Intro To Financial Statement Analysis COM5024 PDF

INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 ★ Net Income: The Bottom Line. Company’s TUE AUG 13, 2024 profitability over time...

INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 ★ Net Income: The Bottom Line. Company’s TUE AUG 13, 2024 profitability over time Statement of Cash Flow ARCSI ★ Shows company’s activities which affects their company’s cash which cannot be seen in an Analyzing income statement ★ Analyze source documents ★ Ex. dividends, loans ★ ex. cash, bank, sale and purchase ★ To know how to allocate the business’ money Recording ★ To know the inflow and outflow of money ★ Making Journal Entries ★ Journal - The process of chronologically INTERNAL AND EXTERNAL USERS OF BUSINESS ACCOUNTING recording of business transactions INTERNAL: Owner, employees, stockholders ★ The accounts are classified by dates EXTERNAL: Banks, competitors, suppliers, lessors Classifying ★ Trials accounts Summarizing TRIAL BALANCE ★ Trial Interpreting ★ Financial statement It is a list of accounts with open balances in the ★ Chart of accounts -> Asset Liability -> Equity general ledger. it proves the equality of the debits Capital and credits in the general ledger in preparing the trial balance, write the heading FINANCIAL STATEMENTS provide a column for the accounts and two money columns - a debit and a credit Balance Sheet the accounts should be written in just one columns ★ Provides a snapshot of a company’s finances arranged in the following sequence : ★ Assets = Liabilities + Equities ★ Assets ★ To know what are the resources and creditors ★ Liabilities ★ Reflects what is the business’s performance: ★ Capital what is the ROI? ★ Income ★ Assets: Business’s Valuables. What the ★ Expenses company has. Current and long -term resources expected to provide economic benefits. Ex. TUE AUG 20, 2024 cash, inventory, equipment ★ Liabilities: Obligations a business owes and TOPIC OVERVIEW must fulfill. What the company owes. Ex. loans accounts payable A. What is a business? ★ Equity: Ownership’s Claim. Remaining value a. Types of Business after all debts are paid. Belongs to b. Types of Business (Nature of Operation) shareholders. Ex. retained earnings B. Form of Business Enterprises Income Statement a. Ownership Structure ★ Revenue - Expenses = Net Income (Loss) b. Advantages and Disadvantages of ★ Determines overall income to know if the Ownership Structures business profits or loses. Overall performance C. What is accounting? as a business over a month, quarter or a year D. Basic Purpose of Accounting ★ Revenue: Cash Inflow. Ex. Interest Revenue, E. Accounting Assumptions F. Accounting Principles Sales Revenue, Other Revenues ★ Expenses: The Costs of Business. Ex. Operating Expenses, Interest and Tax CHAPTER 1: INTRODUCTION TO ACCOUNTING Expenses and Cost of Goods Sold 1  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 WHAT IS A BUSINESS ★ Partnership (Advantage) - It will not be a burden since many people are going to One or two persons contributes, money, resources raise up the capital and skills to form enterprise or a business,you ★ Corporation (Advantage) - The more cannot forma business without a capital investors the more capital you have A business (enter Distribution of Profit and Losses To earn profit and to increase wealth of owners ★ Sole Proprietorship (Dis/Advantage) - Must engage: trading of goods and services Profit will only go to one person (Advantage), Losses will only have one TYPES OF BUSINESSES person responsible for (Disadvantage) ★ Partnership (Dis/Advantage) - Profit will For-Profit - Distributed to the owners be distributed to the co-owners as well as Non-Profit - To accomplish an advocacy, no the losses exchange of money or services and no expectation ★ Corporation - Will only distribute a portion of return of the profit through dividend to the shareholders TYPES OF BUSINESSES (NATURE OF Management Decision-Making OPERATION) ★ Sole Proprietorship (Advantage) - Direct decision making Service ★ Partnership (Disadvantage) - Partners ★ Skills of a person mahe have disagreements ★ It is a service if the service is the one payed ★ Corporations - Board of directors or initial Merchandising owners will be the one to create policies but ★ Reselling not the ones who will implement it. They will ★ Goods and products bring it to the management to implement Manufacturing the decision. ★ Manufacturers buy raw materials and Control in The Operation convert it into a finished product Taxation ★ Sole FORMS OF BUSINESS ENTERPRISES ★ Partnership - The business will be the one that will be taxed then the net income will OWNERSHIP STRUCTURE be distributed to the owners ★ Corporation (Disadvantage) - Has double Single/Sole Proprietorship taxation. The profit will be taxed at 25 ★ One owner percent, the dividends will be taxed at 10 ★ Only one stockholder percent ★ Sole Proprietorship and a One-Person Corporation WHAT IS ACCOUNTING? Partnership ★ Two or more owners but not exceeds 15 Corporation Art of recording, classifying and summarizing, in a ★ Manufacturers buy raw materials and significant manner and in terms of money, convert it into a finished product transactions, events, which are part of atleast of a financial character, interpreting the results thereof ADVANTAGES AND DISADVANTAGES OF OWNERSHIP STRUCTURES Is the process of identifying, measuring and communicating economic information to permit Raising/Starting Up Capital informed judgment and decision by users of the ★ Sole Proprietorship (Disadvantage) - information Capital is only limited to owner’s financial Is a service activity that provides quantitative capacity information, primarily financial in nature, about 2  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 economic entities, that is intended to be ★ Purchase = Expense, Sold = Income useful in making economic decisions ★ You cannot sell products without buying products to sell BASIC PURPOSE OF ACCOUNTING Historical Cost Principle ★ Assets are recorded at their original cost To supply financial information to help users to ★ Shows historical cost and depreciation help them make informed judgments and sound accumulation economic decision Full Disclosure Principle Ex. Banks, shareholders, customers ★ All relevant information ★ Attached in financial statements to explain ACCOUNTING ASSUMPTIONS the statements ★ Contingent liabilities Going Concern Assumptions Consistency Principle ★ A business will continue to operate ★ Straigthline = The cost of equipment - indefinitely estimated life of assets = depreciation ★ Assuming that the business will operate ★ How you compute the depreciation should long term be the same yearly Economic Entity Assumptions Materiality Principle ★ A business is separate from its owner ★ Only significant and relevant items should ★ What is for the business is for the business be recorded only, what is for the owners is for the ★ It is relevant when it can affect a certain owners only decision Monetary Unit Assumptions ★ Financial transactions are measure in a ELEMENTS OF FINANCIAL STATEMENTS specific currency ★ If a transaction is done from Country 1 to FINANCIAL STATEMENTS - Are formal records of Country 2, the currency of the money must a company’s financial activities be converted to the currency of Country 2 They provide a snapshot of a company’s financial Time Period Assumptions health at a specific point in time and its ★ Can be reported on a daily, weekly, monthly performance over a period or yearly basis These statements are crucial for decision-making ★ The lie of a business is divided into specific by various stakeholders, including investors, time periods for reporting purposes creditors, management, and government agencies The Primary Purpose of financial statements is to SIDE NOTE communicate financial information to stakeholders. Subsidiary: New business of a business They provide insights into a company’s: ★ Financial Position - A snapshot of what ACCOUNTING PRINCIPLES the company owns (assets), owes (liabilities) and is worth (equity) at a Guidelines on how accounting should be done specific point in time Revenue Recognition ★ Financial Performance - How profitable a ★ Revenue is recognized when earned company is over a specific period regardless of when cash is received ★ Cash Flows - How a company generates ★ Goods are delivered to the customers, and uses cash regardless if it is payed or not yet, revenue is still recognized ELEMENTS OF FINANCIAL STATEMENTS Matching Principle ★ Expenses are matched with the revenue Income Statement - Positive = Company is they help generate profiting, Negative = Company is incurring losses ★ No revenue of there are no expenses 3  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 Balance Sheet - Communicates ★ Inventory - Raw materials, work in progres financial position, ownership, residual ownership or finished goods for sale, sold to be Statement of Cashflow - Movement of Cash consumed ★ Operating ★ Supplies - Part of current assets that are ★ Investing not consumed ★ Financing ★ Prepaid Expenses - Have been paid in Statement of Changes in Equity - advance. Audit of Financial Statements = Notes of ★ ACRONYM: Cash, Receivable, Inventory Financial Statements - Describes information of (Stocks), Supplies, Pre-Payments income statement, balance sheet and statement of Non Current Assets - Provides future benefits cashflow ★ Property, Plant and Equipment (PPE) - Tangible assets. Ex. buildings, land, crop, FINANCIAL STATEMENTS trucks, machines ★ Intangible Assets - Patents, copyrights, Formal records of a company’s financial activities trademarks, goodwill, franchise Outcome of accounting process ★ Long Term Investments - Investments in Snapshot of a company’s financial health securities that will be held for more than Crucial for decision making of different one year stakeholders such as creditors, agencies and ★ Deferred Tax Assets - Tax benefits that government will be realized in future periods Purpose: Communication financial information to ★ ACRONYM: PPE, Intangibles and Other stakeholders Non Current Assets Liabilities - Obligations of the company to the 3rd INCOME STATEMENT party Current Liabilities - Obligations that the company Revenue depends on the nature of operation expects to pay within 1 year or the operating cycle. Expenses - Costs of sales = Puhunan Short Term Debts Operating Expenses - Employees salary, utilities, ★ Accounts Payable - Owed money of the rent company to the suppliers. To be payed. Revenue - Expenses = Net Income ★ Short Term Notes Payable - Short term *Income will be added to income statement loans supported by a promissory note or agreement between buyer and lender BALANCE SHEETS ★ Accrued Expenses - Has been incurred or consumed but not yet been paid. Ex. Asset = Liability + Equity Salary, Electricity, Rent Current Asset - What the company expects to ★ Current Portion of Long Term Debt - A convert into cash, sell or consume within a year or bond is a type of debt security where an operating cycle investor (Mr. A) loans money to a company ★ What the company uses in a day to day (Company A) in exchange for periodic basis interest payments and the return of the ★ Cash - Most liquid asset (can be used principal amount at maturity. The payment everywhere) companies cannot operate for the year of payment of Long Term Debt without cash; life and blood of a company is the Current Liabilities. ★ Short Term Investments - Investments in ★ Unearned Revenues - Paid to reserve a securities, can be converted into cash. product or services that are not yet ★ Accounts Receivable - Owed money buy received. customers. What companies expect to ACRONYMS: Accounts Payable, Notes Payable collect after delivering or doing a product or (Short Term Loans), Accrued Expenses a service sold on credit or agreed period. Non Current Liabilities - Debts payable for a long Realizable into cash term period, longer than one year or operating cycle 4  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 ★ Long Term Notes Payable - ★ Airlines - Carriers Income Loans that the company has to repay over Expenses a period longer than one year. Ex. Debts to ★ If there is a recognition of revenue then be paid for 5 years. Debts are paid there are expenses. regularly from a portion of the capital ★ Costs incurred by a company in the ★ Bond Payable - Long term debts securities process of generating revenue issued by the company. The debt will be ★ The Costs of Goods Sold or Costs of paid as a whole when the maturity date Service comes but the payment for interest based ★ Operating Expenses - Salaries and on principal amount is paid yearly Wages, rent Expenses, advertising ★ Mortgage Payable - Long term loan that is expenses, offiece expenses, utilities backed up or collateralized. Secured bind ★ Others - Interest Expense (Costs of by an asset or a collateral. Borrowing) ★ Deferred Tax Liabilities - Recognized as liabilities but not yet paid ACCOUNTING EQUATION ★ ACRONYM: Long Term Notes Payable, Bonds Payable, Mortgage Payable Assets should always be equal to liabilities and equity NOTE Assets = Liabilities + Equity Revenue or Income will already be Fundamental formula in accounting showing that recognized if it has been delivered it doesn't assets are equal to liabilities plus owner’s equity matter if is not paid or not Most fundamental in double entry bookkeeping If short term notes comes from short term Based on the principle that everything a loans then it is part of current liabiities, if it is company owns (assets) is owed to either from long term loans then it is part of non creditors (liabilities) or owners (owner’s current equity). Overdraft - Overwithdrawn Depicts relationships between accounts and how Credit card is paid ahead one transaction affects each other Debit (Dr) - LEFT Side of a ledger account. Incoming money.. It increases asset or expense Equity accounts and decreases liabilities, revenue or ★ Residual interest in a company’s asset after equity. deducting its liabilities. The owner’s stake. Credit (Cr) - RIGHT Side of a ledger account. ★ Sole Proprietorship/Partnership - Capital, Increases liability, revenue, or equity and how much money is put into the business decreases assets or expense accounts/ ★ Corporation - Equity, capital is from common stocks Outgoing money. ★ Financial statement may vary on the nature of the operation or the ownership structure Revenue ★ The income generated by a company from its primary operations. Comes from sales of goods and services ★ Sales revenue, service revenue, interest income ★ Merch - Sales revenue ★ Service - Service income ★ Banks/Lending Companies - Interest Income ★ Leasing of Properties - Rent Income ★ Schools - Tuition Fee Income 5  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 ★ To Prepare Financial Statements - once the trial balance is accurate, it serves as the basis for preparing financial statements such as income statements, balance sheets and statement of cash flows ★ To Identify Missing or Out-Of-Balance Accounts - can highlight any accounts that are missing or have incorrect balances. get the di erence between the debit and credits INCREASE IN ASSETS: DEBIT Acquisitions: Chart of Account ★ List of financial accounts and reference ★ Purchasing new assets, such as equipment, numbers, grouped into categories, such as property and inventory. If it is paid in cash assets, liabilities, equity, revenue and it can also decrease asset. expenses. Investment ★ Used for recording transactions in the org’s ★ Investing stocks, bonds, or other financial general ledger instruments. If paid in cash, it will decrease ★ Helps organizing T accounts assets Revenue ★ Generating income from sales of goods or DOUBLE-ENTRY ACCOUNTING SYSTEM services T-ACCOUNTS Increases in Account Receivable ★ When customers owe cash to the business Visual representation of a ledger account Ledger - Book of accounts to view debits and DECREASES IN ASSET: CREDIT credits separately Shaped like a capital T Depreciation, Amortization and Depletion Left Side: DEBIT ★ Allocating the cost of tangible assets like Right Side: CREDIT equipment over their useful lives Used to summarize ★ Depreciation - Decrease in tangible assets TRIAL BALANCE (PPE), decline in value of assets which are computed based on their useful life A list of all the general ledger accounts and their ★ Amortization and Depletion - Intangible corresponding debit or credit balances at a assets, value of intangible assets are specific point in time. crucial step in the computed based on their useful life accounting process as it helps to verify the Expenses accuracy of bookkeeping process ★ Using up assets to generate revenue )e.g KEY PURPOSES: paying salaries or rent) ★ Check For Mathematical Errors - to ensure Decreases in Accounts Receivable that the total debit must always be equal to ★ When customers pay o their debts. the total credit, helps identify errors in Collects debt to increases assets but recording transactions decreases accounts receivable Sales of assets 6  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 ★ Selling o existing assets for cash INCREASE IN CAPITAL/EQUITY: CREDIT INCREASE IN LIABILITIES: CREDIT Investments - Additional contributions of cash or other assets by the owner Borrowing - Taking out loads or issuing bonds to Net Income - When a business generates profits obtain funds. Ex. Short of Long Term that exceed its expenses Accrued Expenses - Expenses that have been Retained Earnings - When a company retains a incurred but not yet paid (e.g., accrued wages, portion of its net income instead of distributing it interest payable) as dividends Purchases on Credit - Buying goods or services on credit from suppliers DECREASE IN CAPITAL/EQUITY: DEBIT Unearned Revenue - Receiving payment for goods or services before delivering them Withdrawals - When the owner takes money or assets out of the business for personal use DECREASES IN LIABILITIES: DEBIT Net Losses - When a business’s expenses exceed its revenue, resulting in a loss Repaying Loans - Paying back principal and Dividends - Distribution of profits to the owners interest loans Paying Bills - Setting outstanding debts with ADJUSTING ENTRIES AND WORKSHEET suppliers or creditors Decrease in Accrued Liabilities - Paying o Concept of Adjusting accrued expenses ★ Transactions are entered as they occur throughout the year. ★ Adjustments are made at the end of the accounting period for items that do not involve exchanges with an outside party. 7  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 ★ Adjusting entries are journal entries made at the end of an accounting period to ensure that financial statements accurately reflect the company's financial position. REASONS TO ADJUST TRIAL BALANCE To report all revenues earned during the accounting period. To report all expenses incurred to produce the revenues earned in the accounting period. To accurately report the assets on the balance sheet date. Some assets may have been used up during the accounting period. To accurately report the liabilities on the balance sheet date. Expenses may have been incurred but not yet paid. COMMON TYPES OF ADJUSTING ENTRIES INCLUDE Accrued Expenses - Expenses that have been incurred but not yet paid (e.g., wages earned but not yet paid, interest accrued on a loan). Accrued Revenues - Revenues that have been earned but not yet received (e.g., interest earned on investments, rent earned but not yet collected). Deferred Expenses - Prepaid expenses that have not yet been used (e.g., insurance premiums paid in advance, supplies purchased but not used). Deferred Revenues - Unearned revenues that have been received but not yet earned (e.g., customer deposits, gift cards sold). Depreciation and Amortization: Allocating the cost of long-term assets over their useful lives. Bad Debt Expense - Estimating the amount of uncollectible accounts receivable. 8  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 Ex. Equipment wearing out, prepaid insurance, DEFFERED OR PREPAID EXPENSES supplies used up b employees earning salaries that have not yet been paid If the original entry is Prepaid Expenses, adjustment must be made for the Expense 3 IMPORTANT PRINCIPLES OF ADJUSTMENT Account. If the original entry is Expenses, adjustment 1. Revenue Recognition must be made for the Prepaid Expense Account. ★ Revenues should be recognized when earned, regardless of when cash is received from the customer. 2. Expense Recognition ★ Expenses should be recognized when incurred, regardless of when cash is paid 3. Matching Recognition ★ Proper matching of revenues earned during an accounting period with the expenses incurred to produce the revenues ★ Best measure of net income NOTE Income Statement - Earnings for a specific time period Balance Sheet - Reports the assets, liabilities and owner’s equity FISCAL YEAR 12 month accounting period that a business uses for financial and tax reporting purposes May not need to be the same as a calendar year NOTE Do not make a journal entry everytime supplies are used, one adjusting entry is made CHAPT 5: ADJUSTING ENTRIES AND WORKSHEET at the and of the accounting period. ADJUSTING ENTRIES NOTE Events that have not yet been entered into the accounting system. As supplies are used, an expense is Must be made before the preparation of financial incurred statements. For items that do not involve exchanges with an outside party. 9  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 ★ Cost remains on the books as long as the business owns it Useful Life ★ the period of time that an asset is expected to help produce revenue Depreciation ★ Method of matching an assets original cost against the revenues produced over its By making an adjusting entry that debits useful life. supplies Expense and credits supplies, you are taking the amount of supplies used ★ Straight-Line Method out of supplies and putting it in supplies expense ★ Salvage Value (Scrap or Residual Value) - The expected market value of an asset at the end of its useful life ★ Market Value (Expected Selling Price) - the amount an item can be sold for under normal economic condition ★ Depreciable Cost - The cost of an asset that is subject to depreciation ★ Plant Asset ★ Assets of a durable nature that are expected to provide benefits over several years or more ★ the business maintains a record of the original cost and the amount of depreciation taken since the asset was acquired (to estimate relative age of the assets) Contra-Asset (Opposite of an asset) - ★ An asset account with a credit balance that is deducted from the related asset account on the balance sheet ★ Used to reduce the value of a related asset account DEPRECIATION EXPENSE DEPRECIATION Historical Cost Principle An accounting method that spreads the cost of a ★ Assets are required to be recorded at their tangible asset over its useful life. It is a way to actual cost recognize the gradual decrease in value of an asset due to wear and tear, obsolescence or other factors 10  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 To allocate a certain percentage that cannot be collected If the property/equipment is acquired in between periods, only the first year will have a di erent amount of depreciation. We will only compute the depreciation for the number of months it has been used. If there are no date indicated, we assume that it WORKSHEET has been 12 month period Multi-column spreadsheet used in accounting to SCHEDULE OF DEPRECIATION facilitate the preparation of financial statements Temporary tool to organize and summarize Carrying or Book Value - When the cost of the financial data before the formal financial asset is depreciating the end balance is the statements are created carrying or book value of the asset 10 Columns Each columns are progressive Key Functions of a Worksheet: ★ Data Organization - Provide a structured format to list all general ledger accounts BAD DEBT EXPENSE and their balances An accounting term used to describe the ★ Trial Balance Preparation - It helps in anticipated loss a business will incur due to creating a trial balance, which is a list of all customers who fail to pay their debts. general ledger accounts and their balances ★ Trial balance comes from the summary of T A provision for the possibility that some customer accounts or general ledger accounts won't fulfill their financial obligation 11  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 ★ Adjusting Entries - Allows for 2. Adjusted Trial Balance CREDIT logic: An the recording of adjusting entries which are account with a normal credit balance will be necessary to ensure that revenue and increased by another credit balance and will expenses are recognized in the correct be decrease by a debit balance period ★ Important: show the e ect of the adjusting entries that is why we start with the unadjusted trial balance first then adjust transactions that are not recorded ★ Adjusted Trial Balance Preparation - It helps in preparing an adjusted trial balance, which reflects the financial position after considering adjusting entries ★ Financial Statement Preparation - It - Green: Credit provides the basis for creating the income - Yellow: Debit statement, statement of retained earnings and balance sheet PREPARATION OF BALANCE SHEET AND INCOME STATEMENT PREPARATION OF TRIAL BALANCE 1. EXTRACT ALL ACCOUNTS THAT BELONG TO INCOME STATEMENT AND BALANCE SHEET 1. Identify which accounts are 2. In preparation of the financial statement, we originally/normally debit and credit balance always prepare first the income statement 2. Allowance for bad debts accounts and followed by the balance sheet allowance for accumulated depreciation are CONTRA ASSET accounts which are deducted from the asset. Contra Asset Accounts are posted as a credit account 3. Debit and Credit totals must be equal and balanced 4. If the problem did not indicate the original entry, if there’s no ‘insurance expense’ and just ‘prepaid insurance’ then the original entry it the ‘prepaid insurance’ - Pink: Balance Sheet 5. Annual Depreciation - Assumed to have been - Green: Income Statement used within the 12 month period 6. Interest Expense - The company’s the one 3. When transferring from adjusting trial balance who loaned to income statement and balance sheet, make 7. Interest Income - The company lended sure you transfer the amounts not the 8. Principal x Rate x Time (Months/12) formulas. RIGHT CLICK THE CELLS IN ATB → PASTE SPECIAL → VALUES PREPARATION OF ADJUSTED TRIAL BALANCE 1. Adjusted Trial Balance EXCEL formula: PREPARATION INCOME STATEMENT ★ FOR DEBIT: = debit + debit- credit ★ FOR CREDIT: = credit + credit - debit 1. The di erence between the debit and credit is ★ Then copy the formula for the whole DEBIT what you call the NET LOSS or NET INCOME column and CREDIT column 12  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 2. If it is net income, the revenue is greater than the expenses. If net loss, the 3. Cell below total revenue: ‘Less Operating revenue is less than the expenses Expenses’ (salaries, advertising, depreciation) 3. Revenue - Expenses = NET LOSS OR NET → copy, paste specials & value → INCOME 4. total the expenses → deduct to revenue = net income/loss PREPARATION BALANCE SHEET 1. When credit is greater than debit, the di erence will be deducted to the capital account to reflect the net loss. The total will be equal if we deduct the di erence to the capital account. 2. Transfer net loss or income to balance sheet PREPARATION OF FINANCIAL STATEMENT: column BALANCE STATEMENT 3. If the original/normal entry is credit, a debit will decrease it ASSET 1. Start with heading: Company name → ‘Balance Sheet’ → ‘As of (ending date)’ 2. Asset → below asset: Current Asset → copy, paste special & values → Total Current Asset 3. CURRENT ASSET: Contra Asset Accounts will be deducted to Accounts Receivables, result is called NET REALIZABLE VALUE 4. Non-Current Asset → copy, paste special & values 5. NON-CURRENT ASSET: Contra Asset PREPARATION OF FINANCIAL STATEMENT: Account (depreciation of PPE) deducted to INCOME STATEMENT Plant/Property/Equipment is the BOOK VALUE or CARRYING VALUE 1. Start with heading: Company name → 6. *land doesn’t depreciate ‘Income Statement’ → ‘For the year __ 7. → Total Non-Current Asset → Total Asset → ending __’ add current and non current asset 2. Start first the revenues (services, interest), copy, paste specials & values → total revenue (=sum(cells)) 13  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 1. Check if balance sheet is balanced: Total Liabilities & Capital 2. If total liabilities & capital are the same as the total asset, the balance sheet is equal and balanced ACCOUNTING FOR MERCHANDISING (REPORTING OF SALES TRANSACTIONS) PREPARATION OF FINANCIAL STATEMENT Financial statements show you where a company’s money came from, where it went and where it is LIABILITIES & CAPITAL now 1. CURRENT LIABILITIES: copy, paste special & First thing to prepare: Income Statement will values for all current liabilities → Total Current show the company’s operation. whether the result Liabilities is an income or a loss, it will a ect the company’s 2. NON-CURRENT LIABILITIES: copy, paste equity. After the equity has been adjusted special & values for all non current liabilities → according to the income or losses, then we can Total Non Current Liabilities now proceed for the preparation of the balance 3. CAPITAL: copy, paste special & values capital & sheet drawing Balance Sheet will provide the information about 4. below CAPITAL: Add Net Income (Loss)/ Add the company’s financial position in terms of its Net Income → copy NET INCOME/LOSS from ownership (assets), obligations (liabilities), equity income statement then paste specials & value → (capital, residual interest of the owner) Total Current Liabilities → ‘Less: Drawing’ → Cash Flow Statement tells us how, where and Total Capital when did we get the sources or used. Inflow and outflow of cash. Movement of cash can come from operating activities, investment, or financing activities Income statements can come from operating and non-operating activities Statement of Comprehensive Income - These are made if there is a need to present or report 14  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 income generated from non-operating ★ We will also deduct the income tax (EBT x activities (i.e Discontinued Operation, Disposal of 25%) Result: Net Income After Tax (NIAT) Assets ★ Sole Proprietorship Tax is progressive (the higher the income the higher the tax rate) TERMS ★ Net Income - Gross Income is greater than the operating expenses NET PROFIT ★ Net Loss - Gross Income is less than the ★ Measure of profitability of the company operating expenses after taking into consideration all costs ★ net income after tax will be added or incurred during an accounting period deducted to the capital investment of the ★ The user of the financial statement would firm. if corporation: the NIAT will be added or know if the company is doing well or deducted to the retained earnings incurring losses that could lead to (accumulated income of the hirm) additional sources of income or EBITDA discontinuation ★ Earnings before interest, depreciation, INCOME STATEMENT taxes and amortization is a financial ★ The summary of a company’s financial measure to represent the cash flow performance over a specific period of time situation of a company (monthly, quarterly or annually) EBIT ★ COMPONENTS: Revenue or Income, ★ Earnings before interest and taxes (EBIT) Expenses, Profits (of Loss) i.e (revenue - is more commonly referred to as operating expenses) income or operating profit and is a measure ★ Cost - Puhunan of a company’s earning ability ★ Operating Expenses - Gastos PBT & PAT GROSS PROFIT ★ Profit Before Taxes - Earning just before ★ The di erence between the revenue making tax payments generated & cost incurred in making the ★ PAT - Earning post taxation. The net product to be sold or services to be earnings or net income or net profit or the rendered bottom line ★ Income that the company generated after RETAINED EARNINGS deducting the puhunan. ★ It is that part of the profit which is invested ★ Gross Profit Margin (GPN - Formula: back into the business. This is the value of GPM= Gross Profit/Net Sales. This formula net earnings invested back in the business shows us how much part of the net sales is after deducting the amount paid as the gross profit and how much part of the dividends to the shareholders net sales is the cost of goods sold ★ Net Sales is always 100% ★ After net sales, we deduct the operating expenses and the result will be EBITDA ★ We will also deduct the depreciation expenses, it is not included in the operating expenses because it is a non-cash expense ★ We will also deduct the interest expense EBIT ★ Then compute the interest expense 15  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 Types of SALES MULTIPLE-STEP INCOME STATEMENT ★ Cash Sales - Customers pay cash. Debit: Cash, Credit: Sales Detailed steps, shows each parts separately ★ Credit Sales - Business to business To measure the profitability easily transactions. Purchases are in the form of credit. i.e wholesale manufacturer to the SINGLE STEP INCOME STATEMENT wholesaler. Debit: Accounts Receivable, Credit: Sales Two Major Parts: ★ Advance Payment Sales - Unearned ★ Net Revenue - All the sources of income income. Advance payment or deposits from (primary and secondary) customers to reserve the goods. Debit: ★ Cost & Expenses - All the expenses & Cash, Credit: Advance Payment/Unearned costs Income Net Revenue - Cost & Expenses = Net Income To see income of the company ACCOUNTING FOR MERCHANDISING (REPORTING OF SALES TRANSACTIONS) Consider the perspective of the seller and the buyer The company buys goods from the seller, it is called a purchase. Company sells the goods to the buyer, it is called sales. We account the purchases of goods and the sales RECORDING: SALES ON ACCOUNT of the good Mark Up - Basis of the company in pricing. NET SALES Mark Up as a Percentage of Cost ★ FORMULA: Cost x (1+ Mark Up %) = Sales SALE ★ Makes the selling price a certain percent ★ A transfer of merchandise from one higher than the original cost. business or individual to another in ★ To record sales: Debit: Accounts exchange for cash or a promise to pay Receivable, Credit: Sales cash → sales on account or credit ★ Matching Principle - If there is an income, ★ INVOICE - Document that supports the there is an expense. That is why we also transaction of sales. Information of the firm, account for the cost of sale. To determine details of the customer, details about the the e ect to the income sales ★ To record cost of sales: Debit: Cost of Sales ★ INTAX OR OUTPUT TAX - Everytime we (puhunan), Credit: Inventories (naibenta make sales, we charge customers with the ang inventories) output tax Considerations in Recording SALES ★ Type of Transactions ★ Mark Up - Determines how much is the sales & cost Mark Up as a Percentage from Sales ★ Output Tax ★ FORMULA: Sales/ (1+ Mark Up %) = Cost 16  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 much is the actual sales. To do that, ★ eg. goods are marked up 50%, therefore, the accounts receivable must be DIVIDED to cost is 50% of the sales 1+Output Tax giving us the amount of the ★ To record sales: Debit: Accounts actual sales, then, MULTIPLIED to output Receivable, Credit: Sales tax percent to give us the output tax ★ To record costs (sales/ (1+ Mark Up %): Debit: COGS, Credit: Inventories RECORDING: OUTPUT TAXES OUTPUT TAX ★ Value-Added Tax (VAT) levied on the sales of goods or services within a country (mandatory) ★ A type of Indirect Tax - Collected from the consumer but paid by the seller to the government ★ Input Tax - A company also pays VAT from suppliers. Input taxes are the taxes when we buy from suppliers. Output taxes are the taxes when we sell to buyers ★ FORMULA: Net Tax Payable = Output Tax - Input Tax Recording Output Taxes: ★ First, we need to know if the amount of the sales is exclusive of tax (no tax included yet), therefore, it will become an add on ★ It could also be inclusive of tax (the amount paid includes the tax) therefore, we have to separated the amount of sales by removing the VAT from the invoice price RECORDING: SALES RETURNS Sales Allowances ★ The company is establishing a certain percentage as an estimate or assumption that there could be a return during the ★ If you are given the invoice price, that is not period the actual sales yet. Therefore you have to remove the output tax to determine how 17  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 ★ If perishable goods, there is a high chance of return. If non-perishable goods, low percentage of return Sales Return ★ The actual return sales ★ Happens when the goods delivered are defective or doesn’t pass the expectation of the customer. ★ Decreases the accounts receivable ★ Immediately account costs too because the returns will increase the inventory ★ Credit Memo - Name of the customer, items returned, output tax. ★ If customer was charged with output tax on the original transaction, the output tax must also be deducted when goods are returned NET SALES FORMULA In computing for net sales, output tax is not included because it is separately taken as tax expense FORMULA: Net Sales = Gross Sales - Sales Return - Allowances - Discounts RECORDING: SALES DISCOUNT Trade Discount - To encourage sales, we do not account or record trade discount Sales or Cash Discount ★ To make a prompt payment, the earlier the customer will pay the better. The company can maximize the use of the cash. ★ Contra-Revenue Account - We deduct it from the revenue, sales discounts are debited ★ Discount is always deducted to the accounts receivable ★ Credit Terms - 18  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 Interest Expense COST OF GOODS SOLD ★ Cost of Borrowing Income Tax Freight In - Cost incurred to ship finished goods to ★ Income Tax = Income before Tax x 25% distributor or retailer Freight Out - Cost incurred to ship goods to customers INCOME STATEMENT OF A MERCHANDISING BUSINESS Perpetual Inventory System ★ Cost of goods sold is updated continuously as each sale is made. The system keeps track of inventory levels in real-time, adjusting for purchases, sales, and returns. Periodic Inventory System ★ Cost of goods sold is calculated periodically, typically at the end of the accounting period, based on a physical count of inventory. Net Sales ★ Net Sales = Sales - Sales Discount - Sales Return & Allowances Cost of Sale/ Cost of Goods Sold ★ COGS = Beginning Inventory + Purchases - Ending Inventory Gross Profit ★ Gross Profit = (Net Sales - COGS) ★ Gross Profit Margin = Gross Profit/Net Sales % Operating Expenses ★ OE = Administrative Expenses + Selling Expenses 19 INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 INCOME STATEMENT OF A MERCHANDISING BUSINESS 20  INTRO. TO FINANCIAL STATEMENT ANALYSIS [COM 5024] Prof. Imelda Angeles | 1st Term S.Y 2024-2025 FORMULA: ★ The invoice price is where we compute the outut tax. Invoice Price = Sales + Output Tax Remove output tax from the invoice price to get sales INCOME STATEMENT-VERTICAL ANALYSIS/COMMON SIZE INCOME STATEMENT Vertical Analysis - How much part is each of the components of the income statement. Ex. how much part of the net sales is cost of goods sold, how much part of net sales is the gross profit The Net Sales is always 100 percent - Net Sales is the basis of computing the vertical analysis How much COGS= COGS/Net Sales How much Gross Profit =GP/Net Sales How much Operating Expense= OE/Net Sales How much Net Profit= NP/Net Sales In computing the vertical analysis of the income statement, always use the markup to determine the cost of goods sold 21