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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NOTES TO FINANCIAL STATEMENT
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 TO FINANCIAL STATEMENT
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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FORMS OF STATEMENT OF
FINANCIAL POSITION
Report form -
this form set forth the major
sections in a downward
sequence of assets, liabilitiesand equity
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FORMS OF STATEMENT OF
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
Goods available for sale 8,000,000
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
Goods available for sale 7,400,000
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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Net income 1,550,000
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
Year Ended December 31, 2013
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
Net income 1,550,000
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
Year Ended December 31, 2013
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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
Year Ended December 31, 2013
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:
Net income 1,550,000
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
Year Ended December 31, 2013
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