Statement of Financial Position  Typical Type of Revenue as follows:

1. Sales
 SFP is composed of the following elements: Assets, Liabilities, and
2. Service Income
Equity. The accounts in the balance sheet is called real accounts.
3. Rent Income
Real accounts are accounts where their balances are carried forward
4. Interest Income
into the next accounting period. Hence, these accounts always have
5. Royalty Income
a closing balance.
6. Gain from sale of other assets
 Formula: Asset = Liability + Equity
 The term “net” means something has been deducted.
 Assets – Debit is the normal balance. There are many kinds of assets
 Sales Return and Discount accounts – Contra-revenue account
and they classified as Current and Noncurrent.
 Cost and Expenses – Debit is the normal balance. Cost in this
 Current Assets – Cash and other assets that are expected to be
context means direct cost in selling the merchandise or rendering the
converted to cash within a year.
services.
1. Cash and Cash Equivalents
Less: Cost of sales
2. Inventories – Represents cost of unsold merchandise
Inventories - beginning 25,000
3. Prepaid Expenses – Expenses not yet incurred but paid in Purchases 1,220,000
advance. Freight-in 32,250
4. Receivables – Is a general term that refers to the company’s TGAS 1,277,250
right to collect payment from third parties. Inventories - ending (50,000) 1,227,250
(a) Advances to  Beginning inventories will form part of the Cost of Sales as they are
(b) Deposits for assumed to be sold during the year. Ending inventories are
(c) Receivables deduction from Cost of Sales since the amount is still unsold.
 Noncurrent Assets – Company’s long-term investments for which Purchases account is presented as its gross because there is no
the full value will not be realized within the accounting year. Purchase Discount or Purchase Return in the given example.
1. Property, Plant and Equipment  Purchase Discount is the opposite of Opposite Discount where the
a. Land company avails discount upon buying bulk amount of goods or by
b. Building paying within the discount period.
c. Equipment  Purchase Discount and Return accounts – Contra-purchase account
d. Improvements Less: Direct cost of services
2. Intangible Assets – Assets that are untouchable. Direct materials 440,000
3. Long-term Investment Direct labor 22,000 462,000
 Liabilities – Credit is the normal balance. These are the obligations
 Direct Materials (DM) means the materials used in order to render
of the company.
the service. In a parlor or salon type of business, DM includes
 Current Liabilities – Amounts due to be paid to creditors within one scissors purchased, shampoos, etc.
year.
 Direct Labor (DL) means salaries of employees who are directly
1. Trade and Other Payables
rendering the service. DL in a salon business includes hairstylists,
a. Notes and Loans Payable – Short-term
manicurists and pedicurists. The salaries of the salon’s office staff is
2. Accrued Expenses – Opposite of prepaid expense.
included in General and Operating Expenses as they are not directly
a. Accrued Utilities
rendering the service.
b. Accrued Salaries
 General and Operating Expenses are those ordinary and necessary in
c. Accrued Interest
the conduct of business.
3. Unearned Income – Represent income received in advance
Less: General and Operating
but not yet earned.
Expenses
 Noncurrent Liabilities – Long-term obligations payable for more Salaries and allowances 55.690
than one year. Utilities expense 44,182
1. Loans Payable – Long-term liability. Usually originate from Rent expense 34,125
borrowing from the banks. Dep. – building 14,325
2. Notes Payable – Long-term Dep. – delivery equipment 13,425
 Equity – Credit is the normal balance. Supplies expense 9,125
 To prepare the SFP simply: Dep. – furniture and equipment 9,075
1. First, list the assets, liabilities, and equity. Dep. – building improvements 8,245
2. Second, Identify the revenue and expense; any excess over Insurance expense 8,080
revenue and expenses will be included as part of the equity. Bad debts 7,825
3. Third, take note that beginning inventories will be expensed Dep. – land improvements 7,185 211,282
as it’s assumed that such is sold in the current year. Ending
inventories will be part of the Current Assets. Statement of Changes in Owner’s Equity
4. Fourth, all accounts with the same nature could be combined
in just one account.  The Statement of Owner’s Equity shows the changes in the capital
account due to contributions, withdrawals, and net income or net
loss.
Statement of Comprehensive Income  The title of the report is Statement of Owner’s Equity. For
partnerships, the title is Statement of Partner’s Equity and for
 Statement of Comprehensive Income was previously referred to as corporations, Statement of Stockholder’s Equity.
an income statement. (Profit & Loss)  Formula:
 Formula: 1. Vertical Analysis – (Item ÷ Total Asset) x 100
1. Net Income = Revenues – Expense 2. Horizontal Analysis – (Current Year – Base Year) ÷ Base
2. Gross Profit = Revenues – Cost of Goods Sold Year x 100
3. Operating Income = Gross Profit – Operating Expenses
4. Net Income = Operating Income + Non-operating Items
 The Income Statement has 2 basic elements: 1st is the Revenue and Cash Flow Statement
2nd is the Cost and Expenses. Accounts in Income Statement are
called nominal accounts.  A Cash Flow Statement is a financial statement that summarizes the
 Revenue – Credit is the normal balance. Revenue from sale of goods amount of cash and cash equivalents entering and leaving a
is recognized when the goods are delivered and title has passed company.
while revenue from sale of services is recognized when service has  The Cash Flow Statement has 3 components: Operating, Investing,
been rendered. and Financing Activities.
  Operating Activities – It includes any sources and uses of cash from Ratio Formula Significance
business activities. In other words, it reflects how much cash is Profit Margin on Net Income Measures the
generated from a company’s product or services. (Operations, Sales or Net Profit ÷ percentage of net
Current Liabilities and Assets) Exchange Net Sales income to sales
1. Receipts from sales of foods and services. EBIT Measures the
2. Interest payments Net Operating ÷ percentage on
Income to Sales Net Sales operating income to
3. Income tax payments
sales
4. Payments made to suppliers of goods and services used in
Return on Net Income ÷ Indicates whether
production
Investment Average Total management is
5. Salary and wage payments to employees Assets using funds wisely
6. Rent payments EBIT A variation of the
7. Any other type of operating expenses Net Operating ÷ return on total assets
 Investing Activities – It includes any sources and uses of cash from Income to Total (Equity + Interest- that excludes non-
a company’s investments. Changes in equipment, assets, or Capital bearing Debt) interest-bearing debt
investments relate to cash from investing. (Purchase or Sale of Non- from total assets
current Assets) Change in EBIT A variation of the
1. Purchase or sale of an asset Marginal ÷ net operating income
2. Loans made to suppliers or received from customers Profitability Rate Change in Capital to total capital ratio
3. Payments related to mergers and acquisition Net Income ÷ Measures the
 Financing Activities – It includes the inflow of cash from investors Return on Equity Average Total return on the
Equity carrying amount of
such as banks and shareholders, as well as the outflow of cash to
equity
shareholders as dividends as the company generate income. (Non-
current Liabilities and Equity)
 Liquidity Ratio – Measures the short-term solvency of financial
1. Dividends paid
position of a firm.
2. Sale or repurchase of company’s stocks
Ratio Formula Significance
3. Net borrowings
Current Ratio or Current Assets Test of short-term
4. Repayment of debt principal, including capital leases. Working Capital ÷ debt paying ability
 Inflows – Amount of money the company receives from its core Ratio or Banker’s Current Liabilities
business of manufacturing and selling finished products or providing Ratio
services. (Received from) Measures the
 Outflow – Payments for expenses. (Payments to) Quick Assets firm’s ability to
 Two Types of Preparation Method – Acid Test or Quick ÷ pay its short-term
 Direct Method - The direct method preferred by the Financial Ratio Current Liabilities debts from its most
Accounting Standards Board (FASB). The direct method lists cash liquid assets
receipts from operations and cash disbursements related to the without having to
rely on inv
operations that consumed cash.
 Quick Assets = Cash + Cash Equivalents + Net Receivables +
 Indirect Method - the indirect method preferred by most businesses
Marketable Securities
for its simplicity. The indirect method begins with the net income
 EBIT – Earnings before interest and taxes
from the income statement, which is then adjusted for noncash
items, such as depreciation.  Assets Management Ratio – Measures how the firm uses its assets
generate income and revenue.
Net Cash used in Investing Activities Ratio Formula Significance
Payment to acquire land (4,000,000) I/O Indicates if a firm
Payment for operating expenses (170,000) O/O Finished Goods or Cost of Sales holds excessive
Cash received from sale of equipment 450,000 I/I Merchandise ÷ stocks of
(3,720,000) (3,550,000) Inventory Average Inventory inventories that are
Turnover unproductive.
No. of Days in a
Net Cash used in Operating Activities Average Age of Year ÷ Inventory Measures the
Payment to suppliers (1,800,000) O/O Inventories or Turnover Ratio average number of
Additional cash investment 300,000 F/I Number of Days of Or days that inventory
Purchase of merchandise inventory (60,000) O/O Inventories Average Inventory is held before sale.
(1,590,000) (1,590,000) ÷ Average Daily
Cost of Sales
Net Credit Sales Measures the
Net Cash provided by Financing Activities Receivables ÷ average number of
Cash Investment 85,000 F/I Turnover Ratio Average Accounts days to collect a
Collection from customers 125,000 O/I Receivable receivable.
Cash withdrawal (70,000) F/O Number of Days in
Cash Payment for inventory (230,000) O/O Average Age of a Year ÷
510,000 15,000 Receivables or Receivables Measures the
Number of Days of Turnover Ratio average number of
Receivable or or days to collect a
Financial Statement Analysis Average Collection Average Accounts receivable.
Period Receivable ÷
 Financial Statement Analysis – Defined as the process of identifying
Average Daily
financial strengths and weaknesses of the firm by establishing
Sales
relationship between the items of the balance sheet and the profit Average Age of Measures the
and loss account. Operating Cycle or Inventories + average number of
 Horizontal Analysis or Trend Analysis – Comparison of two or Conversion Period Average Age of days to convert
more year’s financial data. Receivables inventories to cash.
 Vertical Analysis or Common Size Analysis – Procedure of Average Accounts Determines
preparing and presenting common size statements. Average Age of Payable ÷ whether the firm is
 Ratio Analysis – The most powerful tool of FS Analysis. Account Payable Average Daily paying its invoices
 Profitability Ratio – Measures the results of business operations or Purchases on a timely basis
overall performance and effectiveness of firm.
 Net Sales Measures the level
Fixed Assets ÷ of use of property,
Turnover Ratio Average Net Fixed plant and
Assets equipment.
Net Sales ÷ Measures the level
Total Assets Average Total of capital
Turnover Ratio Assets investment relative
to sales volume.
Measures the level
Total Capital Net Sales of total assets
Turnover Ratio ÷ having explicit costs
Total Capital relative to sales
volume.
(Total Capital, Measures the
200B – Total percentage change
Investment Rate Capital 200A) ÷ in total capital.
Total Capital, 200A

 Total Capital = Total assets having explicit costs (equity + interest-

bearing debt)
 Long-term Solvency or Leverage Ratio – Conveys a firm’s ability
to meet the interest costs and payments schedule of its long-term
obligations.
Ratio Formula Significance
Interest-bearing Interest-bearing Measures the extent
Debt Ration Debt ÷ (Equity + to which assets
Interest-bearing having explicit cost
Debt) (total capital) are
financed by interest-
bearing debt.
Total Debt Ratio Total Liabilities ÷ Measures
Total Assets percentage of funds
(Capital) provided by
creditors
Debt to Equity Total Liabilities ÷ Compares
Ratio Equity resources provided
by creditors with
resources provided
by shareholders
Debt to Tangible Total Liabilities ÷ A more conservative
Net Worth Ratio (Equity – Intangible measure of long –
Assets) term debt payment
ability than the debt
ratio or debt to
equity ratio.