Pharmaceutical

Accounting

Liabilities
Obligations of a company to
suppliers, banks, public, other
companies, government and
company employees and officers
Claims against the entitys assets
(e.g. mortgage loan or secured longterm debt)
Obligations to outside parties arising
from the events that have already
occured

Current Liabilities
These are obligations satisfied either
by the use of current assets or by
other current liabilities

Four Types of Current

Liabilities
1. Accounts Payable claims of suppliers arising
from their selling of goods and services to the
entity for which they have not yet paid.
2. Notes Payable or Short-term Loans refer to
the amounts owed to financial intermediaries
which supply funds instead of goods and
services.
3. Accrued Expenses amounts earned by
outside parties but not yet collected or paid
by the entity (e.g. wages and salaries owed
to employees but not yet paid by the entity)

Four Types of Current

Liabilities
4. Defferred Revenues, Unearned
Revenues or Precollected Revenues
liabilities that arise where the entity
has received advance payments for
goods and services to be rendered in
the future
Current Portion of Long-term debt
refers to that part of a long term loan
due within the next year.

Owners Equity
Claims of owners in the business
Sheet reflecting the amount of the
owners investment in the entity
referred to as shares of stocks
Shareholders equity or stockholders
equity

Two Categories of Shareholders

Equity
1. Paid-In Capital or Contributed Capital
refers to the owners investment in the
business by purchasing shares of stocks
Two Types of Paid-In Capital
a. Capital Stock the value per share
times the number of shares outstanding
b. Additional Paid-In Capital the
payment of investors into the
corporation more than the stated value

Two Categories of Shareholders

Equity
2. Retained Earnings the difference
between the total earnings of the
entity from its inception to date and
the total amount of dividends paid
out to its shareholders over its
entire life
e.g. Retained earnings are
reinvested in business

ACCOUNTING EQUATION

ASSETS = LIABILITIES + PAID IN

CAPITAL + RETAINED EARNINGS

Current Ratio
The ratio of current assets to current
liabilities
Most current assets are converted into
cash within a year or less. Current
liabilities are obligations expected to
use cash within a year or less

Income Statement
A summary of the financial
performance of a company, reflecting
revenues, expenses and net income
This is prepared to show the variance
or the change in value of the owners
equity during a given period
REVENUES EXPENSES = NET INCOME
(LOSS)

Income Statement
REVENUE or SALES delivery of goods and
services to the intended customers
EXPENSES the use of resources to support
the revenue generating activities of a
company
NET INCOME or NET EARNINGS the
difference bet revenues and expenses. Net
loss if expenses are higher than income, or
net excess of all the revenues over all the
expenses

Income Statement
PROFIT or INCOME the amount by which
revenue exceeds expenses
NET LOSS where the total expenses
exceed total revenues
INTEREST the banks charge for services
in lending money to the borrower
INTEREST REVENUE the amount earned
by the bank when lending the money to
the borrower

Income Statement
COST a monetary measurement of the
amount of resources used for some purpose
EXPENDITURES decrease in cash or an
increase in accounts payable
EXPENSE an item of cost applicable to the
current accounting period
DISBURSEMENT payment of cash
GAINS increase in returned earnings
LOSSES decrease in retained earnings

Summary
Income statement or profit and loss
statement or statement of earnings
or statement of operations refers
to the accounting report expenses
of an accounting period. The
income statement shows the actual
results of operations and qualifies
the entitys profitability or loss
during a given period.

9 Types of Information found in an Income

Statement
1.
2.
3.
4.

5.
6.
7.
8.
9.

Name of the entity or corporation

Name of the statement: Income Statement
Time period: month, date, and year
Net Sales or Net Sales Volume, gross sales,
sales returns and allowances, trades
discounts, other revenues
Cost of sales or cost of goods or service sold
Gross margin
Expenses
Net Income
Statement of retained earnings

12 Accounting
Terminologies
1. GROSS SALES the total invoice / catalog price of
the goods delivered or services rendered during the
period, excluding Value Added Tax or Excise Tax
2. SALES RETURNS AND ALLOWANCES the sales
value of goods returned by customers and
allowances given to customers
3. SALES DISCOUNT the amount taken by the
customers either for prompt payment, volume
purchase or cash payments
4. TRADE DISCOUNT list price less deductions from
actual payments

12 Accounting
Terminologies
5. GROSS MARGIN or GROSS PROFIT the difference
between net sales revenue and cost of sales
6. NET INCOME referred to as the bottom line of
the income statement; also called net earnings; if
negative net loss
7. STATEMENT OF RETAINED EARNINGS or A
RECONCILIATION OF RETAINED EARNINGS
reflected separate page or at the bottom of the
income statement
8. GROSS MARGIN PERCENTAGE the gross margin
divided by the net sales

12 Accounting
Terminologies
9. PROFIT MARGIN the net income
divided by net sales
10. CASH BASIS ACCOUNTING an
alternative way of measuring income
11. ACCOUNTING PERIOD measures
activities for a specified interval of
time for a period of one year
12. MATERIALITY refers to disregarded
insignificant events

Cash Flow Statement

A summary of the change in assets
and liabilities and operating results
as they affect the cash position of a
company.
The sources of funds increase the
cash position of a company while
uses of funds decrease these cash
positions

3 Terminologies in Cash Flow

Statement
1. OPERATING ACTIVITIES the results
of companys sale of goods and
services
2. INVESTING ACTIVITIES the
purchase or sale of assets,
investments in new corporate share
3. FINANCING ACTIVITIES the change
in funding sources of the company,
e.g. additional loans, payment of
dividends

3 Purposes of the Cash Flow

Statement
Inflows

Outflows

A. Operating Activities
Reduction in Inventory
Reduction in Accounts Payable
Decrease in Prepaid Assets
Increase in Accounts Payable
Increase in Accrued Liabilities
Reduction in temporary investment

Increase in Inventory
Increase in Accounts Payable
Increase in Prepaid Assets
Reduction in Accounts Payable
Decrease in Accrued Liabilities
Increase in temporary
investment

B. Investment Activities
Sales of fixed assets and other
properties
Sales of financial investments and
holdings
Share of treasury of stocks

Purchase of additional
equipment

C. Financing Activities
New debt
Issuance of new equity shares

Payment of dividends

3 Purposes of Cash Flow

Statement
A. OPERATING ACTIVITIES
1. Cash inflows assoc with sales revenues
2. Cash outflows associated with operating expenses
1. Payments to suppliers of goods and services
2. Payments for wages, interest and taxes

B. INVESTING ACTIVITIES
1.
2.
3.
4.

Acquiring property, plant, equipment and investment in securities

Lending money e.g. loans receivable
Dispensing of long-lived assets
Collecting loans

C. FINANCING ACTIVITIES
1. Borrowing of cash e.g. NP, mortgages, bonds and other non-current
borrowings
2. Issuance of equity securities e.g. common or preferred stocks
3. Repayment of borrowings
4. Dividend payments and stakeholders
5. Use of cash to retire stock

Terms in Record Keeping

Fundamentals
ACCOUNT used for calculating the net change
T ACCOUNT all increases are listed on one side and all
decreases are listed on the other side e.g. inc in
cash(deposits) recorded in one column, decreases(checks
written) in another column
PERMANENT or REAL ACCOUNT the accounts maintained
for the various items on the balance sheets
TEMPORARY ACCOUNTS established for each revenue and
expense item appearing on the income statement
LEDGER a group of accounts e.g cash accounts
CHART OF ACCOUNTS a prepared list of each item for which
a ledger account is maintained
DEBIT SIDE refers to the lefthand side of any account

Terms in Record Keeping

Fundamentals
CREDIT SIDE refers to the right-hand side of any account
DEBITS ORDER amounts entered on the left hand side
CREDITS ORDER amounts entered on the right-hand side
A TRIAL BALANCE a list of the balances in each account
during a given period of time where debit balances are in
one column and credit balances in another column
JOURNAL a chronological record of accounting transactions
reflecting the names of the account to be debited or
credited, the amounts of debits and credits
AUDIT TRIAL an approach of tracing the amounts in the
legder back to their sources
LEDGER FOLIO the page reference to the ledger where the
entry is to be made

Transactional Analysis
2 Basic Identities
1. Asset = Liabilities and Owners
Equity
2. Debits = Credits

Steps in the Accounting

Cycle
1. Analysis of Transactions the process of deciding which
accounts is to be debited or credited and in what amounts
2. Journalizing Original Entries recording the results of the
transaction analysis in the journal
3. Posting the process of recording changes in the ledger
accounts as called for in the journal entries.
4. Adjusting Entries these are journalized and posted
similarly as original entries
5. Closing Entries these are journalized and posted
6. Financial Statement prepared based on sound judgement
Accounting Cycle, therefore refers to the sequence of steps
leading to the preparations of financial statements

Summary Steps in the Accounting

Cycle
1. Analysis of Transaction where the bookkeeper
determines the nature of the transaction and the
accounts affected
2. Recording the Transaction in a Journal using the
debit-credit mechanism
3. Summarizing the transactions in accounts
transactions in special journals that collect the total
amount of transactions in accounts called the ledger
accounts
4. Preparation of Adjustment Entries duly authorized
by management and recorded in the general journal
5. Preparation of Financial Statements

Two Rules of Recording Transactions

Debit means the left-hand side of an
account and used to record a
transaction that:
1. Inc an assets account
2. Dec a liability account
3. Dec an owners equity account
4. Dec a revenue account
5. Inc an expense account

Two Rules of Recording Transactions

Credit means the right-hand side of
an account used to record a
transaction that:
1. Dec an assets account
2. Inc a liability account
3. Inc an owners equity account
4. Inc a revenue account
5. Dec an expense account

The Accounting Cycle

1. JORNALIZE IN :
2. POST TO:
3. PREPARE :
4. COMPLETE :

General Journal Book

Cash Receipts Book
Cash Disbursement
Book
Sales Book
Purchase Book
Ledgers
Trial Balance
Working Papers

Prepare and Post

Adjusting Entries

Prepare

Income Statement
Balance Sheet

Prepare and Post

Closing Entries

Prepare

Post Closing Transaction

Book

Financial
Statements

Objectives of the Accounting

System
1. To efficiently process the information
at the least cost possible
2. To promptly obtain accurate reports
3. To minimize the possibility of theft
or fraud

Two Types of Business Firms

A. According to output (what they produce
for society)
1. Service firms
2. Merchandising firms
3. Manufacturing firms
B. According to their organization
1. Proprietorship
2. Partnership
3. Corporation

Two types of Corporation According

to Distribution of Stock Certificates
1. Open corportation
2. Closed or family-owned corporation

Two Types of Corporation According

to Distribution of Profits
1. Profit Organization
2. Non-profit Organization

Financial Ratio Analysis

Financial ratios useful for evaluating
the past financial performance of a
company
-answer questions involving a
companys financial status,
competitive position, influence in the
industry, and performance

Types of Financial Ratio

Analysis
1. Profitability Ratios relationships
between income and sales or investments.
These ratios provide a basis for
determining the ability of the company
a. To be efficient by generating income from
eveery peso of sale revenue; and
b. To reward shareholders with profits and
dividends
Profitability ratios measure the ability to generate
returns on the capital and assets employed.
These ratios show the rewards to shareholders

Gross profit margin ratio reflects

the companys ability to recover its
purchased cost of merchandise from
ratios
Net profit margin ratio is a bottom
line ratio indicating the companys
ability to generate income for its
stockholders

Return on investment ratios measures the

returns to stockholders after payment of
interest and taxes.
The higher the return on equity ratio, the
greater the capacity of the company to
generate returns, and the more successful is
the shareholders investment
Return on stockholders equity (ROE)
ratio shows the earnings of stockholders for
a given period as a ratio of their investment

 Return on Assets (ROA)

measures the efficiency in the
employment of assets. Assets
generates income. Shareholders or
creditors finance these assets

2. Turnover or Asset-utilization ratios

are indicators of the capacity of a companys
assets to generate sales. Turnover ratio
relates sales to investment in assets.
Turnover ratios measure the potential of
assets to generate sales or to be converted
to cash.
Total asset turnover ratio reflects the
efficiency in asset utilization

 Accounts Receivable Turnover relates

credit sales to accounts receivable. It
indicates the productivity if accounts
receivable in terms of revenue and the
efficiency of the credit and collection
department

Inventory Turnover ratio of cost of goods

to average inventory. Management would
like to minimize inventories for any given
level of sales.
Inventory turnover =

3. Liquidity Ratios measure a companys

capacity to meet obligations using its current
assets.
Current Ratio relates current asset and current
liabilities
Quick Ratio measures the firms capacity to
cover its short-term obligations using only its
more liquid assets. It measures the safety
margin for payment of current debt if there is
shrinkage in value of cash and receivable, and
inventory could not be sold immediately

4. Leverage ratios indicate the overall

independence of the company on external financing.
Financing from creditors carries a contractual
obligation for payment of interest and principal that
must be met by a company regardless of business
conditions
Leverage ratios measure the relative level of debt in
the capacity of the company to service debts
Total debt to asset ratio the proportion of total
liabilities to assets
Debt to equity ratio ratio of long-term to total equity.
This ratio measures leverage which is the use of
long-term debt to finance a companys requirements