Fundamentals of Accountancy, Business and Management 2 Past Paper PDF

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2 Content Standard The learners demonstrate an understanding of: 1. account titles under the assets, liabilities, and capital accounts of the Statement of Financial Position, namely, cash, receivables, inventories, prepaid expens...

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2 Content Standard The learners demonstrate an understanding of: 1. account titles under the assets, liabilities, and capital accounts of the Statement of Financial 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 erformance Standards The learners are able to: 1. solve exercises and problems that require preparation of an SFP for a single proprietorship with proper classification of accounts as current and noncurrent using the report form st Essential Learning competencies The learner 1. identify the elements of the SFP and describe each of them ABM_FABM12- Ia-b-1 2. prepare an SFP using the report form and the account form with proper classification of items as current and noncurrent ABM_FABM12- Ia-b-4  1. Analyze 10. Create Transacti 2. and Post Reversing ons Prepare Entries Journal *if needed Entries 9. Prepare 3. Post Post- Journal Closing Entries ACCOUNTI Entries NG CYCLE 4. 8. Prepare Prepare Unadjust Closing ed Trial Entries Balance 7. 5. Make Prepare Adjustin Financial 6. g Journal Stateme Prepare Entries nts Adjusted Trial Balance inancial Statements Are the means by which the information accumulated and processed in financial accounting is periodically communicated to the users. The end product or main output of the financial accounting process. The structured financial representation of the financial position and financial performance of an entity.  OBJECTIVE OF FINANCIAL STATEMENTS “ To provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions” To meet this objective, Financial statements provide information about the following: a.ASSETS b.LIABILITIES c.EQUITY d.INCOME AND EXPENSES, Including gains and losses e.Contributions by and distributions to owners in their capacity as owners f.Cash flows  FREQUENCY OF REPORTING Financial statements shall be presented at least annually. When an entity’s end of reporting period changes and financial statements are presented for a period longer or shorter than one year, an entity shall disclose: a.The period cover by the financial statements b.The reason for using a longer of shorter period. c.The fact that the amounts presented in the financial statements are not entirely comparable.  COMPONENTS OF FINANCIAL STATEMENTS STATEMENT OF FINANCIAL POSITION STATEMENT OF COMPREHENSIVE INCOME STATEMENT OF CHANGES IN EQUITY STATEMENT OF CASHFLOWS NOTES TO FINANCIAL STATEMENT STATEMEN T OF FINANCIA STATEMENT OF FINANCIAL POSITION ASSETS LIABILITIES OWNER’S EQUITY STATEMENT OF FINANCIAL POSITION A statement of financial position is a formal statement showing the three elements comprising financial position, namely: ASSETS, LIABILITIES AND EQUITY Investors, creditors and other statement users analyse the statement of financial position to evaluate such factors as LIQUIDITY, SOLVENCY, and THE NEED OF THE ENTITY FOR ADDITIONAL FINANCING. STATEMENT OF FINANCIAL POSITION ASSETS are defined as “resources controlled by the entity as a result of past transactions and events and from which future economic benefits are expected to flow to the entity” ESSENTIAL CHARACTERISTICS OF AN ASSETS are: a.The asset is controlled by the entity. b.The asset is the result of past transaction or event. c.The asset provides future economic benefits. d.The cost of the asset can be measured reliably CLASSIFICATION OF ASSETS When an entity supplies goods or services within a clearly identifiable operating cycle, the separate classification of current and noncurrent assets is a useful information by distinguishing between net assets that are continuously circulating as working capital from the net assets used in long-term operations. The operating cycle of an entity is the time between the acquisition of assets for processing and their realization in cash or cash equivalents. When the entity’s normal operating cycle is not clearly identifiable, its duration is assumed to be twelve months. CURRENT ASSETS PAS 1, paragraph 66, provides that an entity shall classify an asset as current when: A. the asset is cash or cash equivalent unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. B. the entity holds the asset primarily for the purpose of trading. C. the entity expects to realize the asset within twelve months after the reporting period. D. the entity expects to realize the asset or intends to sell or consume it within the entity’s normal operating cycle. PRESENTATION OF CURRENT ASSETS Current assets are usually listed in order of liquidity. PAS 1, paragraph 54, provides that as a minimum, the line items under current assets are: A. Cash and cash equivalents B. Financial assets at fair value such as trading securities and other investments in quoted equity instruments C. Trade and other recievables D. Inventories E. Prepaid Expenses NONCURRENT It is the residual definition. ASSETS PAS 1, paragraph 66, simply states that “ an entity shall classify all other assets not classified as current as noncurrent In other words, what is not included in the definition of current assets is deemed excluded. All others are classified as noncurrent assets. Accordingly, noncurrent assets include the following: a.Property, plant and equipment b.Long-term investments c.Intangible assets d.Other noncurrent assets NONCURRENT ASSETS PAS 1, paragraph 56, provides that “when an entity presents current and noncurrent assets as separate classifications on the face of the statement of financial position, it shall not classify deferred tax asset as current assets” Property, Plant and Equipment Tangible assets which are held by an entity for use in production or supply of goods and services, for rental to others, or for NONCURRENT ASSETS LONG TERM INVESTMENTS “It is an asset held by an entity for the accretion of wealth through capital distribution, such as interest, royalties, dividends and rentals, for capital appreciation or for other benefits to the investing entity such as those obtained through trading NONCURRENT ASSETS INTANGIBLE ASSETS It is simply defined as “an identifiable nonmonetary asset without physical substance” Examples: Identifiable assets: PATENT, FRANCHISE, COPYRIGHT, LEASE RIGHTS, TRADEMARK and COMPUTER SOFTWARE. Unidentifiable Assets: NONCURRENT ASSETS Other Noncurrent Assets Long term Advances to Officers, directors, shareholders and employees, or abandoned Property and Long term Refundable Deposit. LIABILITIES DEFINITION: It is defined as “present obligations of an entity arising from past transactions or events, the settlement of which is expected to result in an outflow from the entity of resources LIABILITIES Essential Characteristics of a LIABILITY are: 1.The liability is the present obligation of a particular entity. 2.The liability arises from past transaction or event. 3.The settlement of the liability requires an outflow of resources LIABILITIES Liabilities are also classified as CURRENT and NONCURRENT. PAS 1, paragraph 69, provides that an entity shall classify a liability as CURRENT when: a.The entity expects to settle the liability within the entity’s normal operating cycle. b.the entity holds the liability primarily for the purpose of trading. c.The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. CURRENT LIABILITIES PRESENTATION OF CURRENT LIABILITIES: PAS 1, paragraph 54, provides that as a minimum, the face of the STATEMENT of FINANCIAL POSITION shall include the following items for current liabilities: a.Trade and Other Payables b.Current Provisions c.Short term Borrowings d.Current portion of the long term debt e.Current tax liability CURRENT LIABILITIES The term “trade and other payables” is a line item for accounts payable, notes payable, accrued interest on notes payable, dividends payable and accrued expenses. No objection can be raised if the trade accounts and notes payable are separately presented. The term “trade and other payables” is a line item for accounts payable, notes payable, accrued interest on notes payable, dividends payable and accrued expenses. No objection can be raised if the trade accounts and notes payable are separately presented. NON CURRENT LIABILITIES Definition: It is also a “residual definition”. PAS 1, paragraph 69, provides that all liabilities not classified as current are classified as noncurrent. NON CURRENT LIABILITIES Examples of Noncurrent Liabilities are: a. Noncurrent portion of long term debt. b. Finance lease liability c. Deferred tax liability d. Long term obligations to company officers e. Long term deferred revenues. NON CURRENT LIABILITIES PAS 1, paragraph 56, provides that “ when an entity presents current and noncurrent liabilities as separate classifications on the face of the Statement of Financial Position, it shall NOT classify deferred tax liability as Current Liability.” CAPITAL / OWNERS EQUITY CAPITAL / OWNERS EQUITY Simply stated, EQUITY means “NET ASSETS” or Total assets minus Liabilities. The terms used in reporting the equity of an entity depending on the form of the business organization are: a. Owner’s Equity in a proprietorship b. Partner’s Equity in a partnership c. Stockholders equity or Shareholders equity in a corporation CAPITAL / OWNERS EQUITY Shareholders equity is the residual interest of owners in the net assets of a corporation measured by the excess of assets over liabilities. FORMS of Statement of Financial Position In practice, there are two customary forms in presenting the statement of financial position, namely: a. REPORT FORM This form sets forth the three major sections in a DOWNWARD sequence of ASSETS, LIABILITIES and EQUITY. b. ACCOUNT FORM As the title suggests, the presentation follows that of an account, meaning, the assets are shown on the left side and the liabilities and equity on the right side of the statement of financial positions  SAMPLAR COMPANY Statement of Finacial Position December 31, 2012 ASSETS Note Current Assets Cash and Cash Equivalent 1 500,000 Fiancial Assets at Fair value 200,000 Trade and Other Receivables 2 700,000 Inventories 3 900,000 Prepad Expenses 4 50,000 Total Current Assets 2,350,000 Noncurrent Assets Property, Plant and Equipment 5 5,000,000 Investment in Associate, at equity 1,000,000 Long term Investments 6 5,100,000 Intangible Assets 7 2,000,000 Other Noncurrent Assets 8 100,000 Total Noncurrent Assets 13,200,000 Total Assets 15,550,000 LIABILITIESANDSHAREHOLDERSEQUITY REPORT Current Liabilities: Trade and Other Payables 9 750,000 Notes Payable - Short term debt 400,000 Current Portion of Bonds Payable 200,000 Warranty Liability 50,000 Total Current Liabilities 1,400,000 FORM Noncurrent Liabilities: Bonds Payable - remaining portion 1,800,000 Notes Payable 600,000 Deferred Tax Liablity 100,000 Total Nocurrent Laibilities 2,500,000 Shareholders' Equity Share Capital, P100 par 5,000,000 Reserves 10 3,000,000 Retained Earnings 3,650,000 Total Shareholder's Equity 11,650,000 Total Liabilities and Shareholders' Equity 15,550,000  SAMPLARCOMPANY Statement of Finacial Position December 31, 2012 ASSETS LIABILITIESANDSHAREHOLDERSEQUITY Current Assets Current Liabilities: Cash and Cash Equivalent 500,000 Trade and Other Payables 750,000 Fiancial Assets at Fair value 200,000 Notes Payable - Short termdebt 400,000 Trade and Other Receivables 700,000 Current Portion of Bonds Payable 200,000 Inventories 900,000 Warranty Liability 50,000 Prepad Expenses 50,000 Total Current Liabilities 1,400,000 Total Current Assets 2,350,000 Noncurrent Assets Noncurrent Liabilities: ACCOUN Property, Plant and Equipment 5,000,000 Bonds Payable - remaining portion1,800,000 T FORM Investment in Associate, at equity 1,000,000 Notes Payable 600,000 Long termInvestments 5,100,000 Deferred Tax Liablity 100,000 Intangible Assets 2,000,000 Total Nocurrent Laibilities 2,500,000 Other Noncurrent Assets 100,000 Total Noncurrent Assets 13,200,000 Equity Share Capital, P100 par 5,000,000 Reserves 3,000,000 Retained Earnings 3,650,000 Total Shareholder's Equity 11,650,000 Total Assets 15,550,000 Total Liabilities and Shareholders' Equity 15,550,000 NOTE 1 Cash and Cash Equivalent Cash on hand 40,000 Cash in bank 300,000 Petty Cash Fund 10,000 BSP Treasury Bill, purchased on Dec 1, 2012 and Due March 1, 2013 150,000 Total Cash and Cash equivalents 500,000 NOTE 2 Tradeand Other Receivables Accounts Receivables 580,000 Allowance for Doubtful Accounts - 20,000 Notes Receivable 100,000 Accrued Interest on Notes Receivable 10,000 Advances to Employees, collectibly currently 30,000 Total Trade and Other Receivables 700,000 NOTE 3 Inventories Finished Goods 300,000 Goods In Process 400,000 Raw Materials 150,000 ManufacturingSupplies 50,000 Total Inventories 900,000 NOTE 4 PrepaidExpenses Office Supplies Unused 30,000 Prepaid Insurance 20,000 Total PrepaidExpenses 50,000 NOTE 5 Property, Plant and Equipment Land 1,500,000 Building 4,500,000 Machinery and Equipment 1,000,000 Furniture and Fixtures 300,000 Patterns, molds, dies and tools, net 100,000 Total 7,400,000 Accumulated Depreciation - 2,400,000 CarryingAmount 5,000,000 Accumulated Depreciation: Building 1,900,000 Machinery and Equipment 350,000 Furniture and Fixture 150,000 Total Accumulated Depreciation 2,400,000 NOTE 6 Long termInvestments Plant expansion Fund 2,000,000 Investment in bonds 3,000,000 Cash Surrender Value 100,000 Total Other LongtermInvestments 5,100,000 NOTE 7 IntangibleAssets Patent 500,000 Franchise 1,500,000 Total Intangible Assets 2,000,000 NOTE 8 Other Noncurrent Assets Long termRefundable Deposit 20,000 Long termAdvance to Officers 80,000 Total Other Noncurrent Assets 100,000 NOTE 9 Trade and Other Payables Accounts Payable 350,000 Notes Payable 150,000 Accrued Interest on NP 15,000 Income Tax Payable 50,000 Dividends Payable 100,000 Accrued Expenses 85,000 Total Tradeand Other Payable 750,000 NOTE 10 Reserves Share Premium 2,000,000 Retained Earnings Appropriated for Contingencies1,000,000 Total Reserves 3,000,000 Line Items in Statement of Financial Position PAS 1, paragraph 54, states that as a minimum, the face of the statement of financial position shall include the following line items: 1.Cash and Cash Equivalents 2.Financial Assets (other than 1, 3 and 6) 3.Trade and Other receivables 4.Inventories 5.Property, Plant and Equipment 6.Investment in Associates accounted for by the equity method 7.Intangible Assets 8.Investment Property 9.Biological Assets 10.Total of Assets classified as held for sale and assets included in disposal group classified as held for sale Line Items in Statement of Financial Position (continuation…) 12. Current Tax Liability 13. Deferred Tax Asset and Deferred Tax Liability 14. Provisions 15. Financial Liabilities (other than 11 and 14) 16. Liabilities included in disposal group classified as held for sale 17. Noncontrolling Interest 18. Share Capital and reserves The following are the account balances of Long Company Accounts Receivable 50,000 Bank Loan 100,000 Building 900,000 Cash 420,000 Copyright 100,000 Income tax Payable 30,000 Inventory 120,000 Land 1,000,000 LongTermLiability 200,000 Machinery Held for Sale` 50,000 Prepaid Rent 10,000 Unearned Income 25,000 Franchise 125,000 Accounts Payable 250,000 Compute the following: 1.Total Current Assets 4. Total Current Liabilities Assignment. It will be sent in the google classroom Name of the Owner: Carlo Dy Name of the Company: Dy Law Offi ce Date: as of December 31, 2018 Account T itle Amount Element Classification Accounts Receivable 75,000 ASSET S CURRENT ASSET S Accumulated Depreciation - Offi ce Equipment a Cash 588,500 a Offi ce Equipment 36,000 a Offi ce Supplies 5,000 a Prepaid Rent 120,000 a Dy, Capital 500,000 c Dy, Withdrawal 25,000 c Depreciation Expense ex Interest Expense ex Offi ce Supplies Expense ex Permit and License Expense ex Rent Expense ex Representation Expense 25,000 ex Salaries Expense 15,000 ex Utilities Expense 8,000 ex Accounts Payable 25,000 l Interest Payable l Notes Payable - Bank 100,000 l Unearned Revenues 35,000 l Professional fees r Note A. All the amounts are in normal balance B. The following are the adjusting amounts in each account title. Adjusting Account T itle Debit Credit Offi ce Supplies 3,000 Prepaid rent 10,000 Accumulated Depreciation - Offi ce Equipment 1,000 Interest Payable 500 Rent Expense 10,000 Offi ce Supplies Expense 3,000 Depreciation Expense 1,000 Interest Expense 500 Requirements: 1. Determine the elements and classification of each account titles: 2. Prepare a separate statement of financial position using a report and account format.  CHECKING OF ACTIVITIES IN THE COLUMNAR FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2 Content Standard The learners demonstrate an understanding of: 1. the service income and operating expenses of a service 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. erformance Standards The learners are able to: 1. solve exercises and problems that require preparation of SCI for a service business and a merchandising business t Essential Learning Competenci The learner 1. identify the elements of the SCI and describe each of these items for a service business and a merchandising business ABM_FABM12-Ic-d-5 2. prepare an SCI for a service business using the single-step approach ABM_FABM12- Ic-d-6 3. prepare an SCI for a merchandising business using the multistep approach ABM_FABM12-Ic-d-7  Statement of Comprehensi ve Income STATEMENT OF COMPREHENSIVE DEFINITION: INCOME Comprehensive Income is the change in equity during a period resulting from transactions and other events, other than changes resulting from transactions with owners in their capacity as owners. In other words, comprehensive income includes the following: 1.Components of Profit and Loss 2.Components of Other Comprehensive Income STATEMENT OF COMPREHENSIVE PROFIT OR LOSS INCOME This term “profit or loss” is the total of income less expense, excluding the components of other comprehensive income. In other words, this is the “bottom line” in the traditional income statement. An entity may use other term to describe this amount as long as the meaning is clear. EXAMPLE: the entity may use “NET INCOME” or “NET LOSS” to describe profit or loss. STATEMENT OF COMPREHENSIVE INCOME OTHER COMPRHENSIVE INCOME The term “OCI” comprises items of income and expenses including reclassification adjustments that are not recognized in profit or loss as required or permitted by Philippine Financial Reporting Standards. STATEMENT OF COMPREHENSIVE INCOME The components of “other comprehensive income” include the following: 1. Unrealized gain or loss on investment in equity instrument measured at fair value through other comprehensive income 2. Gain or loss from translation of the Financial Statements of a foreign corporation 3. changes in Revaluation Surplus 4. Unrealized Gain or loss from derivative contracts designated as Cash flow hedge 5. Actuarial gain or loss on defined benefit plan fully recognized through other comprehensive income. STATEMENT OF COMPREHENSIVE INCOME The Amended PAS 1, paragraph 82A, provides that the other comprehensive income section shall present line items for amounts of the other comprehensive income in the period, classified by nature. The items for amounts of OCI shall be grouped as follows: a.OCI that will be reclassified subsequently to profit or loss when specific conditions are met. b.OCI that will NOT be reclassified subsequently to profit or l STATEMENT OF COMPREHENSIVE INCOME Line Items for OCI that will be reclassified subsequently to Profit or Loss include the following: a.Gain or loss from translating financial statements of a foreign operation b.Unrealized gain or loss on derivative contracts designated as Cash flow STATEMENT OF COMPREHENSIVE Line Items for OCI INCOME that will NOT be reclassified subsequently to profit or loss include the following: a.Unrealized gain or loss on investments in equity instruments measured at Fair Value through OCI. Under PFRS 9, the unrealized gain or loss is reclassified to retained earnings upon disposal of the investment. b.Change in revaluation surplus. The realization of the revaluation surplus is through retained earnings. c.Actuarial gain or loss on a defined benefit plan fully recognized through OCI. The actuarial gain or loss is STATEMENT OF COMPREHENSIVE INCOME An entity has two options of presenting comprehensive income, namely: 1. Two statements: a. An income statement showing the components of profit or loss b. A statement of comprehensive income beginning with profit or loss as shown in the income statement plus or minus the components of other comprehensive income. STATEMENT OF COMPREHENSIVE INCOME Presentation of Comprehensive Income 2. Single Statement of Comprehensive Income This is the combined statement showing the components of profit or loss and components of other comprehensive income in a single statement  STATEMENT OF COMPREHENSIVE INCOME INCOME STATEMENT DEFINITION: This is a formal statement showing the FINANCIAL PERFORMANCE of an entity for a given period of time. The financial performance of an entity is primarily measured in terms of the level of income earned by the entity through the effective and efficient utilization of its resources. STATEMENT OF COMPREHENSIVE INCOME This FINANCIAL PERFORMANCE is also known as the RESULTS OF OPERATIONs of the entity. The income Statement for a period presents the income, expenses, gains, losses and net income or loss recognized during the period and thereby presents an indication in conformity with PFRS of the results of the entity’s profit directed activities during the period. STATEMENT OF COMPREHENSIVE INCOME Sale of merchandise to customers – the income from sales shall include ALL SALES to customers during the period. Sales returns, allowances and discounts shall be deducted from GROSS SALES to arrive at NET SALES. Rendering of Services – Income from rendering of services, among others, includes professional fees, media advertising commissions, insurance agency commissions, admission fees for artistic performance and tuition fees Use of entity resources - this income include interest, rent, royalty and dividend income. Disposal of resources other than products – Examples include gain on sale of investments, gain on sale of PPE and gain on sale of intangible assets. STATEMENT OF COMPREHENSIVE INCOME COMPONENTS OF EXPENSES a.Cost of Sales or Cost of Goods Sold b.Distribution Costs or Selling Expenses c.Administrative Expenses d.Other Expenses e.Income Tax Expense STATEMENT OF COMPREHENSIVE COSTOFSAL INCOME EOFMERCHANDISING CONCERN Beginning Inventory 500,000.00 Net Purchases* 2,000,000.00 Goods Available for Sale 2,500,000.00 Ending Inventory - 300,000.00 Cost of Sale 2,200,000.00 Gross Purchases 1,900,000.00 Freight In 150,000.00 Total 2,050,000.00 Purchase Returns, Allowances and Discounts - 50,000.00 Net Purchases 2,000,000.00 STATEMENT OF COMPREHENSIVE COS INCOME TOFGOODSOLOFMANUFACTURING CONCERN Beginning Raw Materials 500,000 Net Purchases 2,000,000 Raw Materials Available for use 2,500,000 Ending Raw Materials - 300,000 Raw Materials Used 2,200,000 Direct Labor 3,000,000 Factory overhead 1,300,000 Total Manufacturing Cost 6,500,000 Beginning Goods in Process 900,000 Total Cost goods in Process 7,400,000 Ending Goods in Process - 1,000,000 Cost of Goods Manufactured 6,400,000 Beginning Finished Goods In process 1,600,000 Goods available for sale 8,000,000 Ending Finished Goods In Process - 1,500,000 Cost of Goods Sold 6,500,000 STATEMENT OF COMPREHENSIVE INCOME DISTRIBUTION COST constitute cost which are directly related to selling, advertising and delivery of goods to customers. –It ordinary include salesmen’s salaries, sales commissions, travelling and marketing expenses, advertising and publicity expenses, freight out, depreciation of delivery equipment and store equipment, and other expenses related directly with the selling function. STATEMENT OF COMPREHENSIVE INCOME ADMINISTRATIVE EXPENSES constitute cost of administering the business. These ordinary include all operating expenses NOT related selling and cost of goods sold. Examples: DOUBTFUL ACCOUNTS, OFFICE SALARIES and EXPENSES OF GENERAL EXECUTIVES and of the GENERAL ACCOUNTING and CREDIT DEPARTMENT, OFFICE SUPPLIES USED, CERTAIN TAXES, CONTRIBUTIONS, PROFESSIONAL FEES, DEPRECIATION OF OFFICE BUILDING and OFFICE EQUIPMENT, and AMORTIZATION OF INTANGIBLES. STATEMENT OF COMPREHENSIVE INCOME OTHER EXPENSES are those expenses which are NOT DIRECTLY related to the selling and administrative function. EXAMPLES: LOSS ON SALE OF TRADING SECURITIES, LOSS ON SALE OF PPE, LOSS ON SALE OF LONG TERM INVESTMENT and OTHER LOSSES STATEMENT OF COMPREHENSIVE INCOME NO MORE EXTRAORDINARY ITEMS PAS 1, paragraph 87, Specifically mandates that “and entity shall NOT PRESENT any items of Income and Expenses as Extraordinary items, either on the face of the income statement or  STATEMENT OF COMPREHENSIVE LINE ITEMS INCOME PAS 1, paragraph 82, provides that as a minimum, the income statement and statement of comprehensive income shall INCLUDE the following line items: A.Revenue B. Gains and loss from the derecognition of financial asset measured at amortized cost as required by PFRS 9. C. Finance Cost D. Share in income or loss of associate and joint venture accounted for using the equity method. STATEMENT OF COMPREHENSIVE INCOME e. Income tax expense f. A single amount comprising the total of discounted operations. g. Profit or loss for the period h. Total other comprehensive income i. Comprehensive Income for the period being the total of profit or loss and other comprehensive income STATEMENT OF COMPREHENSIVE INCOME The following LINE ITEMS shall be DISCLOSED on the face of the income Statement and Statement of Comprehensive income a.Profit or loss for the period attributable to non controlling interest and owners of the parent b.Total comprehensive income for the period attributable to noncontrolling STATEMENT OF COMPREHENSIVE FORMS OF INCOME STATEMENT INCOME PAS 1, paragraph 99, provides that an entity shall present analysis of expenses recognized in profit or loss using classification based on either the function of expense or their nature within the entity, whichever provides information that is reliable and more relevant. Accordingly, the income statement may be presented in two ways, namely FUNCTIONAL and NATURAL STATEMENT OF COMPREHENSIVE INCOME 1. FUNCTIONAL PRESENTATION this form classifies expenses according to their function as part of the cost of sales, distribution cost, administrative activities and other activities. It is also known as the COST OF SALES METHOD. An entity classifying expenses by function shall disclose ADDITIONAL INFORMATION on the nature of expenses, including depreciation, amortization and employee benefit cost. STATEMENT OF COMPREHENSIVE FUNCT INCOME IONALINCOMESTATEMENT EXEMPLAR COMPANY Income Statement year ended December 31, 2012 NOTE Net Sales 1 9,000,000 Cost of Sales 2 - 5,400,000 Gross Income 3,600,000 Other Income 3 900,000 Investment Income 4 500,000 Total Income 5,000,000 Expenses Distribution Cost 5 1,350,000 Administrative Expenses 6 1,000,000 Other Expenses 7 320,000 Finance cost 8 200,000 2,870,000 Income before tax 2,130,000 Income Tax expense 580,000 Net Income 1,550,000 STATEMENT OF COMPREHENSIVE 2. NATURAL PRESENTATION INCOME This presentation is referred to as the NATURE OF EXPENSE METHOD. Under this form, expenses are aggregated according to their nature and not allocated among the various functions within the entity. In other words, the expenses are no longer classified as cost of sales, distribution cost, administrative and other expenses. the expenses which are of the same nature are grouped or aggregated and presented as one item. For example, depreciation, purchase of raw materials, transportation costs, employee benefit cost, and advertising cost are presented SEPARATELY STATEMENT OF COMPREHENSIVE NATURALINCINCOME OMESTATEMENT E XEMPLAR C OMPANY IncomeS tatem ent year ended Decem ber 31, 2012 NOTE Net S ales 1 9,000,000 Other Incom e 2 900,000 Investm ent Income 3 500,000 Total Incom e 10,400,000 Expenses: Increase in Inventory 4 - 500,000 Net Purchases 5 5,900,000 E m ployee Benefit C ost 6 1,400,000 S ales Com m ission 180,000 Advertising 100,000 S upplies Expense 7 120,000 D elivery Expenses 250,000 D epreciation 8 240,000 Taxes and L icenses 20,000 D oubtful Accounts 40,000 Other E xpenses 9 320,000 Finance C ost 10 200,000 8,270,000 Incom e before tax 2,130,000 Incom e Tax Expense 580,000 Net Incom e 1,550,000 - STATEMENT OF COMPREHENSIVE WHICH INCOME FORM OF INCOME STATEMENT? PAS 1 DOES NOT describe any format. Paragraph 105 simply states that “because each method of presentation has merit for different types of entities, management is required to select the presentation that is reliable and more relevant” STATEMENT OF COMPREHENSIVE INCOME It is also prepared in order to show the total comprehensive income. It starts with the profit or loss as shown in the income statement plus or minus the components of other comprehensive income. The PURPOSE of this statement is to provide a more comprehensive information on financial performance measured more broadly than the income as traditionally computed. STATEMENT OF COMPREHENSIVE INCOME EXEMPLAR COMPANY Statement of Comprehensive Income Year ended December 31, 2012 Net Income 1,550,000.00 Other comprehensive income to be reclassified to profit or loss: Foreign currency translation gain 150,000.00 Unrealized gain or loss on derivative contract designated as cashflow hedge - 100,000.00 50,000.00 Com prehensive Incom e 1,600,000.00 Comprehensive Income for a period Includes the net income or loss for the period plus or minus the components of other comprehensive income. However, the comprehensive income of P 1,600,000 is not carried to retained earnings. Only the net income of P 1,550,000 is included in the determination of retained earnings unappropriated. The net other comprehensive income of P50,000 is carried to “reserves” or shown separately in the statement of changes in equity. Exercise: I. Classify the following whether they are classified as OTHER COMPREHENSIVE INCOME (OCI) or as part of the Profit or Loss (PL) 1.Sales 2.Rent Income 3.Unrealized gain or loss on investment in equity instruments at FVOCI 4.Salaries Expense 5.Utilities Expense 6.Gains or Loss from translating the FS of a foreign operation 7.Change in Revaluation Surplus 8.Administrative Expense 9.Rent Expense 10.Unrealized gain or loss from derivative contracts designated as Application: Formula of the following: 1.Net Sales 2.Net Purchases 3.Cost of Goods Available for Sale 4.Cost of Goods Sold 5.Net Income or Loss Application: The following are the account balances of Love Company Cash Sales 150,000 Credit Sales 350,000 Inventory beginning 80,000 Inventory, ending 40,000 Cash Purchases 30,000 Credit Purchases 50,000 Sales Return and Allowances 3,000 Sales Discount 1,000 Purchase Discount 5,000 Purchase Return and Allowances 2,000 Freight In 800 Selling Expense 10,000 Administrative Expenses 150,000 Gains from translating financial statements 25,000  Application: Formula of the following in Manufacturing Business 1.Raw Materials Used 2.Total Manufacturing Cost 3.Cost of Goods in Process 4.Cost of Goods Manufactured 5.Goods Available for Sale 6.Cost of Goods Sold Determine the following 1. Net Sales 2. Total Manufacturing Cost 3. Cost of Goods Manufactured 4. Cost of Goods Sold 5. Net Purchases 6. Gross Profit 7. Net Income Beginning Raw Materials 500,000 Net Purchases 2,000,000 Ending Raw Materials 300,000 Direct Labor 3,000,000 Factory Overhead 1,300,000 WIP, Beginning 900,000 WIP, Ending 1,000,000 Finished Goods, Beginning 1,600,000 Finished Goods, Ending 1,500,000 Sales 10,000,000 Beginning Inventory 500,000 Ending Inventory 200,000 Purchases 2,000,000 Sales Return and Allowances 200,000 Sales Discount 1,400,000 Purchase Discount 155,000 Purchase Return and Allowances 115,250 Freight In 230,000 Selling Expense 300,000 Administrative Expenses 200,000  AND INTERPRETATION OF FINANCIAL STATEMENTS B a c k N e x t  Content Standard The learner demonstrate an understanding of the methods or tools of analysis of financial statements to include horizontal analysis, vertical analysis, and financial ratios to test the level of liquidity, solvency, profitability, and stability of the business.  Performance Standard The learners are able to solve exercises and problems that require computation and interpretation using horizontal analysis, vertical analysis, and various financial ratios  Most Essential Learning Competencies The learner b. compute and interpret a. a. perform vertical perform and vertical horizontal analyses financial ratios such as and of financial statements horizontal of a single current ratio, working capital, proprietorship analyses of financial gross profit ratio, net profit b. compute and interpret ratio, financial receivable ratios turnover, statements such as current ratio, working inventory of turnover, a single capital, gross debt-to- proprietorship profit ratio, netequity profit ratio, receivable and the like turnover, inventory turnover, debt-to-equity FINANCIAL ANALYSIS it is the use of the company’s FS to measure the entity’s financial position and performance. It provides information on the following areas: LIQUIDITY, SOLVENCY, STRUCTURE and PROFITABILITY  LIQUIDITY SOLVENCY Pertains to the company’s ability to meet its pertains to the company’s ability to meet its long-term currently maturing obligations. In short it is the obligations. It provides measures on whether the company’s assets are sufficient to cover for their capability to pay for short term debts. liabilities. STRUCTURE PROFITABILITY pertains to the company’s dependence on creditors or own indicates measures on how well a company equity. It provides insights on whether a company is geared performed on their operations. It provides towards finances coming from their equity or those provided information as to the performance of the company by creditors. regarding their income and expenses. METHODS IN ANALYZING FINANCIAL STATEMENTS FINANCI HORIZONTAL VERTICAL ANALYSIS ANALYSIS AL RATIOS  The company will compare their own financial statements for the current period with their FS HORIZONTA from the prior period. The prior period amount serves as the basis or L ANALYSIS the starting point of the comparison. Increase or decrease are being take and such will be measured in percentages. Companies express items of a certain FS as a VERTICAL percentage of a given base amount. Items in SFP are compared to total assets, ANALYSIS while SCI items are compared to net sales of the accounting period.  makes use of the relationship of FINANCIAL accounts through ratios and RATIOS percentages. MANAGEME PROFITABILI LIQUIDITY TY NT STABILITY RATIO EFFICIENCY 1.GROSS 1. Current Ratio 1. 1. DEBT RATIO PROFIT 2. ACID TEST RECEIVABLE 2. EQUITY MARGIN RATIO or QUICK TURNOVER 2.NET PROFIT RATIO RATIO 3. DEBT to MARGIN 3.WORKING 2. INVENTORY 3.RATIO of CAPITAL TURNOVER EQUITY RATIO RETURN on EQUITY  Pertains to the company’s ability to meet its currently maturing LIQUIDITY obligations. In short it is the capability to pay for short term debts. Current Ratio Formula: TOTAL CURRENT ASSETS Description: Tests the ability of the TOTAL CURRENT company to pay its current obligations LIABILITIES ACID TEST RATIO or QUICK RATIO Formula: Total Quick Assets* Description: a more strict test of the Total Current company’s ability to pay current obligations. Liabilities Inventory and prepaid assets are *Quick Assets: Cash + Marketable securities removed from the equation. + Accounts Receivable WORKING CAPITAL Description: Excess of current asset after covering the current liabilities. Formula: Current Assets – Current Shows the remaining amount of Liabilities current  pertains to the company’s ability to meet its long-term SOLVENCY obligations. It provides measures on whether the company’s assets are sufficient to cover for their liabilities. DEBT RATIO Formula: Total Description: Shows the Liabilities proportion of all assets that are Total financed with liabilities. Assets EQUITY RATIO Formula: Total Equity Description: Shows the Total proportion of assets from owners. Assets DEBT to EQUITY RATIO Formula: Total Description: Measure Liabilities debt about equity  pertains to the company’s dependence on creditors or STRUCTURE own equity. It provides insights on whether a company is geared towards finances coming from their equity or those provided by creditors. RECEIVABLE TURNOVER Formula: Description: Tests the Net Credit Sales efficiency of managements’ Average Accounts collection of receivables Receivable (net) INVENTORY TURNOVER Formula: Description: Determines the Cost of Goods Sold efficiency of the company in managing Average Merchandise the business. Inventory  indicates measures on how well a company performed on their operations. It provides PROFITABILITY information as to the performance of the company regarding their income and expenses. GROSS PROFIT MARGIN Description: Determines the Formula: Gross Profit percentage of profit generated after deducting Cost of Goods Sold. Net Sales NET PROFIT MARGIN Formula: Net Profit Description: Determined the percentage of profit after adding all Net income and deducting all expenses. Sales RATIO of RETURN on EQUITY Formula: Description: measures rate Net Income of return on resources provided Average Ordinary by owners. HORIZONTAL ANALYSIS VERTICAL ANALYSIS  Equal Company Statement of Financial Position December 31, 2016 2016 AS SETS Current Assets Cash 190,000 Accounts Receivable, net 102,000 Inventory 55,000 Short-term Investments 20,000 Prepaid Expenses 8,000 Total Current Assets 375,000 Non-current Assets Land 800,000 Building, net 480,000 Machinery, net 290,000 FINANCIAL Furniture and Fixture, net Long Term Investments 96,000 80,000 RATIOS Total Non-Current Assets 1,746,000 Total Assets 2,121,000 LIABILITIESANDEQUITY Current Liabilities Accounts Payable 55,000 Short term Liabilities 50,000 Total Current Liabilities 105,000 Non-current Liabilities Long-term Debts 100,000 Bonds Payable 90,000 Total Non-Current Liabilities 190,000 Total Liabilities 295,000 Total Capital 1,826,000 Total LiabilitiesandCapital 2,121,000  Equal Company Income Statement for the year endedDecember 31, 2016 Net Sales 120,000 Cost of Goods Sold 60,000 Gross Profit 60,000 Administrative Expenses 10,000 Selling Expenses 6,000 Net Income 44,000 LIQUIDITY CURRENT RATIO Formula: Total Current Assets Total Current Liabilities 375,000 105,000 Current Ratio = 3.57:1 Interpretation: This means that for every 1 peso current liability of the company, they have approximately 3.57 current assets to pay for it. ACID TEST RATIO or QUICK RATIO Formula: Total Quick Assets/ Total Current Liabilities Quick Assets: Cash + Marketable Securities + Accounts Receivable = 190,000 + 20,000 + 102,000 Quick Ratio = 312,000/ 105,000 = 2.97 : 1 Interpretation: This means that even if the inventory and prepaid assets are removed. The company is able to meet their current obligations. For every 1 peso of current liability, they have an estimated amount of 2.97 pesos to cover for it. WORKING CAPITAL Formula: Current Assets – Current Liabilities Computation: 375,000 – 105,000 Working Capital = 270,000 Interpretation: This means that the company has 270,000 pesos free current assets that they can use for the operations of the business STABILITY Debt Ratio Formula: Total Liabilities / Total Assets = 295,000 / 2,121,000 = 13.9% Interpretation: This means that 13.9% of the company’s asset are being financed by creditors EQUITY RATIO Formula: Total Equity / Total Assets = 1,826,000 / 2,121,000 Equity Ratio = 86.1 % Interpretation: This means that 86.1 % of the company’s assets are being financed by the company’s own capital. DEBT to EQUITY RATIO Formula: Total Liabilities / Total Equity = 295,000 / 1,826,000 = 16.16% Interpretation: This means that compared to the total equity, the liabilities represent only around 16.16% of the company’s capital MANAGEMENT EFFICIENCY RATIO 1. Receivable Turnover Formula: Net Credit Sales / Average Accounts Receivable (net) = 120,000 / 102,000 = 1.18 times Interpretation: The low receivable turnover indicates the inefficiency of the company in collecting their receivables. This maybe because of poor credit and collection policies. 2. Inventory Turnover Formula: Cost of Goods Sold / Average Merchandise Inventory = 60,000 / 55,000 = 1.09 times Interpretation: The low inventory turnover indicates the inefficiency of the management in managing inventory. This could indicate that the company is storing too much inventory about its ability to sell. PROFITABILITY 1. Gross Profit Margin Formula: Gross Profit / Net Sales = 60,000 / 120,000 = 50% Interpretation: This means that after deducting cost of goods sold, 50% of the net sales is left and is available for other expenses. 2. Net Profit Margin Formula: Net Profit / Net Sales = 44,000 / 120,000 = 36.67% Interpretation: This means that after all the income and expenses have been considered 36.67% of the net sales is left for the company 3. Rate of Return on Equity Formula: Net Income / Average Equity = 44,000 / 1,826,000 = 2.4% Interpretation: This means that the owner was able to get returns equivalent to 2.4% of his investment in the company based on the performance of the company this year. THANK YOU 