Financial Management Part 3

7/28/2019 Financial Management Part 3

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FINANCIAL

MANAGEMENT(IE 210)


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COMPREHENSIVE INCOME

STATEMENT

The change in equity during a

period resulting from transactionsand other events, other than

changes resulting from transactions

with owners in their capacity as

owners.


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COMPREHENSIVE INCOME

STATEMENT - Presentations

1. Two statements:

a. Income Statement

- showing the components of profit

b. Statement of Comprehensive Income

- beginning with profit or loss as shown inthe income statement plus or minus the

components of other comprehensive

income.


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FINANCIAL STATEMENTS (F/S) -

Definitions

A structured financial

representation of the financialposition and financial

performance of an entity.


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COMPONENTS OF F/S

1. Statement ofFinancial Position orformerly Balance Sheet

2. Income Statement

3. Statement of Comprehensive

Income

4. Statement of Changes in Equity

5. Statement of Cash Flows

6. Notes, comprising a summary of

significant accounting policies and

other explanatory notes


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OBJECTIVES OF F/S

To provide information about the

financial position, financial

performance and cash flows of an

entity that is useful to a wide

range ofusers in making economicdecisions


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OBJECTIVES OF F/S

F/S also shows the results

of the managementsstewardship of the

resources entrusted to it.


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OBJECTIVES OF F/S

Thus, F/S provide info about anentitys:

Assets

Liabilities

Equity

Income and expenses, includinggains and losses

Contributions by and distributions toowners in their capacity as owners

Cash flows


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F/S FREQUENCY OF REPORTING

Financial statements shall be

presented at least annually.


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STATEMENT OF FINANCIAL POSITION (

(or B/S)

A formal statement showing the

three elements comprising

financial position, namely

Assets, Liabilities, and Equity.


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STATEMENT OF FINANCIAL POSITION (

(or B/S)

Users such as Investors, Creditors,and Other statement Users analyze

this F/S to evaluate the entitys

Liquidity

Solvency

Financial Structure, and

Capacity for Adaptation


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ASSETS

Resources controlled by the entity as

a result of past transactions and

events and from which futureeconomic benefits are expected to

flow to the entity.

Can be measured reliably.


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ASSETS CLASSIFICATION

CURRENT

ASSETS NON-CURRENT

ASSETS


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OPERATING CYCLE of an entity

The time between the acquisition ofassets for processing and theirrealization in cash or cash equivalents.

When the entitys operating cycle is

not clearly identifiable, its duration isassumed to be twelve months.


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CURRENT ASSETS

Cash and cash equivalents

Held for trading

Realizable within twelve months after

the reporting period

Entity intends to sell or consume it

with the entitys normal operatingcycle.


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NONCURRENT ASSETS

All other assets not classified as

current assets

O C SS S


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NONCURRENT ASSETS

Include the following

Property, plant and equipment

Long-term investments

Intangible assts

Other noncurrent assets

NONCURRENT ASSETS


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NONCURRENT ASSETS

Property, plant and equipment

Tangible assets which are held by an

entity for use in production or supplyof goods and services, for rental to

others, or for administrative

purposes, and are expected to beused during more than one period.


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NONCURRENT ASSETS

LandBuilding

Machinery

Equipment

Furniture

Fixtures Patterns

Dies

Molds

Plant, Property and Equipment

NONCURRENT ASSETS


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NONCURRENT ASSETS

Long-term Investments

An investment is an asset held by an

entity for the accretion of wealth

through capital distribution(interest, royalties, dividends andrentals), for capital appreciation or

for other benefits to the investingentity such as those obtainedthrough trading relationship.

NONCURRENT ASSETS


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NONCURRENT ASSETS

Intangible Assets

Identifiable nonmonetary asset

without physical substance.Examples:

Patent, Franchise, Copyright, Lease

rights, Trademark and Computer

Software

NONCURRENT ASSETS


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NONCURRENT ASSETS

Intangible Assets

Example of unidentifiable intangible

asset:

Goodwill

OTHER NONCURRENT ASSETS


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OTHER NONCURRENT ASSETS

Those which do not fit into the

definition of the previouslymentioned noncurrent assets.

Examples:

o Long-term advances to officers,directors, shareholders andemployees

o Abandoned property

o Long-term refundable deposit


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LIABILITIES

Present obligations of an entity

arising from past transactions or

events, the settlement of which isexpected to result in an outflow

from the entity of resources

embodying economic benefits.


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LIABILITIES CLASSIFICATION

CURRENT

LIABILITIES NON-CURRENT

LIABILITIES


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CURRENT LIABILITIES

The entity expects to settle withinnormal operating cycle.

Entity holds the liability primarily for

the purpose of trading. Due to be settled within twelve

months after the reporting period.

Entity does not have an unconditionalright to defer settlement for at leasttwelve months after the reportingperiod.s


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CURRENT LIABILITIES - Line items

a. Trade and other payables

b. Current provisions

c. Short-term borrowing

d. Current portion of long-term debt

e. Current tax liability


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NONCURRENT LIABILITIES

All liabilities not classified as

current


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NONCURRENT LIABILITIES - Line

items

a. Noncurrent portion of long-term debt

b. Finance lease liability

c. Deferred tax liability

d. Long-term obligations to company

officers

e. Long-term deferred revenue


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EQUITY

The residual interest in the assets

of the entity after deducting all ofits liabilities.

Net assets or total assets minusliabilities.


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EQUITY

The term equity may simply be

used for all business entities


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EQUITY

a. Owners equity in a

proprietorship businessb. Owners equity in a partnership

c. Stockholders equity or

shareholders equity in acorporation


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SHAREHOLDERS EQUITY

PHILIPPINE TERM

Capital stock

Subscribed capital stock

Preferred stock

Common stock

Additional paid capital

Retained earnings (deficit)

Retained earnings

appropriated

Revaluation surplus

Treasury Stock

IAS TERM

Share capital

Subscribed share capital

Preference share capital

Ordinary share capital

Share premium

Accumulated profits (loss)

Appropriation reserve

Revaluation reserve

Treasury share


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NOTES TO FINANCIAL STATEMENT

Provide narrative description ordisaggregation of items presentedin the financial statements and

information about items that donot qualify for recognition.


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Contain information in addition tothat presented in the statement of

financial position, income statement,

statement of changers in equity andstatement of cash flows.


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Notes are used to report informationthat does not fit into the body of the

statements in order to enhance the

understanding of the statements.


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FORMS OF STATEMENT OF

FINANCIAL POSITION

a. Report form

b. Account form


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FINANCIAL POSITION

Report form -

this form set forth the major

sections in a downward

sequence of assets, liabilitiesand equity


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FINANCIAL POSITION

Account form -

The presentation follows that ofaccount, meaning the assets areshown on the left side and theliabilities and equity on the right

side of the statement of financialposition.


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Proprietorship Account Form

Cash P 232,500 Accounts Payable P 37,500Supplies 6,000 Loans Payable 250,000Prepaid Rent 75,000 Total Liability 287,500Equipment 230,000Store Renovation 80,000 Owner's capital 336,000

Total Assets P 623,500 P 623,500

ASSETS LIABILITIES & OWNER'S EQUITY

JERICHO HEALTH FITNESS WORLDStatement of Financial Condition

March 31, 2013


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Proprietorship Account Form

Cash P 232,500 Accounts Payable P 37,500Supplies 6,000 Loans Payable 250,000Prepaid Rent 75,000 Total Liability 287,500Equipment 230,000Store Renovation 80,000 Owner's capital 336,000

Total Assets P 623,500 P 623,500

ASSETS LIABILITIES & OWNER'S EQUITY

JERICHO HEALTH FITNESS WORLDStatement of Financial Position

March 31, 2013


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Proprietorship Report Form

Cash P 232,500Supplies 6,000Prepaid Rent 75,000Equipment 230,000Store Renovation 80,000Total Assets 623,500

Accounts Payable P 37,500Loans Payable 250,000

Total Liability 287,500Owner's capital 336,000

P 623,500

LIABILITIES & OW NER'S EQU ITY

ASSETS

Jericho Health Fitness World

Statement of Financial Position

31-Mar-13


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REPRESENTS THE RESULTSOF OPERATIONS

REVENUES, EXPENSES, NET

PROFIT OR LOSS, FOR THE

ACCOUNTING PERIOD


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USES OF INCOME

STATEMENT TO

MANAGEMENT - Strategize profitability

- Control expenses


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Income representsrevenue and gains earned

by the entity during the

accounting period.


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Revenuearises from the ordinary

activities of an entity. Examples:

service fees, sales, interest,dividends, royalties, rent, etc.

Gainsare other incomes thatarise from the ordinary or extra

ordinary activities of an entity.


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Expenses represent the amount of

resources used up by the entity toearn revenues during the accountingperiod.

Examples:

1. Cost of Goods Sold(also known asCost of Sales)

2. Administrative or general expenses

3. Selling expenses


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Cost of Goods Sold(also known asCost of Sales) represents the costs of

producing or purchasing the goods

sold by the company.

Administrative or General Expenses

include all expenses incurred by the

administration. Examples: Salariesand fringe benefits, Taxes, Utilities,

Depreciation, etc.


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Selling Expenses(marketing

expenses) are cost necessary to

sell the finished product or

service. Examples: Advertising,

Sales travel, Shipping, Sales

salaries and commissions,finished goods warehousing.


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Gross Profit or Gross Marginis

computed as revenue or sales minus

cost of goods sold or cost of sales.

Operating ProfitorNet Profit before

Tax is equal to gross profit minus

operating expenses (administrativeand selling expenses).


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Net Profit or (Net loss)

represents the companys

profit or loss after paying

income tax.


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Cost of Sales or Cost of Goods Sold

Beginning inventory 500,000

Net purchases 2,000,000

Goods available for sale 2,500,000

Less: Ending inventory 300,000Cost of sales 2,200,000

Gross purchases 1,900,000

Freight-in 150,000

Total 2,050,000

Less: Purchases returns, allowances & 50,000

Net purchases 2,000,000

(Merchandising Concern)


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Cost of Sales or Cost of Goods Sold

Beginning raw materials 500,000Net purchases 2,000,000

Raw materials available for use 2,500,000

Less: Ending raw materials 300,000

Raw materials used 2,200,000

Direct labor 3,000,000

Factory overhead 1,300,000Total manufacturing costs 6,500,000

Beginning goods in process 900,000

Total cost of goods in process 7,400,000

Less: Ending goods in process 1,000,000

Cost of goods manufactured 6,400,000

Beginning finished goods 1,600,000


Less: Ending finished goods 1,500,000

Cost of goods sold 6,500,000

(Mnufacturing Concern)

S i B i


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Service Business

REVENUES

Consulting revenues 67,700

Referral revenues 4,000

Total 71,700

EXPENSES

Salaries expense 15,600

Utilitie expense 4,400

Rent expense 4,000

Deepreciation expenses-Service Vehicle 4,000

Interest expense 3,500

Supplies expense 3,000Insurance expense 1,200

Depreciation Expense-Office Equipment 1,000

Total 36,700

PROFIT 35,000

Income Statement

the month ended May 31, 2

Weddig "R" Us


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NoteNet sales revenue (1) 9,000,000

Cost of sales (2) 5,400,000

Gross income 3,600,000

Other income (3) 900,000

Investment income (4) 500,000

Total income 5,000,000

Expenses:

Distribution costs (5) 1,350,000

Administrative expens (6) 1,000,000

Other expenses (7) 320,000

Finance cost (8) 200,000 2,870,000

Income before tax 2,130,000

Income tax expense 580,000

Net income 1,550,000

EXEMPLAR COMPANY

Income Statement

Year Ended December 31, 2013


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Note 1 Net sales revenue

Gross sales 9,300,000Sales return and allowance (100,000)

Sales discount (200,000)

Net sales 9,000,000

Note 2 Cost of sales


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Note 2 Cost of sales

Inventory, January 1 1,500,000

Purchases 6,000,000Freight in 300,000

Total 6,300,000

Purchase return and allowance (150,000)Purchase discount (250,000) 5,900,000


Inventory, December 31 2,000,000Cost of sales 5,400,000

Note 3 Other income


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Note 3 Other income

Interest revenue 180,000

Dividend revenue 120,000Rent revenue 100,000

Gain from expropriation 500,000

Total 900,000

Note 4 Investment incomeShare in net income of associate (25%) 500,000

N t 5 Di t ib ti t


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Note 5 Distribution costs

Sales salaries 600,000

SSS and Philhealth - sales 20,000

Sales commission 180,000

Advertising 100,000Store supplies expense 50,000

Delivery expense 250,000

Depreciation - store equipment 150,000Total distribution costs 1,350,000

Note 6 Administrative expenses


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Note 6 Administrative expenses

Office salaries 650,000

SSS and Philhealth - office 30,000Bonuses 100,000

Office supplies expense 70,000

Taxes and licenses 20,000

Doubtful accounts 40,000

Depreciation - office equipment 90,000Total administrative expenses 1,000,000

Note 7 Other expenses


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Note 7 Other expenses

Loss on sale of investment 30,000

Loss on sale of property 120,000Casualty loss from earthquake 170,000

Total 320,000

Note 8 Finance cost

Interest expense on bank loan 50,000

Interest expense on bonds payable 150,000Total finance cost 200,000


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EXAMPLAR COMPANY


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Other comprehensive income to be reclassified to profit or loss

Foreign currency translation gain 150,000

Unrealized loss on derivative contract

designated as cash flow hedge (100,000) 50,000

Comprehensive income 1,600,000

EXAMPLAR COMPANY

Statement of Comprehensive Income


EXAMPLAR COMPANY


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Net sales 9,000,000

Cost of sales (5,400,000)Gross income 3,600,000

Other income 900,000

Investment income 500,000

Total income 5,000,000

Expenses

Distribution costs 1,350,000Administrative expenses 1,000,000

Other expenses 320,000

Finance cost 200,000 2,870,000

Income before tax 2,130,000

Income tax expense 580,000


Other comprehensive income to be recalssified to profit or loss:

Foreign currency translation gain 150,000

Unrealized loss on derivative contract

designated as cash flow hedge (100,000) 50,000

Comprehensive income 1,600,000

Statement of Comprehensive Income



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Statement of Retained

Earnings

Shows the changes

affecting directly the retainedearnings of an entity and

relates the income statement

to the statement of financial

position.

The important data affecting the


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The important data affecting the

retained earnings that should be

clearly disclosed in the statement

of retained earnings are:

a. Profit or loss for the period

b. Prior period errorsc. Dividends declared and paid to

shareholders

d. Effect of change in accountingpolicy

e. Appropriation of retained

earnings

EXAMPLAR COMPANY


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Retained earnings, January 1 1,000,000

Correction of error resulting

from prior year underdepreciation (100,000)

Change in accounting policy from weightedaverage to FIFO inventory valuation

resulting in an increase 300,000

Corrected beginning balance 1,200,000

Net income for the period 1,550,000

Dividends declared during the year (400,000)

Appropriated for contingencies (200,000)

Retained earnings, December 31 2,150,000


Statement of Retained Earnings

EXAMPLAR COMPANY


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Statement of Changes in

Equity

A basic statement thatshows the movements in

the elements or

components of theshareholders equity.

An entity shall present a statement of changes in


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An entity shall present a statement of changes in

equity showing the following:

1. Total comprehensive income for the period.2. For each component of equity, the effects of

changes in accounting policies and corrections of

errors.

3. For each component of equity, a reconciliation

between the carrying amount at the beginning and

end of the period, separately disclosing changes

from:

a. Profit or loss

b. Each item of other comprehensive incomec. Transactions with owners in their capacity as

owners showing separately contributions by and

distribution to owners.

EXAMPLAR COMPANY


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Share

capital Reserves

Retained

earningsBalances - January 1 5,000,000 2,000,000 1,000,000

Correction of error resulting

from prior year underdepreciation (100,000)

Change in accounting policy from

weighted average to FIFO - credit 300,000

Issuance of 10,000 ordinary shareswith P100 par at P150 per share 1,000,000 500,000

Issuance of 5,000 preference shares

with P50 par at P100 per share 250,000 250,000

Comprehensive income:


Other comprehensive income 50,000Dividends paid during the year (400,000)

Current appropriation for

contingencies 200,000 (200,000)

Balances - December 31 6,250,000 3,000,000 2,150,000

Statement of Changes in Equity


Financial Management Part 3

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