IX.

STATEMENT OF CASH FLOWS

Learning Objectives:
At the end of this chapter, the students should be able to:
1. discuss the components and structures of a statement of cash flows; and
2. prepare a statement of cash flows.

LO1. COMPONENTS OF A STATEMENT OF CASH FLOW

1. Operating Activities
Operating activities are the basic-line cash activities of the entity related to its normal
operating cycle. Furthermore, such activities are related to the primary revenue-producing activity
of the entity. The following transactions are examples of operating activities:
a. Cash receipts from sale of goods and rendering of services ( + )
b. Cash receipts from royalties, fees, commissions and other revenue ( + )
c. Cash payments of suppliers of goods and services ( - )
d. Cash payments to employees ( - )
e. Cash payments to income taxes ( - )
f. Interest paid ( - )
g. Interest received ( + )
h. Dividends received ( + )

2. Investing Activities
Investing activities generally result from acquisition and disposal of non-current assets.
The following transactions are examples of investing activities:
a. Cash payments to acquire property, plant and equipment ( - )
b. Cash payments to acquire intangible asset ( - )
c. Cash receipts from sale of property, plant and equipment ( + )
d. Cash receipts from sale of intangible asset ( + )
e. Cash receipts from sale of other long-term assets ( + )

3. Financing Activities
Financing activities arise from changes in non-current liabilities and owner’s equity of a
business organization. The following items are financing activities:
a. Cash investments from owners ( + )
b. Cash proceeds from bank loans ( + )
c. Cash distributions to owners ( - )
d. Repayment of bank loans ( - )

LO2. PREPARING THE STATEMENT OF CASG FLOWS

1. Heading
 Name of the company
 Appropriate title or heading
 Period covered
2. Prepare the Operating Activities Section

3. Prepare the Investing Activities Section

4. Prepare the Financing Activities Section

5. Determine the Ending Cash Balance

X. ANALYSIS AND INTERPRETATION OF FINANCIAL STATEMENTS

Learning Objectives:
At the end of this chapter, the students should be able to:
1. identify the importance of financial statement analysis in the life of every enterprise;

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 2. enumerate the different kind of standards that could be used in comparing companies;
3. perform horizontal and vertical analysis on the financial statements of selected companies;
4. enumerate the different ratios according to its classification; and
5. compute the different ratios and interpret the results if it has improved from the previous year.

LO1. IMPORTANCE OF FINANCIAL STATEMENT ANALYSIS

Financial statement analysis is the process of evaluating risks, performance, financial

health, and future prospects of a business using computational and analytical techniques with the
objective of making economic decisions.

LO2. COMPARISON STANDARDS

1. Intracomparability
In this kind of comparison, the company’s financial statements for the current period are
being compared with the financial statements of prior or earlier periods.

2. Intercomparability
This comparison deals with the comparative analysis of the company’s financial
statement against a direct competitor.

3. Industry Standard
By looking at the industry averages as a whole instead on a per competitive basis, the
process would negate the seasonal fluctuations affecting the direct competitor.

LO3. HORIZONTAL ANALYSIS vs VERTICAL ANALYSIS

In horizontal analysis, the company will compare their own financial statements from the
prior period. The prior period amount normally serves as the basis or the starting point of the
comparison.

Peso change = Balance of Current Year – Balance of Prior Year

Percentage change = Peso change / Balance of Prior Year

ILLUSTRATION:

CHESCA Company
Statement of Financial Position
As of December 31
Peso change % age
2019 2020 change
Assets:
Cash P 520,000 P 600,000
Accounts Receivable 200,000 180,000
Inventory 135,000 160,000
Land 725,000 800,000
Patent 150,000 190,000
Total Assets P 1,730,000 P 1,930,000

Liabilities
Accounts Payable P 330,000 P 500,000
Notes Payable 500,000 450,000
Total Liabilities P 830,000 P 950,000

Capital P 900,000 P 980,000

Total Liabilities & Equity P1,730,000 P1,930,000

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 CHESCA Company
Statement of Comprehensive Income
For the years ended December 31
Peso change % age
2019 2020 change
Net Sales P 880,000 P 950,000
Cost of Goods Sold 260,000 180,000
Gross Profit 620,000 770,000
Operating Expenses 140,000 180,000
Operating Income 480,000 590,000
Interest Expense 65,000 25,000
Income before Tax 415,000 565,000
Income Tax Expense 124,500 180,000
Net Income After Tax P 290,500 385,000

In vertical analysis, companies express items of a certain financial statement as a

percentage of a given base amount. For the SFP, the base amount used is total assets. On the other
hand, sales or net sales is used as base amount for the SCI.

ILLUSTRATION:
CHESCA Company
Statement of Financial Position
As of December 31, 2020
Percentage
Assets:
Cash P 600,000
Accounts Receivable 180,000
Inventory 160,000
Land 800,000
Patent 190,000
Total Assets P 1,930,000

Liabilities
Accounts Payable P 500,000
Notes Payable 450,000
Total Liabilities P 950,000

Capital P 980,000
Total Liabilities & Equity P1,930,000

CHESCA Company
Statement of Comprehensive Income
For the years ended December 31, 2020
Percentage
Net Sales P 950,000
Cost of Goods Sold 180,000
Gross Profit 770,000
Operating Expenses 180,000
Operating Income 590,000
Interest Expense 25,000
Income before Tax 565,000
Income Tax Expense 180,000
Net Income After Tax 385,000

LO 4, LO5. DIFFERENT FINANCIAL RATIOS

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 The financial statements of Hilltop Hotel, Inc. will be used to illustrate the use of
financial ratios in analyzing the company’s:

1. Liquidity ratios – are ratios that measure the firm’s ability to meet cash needs as they arise
(e.g. payment of accounts payable, bank loans and operating costs).

2. Solvency ratios – are ratios that measure the extent of a firm’s financing, with debt relative
to equity and its ability to cover interest and other fixed charges such as rent and sinking fund
payments.

3. Activity ratios – are ratios that measure the liquidity of specific assets and deficiency in
managing assets such as accounts receivable, inventory and fixed assets.

4. Profitability ratios – are ratios that measure the overall performance of the firm and its
efficiency in managing assets, liabilities and owners’ equity.

5. Operating ratios – these ratios assist in the analysis of hospitality establishment operations.

The statement of financial position as of December 31, 2020 and 2019 and statement of
comprehensive income for years 2020 and 2019 of Hilltop Hotel, Inc. are shown below:
Hilltop Hotel, Inc.
Statement of Financial Position
As of December 31
(in P000’s)
2020 2019
Assets
Current Assets:
Cash P 5,666.0 P 2,793.0
Accounts receivable 4,704.0 4,383.5
Allowance for doubtful accounts (224.0) (208.5)
Inventories (Food and beverages) 1,520.0 1,384.5
Prepaid expenses 1,257.0 1,379.5
Total current assets P 12,923.0 P 9,732.0

Property and Equipment

Land P 10,405.0 P 10,405.0
Buildings 19,136.5 14,364.0
Accumulated depreciation (956.8) (718.2)
Equipment 10,000.0 6,000.0
Accumulated depreciation (500.0) (300.0)
Furniture and fixtures 761.5 884.0
Accumulated depreciation (30.0) (44.2)
Total property and equipment P 38,816.2 P 30,590.6
Total Assets P 51,739.2 P 40,322.6

Liabilities and Shareholders’ Equity

Current Liabilities
Accrued liabilities P 1,147.0 P 1,795.5
Accounts payable 2,807.0 2,006.0
Notes payable – banks 2,776.5 2,414.5
Long-term Liabilities 3,788.9 19,718.0
Total Liabilities P 10,516.4 P 25,933.5

Shareholders’ Equity
Ordinary share, par value P1, authorized 10,000,000 P 2,401.5 P 2,297.0
shares; issued, 2,401,500 shares in 2020 and 2,297,000
shares in 2019
Share Premium 478.5 455.0
Retained Earnings 38,342.8 23,181.5
Total Liabilities and Shareholders’ Equity P 51,739.2 P 40,322.8

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 Hilltop Hotel, Inc.
Statement of Comprehensive Income
For the years ended December 31
(in P000’s)
2020 2019
Revenues:
Rooms P 48,410.0 P 34,475.0
Food and Beverages 35,644.0 25,383.0
Telephone 7,349.0 4,966.0
Rentals 211.0 419.0
Total Revenues P 91,614.0 P 65,243.0

Expenses:
Cost of sales P 17,275.0 P 12,101.0
Payroll and related costs 32,783.0 24,839.0
Utilities expense 10,450.0 6,097.0
Rent 5,355.0 3,555.0
Property taxes 400.0 380.0
Insurance 400.0 380.0
Interest 1,293.0 1,138.0
Depreciation expense 1,999.0 1,492.0
Total Expenses P 69,955.0 P 49,983.0
Income before income taxes P 21,659.0 P 15,261.0
Income taxes 6,497.7 4,578.3
Net income P 15,161.3 P 10,682.7

1. LIQUIDITY RATIOS

a. Current Ratio

Formula: Current Assets divided by Current Liabilities

Solution:
2019 2020

b. Acid-test Ratio or Quick Ratio

Formula: Quick Assets divided by Current Liabilities

Solution:
2019 2020

c. Working Capital

Formula: Current Asset minus Current Liabilities

Solution:
2019 2020

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 2. SOLVENCY RATIOS

a. Debt Ratio

Formula: Total Liabilities divided by Total Assets

Solution:
2019 2020

b. Debt-to-Equity Ratio

Formula: Total Liabilities divided by Total Shareholders’ Equity

Solution:
2019 2020

c. Times Interest Earned Ratio

Formula: Earnings Before Interest and Taxes divided by Interest Expense

Solution:
2019 2020

3. ACTIVITY RATIOS

a. Total Assets Turnover Ratio

Formula: Sales divided by Average Total Assets

Solution:
2019 2020

b. Fixed Assets Turnover Ratio

Formula: Sales divided by Average Total Fixed Assets

Solution:
2019 2020

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 c. Accounts Receivable Turnover

Formula: Sales divided by Average Accounts Receivable

Solution:
2019 2020

d. Average Collection Period

Formula: 360 days divided by Accounts Receivable Turnover

Solution:
2019 2020

e. Inventory Turnover

Formula: Cost of Sales divided by Average Inventory

Solution:
2019 2020

f. Average Days in Inventories

Formula: 360 days divided by Inventory Turnover

Solution:
2019 2020

g. Accounts Payable Turnover

Formula: Cost of Sales divided by Average Accounts Payable

Solution:
2019 2020

4. PROFITABILITY RATIOS

a. Return on Equity

Formula: Net Income divided by Average Shareholders’ Equity

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 Solution:
2019 2020

b. Return on Assets

Formula: Net Income divided by Average Total Assets

Solution:
2019 2020

c. Gross Profit Margin

Formula: Gross Profit divided by Sales

Solution:
2019 2020

d. Operating Profit Margin

Formula: Operating Income divided by Sales

Solution:
2019 2020

e. Net Profit Margin

Formula: Net Income divided by Sales

Solution:
2019 2020

5. OPERATING RATIOS

a. Sales Mix = Departmental Revenues divided by Total Revenues

b. Average Room rate = Rooms Revenue divided by Number of Rooms Sold

c. Revenue per Available Room = Rooms Revenue divided by Available Rooms

d. Available Food Service Check = Total Food Revenue divided by Number of Food Covers

e. Food Cost Percentage = Cost of Foods Sold divided by Food Sales

f. Beverage Cost Percentage = Cost of Beverage Sold divided by Beverage Sales

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 g. Labor Cost Percentage = Labor Cost by Departments divided by Department Revenues

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