MANAGEMENT

ACCOUNTING
by: ELISA L. RICAFRANCA, MBA

Saturday | November 4, 2017

OBJECTIVES
• analyze why there is a need to reassess they way
people to handle business;
• understand how financial reports help in making a good
business decision;
• identify six financial statements and its functions;
• prepare an analysis using vertical, horizontal, and a ratio
analysis along with their interpretations.
Before
 Doing business was simple
 Few people were doing business
 Few people were patronizing the products and services
Now as population increases
 Businessmen and customers increases
 Business becomes complex
 Customer behavior shifted to a higher level
Effects:
 Businesses open local branches
 Some managers are now more educated and trained
in well known colleges and universities abroad
 Business are now accepting multi currency transaction
 Business centers are now open in bigger venues
 Accounting has entered a global milieu
 Business compete for total customer satisfaction
 Better quality products with the least price
 System and managerial principles must be modified for
according customer need
 Innovation have to be made to remain competitive and
profitable
4Ps in marketing have been modified to 4Cs
 Product - Customer

 Place - Convenience
 Price - Cost

 Promotion - Communication
There is a need now to have a smart Manager; to combat
competition
 Management Accounting
 The process of analyzing, interpreting and presenting
financial statements using the statements prepared
under financial accounting.
 Assist managers in;

 1. the process of decision making;

a. pricing of the products
 b. discounting to various selected customer
c. spending money based on budgets or beyond budget
d. Product distribution
2. The creation of policy and day to day operation of the
organization so that there will be a consistent accounting
application in all transaction of the business.
3. The strengthening of internal control that will give an
assurance not only to the resources but even the
generating revenue.
Scope of Management Accounting
1. Financial Accounting
2. Cost Accounting
3. Financial Management
4. Financial statement analysis
5. Interpretation of data
6. Management Account
7. Quantitative Techniques
8. Inflation Accounting
FINANCIAL STATEMENTS
1. The Income Statement
2. The statement of Comprehensive Income
3. Statement of Financial Condition
4. Statement of Cash Flows
5. Statement of Changes in Equity
6. Notes to Financial Statements
 GRAND LE'KASJ CORPORATION
COMPARATIVE INCOME STATEMENT
for the year ended 2011-2013

2013 2012 2011

Sales 20,880,000.00 17,010,000.00 17,270,000.00
Less: Cost of Sales
Inventory Beginning 350,000.00 340,000.00 320,000.00
Add: Purchases 9,750,000.00 8,500,000.00 8,750,000.00
Total Goods Available for sale 10,100,000.00 8,840,000.00 9,070,000.00
Less: Inventory end 380,000.00 350,000.00 340,000.00
Cost of Sales 9,720,000.00 8,490,000.00 8,730,000.00
Gross: Profit 11,160,000.00 8,520,000.00 8,540,000.00
Less: Operating Expenses
Salaries and wages 4,500,000.00 4,200,000.00 4,080,000.00
13th month pay 375,000.00 350,000.00 340,000.00
SSS, Phihealth and Pag-ibig contribution 360,000.00 336,000.00 326,400.00
Rent 360,000.00 360,000.00 360,000.00
Depreciation 239,750.00 239,750.00 239,750.00
Utilities 240,000.00 250,000.00 230,000.00
Taxes and Licences 38,250.00 31,875.00 32,500.00
Insurance 20,000.00 20,000.00 20,000.00
Advertising 550,000.00 500,000.00 430,000.00
Misc. Expense 28,950.00 22,650.00 22,675.00
Total operating expenses 6,711,950.00 6,310,275.00 6,081,325.00
Net Income before tax 4,448,050.00 2,209,725.00 2,458,675.00
Income tax (30%) 1,334,415.00 662,917.50 737,602.50
Net Income after tax 3,113,635.00 1,546,807.50 1,721,072.50
 VERTICAL ANALYSIS
 The income statement of Grand Les’Kasj as shown focuses
on the major components of the income statement. Using
the vertical analysis, sales are considered as the standard of
comparison at which all other figures are compared. Since
sales are the standard of comparison, sales will be 100% for
the year 2011, the percentage of cost of sales is computed
by dividing 8,730,000 (cost of sales) by 17,270,000 (sales)
and the percentage of operating expenses is computed by
dividing 6,081,325 (total operating expenses) by 17,270,000
(sales)
 2013 2012 2011
Sales 20,880,000.00 100% 17,010,000.00 17,270,000.00
Less: Cost of Sales 9,720,000.00 47% 8,490,000.00 50% 8,730,000.00 51%
Gross: Profit 11,160,000.00 53% 8,520,000.00 50% 8,540,000.00 49%
Less: Operating Expenses 6,711,950.00 32% 6,310,275.00 37% 6,081,325.00 35%
Net Income before tax 4,448,050.00 21% 2,209,725.00 13% 2,458,675.00 14%
Income tax (30%) 1,334,415.00 6% 662,917.50 4% 737,602.50 4%
Net Income after tax 3,113,635.00 15% 1,546,807.50 9% 1,721,072.50 10%
Interpretation:
 After the computational aspect, analyze and observe the rise and
fall of percentage from year to year

 In year 2011, the cost of sales is 51% and the operating expenses is 35%

 In year 2012, the cost of sales is 50% and the operating expenses is 37%

 In year 2013, the cost of sales is 47% and the operating expenses is 32%
The operating performances of the company showed that it
continuously improved its cost of sales from 51% in year 2011 to
47% of 2013. It is assumed that the qualities of products were not
reduced because the sales also increased, neither were the
company’s services to their customers because operating expenses
were reduced by 3% in comparison with the year 2011 figures. As
stated before, these analyses are not conclusive. These will only be
the starting point where the company should consider non-
financial aspects and discover more opportunities for growth.
Horizontal Analysis of Income Statement
In doing the horizontal analysis of an income statement, two year reports
shall be compared and the increase of each account is computed. These are
the steps that one has to follow in doing the horizontal analysis

1. Plot the report in a comparative format.

2. Get the difference by subtracting the figures from the later year with the
figures from the earlier year.
3. To get the percentage of increase, divide the difference with the base year
which is the earlier year.
 2013 2012 Difference Percentage
Sales 20,880,000.00 17,010,000.00 3,870,000.00 23%
Less: Cost of Sales 9,720,000.00 8,490,000.00 1,230,000.00 14%
Gross: Profit 11,160,000.00 8,520,000.00 2,640,000.00 31%
Less: Operating Expenses 6,711,950.00 6,310,275.00 401,675.00 6%
Net Income before tax 4,448,050.00 2,209,725.00 2,238,325.00 101%
Income tax (30%) 1,334,415.00 662,917.50 671,497.50 101%
Net Income after tax 3,113,635.00 1,546,807.50 1,566,827.50 101%
Interpretation
The reason for the good performance is the sales
increased of 23% in comparison with the cost of
sales, 14% and the operating expenses, 6%. As a
result, the operating performance has increased by
101%
 Year 2013 Year 2012 Year 2011
Current Assets 1,105,500.00 17% 1,025,500.00 15% 955,900.00 14%
Non-Current Assets 5,583,120.00 83% 5,822,710.00 85% 6,062,700.00 86%
Total Assets 6,688,620.00 100% 6,848,210.00 100% 7,018,600.00 100%
Current Liabilities 1,664,415.00 25% 952,918.00 14% 1,147,528.00 16%
Non-Current Liabilities 1,500,000.00 22% 1,500,000.00 22% 1,500,000.00 21%
Stockholders Equity 3,524,205.00 53% 4,395,292.00 64% 4,371,072.00 62%
6,688,620.00 100% 6,848,210.00 100% 7,018,600.00 100%
Interpretation
The company has put 17% of its assets to current assets.
Current Assets is important to a business as this will be your
working capital. If the business has a difficulty in a working
capital it will resort to short term barrowing to sustain the
day to day operations. Current liabilities is 25% of its total
assets. These means that the company is taking the
creditors to participate in the sustainability of its working
capital, for the mean time, it can be assumed that there is a
delay in the payment to creditors to sustain the operation.
 Year 2013 Year 2012 Difference
Current Assets 1,105,500.00 1,025,500.00 80,000.00 8%
Non-Current Assets 5,583,120.00 5,822,710.00 (239,590.00) -4%
Total Assets 6,688,620.00 6,848,210.00 (159,590.00) -2%
Current Liabilities 1,664,415.00 952,918.00 711,497.00 75%
Non-Current Liabilities 1,500,000.00 1,500,000.00 -
Stockholders Equity 3,524,205.00 4,395,292.00 (871,087.00) -20%
6,688,620.00 6,848,210.00 (159,590.00) -2%
 RATIO ANALYSIS
- This will show the ability of the company to pay the
current maturing obligations. Sometimes this is referred
to as banker’s ratio. The ratio must be interpreted with
extra care because some of the components of the
current assets like receivable and inventory might not be
working well, it is therefore required that the
interpretation of the current ratio must have reference
with the receivable and inventory analysis.
CURRENT RATIO Interpretation:
There is P0.66 of current assets for every 1.00
FORMULA liabilities. This means that the company does not
have enough current assets to pay its outstanding
Current Assets liabilities
Current Liabilities Effects:
Application 1. The creditors might stop supplying the raw
materials if the payment of the company is
delayed, or;
1,105,500.00
2. The creditor might deliver sub-standard raw
1,664,415.00
material which will affect the company/s
production.
66%
Accounts Receivable Turnover
The analytical tool will show how fast the company
collects the receivable

FORMULA Application
20,880,000.00
Credit Sales 412,500.00
Average Receivable
51 times
Interpretation
This means that the company sold and collected 51 times
in a year
To fully appreciate the analytical tool the number of days
in receivable should be computed
Formula
365 days
Receivalbe Turnover
Application
365
51

7 days

Interpretation

The company is able to collect its receivable in seven

days if the credit terms of the company is n/30 (no
discount in 30 days) then the company is considered as
fast collector.
Inventory Turnover
The analytical tool will show how fast the company
sells its products

FORMULA Application

Cost of Sales 9,720.00

365,000.00
Average Inventory 27 times
HUMAN CAPITAL in the organization is indispensable

With diverse personality

Management, involves the coordination of human

and material resources toward the attainment of
organization’s goals (Kast, 1974).
Number of days in inventory
FORMULA Application
365 days 365
inventory turnover 27

14 days
Interpretation
The ratio shows that the average number of days that the
company can dispose the inventory is 14 days. The
company is fast in disposal and fact in collecting its sales
on account.
Payable Turnover
FORMULA Application
Purchases 9,750.00
Average Payable 200,000.00
49 times
No of days
365 days 365 7 days
Payable turnover 49
This show that the company is also fast in paying its supplier.
The question now???? What caused the current ratio to fall
below P1.00 for every P1.00 of liability?
To Summarize:
Jan. 1 – The company purchases inventory for sale
Jan. 14 – The company was able to dispose to 14 days no. of days in inventory
customer
Jan. 21 – The company was able to collect the 7 days no. of days in receivable
sales on account
Jan. 7 – the company paid the payable
The working capital will decrease because the
company made an early settlement of its payable
Learnings
1. As much as possible convert cash back to cash before
settlement of accounts payable. As a manager; you can
invest the money to high yielding investment just in time
when the payable falls due.
2. It can be seen that the operating performance of the
company is really good but because of financial
analysis, operation can still be improved by scanning all
the potential opportunities or earning money for the
company.