DEEPENING

ACCOUNTANCY, BUSINESS
AND MANAGEMENT 2

MA. JASMINE J. DE GUZMAN

80 hours/ semester
Grade: 12
1st and 2nd Quarter Prerequisite: ABM 1
 1ST QUARTER CONTENT

1. Statement of Financial Position (SFP)

2. Statement of Comprehensive Income (SCI)
3. Statement of Changes in Equity (SCE)
4. Cash Flow Statement (CFS)
5. Analysis and Interpretation of Financial
Statements
 CHAPTER 1:
STATEMENT OF FINANCIAL
POSITION (SFP)
CONTENT Statement of Financial Position (SFP)
CONTENT The learners demonstrate an understanding of account titles under the
assets, liabilities, and capital accounts of the Statement of Financial
STANDARD Position, namely, cash,
receivables, inventories, prepaid expenses, property, plant and
equipment, payables, accrued expenses,
unearned income, long-term liabilities and capital that will equip
him / her in the preparation of the SFP using the report form and
account form.
PERFORMANC The learners shall be able to solve exercises and problems that require
preparation of an SFP for a single proprietorship with proper
E STANDARDS classification of accounts as
current and noncurrent using the report form and the account form.
LEARNING 1. Identify the elements of the SFP and describe each of them.
COMPETENCIE 2. Classify the elements of the SFP into current and noncurrent items.
S
3. Prepare the SFP of a single proprietorship.

4. prepare an SFP using the report form and the account form with
proper classification of items as current and noncurrent.
 IAS 1
IAS 1 :Presentation of Financial Statements
l Position (SFP)
• Sets out the overall requirements for financial
statements, including how they should be structured, the
minimum requirements for their content and overriding
concepts such as going concern, the accrual basis of
accounting and the current/non-current distinction.
• The standard requires a complete set of financial
statements to comprise a statement of financial position,
a statement of profit or loss and other comprehensive
income, a statement of changes in equity and a statement
of cash flows.
FINANCIAL STATEMENTS
Definition
of Financial Position (SFP)
• FSs represent a formal record of the financial
activities of an entity.
• These are written reports that quantify the
financial strength, performance and liquidity of a
company.
• Financial Statements reflect the financial effects
of business transactions and events on the entity.
FINANCIAL STATEMENTS
Purpose
of Financial Position (SFP)
• Financial statements are a collection of reports about an organization's
financial results, financial condition, and cash flows. They are useful for
the following reasons:

1. To determine the ability of a business to generate cash, and the

sources and uses of that cash.
2. To determine whether a business has the capability to pay back its
debts.
3. To track financial results on a trend line to spot any looming
profitability issues.
4. To derive financial ratios from the statements that can indicate the
condition of the business.
5. To investigate the details of certain business transactions, as outlined
in the disclosures that accompany the statements.
FINANCIAL STATEMENTS
of Financial Position (SFP)

The standard contents of a set of financial statements

comprises:
A. a Statement of Financial Position as at the end of the
period. (Balance sheet)
B. a Statement of Comprehensive Income for the period.
(Profit and Loss Statement)
C. a Statement of Changes in Equity for the period.
(Statement of Retained Earnings)
D. a Statement of Cash Flows for the period.
E. Supplementary notes. Includes explanations of various
activities, additional detail on some accounts, and other
items as mandated by the applicable accounting
framework, such as GAAP or IFRS.
 INTRODUCTION TO FINANCIAL STATEMENTS

Companies prepare interim

financial statements and annual
financial statements.

2000

X
 INTRODUCTION TO FINANCIAL STATEMENTS

Balance Sheet Three primary

financial
Income Statement
statements.
Statement of Cash Flows
INTRODUCTION TO FINANCIAL STATEMENTS

Balance Sheet
Describes
where the
Income Statement enterprise
stands at a
Statement of Cash Flows
specific date.
INTRODUCTION TO FINANCIAL STATEMENTS

Balance Sheet

Income Statement
Depicts the
revenue and
Statement of Cash Flows expenses for a
designated
period of time.
INTRODUCTION TO FINANCIAL STATEMENTS

Revenues Expenses
result in result in
positive cash negative cash
flow. flow.

Either in the past, present, or future.

INTRODUCTION TO FINANCIAL STATEMENTS

Balance Sheet

Income Statement
Net income (or
net loss) is
Statement of Cash Flows simply the
difference
between
revenues and
expenses.
INTRODUCTION TO FINANCIAL STATEMENTS

Balance Sheet

Income Statement

Statement of Cash Flows

Depicts the
ways cash has
changed during
a designated
period of time.
THE CONCEPT OF THE BUSINESS ENTITY

A business
entity is
JUAN’s Travel separate from
Agency
the personal
affairs of its
owner.
 STATEMENT OF FINANCIAL POSITION (SFP) LC 1 to
LC4
• Statement of Financial Position, also known as the Balance Sheet,
presents the financial “snapshot” of an entity at a given date in time. The
accounts in the balance sheet are known as “Real Accounts”
(Permanent). It is comprised of the following three elements:

• Assets: Something a business owns or controls (e.g. cash, inventory,

plant and machinery, etc)
• Liabilities: Something a business owes to someone (e.g. creditors,
bank loans, etc)
• Equity: What the business owes to its owners. This represents the
amount of capital that remains in the business after its assets are used
to pay off its outstanding liabilities. Equity therefore represents the
difference between the assets and liabilities. (Assets – Liabilities =
Equity)
RATIONALE - WHY THE BALANCE SHEET
ALWAYS BALANCES? LC 1 to
LC4

• The balance sheet is structured in a manner that the total

assets of an entity equal to the sum of liabilities and
equity.
• Assets of an entity may be financed from internal sources
(i.e. share capital and profits) or from external credit (e.g.
bank loan, trade creditors, etc.). Since the total assets of a
business must be equal to the amount of capital invested
by the owners (i.e. in the form of share capital and profits
not withdrawn) and any borrowings, the total assets of a
business must equal to the sum of equity and liabilities.

This leads us to the Accounting Equation: Assets = Liabilities

+ Equity
 PURPOSE & IMPORTANCE LC 1 to
LC4
• Statement of financial position helps users of financial statements
to assess the financial health of an entity.
• When analyzed over several accounting periods, balance sheets
may assist in identifying underlying trends in the financial position
of the entity.
• It is particularly helpful in determining the state of the entity's
liquidity, long-term solvency and assessing future cash flows.
• When used in conjunction with other financial statements of the
entity and the financial statements of its competitors, balance sheet
may help to identify relationships and trends which are indicative of
potential problems or areas for further improvement.
• Analysis of the statement of financial position could therefore assist
the users of financial statements to predict the amount, timing and
volatility of entity's future earnings.
VALUATION METHOD LC 1 to
LC4
• For an item to e recognized in the SFP, it must:
1. meet the definition of an element of accounting;
2. be measurable (valuation);
3. be relevant; and
4. be reliable.
VALUATION- HISTORICAL
COST
- It provides measurable information and has a relatively high degree of reliability
(verifiable).
- It is the price paid for an asset when it was acquired.
Other VALUATION Methods
1. Current Cost- amount of cash/cash equivalent required to obtain the same asset
at the Balance Sheet date.
2. Current market value or exit value- amount of cash obtained at the Balance Sheet
date by selling the asset in an orderly liquidation
3. Net Realizable Value- amount of cash obtained as a result of future sale of asset
4. Present Value- expected exit value discounted to the Balance Sheet date
 CLASSIFICATION OF ELEMENTS OF SFP LC 1 to
LC4
of Financial
ASSETS
• Classified and presented in decreasing order of liquidity (convertible into
cash)
Current Assets

• An asset should be classified as current when:

1. It expects to realize the asset, or intends to sell or consume it, in its normal
operating cycle;
2. It holds the asset primarily for the purpose of trading;
3. It expects to realize the asset within 12 months after the reporting period; or
4. The asset is cash or cash equivalent unless the asset is restricted from being
exchanges or used to settle a liability for at least 12 months after the reporting
period.
Non-Current Assets

An entity shall classify all other assets as non-current

 CLASSIFICATION OF ELEMENTS OF SFP LC 1 to
LC4
of Financial
Current Assets
• Cash - cash on hand consisting of coins, currency and undeposited
checks; money orders and drafts and cash in banks (deposits in
checking and savings account) that are readily available for current
use of the entity.
• Cash equivalents – short-term , highly liquid investments that are
readily convertible to known amounts of cash or so near their
maturity that they present insignificant risk of change in value
because of changes in interest rate. Example: 3-month commercial
paper or money-market instrument; 3-m0nth deposit and 3-month
treasury bills.
• Short-term investments in Marketable Securities- investment in
debt and equity securities that are classified as “Financial assets at
fair value through profit and loss”. Ex. Available for sale securities .
CLASSIFICATION OF ELEMENTS OF SFP LC 1 to
of Financial LC4
Current Assets
• Receivables- presented at their amortized cost (FV less
allowance for bad debts). Include accounts and notes
receivable, non-trade short-term receivables from affiliates,
officers and employees.
• Inventories- presented at their historical cost or net
realizable value(estimated selling price less estimated
costs to complete and to sell) , which ever is lower.
Includes merchandise and finished goods held for sale in
the normal course of business, raw materials and goods in
process.
• Prepaid expenses- presented at historical cost of the
remaining amount. Created by the prepayment of cash or
incurrence of a liability. Examples: prepaid rent and
insurance
CLASSIFICATION OF ELEMENTS OF SFP LC 1 to
LC4
of Financial
Non-Current Assets
• Property Plant and Equipment- tangible assets held for use in the
production or supply of goods or services or for rental to others or for
administrative purposes and which are expected to be used during
more than one period.
 Examples: land ,buildings, machinery and equipment, furniture and
fixtures, motor vehicles and the like.
 May also include leased property when the lease arrangement s
deemed to be a method of financing the permanent acquisition of the
facilities (capital or financial lease)
 Presented at their original cash equivalent costless accumulated
depreciation to date.
 May be presented at its revalued amount which is its FV at the date of
revaluation less any subsequent accumulated depreciation and
subsequent impairment losses.
CLASSIFICATION OF ELEMENTS OF SFP LC 1 to
of Financial LC4
Non-Current Assets
• Intangible assets-identifiable non-monetary asset without
physical substance and from which future economic
benefits are expected to flow to the entity.
 Examples: computer software, patents, franchise,
copyrights etc.
 Presented at amortized cost (historical costs less
accumulated amortization).
 Intangible assets with indefinite life (goodwill, copyright ad
trademark) are not amortized but periodically reviewed for
possible impairment in value.
 May also be carried at revalued amount (FV at the date of
revaluation less any subsequent accumulate amortization
or any subsequent accumulated impairment loss).
CLASSIFICATION OF ELEMENTS OF SFP LC 1 to
LC4
of Financial
Non-Current Assets

• Investment property- includes investment in land or a

building or both held (by the owner or by a lessee under a
finance lease) with the intention of earning rentals or for
capital appreciation or both.
 Examples: land held for long-term capital appreciation,
investment in condominium units or vacant building to be
leased out one or more operating leases.
CLASSIFICATION OF ELEMENTS OF SFP LC 1 to
LC4
of Financial
LIABILITIES
• Classified and presented based on time to maturity. Thus, obligations
current due are listed first , and those carrying the most distant
maturity dates are listed last.
Current Liabilities
• An asset should be classified as current when:
1. It expects to settle the liability in its normal operating cycle;
2. It is due to be settled with in one year after the reporting period;
3. It holds primarily for the purpose of trading; or
4. The entity does not have an unconditional right to defer settlement of the
liability for at least 12 months after the reporting period.

Non-Current Liabilities
An entity shall classify all other liabilities as non-current
CLASSIFICATION OF ELEMENTS OF SFP LC 1 to
LC4
Guiding Principles- Current Liabilities
 Some current liabilities (trade payables and accruals for employees and operating
costs ) are part of the working capital used in the entity’s normal operating cycle.
They are classified as current liabilities even if they are due o be settled more
than 12 months after the reporting period. IF THE OPERATING CYCLE OF AN
ENTITY IS NOT CLEARLY IDENTIFIABLE, IT IS ASSUMED TO BE 12 MONTHS
 Other current liabilities not part of the normal operating cycle , but are due for
settlement within 12 months after the reporting period or held primarily for the
purpose of trading. Example: bank overdrafts, current portion of long-term
liabilities, dividends payable, income taxes and other non-trade receivables.
 Due to be settled within 12 months after the balance sheet date, even if:
 The original term is for a period of more than 12 months and
 The intention supported by an agreement to refinance or to reschedule payments,
on a long-term basis is completed after the balance sheet date and completed
before the financial statements are authorize for issue.
 Refinancing or rolling over the obligation is not at the discretion of the entity
 The entity breaches or has violated an undertaking under an long term loan
agreement on or before the balance sheet date. (non-payment of interest )
CLASSIFICATION OF ELEMENTS OF SFP LC 1 to
LC4
of Financial
Current Liabilities
 Trade accounts and Notes Payable- obligations arising from the firm’s ongoing
operations including purchase of merchandise, materials, supplies and services
used in the production and sale of goods and services.
 Accrued Expenses Payable- already incurred as of the financial reporting date
but has not been paid. Examples: accrued wages, interests and property taxes.
 Unearned or Deferred Revenues/ Advances from customers- advance
collections from customers relating to future delivery of goods and services.
Examples: gift certificates, tuition fees, rent and magazine subscription.
 Income Taxes Payable- unpaid portion of the income tax payable to BIR.
“Agency Liabilities” – collection for 3 rd parties from customers or employees that
will have to be remitted to BIR (withholding taxes, GSIS/SSS/PhilHealth/Pag-
ibig premiums payable, VAT and union dues) .
 Currently Maturing Long-term Debt- portions of long-term liabilities (bank loans,
notes) which become payable within one year or normal operating cycle if
longer than one year.
CLASSIFICATION OF ELEMENTS OF SFP LC 1 to
LC4
of Financial
Non-Current Liabilities

 Bonds Payable – long-term groups of notes payable (bonds)

issued to multiple lenders called bondholders. Recorded at
exchange value of the assets or services received and
involved interest that is recognized as expense over time.
 Long term Notes Payable- evidenced by a promissory note
issued in exchange for a loan from bank or for noncash
asset like equipment purchased on credit.
 Long-term Capital Lease Obligation- represents the present
value of the contract lease payments for properties held
under finance or capital lease.
CLASSIFICATION OF ELEMENTS OF SFP LC 1 to
LC4
of Financial
Equity
• Classified and presented in order of permanence. Thus, capital
contribution accounts, which typically change the least, should be listed
first. Equity accounts used to report accumulated earnings and updated
on an on-going basis are listed last.
 In a sole proprietorship, this includes owner’s residual interest in the
business; in partnership, it represents partner’s equity and in
corporation , it represents the shareholder’s equity.
 In shareholder’s equity, the most commonly reported sources are:
 Contributed Capital
a. Share capital- firm’s stated or legal capital specified in the articles of incorporation and
approved by SEC. It is the issued/outstanding / ordinary shares stated at par value and is
not available for dividend declaration
b. Contributed capital in Excess of Par or share premium- excess of value of assets received
by the corporation over the par value or stated value of the share capital given in exchange
CLASSIFICATION OF ELEMENTS OF SFP LC 1 to
LC4
of Financial
Equity
 In shareholder’s equity, the most commonly reported
sources are ; (continued)
 Accumulated Profit (Loss) / Retained Earnings- accumulated
earnings less dividends paid out, since the company’s
inception. A negative balance in the retained earnings is
called “Deficit” and usually arises when the company
experience operating losses.
 Treasury shares- shares previously issued and then
reacquired by the company, but not retired. They are not
assets of the issuing shares. The carrying value (cost) is
deducted from the total contributed capital and RE.
 FORMAT OF SFP LC 1 to
LC4
of Financial FORM
ACCOUNT

Reflects the basic accounting equation:

Assets = Liabilities + Owner’s Equity
Assets are listed on the left-hand side of the
report while liabilities and owner’s equity on
the right-hand side in horizontal order.
ACCOUNT FORM
 FORMAT OF SFP LC 1 to
LC4
REPORT FORM
Lists the accounts in a vertical or downward
sequence. Thus, assets are listed at the top and
liabilities and owner’s equity below.
 FORMAT OF SFP LC 1 to
LC4
REPORT FORM
 EXERCISES LC 1 to
LC4
of Financial
 CHAPTER 2:
STATEMENT OF
COMPREHENSIVE INCOME
(SCI)
CONTENT Statement of Comprehensive Income (SCI)

CONTENT The learners demonstrate an understanding of the

service income and operating expenses of a service
STANDARD business as well as sales, contra sales, purchases,
contra purchase accounts, cost of goods sold and
general administrative and selling expenses of a
merchandising business that will equip him / her in the
preparation of the SCI for both service and
merchandising businesses.

PERFORMANCE The learners shall be able to solve exercises and

problems that require preparation of SCI for a service
STANDARDS business and a merchandising business.

1. Identify the elements of the SCI and describe

each of these items for a service business
LEARNING and a merchandising business.
COMPETENCIES 2. Prepare an SCI for a service business using the
single-step approach.

3. Prepare an SCI for a merchandising business using

the multistep approach.
STATEMENT OF COMPREHENSIVE INCOME (SCI) LC 5 to
LC7
of Financial
Statement of Comprehensive Income
 Shows the results of the entity's operations and financial
activities for the reporting period. It includes revenues,
expenses, gains, and losses.
 “Statement of Income”, “Statement of Earnings”, “ Statement
of Operations", "Statement of Operating Results”
 An income statement usually covers a year; however this
statement may be drawn up for shorter periods, such as one
month, three months (quarters) or six months. The period of
time that is covered by the income statement (and other
financial statements) is called the accounting period.
 The accounts in the Income statement are called “nominal
accounts” (temporary)
STATEMENT OF COMPREHENSIVE INCOME (SCI) LC 5 to
LC7
of Financial
Basis of Preparation
 Income statement is prepared on the accruals basis of accounting.
 Income (including revenue) is recognized when it is earned rather than
when receipts are realized (although in many instances income may be
earned and received in the same accounting period).
 Conversely, expenses are recognized when they are incurred even if
they are paid for in the previous or subsequent accounting periods.
 Income statement does not report transactions with the owners of an
entity.
 Hence, dividends paid to ordinary shareholders are not presented as an
expense in the income statement and proceeds from the issuance of
shares is not recognized as an income. Transactions between the entity
and its owners are accounted for separately in the statement of
changes in equity.
STATEMENT OF COMPREHENSIVE INCOME (SCI) LC 5 to
LC7
of Financial
COMPONENTS
 income statement comprises of the following main elements:
 Revenue- includes income earned from the principal activities of an
entity. Example: in case of a retailer of electronic appliances, revenue
will comprise of the sales from electronic appliance business.
Conversely, if the same retailer earns interest on its bank account, it
shall not be classified as revenue but as other income.
 Other income - consists of income earned from activities that are not
related to the entity's main business. For example, other income of an
entity that sells electronic appliances may include:

 Gain on disposal of fixed assets

 Interest income on bank deposits
 Exchange gain on translation of a foreign currency bank account
STATEMENT OF COMPREHENSIVE INCOME (SCI) LC 5 to
LC7
of Financial
COMPONENTS
 Cost of Sales- represents the cost of goods sold or services
rendered during an accounting period.

 Hence, for a retailer, cost of sales will be the sum of inventory at

the start of the period and purchases during the period minus
any closing inventory.

 In service concern business, cost of services is used to

represent direct costs incurred in rendering the service
 n case of a manufacturer however, cost of sales will also include
production costs incurred in the manufacture of goods during a
period such as the cost of direct labor, direct material
consumption, depreciation of plant and machinery and factory
overheads, etc.
STATEMENT OF COMPREHENSIVE INCOME (SCI) LC 5 to
LC7
of Financial
COMPONENTS
 Distribution cost (Selling Expenses) includes expenses incurred in delivering
goods from the business premises to customers.

 Administrative Expenses- generally comprise of costs relating to the management

and support functions within an organization that are not directly involved in the
production and supply of goods and services offered by the entity.

 Examples of administrative expenses include:

 Salary cost of executive management

 Legal and professional charges
 Depreciation of head office building
 Rent expense of offices used for administration and management purposes
 Cost of functions / departments not directly involved in production such as
finance department, HR department and administration department
STATEMENT OF COMPREHENSIVE INCOME (SCI) LC 5 to
LC7
of Financial
COMPONENTS
 Other Expenses- this is essentially a residual category in
which any expenses that are not suitably classifiable
elsewhere are included.
 Finance Charges - usually comprise of interest expense on
loans and debentures.
 Income tax expense- recognized during a period is generally
comprised of the following three elements:

 Current period's estimated tax charge

 Prior period tax adjustments
 Deferred tax expense
FORMAT OF STATEMENT OF COMPREHENSIVE INCOME (SCI) LC 5 to
LC7
of Financial
Multi-Step
 Four Measure s of Profitability (*) are revealed at four
critical conjunctions in a company’s operations – gross
profit, income from operation, pre-tax and after income.
 Commonly used in merchandising and manufacturing
concern business

Single-Step
 Commonly used by service concern. In this form, al
expenses incurred are deducted from income earned in
order to obtain the net income of the period.
FORMAT OF STATEMENT OF COMPREHENSIVE INCOME (SCI) LC 5 to
LC7
Multi-Step
of Financial
FORMAT OF STATEMENT OF COMPREHENSIVE INCOME (SCI) LC 5 to
LC7
ofSingle-Step
Financial
FORMAT OF STATEMENT OF COMPREHENSIVE INCOME (SCI) LC 5 to
LC7
of Financial
EXERCISES
 CHAPTER 3:
STATEMENT OF CHANGES IN
EQUITY (SCE)
CONTENT Statement of Changes in Equity (SCE)
CONTENT The learners demonstrate an understanding of
the forms of business organization, namely,
STANDARD single proprietorship, partnership, and
corporation, and the structure of a SCE of a
single proprietorship that will equip him / her
in the preparation of the said financial
Report.
PERFORMAN The learners shall be able to solve exercises
and problems that require preparation of an
CE SCE for
STANDARDS a single proprietorship
LEARNING 1. Discuss the different forms of business
Organization.
COMPETENCI
ES
2. Prepare an SCE for a single proprietorship.
 STATEMENT OF CHANGES IN EQUITY (SCE) LC 8 to
ial
LC 9
 Statement of Changes in Equity, also known as the Statement of
Retained Earnings, details the movement or changes in owners'
equity that have occurred during the period. These changes
comprise capital, drawings and the profit for the period.
 The movement in owners' equity is derived from the following
components:

 Net Profit or loss during the period as reported in the income

statement
 Share capital issued or repaid during the period
 Dividend payments
 Gains or losses recognized directly in equity (e.g. revaluation
surpluses)
 Effects of a change in accounting policy or correction of
accounting error
 STATEMENT OF CHANGES IN EQUITY (SCE) LC 8 to
LC 9
i

PHP
 STATEMENT OF CHANGES IN EQUITY (SCE) LC 8 to
LC 9
 The statement must show:
 Profit or loss for the period;
 Each item of income and expense for the period that is recognized
directly in equity, and the total of those items;
 Total income and expense for the period, showing separately the total
amounts attributable to equity holders of the parent and to minority
interest; and
 For each component of equity, the effects of changes in accounting
policies and corrections of errors in accordance with IAS 8
 The following may be presented in SCE or in the notes to financial
statements:
 Capital transactions with owners
 The balance of accumulated profits at the beginning and end of the
period and
 A reconciliation between the carrying amount of each class of equity
capital, share premium and each reserve at the beginning and end of the
period disclosing each movement
 STATEMENT OF CHANGES IN EQUITY (SCE) LC 8 to
LC 9
BUSINESS ORGANIZATIONS have different
Structures of Equity

Sole Proprietorship- the equity is called owner’s equity

or capital (composed of owner’s contributions and
drawings and accumulated earnings or losses)
Partnership - the equity is composed of all the partners’
equity (partners’ capital contribution and drawings, and
accumulated and undivided earnings and losses.
Corporation - include capital stock (common and
preferred shares), treasury stock and retained earnings
(appropriated and unappropriated)
 STATEMENT OF CHANGES IN EQUITY (SCE) LC 8 to
LC 9
PURPOSE:
“ provide readers with useful information on
how the capital or fund of an entity is utilized and
used.”
EXAMPLE:
Juan Catering Services , a sole proprietorship,
has a beginning capital balance of Php 73, 000.
The owner withdraws Php 12,000 and profit
earned by the catering services amounts to Php
46,000 during the year. In December 2010, the
owner puts additional investments of Php
17,000. Based on this situation, prepare the SCE.
STATEMENT OF CHANGES IN EQUITY (SCE) LC 8 to
LC 9
EXERCISES LC 8 to
LC 9
 CHAPTER 4:
CASH FLOW
STATEMENT (CFS)
CONTENT Cash Flow Statement (CFS)

CONTENT The learners demonstrate an understanding

STANDARD of the components and the structure of a
CFS that will equip him / her in the
preparation of the said financial report.
PERFORMANCE The learners shall be able to solve
STANDARDS exercises and problems that require
preparation of a CFS.
LEARNING 1. Discuss the components and structures
COMPETENCIES of a CFS.

2. Prepare a CFS.
CASH FLOW STATEMENT (CFS) LC 10 to
LC 11
Cash Flow Statement also known as Statement of Cash
Flows or Funds Flow Statement
 is a financial statement that shows how changes in Balance Sheet
accounts and Income affect cash and cash equivalents.
 As an analytical tool, SCF is useful in determining the short –term
viability of a company, particularly its ability to pay bills.
CASH FLOW STATEMENT (CFS) LC 10 to
LC 11
Purpose & Importance
 Statement of cash flows provides important insights about the liquidity and
solvency of a company which are vital for survival and growth of any
organization.
 It also enables analysts to use the information about historic cash flows to
form projections of future cash flows of an entity (e.g. in NPV analysis) on
which to base their economic decisions.
 By summarizing key changes in financial position during a period, cash flow
statement serves to highlight priorities of management.
 Furthermore, comparison of the cash flows of different entities may better
reveal the relative quality of their earnings since cash flow information is more
objective as opposed to the financial performance reflected in income
statement which is susceptible to significant variations caused by the adoption
of different accounting policies.
 For example, increase in capital expenditure and development costs may
indicate a higher increase in future revenue streams whereas a trend of
excessive investment in short term investments may suggest lack of viable long
term investment opportunities.
CASH FLOW STATEMENT (CFS) LC 10 to
LC 11

Operating Activities
 Represents the cash flow during an accounting period from primary
revenue generating activities of a business.
For example, operating activities of a hotel will include cash inflows and
outflows from the hotel business (e.g. receipts from sales revenue, salaries
paid during the year etc), but interest income on a bank deposit shall not be
classified as such (i.e. the hotel's interest income shall be presented in
investing activities).
 Profit before tax as presented in the income statement could be used as
a starting point to calculate the cash flows from operating activities.
 Include the production, sales, delivery of the company’s product as well
as collecting payment from its customers, interest from receivables,
purchasing raw materials, building inventory , advertising, and
shipping the product
CASH FLOW STATEMENT (CFS) LC 10 to
LC 11
Operating Activities
 The following adjustments are required to be made to the profit before tax
to arrive at the cash flow from operations:

 Elimination of non cash expenses (e.g. depreciation, amortization,

impairment losses, bad debts written off, etc)
 Removal of expenses to be classified elsewhere in the cash flow statement
(e.g. interest expense should be classified under financing activities)
 Elimination of non cash income (e.g. gain on revaluation of investments)
 Removal of income to be presented elsewhere in the cash flow statement
(e.g. dividend income and interest income should be classified under
investing activities unless in case of for example an investment bank)
 Working capital changes (e.g. an increase in trade receivables must be
deducted to arrive at sales revenue that actually resulted in cash inflow
during the period)
CASH FLOW STATEMENT (CFS) LC 10 to
LC 11

Investing Activities

 Represents cash flow from the purchase and sale of assets other than
those which the entity primarily trades in (purchase of a factory plant )
 It means spending of cash on non-current assets. For example, one
could be spending cash on computer equipment, on vehicles, or even on
a building one purchased.
 Cash flow from investing activities includes the movement in cash flow
as a result of the purchase and sale of.
 For example, in case of a manufacturer of cars, proceeds from the sale
of factory plant shall be classified as cash flow from investing activities
whereas the cash inflow from the sale of cars shall be presented under
the operating activities.
CASH FLOW STATEMENT (CFS) LC 10 to
LC 11

Investing Activities
 Inflows occur only when cash is received from the sale or disposal of
prior investments.
 Outflows are investments of cash by the entity to acquire non-cash
assets
 Cash flow from investing activities consists primarily of the following:
 Cash outflow expended on the purchase of investments and fixed
assets ( land, building, equipment , marketable securities)
 Cash inflow from income from investments
 Cash inflow from disposal of investments and fixed assets
CASH FLOW STATEMENT (CFS) LC 10 to
LC 11

Financing Activities
 Represents cash flow generated or spent related to borrowing and
issuing shares used to obtain cash for the business.
 Inflows occur when cash is received from investors such as banks or
owners from.
 Outflow occurs when cash is paid to the owners and creditors for their
earlier investments.(dividends/ drawings)

 Cash flow from financing activities includes the following:

 Proceeds from issuance of share capital, debentures & bank loans
 Cash outflow expended on the cost of finance (i.e. dividends and
interest expense)
 Cash outflow on the repurchase of share capital and repayment of
debentures & loans
 PREPARATION METHODS LC 10 to
LC 11
DIRECT METHOD
 Reports major classes of gross cash receipts and payments
PREPARATION METHODS LC 10 to
LC 11

INDIRECT METHOD

 Uses Net Income as a starting point, makes adjustments for all

transactions for non-cash items , then adjust from all cash-based
transactions.
 An increase in asset is subtracted from net income
 An increase in liability is added back to net income.
 This method converts accrual-basis net income into cash flow by using
series of additions and subtractions
 PREPARATION METHODS LC 10 to
LC 11

RULES- Operating Activities

For increase in Net income adjustment
Current Assets (non-cash) Decrease
Current Liabilities Increase
* Expenses (decreases in Fixed Increase
assets)
* None cash expenses must be added back to NY
 Rule applies when given a 2-year comparative SFP and SCI.
 When comparing long-term assets over a year, the accountant must be
certain that these changes were caused by their devaluation rather
than purchases or sales ( they must be operating items not providing or
using cash ) or if they non-operating items.
 INDIRECT METHOD LC 10 to
LC 11

RULES- Operating Activities

Added to NY Deducted from NY

Decreases in non-current assets Increases in non-current assets
Increases in current liabilities Decreases in current liabilities
Non-cash expenses (depreciation Revenues with no cash inflows
and amortizations)
Non-operating losses Non – operating gains

The intricacies of this procedure might be seen as:

Net Cash Flows from Operating Activities = NY +
 INDIRECT METHOD LC 10 to
LC 11

RULES- Financing Activities

Inflows Outflows
Issuance of notes payable Decrease of Long-term Notes
Payable
Dividends received from outside Dividends paid to outside parties
parties
Receipt of payments of financing Purchase of stocks or bonds
vehicles
Exclude intra-company dividend payments and intra-company bond interest
INDIRECT METHOD LC 10 to
EXAMPLE LC 11
 CHAPTER 5:
ANALYSIS AND
INTERPRETATION OF
FINANCIAL STATEMENTS
CONTENT Analysis and Interpretation of Financial Statements
CONTENT The learners demonstrate an understanding of the methods or
tools of analysis of financial statements to include horizontal
STANDARD analysis, vertical analysis, and financial ratios to test the level
of liquidity, solvency, profitability, and stability of the business.

PERFORMANC The learners shall be able to solve exercises and problems

that require computation and interpretation using horizontal
E STANDARDS analysis, vertical analysis, and various financial ratios .
Using the downloaded sample financial statements, he / she
performs horizontal and vertical analysis, computes various
financial ratios and interprets the level of liquidity, solvency,
stability, and profitability of the
Business.
LEARNING 1. Define the measurement levels, namely, liquidity,
COMPETENCIE solvency, stability, and profitability.
S 2. Perform vertical and horizontal analyses of financial
statements of a single proprietorship.
3. Compute and interpret financial ratios such as
current ratio, working capital, gross profit ratio, net
profit ratio, receivable turnover, inventory turnover,
debt-to-equity ratio, and the like.
 BASICS OF ANALYSIS

Application
of analytical
tools

Involves
Reduces
transforming
uncertainty
data
OBJECTIVES OF FINANCIAL STATEMENT ANALYSIS

 It attempts to evaluate a business entity for

financial and management decision making
process
 It explores some aspect of a firm’s profitability
or its risk (Short term and Long-term Liquidity,
or both
 It attempts to measure the firm’s operational
efficiency and investment provided by owners
and creditors.
 PURPOSE OF ANALYSIS

Financial statement analysis helps users

make better decisions.

Internal Users External Users

Managers Shareholders
Officers Lenders
Internal Auditors Customers
 BUILDING BLOCKS OF ANALYSIS

Ability to meet
short-term Ability to
obligations and Liquidity generate future
to efficiently
generate
and Solvency revenues and
meet long-term
revenues Efficiency obligations

Ability to provide Ability to

financial rewards
sufficient to
Profitability Market generate
positive
attract and retain market
financing expectations
INFORMATION FOR ANALYSIS
Income Statement
Notes
Balance Sheet
Statement of
Changes in Stockholders’
Equity

Statement of Cash
Flows
 SOURCES OF INFORMATION LC 12 to
LC 14
In order to draw valid conclusion about the financial
health of an entity, it is essential to analyze and
compare specific types of and source of information .
This would include consideration of the following:
1. A review of the firm’s accounting policies
2. An examination of recent auditor s’ reports
3. Analysis of footnotes and other supplemental
information accompanying the various financial
statements and
4. Additional information provided by trade journals
and industry publications
STANDARDS FOR COMPARISON

To help me interpret our

financial statements, I
use several standards of
comparison.

 Intracompany
 Competitor
 Industry
 Guidelines
TOOLS OF ANALYSIS V
e
r
t
Comparing a company’s i
financial condition and c
performance to a base amount a
l
A
n
a
l
y
s
i
s
 VERTICAL ANALYSIS LC 12 to
LC 14
 The presentation of each item on a financial statement as a
percentage of an appropriate base amount
 Statements presented in form are known as “Common – size
Statements.
 In Income statement- base amount is Total Net Sales (100%)
 In Balance sheet – base amount is Total Assets or Total Liabilities and
Owner’s Equity (100%)
ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS LC 12 to
LC 14
ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS LC 12 to
LC 14
ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS LC 12 to
LC 14
ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS LC 12 to
LC 14
ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS LC 12 to
LC 14
ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS LC 12 to
LC 14
 TOOLS OF ANALYSIS

Horizontal Analysis
Comparing a company’s financial condition
and performance across time

Time
HORIZONTAL ANALYSIS LC 12 to
LC 14
 Presentation o FS data on a % basis
over time
 An index value of 100 is assigned to each
particular base year.
 In succeeding years, peso amount of each
item is divided by the peso amount of the
same item in the base year.
 The result is the presentation of the relative
growth or decline of each item in terms of the
base year
ANALYSIS AND INTERPRETATION OF
FINANCIAL STATEMENTS
LC 12 to
LC 14
ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS LC 12 to
LC 14
ANALYSIS AND INTERPRETATION OF
FINANCIAL STATEMENTS LC 12 to
LC 14
 TOOLS OF ANALYSIS

Using key relations

among financial
statement items
 RATIO ANALYSIS LC 12 to
LC 14
It provides an indication of the
firm’s financial strengths and
weaknesses
Ratios are useful tools of financial
statement analysis because they
summarize data in a form easy to
understand, interpret and compare
LIQUIDITY AND EFFICIENCY

Current Inventory
Ratio Turnover

Acid-test Days’ Sales

Ratio Uncollected

Accounts
Receivable Days’ Sales in
Turnover Inventory

Total Asset
Turnover
 FINANCIAL RATIOS LC 12 to
LC 14
LIQUIDITY
- Ability of the firm to meet its current obligations as they fall due.
RATIO FORMULA SIGNIFICANCE
Current ratio Current assets/current Measures ability to meet
liabilities currently maturing
obligations from existing
current assets
Acid test ratio or quick (Cash+MS+NR)/ Provides a more severe test
ratio Current liabilities of immediate solvency.
Measure ability to discharge
“all CA except Prepaid currently maturing
and inventories” obligations based o most
liquid (quick) assets
Accounts receivable Net Credit Sales/ Ave. Confirms fairness of rec. bal.
turnover Trade or Notes Provides an indication of the
Receivables efficiency of credit policies
and collection
 FINANCIAL RATIOS LC 12 to
LC 14
LIQUIDITY
- Ability of the firm to meet its current obligations as they fall due.
RATIO FORMULA SIGNIFICANCE
Total asset turn over Net sales/Ave. Total Measures how efficiently
asset assets are used to produce
sales
Day’s sales in inventory 360 days/invty. Turn Indicates the no. of days
over or ending invty. Is held for sale.
invty./ave. daily COGS Reflects efficiency of invty.
policies
Day’s sales uncollected 360 days/rec. turn over Measure the ave. no. of days
or required to collect recivables
AR-ending/ Ave. daily
sales
Inventory turn over COGS/ Ave. Invty. Measure relative control over
inventory investment
 NORTON CORPORATION
2002
Cash PHP 30000
Use this Accounts receivable, net

information to Beginning of year 17,000

End of year 20,000
calculate the Inventory
liquidity and Beginning of year 10,000

efficiency End of year 12,000

Total current assets 65,000
ratios for Total current liabilities 42,000
Norton Total assets

Corporation. Beginning of year 300,000

End of year 346,390
Revenues 494,000
Cost of sales 140,000
CURRENT RATIO
Current Current Assets
=
Ratio Current Liabilities

Current Php 65,000

= = 1.55 : 1
Ratio Php 42,000

This ratio measures the short-

term debt-paying ability of the
company.
 ACID-TEST RATIO
Acid-Test = Quick Assets
Ratio Current Liabilities
Quick assets are Cash, Short-Term Investments,
Accounts Receivable and Notes Receivable.

Acid-Test =PHp 50,000= 1.19 : 1

Ratio Php 42,000
This ratio is like the current
ratio but excludes current assets such as
inventories and prepaid expenses that may be
difficult to quickly convert into cash.
ACCOUNTS RECEIVABLE TURNOVER

Accounts Sales on Account

Receivable = Average Accounts Receivable
Turnover

Accounts Php 494,000

=
Receivable(Php = 26.7 times
17,000 + Php 20,000) ÷ 2
Turnover

This ratio measures how many times a

company converts its receivables into cash
each year.
 INVENTORY TURNOVER

Inventory Cost of Goods Sold

=
Turnover Average Inventory

Inventory Php 140,000

= = 12.73 times
Turnover (Php 10,000 + Php 12,000) ÷ 2

This ratio measures the number

of times merchandise
is sold and replaced during the year.
DAYS’ SALES UNCOLLECTED

Days’ Sales AR-ending

= ´ 365
Uncollected Ave. Net Sales

Days’ Sales Php20,000

= ´ 365 = 14.8 days
Uncollected Php494,000

This ratio measures the

liquidity of receivables.
DAYS’ SALES IN INVENTORY

Days’ Sales Ending Inventory

= ´ 365
in Inventory Ave. Cost of Goods Sold

Days’ Sales Php12,000

= ´ 365 = 31.29 days
in Inventory Php140,000

This ratio measures the

liquidity of inventory.
 TOTAL ASSET TURNOVER

Total Asset Net Sales

=
Turnover Average Total Assets

Total Asset $494,000

= = 1.53 times
Turnover ($300,000 + $346,390) ÷ 2

This ratio measures the

efficiency of assets in
producing sales.
 SOLVENCY
Debt
Ratio

Equity
Ratio

Pledged Assets
to Secured
Liabilities

Times
Interest
Earned
 FINANCIAL RATIOS LC 12 to
LC 14
SOLVENCY
- Ability of the firm to stay in business over a long period of time. Owners and
investors are interested whether the firm is stable as to assure security of their
investments or the payments of the firm’s long-term obligations
RATIO FORMULA SIGNIFICANCE

Debt ratio or Debt to Total Liabilities/Total Assets Measures the proportion of debt in a
Asset ratio company’s capital structure
Equity ratio or Debt to Total Liabilities/ Measures the relatively amount of
Equity ratio Shareholder’s Equity resources provided by owners and
creditors. Indicates extent of leverage
used and creditor protection in case of
insolvency
Pledge assets to BV of Pledge assets/BV Measures the protection to secured
secured liabilities of Secured Liabilities creditors.

Times interest earned Income before interest Measure the adequacy of current
expense and Income earnings for the payment of preferred
Taxes/ Int. Exp. dividents
 Use this information to calculate the
solvency ratios for Norton Corporation.

NORTON CORPORATION
2002
Net income before interest
expense and income taxes Php 84000
Interest expense 7,300
Total shareholders' equity 234,390
Total liabilities 112,000
Total assets 346,390
 DEBT RATIO

Debt Total Liabilities

=
Ratio Total Assets

Debt Php 112,000

= = 32.3%
Ratio Php 346,390

This ratio measures what

portion of a company’s assets
are contributed by creditors.
 EQUITY RATIO
Equity Total Equity
=
Ratio Total Assets

Equity Php 234,390

= = 67.7%
Ratio Php 346,390

This ratio measures what

portion of a company’s assets
are contributed by owners.
PLEDGED ASSETS TO SECURED LIABILITIES

Pledged
Assets to = Book Value of Pledged Assets
Secured Book Value of Secured Liabilities
Liabilities

This ratio measures the

protection to secured
creditors.
 TIMES INTEREST EARNED

Net Income before Interest Expense

Times and Income Taxes
Interest =
Interest Expense
Earned
Times Php 84,000
Interest = = 11.51
Php 7,300
Earned
This is the most common measure of
the ability of a firm’s operations to
provide protection to the long-term
creditor.
 PROFITABILITY

Profit Basic
Margin Earnings per
Share

Gross Book Value

Margin per Common
Share

Return on Return on
Total Common
Stockholders’
Assets
Equity
 FINANCIAL RATIOS LC 12 to
LC 14
PROFITABILTY
- Ability of the firm to increase assets as a result of its operational
activity and not of the contributions of the investors

RATIO FORMULA SIGNIFICANCE

Gross Margin Gross Margin/ Net Sales Indicates the ave. markup available to
cover the Selling and Administrative
Expense
Profit Margin Ratio Net Income/ Net sales Measures efficiency of earning net
income from sales
Return on Total Assets Net Income + Expense (net Measures the productivity of assets to
of Tax)/ Ave. Total Assets generate income
Return on Common Net Income-Pref. Div./ Ave. Measures return on Common SH in
Shareholders Equity Com. SHE aggregate
BV per Common Share Com. SHE/ No. of Com Measures net assets applicable to
Shares Outstanding each common share
Basic Earnings per Share Net Income-Pref. Div./ Ave. Measures the amount of earnings
(EPS) Com. Shares Outstanding attributable to each share of common
stock
 NORTON CORPORATION
2002
Number of common shares
outstanding all year 27,400
Use this
Net income Php53, 690
information
Shareholders' equity
to
Beginning of year 180,000
calculate
End of year 234,390
the
Revenues 494,000
profitability Cost of sales 140,000
ratios for Total assets
Norton Beginning of year 300,000
Corporation End of year 346,390
.
 PROFIT MARGIN
Profit Net Income
=
Margin Net Sales

Profit Php 53,690

= = 10.87%
Margin Php 494,000

This ratio describes a company’s

ability to earn a net income from
sales.
 GROSS MARGIN

Gross Net Sales - Cost of Sales

=
Margin Net Sales
Gross Php 494,000 - $140,000
= = 71.66%
Margin Php 494,000

This ratio measures the amount

remaining from $1 in sales that is
left to cover operating expenses
and a profit after considering cost
of sales.
 RETURN ON TOTAL ASSETS

Return on = Net Income

Total Assets Average Total Assets

Return on Php 53,690

= = 16.61%
Total Assets (P300,000 + P346,390) ÷ 2

This ratio is generally considered

the best overall measure of a
company’s profitability.
 RETURN ON COMMON STOCKHOLDERS’ EQUITY

Return on
Common Net Income - Preferred Dividends
=
Stockholders’ Average Common
Equity Stockholders’ Equity
Return on
Common = Php53,690 - 0
= 25.9%
Stockholders’ (P180,000 + P234,390) ÷ 2
Equity
This measure indicates how well
the company employed the
owners’ investments to earn
income.
BOOK VALUE PER COMMON SHARE

Book Value Shareholders’ Equity Applicable to

per Common Shares
=
Common Number of Common Shares
Share Outstanding

This ratio
measures
liquidation at
reported amounts.
BASIC EARNINGS PER SHARE
Basic
Earnings Net Income - Preferred Dividends
=
per Weighted-Average Common
Share Shares Outstanding

Basic
Earnings P53,690 - 0
= = $1.96 per share
per 27,400
Share
This measure indicates how much
income was earned for each share of
common stock outstanding.
 MARKET
Price-
Earnings
Ratio

Dividend
Yield
 FINANCIAL RATIOS LC 12 to
LC 14
MARKET
- Ability to generate positive market expectations

RATIO FORMULA SIGNIFICANCE

Price earnings Ratio Market Price Per Indicates relationship of market

Common Share/ price of common stock to net
Earnings Per Share earnings

Dividends Yield on Div. Per common share/ Measures cash flow return on
CS Market price per common common stock investment
share
Use this
NORTON CORPORATION
information
December 31, 2002
to calculate
Earnings per Share Php 1.96
the market
Market Price 15.00
ratios for
Annual Dividend per Share 2.00
Norton
Corporation.
 PRICE-EARNINGS RATIO

Price-Earnings Market Price Per Share

=
Ratio Earnings Per Share

Price-Earnings Php15.00
= = 7.65 times
Ratio Php 1.96

This measure is often used by investors as a general

guideline in gauging stock values. Generally, the
higher the price-earnings ratio, the more opportunity
a company has for growth.
 DIVIDEND YIELD
Dividend Annual Dividends Per Share
=
Yield Market Price Per Share

Dividend Php2.00
= = 13.3%
Yield Php15.00

This ratio identifies the return, in

terms of cash dividends, on the
current market price of the stock.
ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS LC 12 to
LC 14
ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS LC 12 to
LC 14
ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS LC 12 to
LC 14
ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS LC 12 to
LC 14
ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS LC 12 to
LC 14
ANALYSIS AND INTERPRETATION OF FINANCIAL
STATEMENTS LC 12 to
LC 14
ANALYSIS AND INTERPRETATION OF
FINANCIAL STATEMENTS
LC 12 to
LC 14
ANALYSIS AND INTERPRETATION OF
FINANCIAL STATEMENTS
LC 12 to
LC 14
ANALYSIS AND INTERPRETATION OF
FINANCIAL STATEMENTS
LC 12 to
LC 14
END OF QUARTER 1
2 ND
QUARTER CONTENT

1. Accounting Books –Journal and

Ledger
2. Basic Documents and Transactions
related to Bank Deposits
3. Bank Reconciliation Statement
4. Accounting Practice Set
5. Income and Business Taxation
 CHAPTER 1:
ACCOUNTING BOOKS
–JOURNAL AND
LEDGER
CONTENT Accounting Books –Journal and Ledger
CONTENT The learners demonstrate an understanding of debits
and credits, journal entries to record basic business
STANDARD transaction and using t-accounts, and posting to
general ledgers.

PERFORMANCE The learners shall be able to prepare journal entries for

basic business transactions; solve exercises and
STANDARDS problems that require using the t-account.

LEARNING 1. Differentiate the journal from the general ledger

COMPETENCIES
2. Determine the normal balance of an account.
3. Prepare journal entries to record basic business
transaction.
4. Determine balances of accounts using the t-
account.
 LC 1 to
ACCOUNTING BOOKS –JOURNAL LC 4
AND LEDGER
 LC 1 to
ACCOUNTING BOOKS –JOURNAL LC 4
AND LEDGER
 LC 1 to
ACCOUNTING BOOKS –JOURNAL LC 4
AND LEDGER
 LC 1 to
ACCOUNTING BOOKS –JOURNAL LC 4
AND LEDGER
 LC 1 to
ACCOUNTING BOOKS –JOURNAL LC 4
AND LEDGER
 LC 1 to
ACCOUNTING BOOKS –JOURNAL LC 4
AND LEDGER
 LC 1 to
ACCOUNTING BOOKS –JOURNAL LC 4
AND LEDGER

HOW RO USE THE JOURNAL

 LC 1 to
ACCOUNTING BOOKS –JOURNAL LC 4
AND LEDGER
 CHAPTER 2:
BASIC DOCUMENTS AND
TRANSACTIONS RELATED
TO BANK DEPOSITS
CONTENT Basic Documents and Transactions Related to
Bank Deposit

CONTENT The learners demonstrate an understanding of

transactions related to Bank Deposits the types of bank
STANDARD accounts, basic transactions, and documents related
to bank deposits and withdrawals.

PERFORMANCE The learners shall be able to share samples of bank

account forms and documents in class and discuss
STANDARDS their uses and importance.

LEARNING 1. Identify the types of bank accounts normally

maintained by a business.
COMPETENCIES
2. Differentiate a savings account from a current or
checking account.
3. Prepare bank deposit and withdrawal slips.
4. Identify and prepare checks.
5. Identify and understand the contents of a bank
statement.
BASIC DOCUMENTS AND TRANSACTIONS
RELATED TO BANK DEPOSIT LC 5 to
LC 9
BASIC DOCUMENTS AND TRANSACTIONS
RELATED TO BANK DEPOSIT LC 5 to
LC 9
 TYPES OF BANK ACCOUNTS LC 5 to
LC 9

Php 1, 000 would earn Php 10 in a year

 BASIC DOCUMENTS AND TRANSACTIONS
RELATED TO BANK DEPOSIT LC 5 to
LC 9
Savings Accounts
These are intended to provide an incentive for you to save money .

 You can make deposits and withdrawals, but usually can't write checks.
 They usually pay an interest rate that's higher than a checking account, but lower than
a money market account or CD.
 Some savings accounts have a passbook, in which transactions are logged in a small
booklet that you keep, while others have a monthly or quarterly statement detailing the
transactions.
 Some savings accounts charge a fee if your balance falls below a specified minimum.
 BASIC DOCUMENTS AND TRANSACTIONS
RELATED TO BANK DEPOSIT LC 5 to
LC 9
Basic Checking Accounts

 Sometimes also called "no frills" accounts, these offer a limited set of
services at a low cost.
 You'll be able to perform basic functions, such as check writing, but
they lack some of the bells and whistles of more comprehensive
accounts.
 They usually do not pay interest, and they may restrict or impose
additional fees for excessive activity, such as writing more than a certain
number of checks per month.
 BASIC DOCUMENTS AND TRANSACTIONS
RELATED TO BANK DEPOSIT LC 5 to
LC 9
Interest-Bearing Checking Accounts

In contrast to "no frills" accounts, these offer a more comprehensive set of

services, but usually at a higher cost . Also, unlike a basic checking account,
you are usually able to write an unlimited number of checks. Checking
accounts which pay interest are sometimes referred to as negotiable order
of withdrawal (NOW) accounts. The interest rate often depends on how
large the balance in the account is, and most charge a monthly service fee if
your balance falls below a preset level.
 BASIC DOCUMENTS AND TRANSACTIONS
RELATED TO BANK DEPOSIT LC 5 to
LC 9
Money Market Deposit Accounts (MMDAs)

These accounts invest your balance in short-term debt such as commercial

paper, Treasury Bills, or CDs. The rates they offer tend to be slightly higher
than those on interest-bearing checking accounts, but they usually require
a higher minimum balance to start earning interest. These accounts
provide only limited check writing privileges (three transfers by check, and
six total transfers, per month), and often impose a service fee if your
balance falls below a certain level.
 BASIC DOCUMENTS AND TRANSACTIONS
RELATED TO BANK DEPOSIT LC 5 to
LC 9
Certificates of Deposit (CDs)

These are also known as "time deposits", because the account holder has
agreed to keep the money in the account for a specified amount of time,
anywhere from three months to six years. Because the money will be
inaccessible, the account holder is rewarded with a higher interest rate,
with the rate increasing as the duration increases. There is a substantial
penalty for early withdrawal, so don't select this option if you think you
might need the money before the time period is over (the "maturity date").
DIFFERENTIATE A SAVINGS ACCOUNT
FROM A CURRENT OR CHECKING
ACCOUNT
LC 5 to
LC 9
DIFFERENTIATE A SAVINGS ACCOUNT
FROM A CURRENT OR CHECKING
ACCOUNT
LC 5 to
LC 9
DIFFERENTIATE A SAVINGS ACCOUNT
FROM A CURRENT OR CHECKING
ACCOUNT
LC 5 to
LC 9
DIFFERENTIATE A SAVINGS ACCOUNT
FROM A CURRENT OR CHECKING
ACCOUNT
LC 5 to
LC 9
DIFFERENTIATE A SAVINGS ACCOUNT
FROM A CURRENT OR CHECKING
ACCOUNT
LC 5 to
LC 9
DEPOSIT SLIP LC 5 to
LC 9
 WRITING A CHECK LC 5 to
LC 9
 Write the date on the line in the upper right hand corner. There will be a blank space
next to or above the word "Date."

 Write the name of the recipient. Write the name of the person or company you're
sending the check to next to the line that says "Pay to the Order of." You can also just
pay the check to "Cash," but be careful, because that means that anyone can cash it. If
it's to an individual, include both their first and last names. If the check is going to an
organization, write out its full name. Do not use acronyms unless explicitly given
permission
 WRITING A CHECK LC 5 to
LC 9
 Write the amount of the check to the right of the peso sign. Write the exact amount,
using pesos and cents. If the check is for twenty dollars, write "20.00."

 Write the monetary amount of the check in word form below the "Pay to the Order of"
line.
 WRITING A CHECK LC 5 to
LC 9
 Sign the check on the line in the bottom right corner. Your check will be invalid if it is
not personally signed.

 Fill out the memo section on the bottom left of the check. Though this part of the
check is optional, it can be helpful to write a note to yourself or the recipient to
remember what the check is for. You can write "For May rent" if you're sending a rent
check.
 BANK STATEMENT LC 5 to
LC 9
 A bank statement or account statement is a summary of financial report released (on a
fixed date every month) by banks and include lists of deposits, withdrawals, checks
paid, interest earned, and service charges or penalties incurred on an account. It shows
the cumulative effect of these transactions the account's balance, up to the date the
report was prepared.

 Bank statements have historically been and continue to be typically printed on one or
several pieces of paper and either mailed directly to the account holder, or kept at the
financial institution's local branch for pick-up. In recent years there has been a shift
towards paperless, electronic statements, and some financial institutions offer direct
download into account holders accounting software.

 Some ATMs offer the possibility to print, at any time, a condensed version of a bank
statement, commonly called a transaction history, or a transaction history may be
viewed on the financial institution's website or available via telephone banking.
 CHAPTER 3:
BANK RECONCILIATION
STATEMENT
CONTENT Bank Reconciliation Statement
CONTENT The learners demonstrate an understanding of
transactions related to Bank Deposits the types of bank
STANDARD accounts, basic transactions, and documents related
to bank deposits and withdrawals. a bank reconciliation
statement, its nature and structure, and reconciling items
and methods of preparation.
PERFORMANCE The learners shall be able to solve exercises and
problems involving the following:
STANDARDS 1. Identification of the proper treatment of reconciling
items in the bank reconciliation Statement
preparation of a bank reconciliation statement.
LEARNING 1. Describe the nature of a bank reconciliation
statement.
COMPETENCIES
2. Identify common reconciling items and describe each
of them.
3. Analyze the effects of the identified reconciling items.
4. Prepare a bank reconciliation statement.
BANK RECONCILIATION
STATEMENT LC 10 to
LC 13
BANK RECONCILIATION
STATEMENT LC 10 to
LC 13
BANK RECONCILIATION
STATEMENT LC 10 to
LC 13
BANK RECONCILIATION
STATEMENT LC 10 to
LC 13
BANK RECONCILIATION
STATEMENT LC 10 to
LC 13
BANK RECONCILIATION
STATEMENT LC 10 to
LC 13
BANK RECONCILIATION
STATEMENT LC 10 to
LC 13
BANK RECONCILIATION
STATEMENT LC 10 to
LC 13
EXERCISES LC 10 to
LC 13
EXERCISES LC 10 to
LC 13
 LC 10 to
EXERCISES
LC 13
 LC 10 to
EXERCISES
LC 13
CHAPTER 4:
ACCOUNTING
PRACTICE SET
CONTENT Accounting Practice Set

CONTENT The learners demonstrate an understanding of the

preparation of an accounting practice set for a
STANDARD merchandising business.

PERFORMANCE The learners shall be able to prepare basic business

forms and documents, such as official receipts,
STANDARDS vouchers, sales invoice, purchase invoice, delivery
receipts, purchase order, and withdrawal and deposits
slips; and complete and submit the accounting practice
set for a merchandising business.

LEARNING Perform the steps in the accounting cycle, from

preparation of document to the preparation, analysis,
COMPETENCIES and interpretation of financial statements.
BUSINESS FORMS AND DOCUMENTS
LC 14
BUSINESS FORMS AND DOCUMENTS
LC 14
BUSINESS FORMS AND DOCUMENTS
LC 14
BUSINESS FORMS AND DOCUMENTS
LC 14
BUSINESS FORMS AND DOCUMENTS
LC 14
BUSINESS FORMS AND DOCUMENTS
LC 14
BUSINESS FORMS AND DOCUMENTS
LC 14
BUSINESS FORMS AND DOCUMENTS
LC 14
 CHAPTER 5:
INCOME AND BUSINESS
TAXATION
CONTENT Income and Business Taxation
CONTENT The learners demonstrate an understanding of
taxation ,the sound principles of taxation, its purpose,
STANDARD and preparation of forms and payment of taxes.

PERFORMANCE The learners shall be able to accomplish the BIR

(Bureau of Internal Revenue) forms.
STANDARDS
LEARNING 1. Define income and business taxation and its
principles and processes.
COMPETENCIES
2. Prepare the list of sources of gross income from
compensation and gross income from business, and
the corresponding personal and additional
deductions.
3. Explain the procedure in the computation of gross
taxable income and tax due.
4. Prepare the BIR forms.
5. Explain the principles and purposes of taxation.
6. Distinguish individual from business taxation.
7. Compute the gross taxable income and tax due.
 INCOME AND BUSINESS TAXATION LC 15 to
LC 21
TAXATION - is the act of levying a tax, the process or means by which
sovereign , trough its law making body , raises income to defray the necessary
expenses of the government. As a power, it refers to the inherent power of the
state to demand enforced contributions for public purpose or purposes.

Taxes - enforced proportional contributions generally payable in money, levied

by the legislature or law making body of the State by virtue of its soveriegnity
on persons, property and acts or transactions for the support of the
government and all public needs

Purpose – primarily is to provide funds or property with which to finance it

multifarious activities with end primarily to:
1. promote country's progress and development,
2. Maintain peace and stability
3. Provide for the security and general well-being of the people.
- Its secondary purpose is for regulation and control (protective tariffs on
imported goods to protect local industries )
 INCOME AND BUSINESS TAXATION LC 15 to
LC 21
Essential elements
1. Enforced proportional contributions
2. generally payable in money,
3. Proportionate in character
4. levied on persons , property or the exercise of a right or privilege
5. Levied by the legislature or law making body of the State
6. Levied by the State which has jurisdiction over the subject or object of
taxation
7. It is levied for public purpose or purposes
 INCOME AND BUSINESS TAXATION LC 15 to
LC 21
Basic Principles of a Sound Tax System
1. Fiscal Adequacy – sources of revenue should be sufficient to meet
the demands of public expenditures
2. Equality or Theoretical justice – the tax burden should be
proportionate to the taxpayer’s ability to pay. “ Ability to Pay
Principle”
3. Administrative Feasibility – Tax laws should be capable of
convenient , just and effective administration.
 INCOME AND BUSINESS TAXATION LC 15 to
LC 21
Taxation System (Process)
1. Levying or imposition of the tax which is a legislative act
(imposition)
2. Collection of the tax levied which is essentially administrative in
character (administration )
 INCOME AND BUSINESS TAXATION LC 15 to
LC 21
Sources of Income
- It is not the place but the property.\, activity or service that
produced the income.
1. Income from labor – place where the labor is performed
2. Income from use of capital- place where the capital is employed
3. Profits from the sale or exchange of capital assets- the place
where the sale or transaction occurs.

Under the Tax Code, Income :

Income is derived in full from sources within the Philippines
Income is derived in full from sources outside the Philippines
Income is derived partly within and partly outside the Philippines
 INCOME AND BUSINESS TAXATION LC 15 to
LC 21
Importance of Knowing the Sources of Income
1. Not all taxpayers are liable to pay income taxes on all their
income
2. Citizens , resident aliens and domestic corporations are taxable
upon income derived from all sources
 INCOME AND BUSINESS TAXATION LC 15 to
LC 21
Income Tax
is a tax on a person's income, emoluments, profits arising from
property, practice of profession, conduct of trade or business or on
the pertinent items of gross income specified in the Tax Code of
1997 (Tax Code), as amended, less the deductions and/or personal
and additional exemptions, if any, authorized for such types of
income, by the Tax Code, as amended, or other special laws.
 INCOME AND BUSINESS TAXATION LC 15 to
LC 21
Who Are Required To File Income Tax Returns

Individuals

 Resident citizens receiving income from sources within or

outside the Philippines
 employees deriving purely compensation income from 2 or more
employers, concurrently or successively at anytime during the
taxable year
 employees deriving purely compensation income regardless
of the amount, whether from a single or several employers during
the calendar
 INCOME AND BUSINESS TAXATION LC 15 to
LC 21
Who Are Required To File Income Tax Returns
Individuals
 self-employed individuals receiving income from the conduct of
trade or business and/or practice of profession
 individuals deriving mixed income, i.e., compensation income
and income from the conduct of trade or business and/or practice
of profession
 individuals deriving other non-business, non-professional
related income in addition to compensation income not otherwise
subject to a final tax
 INCOME AND BUSINESS TAXATION LC 15 to
LC 21
Tax Form
BIR Form 1700 - Annual Income Tax Return (For Individual
Earning Purely Compensation Income Including Non-Business/Non-
Profession Related Income)

Documentary Requirements

1. Certificate of Income Tax Withheld on Compensation (BIR Form

2316)

2. Waiver of the Husband’s right to claim additional exemption, if

applicable
 INCOME AND BUSINESS TAXATION LC 15 to
LC 21
Documentary Requirements
1. 3. Duly approved Tax Debit Memo, if applicable

4. Proof of Foreign Tax Credits, if applicable

5. Income Tax Return previously filed and proof of payment, if

filing an amended return for the same taxable year

Deadline
On or before the 15th day of April of each year covering
taxable income for the preceding taxable year
 INCOME AND BUSINESS TAXATION LC 15 to
LC 21

On
 INCOME AND BUSINESS TAXATION LC 15 to
LC 21

1
INCOME AND BUSINESS TAXATION LC 15 to
LC 21
INCOME AND BUSINESS TAXATION LC 15 to
LC 21
INCOME AND BUSINESS TAXATION LC 15 to
LC 21
INCOME AND BUSINESS TAXATION LC 15 to
LC 21
INCOME AND BUSINESS TAXATION LC 15 to
LC 21
 SOURCES
Some of the slides presented are taken from the Teaching guide of :
 Fundamentals of Basic Accounting by LEONARDO E. ALILING; REX
Bookstore , Inc. ;Philippine Copyright 2013