MODULE-1-FOR-FAR 1 JULY 2024.pptx

FINANCIAL ACCOUNTING AND REPORTING For Service Providers and Merchandisers  MODULES 1. Introduction to Accounting and Business 2. Business and Accounting in the 21st Century 3. Analyzing Transactions to Start a Business 4. Accounting Equation Showing Revenues and Expenses 5. Double Entry...

FINANCIAL ACCOUNTING AND REPORTING For Service Providers and Merchandisers  MODULES 1. Introduction to Accounting and Business 2. Business and Accounting in the 21st Century 3. Analyzing Transactions to Start a Business 4. Accounting Equation Showing Revenues and Expenses 5. Double Entry Bookkeeping for A Service Provider 6. Payroll Accounting and other Selected Business Transactions 7. Completing the accounting Cycle for a Service Provider 8. Financial Statement Presentation, closing Entries, Financial Analysis 9. Accounting for a Merchandiser 10. AcclountingSystem: Using Special Journals 11. Completing the accounting process for a merchandiser Professor Zenaida Vera Cruz- Manuel  THE BASIC BUSINESS ENVIRONMENT Module 1 FINANCIAL ACCOUNTING AND REPORTING For Servicers and Merchandisers  Financial Accounting and Reporting- Part 1 LEARNING OUTCOMES The student should be able to: A B C Explain Net Worth Explain what a business is, Describe the Role of Accounting in business Define Assets and its objectives Business Transactions Define Liabilities Describe the types of business operation Financial Reports Give the Accounting Equation Enumerate and explain the Financial Information needs of the decision makers  The success of a business hinges on quality service and people. Accounting will show how the three kinds of activities are transformed into relevant financial reports to help the stakeholders make right and timely decisions. This chapter will illustrate the business activities, and how these are summarized into financial reports. The last part explains the financial information provided by the financial reports - profitability, liquidity and solvency. A summary of the very essence of accounting, its concepts and financial reports in Fig 1.2 next slide shapes the accounting environment. The shape is further crystallized with the preparation of the formal accounting records and the proper presentation of the financial reports in Chapters 5 to 7. FINANCIAL ACCOUNTING AND REPORTING For Service Providers and Merchandisers FINANCIAL ACCOUNTING AND REPORTING For Service Providers and Merchandisers FINANCIAL ACCOUNTING AND REPORTING For Servicers and Merchandisers  A) Explain net worth  Net worth is about your wealth and is measured in the form of properties or assets. DO IT!!! Look around you, what assets do you see?  Ifyou do not owe anybody, that means no obligations to be paid, then this wealth is your net worth. DO IT!!! Interview parents or relatives. What obligations do you owe?  Wealth or net worth gives a picture of your financial state. To measure net worth or wealth, you have to put a value or price to the assets or properties owned: WHAT IS NET WORTH AND WHY IS THIS IMPORTANT? Net worth represents your Wealth or Finance which is made up of properties or assets. You probably own several gadgets such as computer, cellphone, iPad, iPhone, as well as clothes, shoes, bags and which amount to two hundred thousand pesos (P200,000). These are your ASSETS that make up your wealth or NET WORTH. However, if the computer was purchased for forty thousand pesos (P40,000) using a credit card, then not all the assets belong to you. The credit company has a claim over the computer. This is a LIABILITY or obligation to pay which will decrease your net worth from P200,000 assets minus P40,000 liability equals your NET WORTH which is now only P160,000 in Philippine pesos. Net Worth affects your status in life. For one, a big net worth means a stable life. Second, knowing how much is your net worth helps you plan on how to improve it and make it grow. Knowing how much is your net worth at the end of every year will give you a clear picture of where your wealth or finances are going. Has it been growing (if you have more assets than liabilities) or deteriorating? From your P160,000 net worth, if you borrow cash of P50,000, will your net worth improve? No. Although your assets will grow, so will your liabilities, too. It is only profit that will make your net worth grow. You must put up a business to earn profit and make your net worth grow.  A) Explain net worth in an Accounting Equation THE BEST WAY FOR YOUR NET WORTH TO GROW IS TO PUT UP A BUSINESS. We express the business values in an accounting equation. Accounting equation for net worth:  Assets P96,000 – Liability P40,000 = Net Worth P56,000 Liabilities have priority over assets. Your claim as business owner comes from the business assets but only after considering the liabilities. The  equation can be expressed another way: Assets 96,000 = Liabilities 40,000 + Net Worth 56,000 Net  worth is also called owner’s equity, appropriately termed if you are talking about your own business venture.  A) Explain how net worth is measured Cellphone. P 10,000 Laptop 40,000 Dresses 12,000 Shoes 4,000 Bike 15,000 Jewelries 15,000 TOTAL P 96,000 Net worth is measured in terms of ______ such as the Philippine peso. Total assets which represents ones net worth amounts to P96,000. Cost Principle is one of the accounting principles which guides accountants in measuring the assets or properties owned which is called net worth.  A) define assets and liabilities.  Assets include cash and other properties owned, be it personal or real. It represents your net worth, if there are no obligations or debts.  But what if you purchased the laptop for P40,000 using a credit card? Then not all your assets really belong to you as the credit company has a claim over the laptop until it is fully paid. The obligation to the credit company or what you owe is called liability. From total assets of P96,000 deduct the liability of P40,000, this time your net worth (assets that you can really call your own) will only be P56,000: Total Assets P 96,000 Less liability 40,000 Net Worth P 56,000 DO IT!! What are the three business values ? What is another title for net worth?  Let’s Do It!! Assets – Liabilities= Net Worth Marny's Hostel showed the following which you should identify into two groups. Cash P120,000 Loan Due to BDO P280,000 Building 750,000 Payable to Suppliers 360,000 Food Inventory 120,000 Car 850,000 Equipment 100,000 Mortgage Payable 300,000 Furniture & Fixture 156,000 ASSETS LIABILITIES LIST DOWN THE ASSETS AND LIST DOWN THE LIABILITIES AND THE AMOUNTS AND PLACE THE THE AMOUNTS AND PLACE THE TOTAL TOTAL. Using the accounting equation: Total Assets P xxx - Total Liabilities P xxx = Marny Capital Pxxx Learning Outcome B. Business, and Accounting as Information Provider pages 5 to 11 of the textbook.  Explain what is business and how to keep it financially well.  Identify the users of accounting  Define accounting and explain its uses.  Describe the four financial reports prepared in business.  Illustrated in the next module pages 16 to 18 of the A business is an entity engaged in trade, an occupation or a professional practice. What is its primary motive? What form DO IT! Read page 6 And answer ex 3  of business would you want to put up? THE BASIC BUSINESS ENVIRONMENT DO IT  THE BASIC BUSINESS ENVIRONMENT  If you are using your money for a business venture, you must track down the following activities: from the money you put in, you buy goods and sell this at a mark up and collect the monies from the customers. Of course you may need cash to pay for rent, telephone, light and water to operate the business. Be sure you receive more money from customers/clients than what you spend for the cost of goods or services. The difference between what you received and what you paid is called profit. B. THE ROLE OF ACCOUNTING  Accounting does this for a business:  1) tracks down business activities,  2) analyzes, calculates and records these activities, and  3) prepares a progress report DO IT! Define Bookkeeping  What information will the progress report provide?  And who are the interested parties who need these information? ACCOUNTING AS A BUSINESS LANGUAGE Accounting is defined as a service activity whose function is to prepare financial reports that will provide relevant information about the business. It is difficult for users to make financial decisions that are not supported by facts. These facts are contained in the accounting reports. Accounting may also be defined as a process of recording, classifying and summarizing transactions and events which are financial in nature and interpreting the results thereof. Accounting is a bridge between the company and the interested parties or statement users. From the business activities which accounting accumulates, reports will be prepared and vital information communicated to the users. Accounting speaks in a language that users must understand, so that when they read the reports they will know what information it is trying to convey to the interested parties. BUSINESS ACTIVITIES ACCOUNTING REPORTS STAKEHOLDERS  Accounting as a language of business DO IT! Read page 10, 12 and 13. B. The Accounting Process DO IT! Define Accounting B. ACCOUNTING DEFINED  It is a _______ activity whose function is to prepare ___________ reports that will provide relevant __________ about the business to statement users also called ___________. They make _________ but these must be supported by facts. These facts are contained in the reports prepared in accounting.  Accountingmay also be defined as a process of recording, classifying and summarizing transactions and events which are financial in nature and interpreting the results thereof.  TYPES TYPESOF OFBUSINESS BUSINESSOPERATION OPERATION MANUFACTURING SERVICE MERCHANDISING Buys raw materials Provides service Buys and sells and converts these to clients and good to into finished customers. customers. products before Examples: Examples: shoe selling to customers. beauty parlor, store, bookstore, Garment factory, school, travel drugstore, and shoe factory, drug agency and supermarket laboratory. airline.  Solve ex. 1 and 2 page 19 of the textbook. DO IT- next slide  How a business earns profit Who Uses Accounting Data? USERS OF FINANCIAL INFORMATION Users of financial statements are called stakeholders. A stakeholder is a person or entity who has a “stake” or interest in the business. Aside from the owners or investors, the other stakeholders are the managers, lenders, suppliers, employees, government and customers. Investor or owner- the one who puts in capital (such as money or property) in a business endeavor. To minimize risk of losing money, an owner or investor must read the financial reports and seek answers to the following questions: 1) Is the business profitable? 2) Has it accumulated sufficient financial wealth to remain stable? Manager- the one who is responsible for running the business. Financial reports make it possible to evaluate performance of the business. 1) Are the plans being implemented beneficial to the business? 2) Is the business operating profitably? A lender or creditor (example Banco de Oro) assesses the paying ability of the business- borrower by reading the financial reports: 1) Will the business be able to pay its debt when it falls due? 2) Does it have liquid assets? A supplier (example Divisoria Textile Store) offers goods or merchandise on cash basis or on credit term. 1) If offered on credit, will the business who is buying merchandise (such as T Shirts) in bulk be able to pay its account on the date it becomes due? 2) Does it have liquid assets? The government seeks to answer the following questions by reading the accounting reports: 1) Is the business paying the right taxes? 2) Is it filing all the required documents? The employee wants: a) higher wages b) benefits c) good working conditions and d) security of  DO IT!!! Match the accounting users based on the questions asked? Matching Type: Can we afford to ask for medical care? _____ A. Financial Manager Is the company earning a satisfactory rate of return? _____ B. Creditor Do we have funds to expand or should we borrow? _____ C. Employees Is the cash sufficient to pay dividends to stockholders? _____ D. Customers Will the company be able pay for its short term debts? _____ E. Government Is the price of their product appropriate compared to _____ F. Investors prices of competitors? Are they overpricing products which are considered G. Financial basic needs? ______ Manager DO IT!! Answer exercise 4 DO IT!! 7. Various reports are prepared for the users. Identify the reports described below as either: A. audited financial statements B. tax reports C. managerial reports D special reports ____1. A comparative report of Philippine Airlines which shows a down trend of operation for three years starting 2019 as a result of the lockdown and travel restrictions. ____2. A performance report submitted to the Finance head of PAL showing the variances between the actual costs and expenses incurred in 2020 by the marketing department and the 2020 budget prepared for this department. ____3. A report prepared by the Finance Head of PAL and submitted to the judicial court in New York showing the proposed rehabilitation plan with capital infusion by Lucio Tan. ____4. A sales report for the Vice President for Sales of Philippine Air Lines showing number of flights and passengers based on specific routes being serviced. ____5. As the rehabilitation mentioned in 3) affected the operation of the company, comparative financial reports showing result of operation were prepared for the years ending December 31 2020 and 2021.  C. BUSINESS TRANSACTIONS A business starts with FINANCING activities. The owner “finances” the business with a start up capital in cash and other resources. If owner’s contribution is insufficient, additional financing can be extended by banks and other financing institutions. Financing activities also include withdrawals (capital withdrawn) made by the owner/investor as well as loans repaid to lenders. As a business needs resources other than cash to be able to operate, it engages in INVESTING activities such as the acquisition of properties in land, furniture, machineries and equipment. Eventually these properties are disposed or retired on its maturity date. A business engages in OPERATING activities to earn profit. Related to earning of income will be receiving money by selling goods or services. Related to incurring of expenses will be paying money for salaries and wages for services of employees, for rent DOwhen IT!! using office space, for utilities when using electricity and water, for transportation when riding in taxis, jeeps and buses and many 11. You are given some activities done by an owner-manager of a health resort. Based on these activities,identify it as Ai) financing B) investing C) operating D) personal activity Example (1) A Mr. Masikap is the owner of a piece of property situated in Tagaytay. He retired last March and decided to put up a health resort. (1) From his pension of P6,000,000, he invested P5,000,000 in the business. (2) He deposited the rest in his personal account. (3) He applied for a business loan from BDO and received cash of P5,000,000 to be paid in five instalments. (4) A building was constructed for the resort which amounted to P7,000,000. (5) P2,000,000 worth of furniture, fixtures and equipment were bought and paid in cash. (6) Total sales revenue of P1,200,000 was collected in cash. (7) P750,000 cash was paid for salaries, utilities and maintenance of the resort. (8) The first instalment for the bank loan was paid. Questions: a) How much was the net income earned by the resort? b) Give the cash balance after transaction 8 c) Give the net worth of Masikap after transaction 8. FINANCIAL REPORTS ILLUSTRATED As mentioned in the early part of this chapter, there are four financial statements from which vital information can be extracted: a) Income Statement- shows how wealth is produced by listing the revenues earned and expenses incurred by the business. b) Statement of Owner’s Equity- shows why the net worth changed by listing the activities that caused it to increase or decrease. c) Statement of Cash Flows- shows what happened to the cash by enumerating the activities of cash received and cash used by the business. d) Statement of Financial Position- shows how the wealth of the business stands by enumerating the assets, liabilities and net worth of the business. Doria Xerox Center Activities for June  The financial reports are illustrated using the business set up by Ms. Doria who opened a Xerox Service Center with the following business activities:  1) Invested on June 1 P300,000 out of her P480,000 pension.  2) She also borrowed from UCPB another P200,000 for use in the business.  3) With this she bought a copying machine for P450,000, and supplies for P20,000. The remaining P30,000 she set aside for operating needs of the business.  4) For June, she received P48,000 from the customers for reproduction work  5) She paid P5,000 for rent and P3,000 for power and water.  6) Of the supplies bought, 40% were used up. : DO IT ! Identify the business activities: a) financing, b) investing , c) operating DO IT ! Answers: Using the Doria problem in the previous slide , identify (by numbers) the following activities: Financing- Nos _1___, _2____ Investng- Nos ___3__, _____ Operating- Nos __4__, __5 and 6___ DO IT ! Answers: Using the Doria problem, prepare the reports (slide 40): profit statement (transactions 5, 6 and 7 will appear in this statement), capital statement (owner’s contribution and the net profit), cash flow statement (cash receipts and disbursements) and statement of financial position (assets, liabilities and net worth) Review slides 14 and 23. ACCOUNTING REPORTS ILLUSTRATED How to assess the Doria business using the accounting reports : The Income Statement or Profit Statement describes how the business operated or produced wealth over a period of one month. It lists the revenues (reproduction service of P48,000) earned and the expenses (operating expenses of P16,000) incurred by the business. A favorable operation called profit P32,000 was obtained since revenues exceeded expenses. The Statement of Changes in Owner's Equity explains what happened to her net worth. It grew from P200,000 to P232,000 because of the profit. There are four activities affecting owner’s equity or net worth 1) Investment (P300,000) 2) Withdrawals (none) 3) Profit P32,000 4) Loss (none) In this illustration only two of these factors were affected: investment and net profit. , What if the business incurs a net loss, what will be the effect on the DO IT assets and owner’s equity?  Accounting Reports explained The  Statement of Cash Flows explains why the amount of cash changed over a period of time. The report makes a listing of where the cash came from (investment, borrowing, operating, a total of P448,000) and where the cash was used (copying machine and expenses, a total of P378,000) resulting in a cash balance of P70,000 at the end of the month. The  Statement of Financial Position gives information about the financial status of the business by listing its assets (cash, supplies and copying machine) and liabilities (debt to pay BDO) and from which the net worth of the owner over the business is determined. In the above illustration, the scarce wealth (initially a total of P300,000) was used productively to earn profit (P32,000) which enhanced the wealth of the owner (P332,000). Total assets is now P532,000, but the bank has a claim of P200,000 over it, so net worth is only P332,000.  Accounting Reports explained  Profitability- the income statement shows whether the business is profitable. A list of _______ and ________ of a business for a period (say one month) shows whether the business is a ___________, or _________ or ________, Refer to page 9.  Solvency and Liquidity- The statement of financial position lists the ________ and _________ and shows whether the business is liquid or not. The ________ must be adequate to cover the _________ and leave a satisfactory net worth to make it financially strong to withstand financial pressures or problems like the pandemic. A business is _________ if it can pay promptly obligations which are immediately due. Liquid assets consists of ________, _______, and ________, A business which can stand financial pressure over a long period of time is ________.  Profitability, Solvency, and Liquidity are three very important information stakeholders will look for when reading the accounting reports.  In summary:  The accounting reports prepared are used to assess the following:  Is the business profitable?  Is the business liquid?  Is the business solvent? Let’s Do The Doria business shows it earned profit. Is it It!! also liquid and solvent?   Continue with the Doria illustration, refer to slide 40. The following transactions took place for the month of July. Sales amounted to P45,000. Paper and ink were purchased and paid for P8,000. Total supplies available amounted to P20,000, half of these were used up. Monthly rent was again paid. Power and water were paid but it increased by P1,500. Doria made a P2,000 cash withdrawal. She paid her UCPB loan for P50,000. Let’s Do It!! Let’s Do It!!  In summary:  The accounting reports prepared are used to assess the following:  Is the business profitable?  Is the business liquid? Is the Let’s Do business solvent? It!! The Doria business shows it earned profit. Is it still 12. Two business proprietors approached you for a loan. Maamo has a travel agency with assets worth P500,000 and liabilities of P200,000. Maganda has a beauty parlor with assets worth P400,000 and liabilities of P200,000. Both businesses are doing well and earning P100,000. They plan to borrow P300,000 and put up a branch. You will need to know: a. how much is net worth. The higher the net worth, the more solvent the business is. b. whether business is profitable. Compute for return on equity: net income divided by net worth x Let’s Do 100. Compute for return on assets: net income divided by assets x 100. It!! c. Based on a) who is more solvent? Based on b) who is more profitable? 13. Gary, a businessman, plans to sell his Rent A Car Agency and go abroad to join his family. He offers to sell his business to a friend, Willy. The assets amount to P1,500,000 but there is a liability amounting to a third of the assets. Willy wants to know what will be a fair price for Gary's business. He has only P750,000 and thinks that it may not be enough. You agreed to help her and asked for Gary’s statement of financial position. The assets include accounts due from clients P150,000 whose whereabouts Gally could not for certain know anymore except for one customer who owes him P50,000. Repair equipment is another asset listed in the statement as P500,000 which was bought ten years ago but is currently worth half its cost price. Given this information, what will be the revised total assets of the business and what will be its net worth to the owner? Will the money of Willy be sufficient to buy the business of Gary? Use the following as a guide: Reported net worth (assets less P xx liabilities) Less: Worthless receivables (xx) Decrease in value of equipment (xx) Revised net worth at its current market P value xx Can willy afford to pay? Compare the revised net worth with the money Willy has. Let’s Do It!!  16. Mr. Siojo opened an internet shop on October 1 with a cash investment of P200,000. After three months of operation, the following activities were given to you for study: Cash received from customers P205,000 Cash borrowed from the bank 150,000 Siojo’s cash withdrawal 15,000 Utilities, salaries, supplies and rent paid 115,000 Cash paid to the bank 50,000 Cash purchase for equipment 100,000 Cash purchase for furniture 25,000 The policy of the store is: No Credit allowed. Likewise, all expenses are paid in cash. Required: Follow the Doria format and a) Compute for the profit or loss after three months of operation. b) Prepare a statement of changes in equity for the three-month period. c) Compute Let’s Do for the cash flows for three months ending December. d) It!!Prepare a statement of financial position as at December 31.  16. The cash balance of Waterfront Hotel on December 31 of the previous year was P750,000. For 2024, the finance manager made the following forecast: a) Total revenues will amount to P1,200,000 but P200,000 will be uncollected. b) Total expenses will amount to P550,000 but P150,000 will be unpaid. c) Business loans will be paid P300,000. d) Owner’s personal drawings will amount to P100,000 e) New equipment will be acquired and paid in cash for P175,000. The forecast for cash is that this will decrease because of the loan payment and new equipment acquisition. Is the finance manager right? Use the following as a guide: Cash inflows from sales revenues P xx Less Cash outflows for: Expenses paid P xx Owner's cash drawing xx Payment of loans xx Let’s Do Acquisition of equipment xx (xx) It!!Net cash inflow (or outflow) during the month P xx Add: Cash balance December 31, 2023 xx Cash balance December 31, 2024 P xx 18. Refer to Exercise 17. Using the same information, what will be the projected net income of Waterfront Hotel? Use the following as guide: Sales Revenues earned (cash and credit) P xx Expenses incurred (cash and credit) xx Net Income P xx 19. Refer to Exercises 17 and 18. Using the same information, if the owner's equity was P1,250,000 on December 31 of the previous year, what was the owner's equity as at December 31 of the current year? Did the owner’s equity increase? Explain why or why not. Use the following as guide: Owner's Equity, Dec 31 2023 P xx Net Income xx Owner's Drawing ( xx) Let’s Do Owner's Equity, Dec 31 2024 P xx It!! TO MY DEAR COLLEAGUES, THANK YOU SO MUCH. MORE POWER AND GOD BLESS YOUR ENDEAVORS. YOURS TRULY, PROF ZEN MANUEL JULY 18, 2024  INTRODUCTION TO ACCOUNTING AND BUSINESS END OF MODULE 1 Manuel Zenaida Vera Cruz, Financial Accounting and Reporting 2024, (30th edition) Raintree Trading and Publishing, Inc.