statements. Tax
Accounting is governed by the Bureau of Internal Revenue (BIR), which dictates the specific rules that entities
must follow when preparing their tax returns. In tax accounting, there are temporary and permanent differences
between the accounting income recorded in the books of the entity and the taxable income reported in the tax
returns. There are various laws and regulations that should be followed in order to comply with the BIR.
Examples are as follows: Laws, Revenue Regulations (RR), Revenue Memorandum Circulars (RMC), Revenue
Memorandum Orders (RMO), and Tax Rulings
 Cost Accounting- a form of managerial accounting with the aim of capturing the company’s total cost of
production by assessing the variable and fixed costs of each step of production. It has its roots in manufacturing
businesses. This assists the manager in planning and controlling the business by budgeting for daily operations,
capital budgeting for expanding operations, standard costing and reporting the difference, and transfer pricing.
Special analyses include cost behavior, cost-volume-profit relationships, make or buy decisions, selling prices for
products, and activity-based costing.
 Accounting Research- deals with all areas of accounting and examines the problem using scientific methods. It
uses evidence from different sources such as financial information, experiments, computer simulations, interviews,
surveys, historical records (Like RPH HAHAHA), and ethnography. Developing new accounting and auditing
standards is an example of how accounting research could be used.
 Bookkeeping- often called record keeping, is the part of accounting that records the transactions and business
events in the accounting system to form journal entries. This can either be done manually on a physical ledger pad
or electronically in accounting programs like Quickbooks, SAP, Netsuite, etc.

FUNDAMENTAL PRINCIPLES OF PROFESSIONAL ACCOUNTANTS

In June 2005, the IESBA (formerly the Ethics Committee) issued a revised Code of Ethics for Professional
Accountants. The revised Code establishes a conceptual framework for all professional accountants to ensure compliance
with the five fundamental principles of ethics:

 Integrity- A professional accountant should be straightforward and honest in all professional and business
relationships
 Objectivity- A professional accountant should not allow bias, conflict of interest, or undue influence of others.
 Professional Competence and Due Care- A professional accountant has a continuing duty to maintain
professional knowledge and skill at the level required to ensure that a client or employer receives competent
professional services based on current developments in practice, legislation, and techniques. A professional

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accountant should act diligently and in accordance with applicable technical and professional standards when
providing professional services.
 Confidentiality- A professional accountant should respect the confidentiality of information acquired as a result
of professional and business relationships and should not disclose any such information to third parties without
proper and specific authority unless there is a legal or professional right or duty to disclose. Confidential
information acquired as a result of professional and business relationships should not be used for the personal
advantage of the professional accountant or third parties.
 Professional Behavior- A professional accountant should comply with the relevant laws and regulations and
should avoid any action that discredits the profession.

Qualitative Characteristics of Accounting Information

The qualitative characteristics of accounting information are important because they make it easier for both
company management and investors to utilize a company’s financial statements to make well-informed decisions.
Fundamental (Primary) Qualitative Characteristics

 Relevance- refers to how helpful the information is for financial decision-making processes. For accounting
information to be relevant, it must possess:
*Confirmatory value – Provides information about past events
*Predictive value – Provides predictive power regarding possible future events

Therefore, accounting information is relevant if it can provide helpful information about past events and help in
predicting future events or in taking action to deal with possible future events. For example, a company experiencing a
strong quarter and presenting these improved results to creditors is relevant to the creditors’ decision-making process to
extend or enlarge credit available to the company.

 Representational faithfulness also known as reliability, is the extent to which information accurately reflects a
company’s resources, obligatory claims, transactions, etc. For accounting information to possess representational
faithfulness, it must be:
*Complete – Financial statements should not exclude any transaction.
*Neutral – The degree to which information is free from bias. Note that there are subjectivity and estimation
involved in financial statements, therefore information cannot be truly “neutral.” However, if a company polled
1,000 accountants and took the average of their answers, that would be considered neutral and free from bias.
*Free from error – The degree to which information is free from errors.

Enhancing (Secondary) Qualitative Characteristics

Qualitative characteristics of accounting information that impact how useful the information is:

 Verifiability is the extent to which information is reproducible given the same data and assumptions. For example,
if a company owns equipment worth $1,000 and told an accountant the purchase cost, salvage value, depreciation
method, and useful life, the accountant should be able to reproduce the same result. If they cannot, the
information is considered not verifiable.
 Timeliness is how quickly information is available to users of accounting information. The less timely (thus
resulting in older information), the less useful information is for decision-making. Timeliness matters for
accounting information because it competes with other information. For example, if a company issues its financial

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statements a year after its accounting period, users of financial statements would find it difficult to determine how
well the company is doing in the present.
 Understandability is the degree to which information is easily understood. In today’s society, corporate annual
reports are in excess of 100 pages, with significant qualitative information. Information that is understandable to
the average user of financial statements is highly desirable. It is common for poorly performing companies to use
a lot of jargon and difficult phrasing in their annual report in an attempt to disguise their underperformance.
 Comparability is the degree to which accounting standards and policies are consistently applied from one period
to another. Financial statements that are comparable, with consistent accounting standards and policies applied
throughout each accounting period, enable users to draw insightful conclusions about the trends and performance
of the company over time. In addition, comparability also refers to the ability to easily compare a company’s
financial statements with those of other companies.

Accounting Concepts or the rules of accounting that should be followed in the preparation of all accounts and
financial statements.
1. Accrual Concepts- revenues and expenses are recorded when earned and incurred respectively.
2. Consistency Concept- use of the same accounting methods from period to period to achieve comparability over
time within a single enterprise, unless there is a sound reason to do otherwise which must be disclosed in the
financial statement.
3. Going Concern- assumes that the business entity will continue to operate for the foreseeable future.
4. Prudence or Conservatism- the inclusion of a degree of caution in the exercise of judgment needed in making
the estimates required under condition uncertainty, such that assets or income are not overstated or liabilities or
expenses are not understated.
5. Time Period- assumes that the indefinite life of the business should be divided into the time periods or
accounting periods for the purpose of preparing financial statements. The financial statements may be prepared on
a monthly basis, every three months (quarterly), every six months (semi-annually), or twelve months (yearly or
annually). An accounting period can be a calendar year that starts on January 1 and ends on December 31 or a
Fiscal year which is a twelve-month period starting on any date except January 1.
6. Cost Basis- the value of assets is recorded at its original acquisition cost and not on its market value.
7. Business Entity- the business entity is treated as separate and distinct from its owner/s or from other business
units.
8. Adequate disclosure- requires all relevant information that would affect the user’s understanding and assessment
of the business entity should be disclosed in the notes to financial statements.
9. Lower Cost or market value- inventory is valued either at cost or market value, whichever is lower.
10. Matching- transactions affecting both revenues and expenses should be recognized in the same accounting period.
11. Materiality- impact or the ability of the information to affect the decision of the users (Like manipulation) of
financial statements, whether it involves the amount of the money or the importance of the occurrence of the
events.
12. Unit of measurement- all financial data should be recorded at a common unit of measure.
13. Objectivity- accounting records and financial statements should be based on verifiable evidence which can be
confirmed by independent observers. Like on the top (No Bias and need to have evidence)

USERS OF FINANCIAL INFORMATION

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Users of Financial Statements are called stakeholders. A stakeholder is a person or entity who has a “stake” or
interest in the business. Aside from the owners or investors, the other stakeholders are the managers, lenders/creditors,
suppliers, employees, government, and customers. The table below shows the concerns of each stakeholder:

INTERNAL STAKEHOLDERS
Owner or Investor The one who puts in the capital (such as money or property) in a business
Sila ung madalas endeavor. To minimize the risk of losing money, an owner or investor must read
nag tatanonh kung the financial reports and seek answers to the following questions:
business is
profitable ba nag 1. Is the business profitable?
accumalate na ba
ng sufficient to 2. Has it accumulated sufficient financial wealth to remain stable?
remain stable, sila
din ung nag pa
project dun, at sila
ung o nasa kanila
ung pera o
property.

Manager Responsible for running the business. Financial reports make it possible to
Responsible daw sa evaluate the performance of the business.
business, ung
parang ako na 1. Are the plans being implemented beneficial to the business?
bahala, tanonh nya
ay, profitable ba? O 2. Is the business operating profitably?
sya din nag
tatanong kung lahat Remember a losing business depletes wealth and is a reflection of inefficient
ba ng nilalagay sa management?
plan ay may
kwenta
EXTERNAL STAKEHOLDERS
Employee The employee wants:
1. Higher wages
External
stakeholders sya, 2. Benefits
sya ung nag 3. Good working conditions
gagawa,
nanghihingi ng mga 4. Security of tenure
demand, like
malaking sahod,
benefits, at good The employees will evaluate the financial report to determine the ability of the
working condition business to grant these demands. Remember, a losing business cannot afford to
at iba pa. give higher salaries and more benefits.
Lender or Creditor A lender or creditor assesses the paying ability of the business borrower by
reading the financial reports.

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Parang sponsor,
sila ung nag 1. Will the business be able to pay its debts when it falls due?
papautang sa
business. Nag 2. Does it have liquid assets (cash assets or easily convertible to cash)?
tatanong, pag
nalugi pa business
pano makakapag
bayad o makakapag
bayad ba sila pag
due na?
Supplier A supplier offers goods or services on a cash basis or on a credit term. If it off on
credit:
Sila ung supplier
HAHAHA obvious, 1. Will the business be able to pay
nag tatanong kung
makakapag bayad
ba ang business.
Government The government seeks to answer the following questions by reading the
accounting reports:
Isa sa external
stakeholders, Sila 1. Is the business paying the right taxes?
ung nanghihingi ng
tax AHHAHA, 2. Is it filing all the required documents?
adik sila e, nag
tatanong kung tama The government through its tax agents, the Bureau of Internal Revenue
ba binabayarang investigates tax returns and assesses the truthfulness of the reported profits as well
tax. O okay na ba as the tax liability paid by the business.
lahat required
documents,
something like that.

Customer The customer assesses the company’s ability to continuously supply the goods
they need at the right price and right quality.
Sila ung
stakeholder na
nabili, dahil sa
kanila nag
papatuloy ang
business. Also
gusto nila ang
tamang presyo at
quality.

FORMS OF BUSINESS ORGANIZATION

The 4 common forms of business in the Philippines are:

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1. Sole Proprietorship

SOLO AHHAHAH
– This is a business, set up and managed by one person.
– The sole proprietorship has no separate legal personality from its owners.
– Does not need registration from Security and Exchange Commission (SEC)
Advantages:
a. Only a small amount of capital is needed.
b. Its operation can be managed easily by the proprietor.
c. The owner or proprietor gets all the profits.
d. Only a minimum requirement to legally operate is needed (DTI Registration, Barangay Clearance, and
Mayor’s Permit only).

Disadvantages:
a. Difficult to expand the business due to low capital
b. No indefinite life. The owner may just want to close it one day or become incapacitated or die.
c. Owner has unlimited liability. If the business is unable to pay its debt, its creditors can go after the owner’s
personal properties.

2. Partnership
– This is a business owned by two or more persons called partners who contribute money, property, and
profession, expertise into a common fund for the purpose of sharing profits among themselves.
– Partnership for the exercise of a profession this is called General Professional Partnership (GPP).
– It should be noted that a partnership is fiduciary in nature, meaning based on trust between the partner.
– Common examples are Professional Partnerships of CPAs, Lawyers, Engineers, Doctors, etc.
– Optional registration with the Securities & Exchange Commission (SEC), but if capital is 3,000 above
required for registration to acquire the juridical Personality)
– General and limited partnership

Advantages:
a. Ease in managing the business and in attracting clients because of more owners involved.
b. Easy for Loans or bank credits because of the personal property of partners.
c. Management is more effective because of the division of responsibilities among partners.

Disadvantages:
a. No indefinite life since disagreements could easily arise because of many owners involved.
b. Partners, like sole proprietors, have unlimited liability.
c. Each partner is an agent of the partnership, meaning each partner is liable for the actions of the other partners.

3. Corporation
– Is an artificial being created and operated by law and is distinct from its owner.
– It has the right of succession which means its ownership could be passed to different persons.
– as legal entities, has the right that most people enjoy.
– A business organized as a separate legal entity from the owners. It means that it can conduct business by itself
enter into contracts, and buy and sell properties and stocks. An investor simply buys shares of stocks in a

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corporation and becomes a shareholder. It is managed by the Board of Directors (for Stock) or Trustees (for
Non-Stock) elected by the shareholders from among themselves.
– The New Corporation Code of the Philippines allows a One-Person Corporation.
– They are registered with the Securities & Exchange Commission (SEC).

Corporators vs. Incorporators

Corporators are those who compose the corporation. They can either be stockholders or shareholders in a stock
corporation or as members of a non-stock corporation. While incorporators are the stockholders or members of the
corporation who are mentioned in the articles of incorporation. They usually are the first members who established the
corporation and are signatories of documents.

Incorporators are usually the first members who established the corporation and are signatories of documents.

Advantages:
a. More capital can be raised because of a large number of shareholders.
b. Can afford to hire experts who can efficiently manage and operate the business.
c. It has perpetual existence.
d. More stable than partnership because it is not affected by the withdrawal of a shareholder. A shareholder who
wants to withdraw from the corporation simply sells the shares owned to others or can even sell the shares
back to the corporation.
e. Higher amounts of profits may be obtained because of its large amounts of resources which also means a
higher return of investment for the shareholders or investors.

Disadvantages:
a. A shareholder, unlike a sole proprietor or a partner, has no unlimited liability. Therefore, there is a higher risk
involved in corporate debts because, in the event of insolvency (assets are not enough to cover liabilities),
corporate creditors cannot go after the personal properties of shareholders or investors.
b. Has the most legal and tax requirements compared to Sole Proprietorship and Partnership.
c. Abuse of power by the Board of Directors/Trustees could certainly affect the welfare of the corporation and
its shareholders.

4. Cooperative

A cooperative is a free and duly registered association of persons. They are formed due to the common interest of
members who have voluntarily joined to achieve their needs and aspirations by contributing to the capital required,
patronizing their products, and accepting the risk and benefits of the cooperative. It is governed by the Cooperative
Development Authority (CDA).

The Republic Act No. 9520 states that “every cooperative shall conduct its affairs in accordance with Filipino Culture,
good values and experience, and the universally accepted principles of cooperation which include, but are not limited to,
the following:
 Voluntary and Open Membership
 Democratic Member Control
 Member Economic Participation

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 Autonomy and Independence

 Education, Training, and Information
 Cooperation among Cooperatives
 Concern for Community

TYPES OF BUSINESSES
There are three types of businesses:

 Service Businesses- provides intangible products. It does not hold inventory, meaning it does not sell a physical
product. Examples: Accounting Firm, Law Firm, Banks
 Merchandising Businesses - buys products at wholesale prices and sells them at retail prices. The products they
sell are similar to the product they purchased. These businesses are called “buy and sell” businesses. They profit
by selling the products at prices higher than their purchase cost. Examples: Groceries, retail Stores, Sari-sari
stores, Hardware store
 Manufacturing Businesses- buys products with the intention of using them as materials to make a new product.
Thus, there is a transformation of the products purchased. A manufacturing business combines raw materials,
labor, and factory overhead in its production process. Examples Food manufacturing, Automotive Companies,
Furniture and Fixtures

TYPES OF BUSINESS ACTIVITIES

The below types of activities are also called cash flow activities since they are presented in the financial
statements under Statement of Cash Flow.

 Operating Activities- include any spending or sources of cash that are involved in a company's day-to-day
business activities. Any cash spent or generated from the company's products or services is listed in this
section. Examples: Cash paid to suppliers, Salaries paid to employees, Collection of receivables, Payment of
payables, Purchase of inventory, Cash received from the sale of goods and services, Interest payments, Income
tax payments
 Investing activities- provide an account of cash used in the purchase of non-current assets–or long-term assets–
that will deliver value in the future. It is an important aspect of growth and capital. A change to property, plant,
and equipment (PPE), a large line item on the balance sheet, is considered an investing activity. When investors
and analysts want to know how much a company spends on PPE, they can look for the sources and uses of funds
in the investing section of the cash flow statement. Capital expenditures (CapEx), also found in this section, is a
popular measure of capital investment used in the valuation of stocks. An increase in capital expenditures means
the company is investing in future operations. However, capital expenditures are a reduction in cash
flow. Typically, companies with a significant amount of capital expenditures are in a state of growth. Example:
Purchase of fixed assets–cash flow negative, Purchase of investments such as stocks or securities–cash flow
negative, Lending money–cash flow negative, Sale of fixed assets–cash flow positive, Sale of investment
securities–cash flow positive, Collection of loans and insurance proceeds–cash flow positive
 Pag pababa - nagative
 Pag pataas - positive

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 Financing Activities- This pertains to activities on how the business is being funded. Cash generated or spent on
financing activities shows the net cash flows involved in funding the company's operations. Financing activities
include: Dividend payments, Stock repurchases, and Bond offerings–generating cash

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