REVIEWER IN ACCOUNTING
- The Two Biggest Classification of
TAXATION
TAXATION
- It is the process by which our
government, through our lawmakers,
raises income to pay its necessary
expenses.
- Tax Laws gives our government the
authority to collect the necessary taxes
from its constituents.
- Tax is the lifeblood
PURPOSE OF TAXATION
Primary Purpose of Taxation
- Promote the general welfare of the
people.
- Provide the proper funding needed to
run the government.
- Taxation is for public purpose.
Secondary Purpose of Taxation
- Regulatory
- Progressive Taxes: Taxation is used to
distribute wealth; equitable distribution
of income.
- Inflation is a situation wherein the
purchasing power of the peso will go
down due to rising prices of
commodities.
- Collection is an Administrative Function
while Levying is a Legislative Function.
BASIC PRINCIPLES OF A SOUND TAX
SYSTEM
1. Fiscal Adequacy
- The government should make sure that
the amount of revenue collected is
enough to shoulder different expenses.
2. Theoretical Justice
- The burden of taxation should be
proportionate to the ability of the
taxpayer to pay it.
3. Administrative Feasibility
- Tax Laws being promulgated by the
government should be capable of just
and equitable administration.
THREE INHERENT POWERS OF THE
GOVERNMENT
1. Eminent Domain - This is the power of
government to take private property,
upon payment of just compensation, to
be used for a public purpose.
2. Police Power - This is the power of the
government to make laws that will
promote public health, morals, safety,
and welfare for the people.
3. Taxation - The power of the
government to collect taxes that will be
used to finance the different projects
needed by the people.
INCOME TAXATION
income taxpayers are Individuals and
Corporations.
INDIVIDUALS:
a. Resident Citizen
b. Non-resident Citizen
c. Resident Alien
d. Non-resident Alien (NRA)
 Engaged in trade or business (NRA-
ETB)
 Not engaged in trade or business
(NRA-NETB)
o A non-resident alien individual is
considered to be engaged in trade or
business if he or she shall go here in the
Philippines and stay here for a total
period of more than 180 days during the
calendar year. If this qualification is not
met, he or she will be considered as not
engaged in trade or business.
KINDS OF INCOME
1. Compensation Income – This is the
income received by employees working
for different companies. This is usually
in the form of salaries, bonuses and
allowances.
2. Business Income – Generated by
entrepreneurs or by different
professionals like lawyers, doctors and
accountants. They do not work as
employees.
3. Passive Income - These are income
generated by different investments
made by the individual.
 For purposes of compensation income
and business income:
Gross Income – Allowable = Taxable
Income
STATEMENT OF CASH FLOWS
 Primary purpose is to provide
information about an entity’s cash
receipts and cash payments during a
period.
 Secondary objective is to provide
information on a cash basis about its
operating, investing and financing
activities.
THREE BUSINESS ACTIVITIES:
1. Operating Activities – involves the
cash effects of transactions that enter
the determination of net income, such
as cash receipts from sales of goods
and services and cash payments to
suppliers and employees for
acquisitions of inventory and expenses.
CASH INFLOWS:
 From sales of goods and services
 From return on loans (interest) and
on equity securities (dividend)
CASH OUTFLOWS:
 To suppliers for inventory
 To employees for services
 To government for taxes
 To lenders for interest
 To others for expenses
INCOME STATEMENT: ITEMS
CASH FLOW: Presents the movement in cash
during an accounting period from the Primary
Revenue Generating activities of the entity.
2. Investing Activities – generally involve
long-term assets and include: making
and collecting loans; acquiring and
disposal of investments and productive
long-lived assets.
CASH INFLOWS:
 From sale of property, plant and
equipment
 From sale of debt or equity securities
of other entities
 From collection of principal on loans
to other entities
CASH OUTFLOWS:
 To purchase property, plant and
equipment
 To purchase debt or equity securities
of the other entities
 To make loans to entities
INCOME STATEMENT: GENERALLY LONG-
TERM ASSET ITEMS
CASH FLOW: Includes the movement in cash
flow as a result of the purchase and sales of
assets.
3. Financing Activities – liability and
stockholders; equity items and include:
obtaining cash from creditors and
repaying the amounts borrowed;
obtaining capital from owners and
providing them with a return, return of
their investment.
CASH INFLOWS:
 From sale of equity securities
 From issuance of debt (bonds and
notes)
CASH OUTFLOWS:
 To stockholders as dividend
 To redeem long-term debt or
reacquire capital stock
INCOME STATEMENT: GENERALLY LONG-
TERM LIABILITY AND EQUITY ITEMS
CASH FLOW:
consists primarily of cash outflow on the
purchase of investments and fixed assets,
cash inflow from income from investments and
cash inflow from disposal of investments and
fixed assets.
TWO METHODS TO PREPARE STATEMENT
OF CASH FLOWS:
1. Direct Method (Income Statement
Method) – reports cash receipts and
cash disbursements from operating
activities. The cash flow from investing
and financing activities are calculated in
the same way under both the methods.
Advantage: it is more consistent with
objective of a statement of cash flows –
to provide information about cash
receipts and cash payments than the
indirect method.
2. Indirect Method (Reconciliation
Method) – is the most widely used
method for the calculation of net cash
flow from operating activities. Net cash
provided or used by operating activities
is determined by adding back or
deducting from net income those items
that do not effect on cash.
 As income statement and balance sheet
are prepared under the accrual basis of
accounting, it is necessary to adjust the
amounts extracted from these financial
statements in order to present only the
movement in cash inflows and outflows
during a period.
PURPOSE AND IMPORTANCE
 Provides importance insights about
the liquidity and solvency of a
company
 Enables analysts to use the
information about historic cash flows
to form projections of future cash
flows of an entity
 Serves to highlight priorities of
management
 Formula to compute cash payment to
suppliers:
Cash payments to suppliers = Cost of
goods sold (increase in inventory,
decrease in accounts payable; decrease
in inventory, increase in accounts
payable)
 ANALYSIS AND INTERPRETATION OF
FINANCIAL STATEMENTS
 Intracomparability – comparison
between prior period and current
period.
 Intercomparability – comparison of
FS between direct competitor
 Industry Standard – for open
market, FS compared with the
industry standard.
Ratio Analysis
- Expresses the relationship among
selected items of financial statement
data.
o A ratio that divides the sales by
assets will find the peso amount
of sales generated by every peso
of asset invested. It tells us the
efficiency of invested asset to
create revenue. This ratio is
called Asset Turnover.

BASIC TOOLS:
 Vertical Analysis (Common-size
Analysis) – shows each item on a
statement as a percentage of a base
figure within the statement.
o Vertical Analysis of Balance
Sheet. The total of assets and
the total of liabilities and
stockholder’s equity are
generally used as base
figures.
o Vertical Analysis of Income
Statement. Sales figure is
generally used as the base
and other components of
income statement
 Percentage of base = amount of
individual item / amount of base x
100
 Horizontal Analysis (Trend
Analysis) – shows changes in the
amounts of corresponding financial
statement items over a period of
time.
o The earliest period is usually
used as the base period and
the items on the statements
for all later periods are
compared with items on the
statements of the base
periods.
o May be conducted for balance
sheet, income statement,
schedules of current and fixed
assets and statement of
retained earnings.
 Dollar Change = amount of the item
in comparison year – amount of the
item in base year
 Percentage change = dollar change /
amount of the item in base year x 100
Profitability Ratios
- Measure the ability of the company to
generate income from the use of its
assets and invested capital as well as
control its lost.
o Gross Margin Ratio compares the
gross margin of a business to the
net sales. This measures how
profitable a company sells its
inventory or merchandise. It is
essentially the percentage mark-
up on merchandise from its cost.
 Gross margin = Net
Sales – Cost of
Goods Sold
 Net sales = Gross
Sales – (Sales returns
and allowance +
Sales discount)
 Gross margin ratio =
gross margin / net
sales
o Profit Margin Ratio measures
the amount of net income
earned with each peso

Financial ratios
- Mathematical comparisons of financial
statement accounts or categories
- It is the most common and widespread
tools used to analyze a business’
financial standing
Ratios
- Comparison based on proportions
- Raw computation of financial position
and performance
-