Saint Joseph College of Sindangan Incorporated College of Accountancy
Saint Joseph College of Sindangan Incorporated College of Accountancy
COLLEGE OF ACCOUNTANCY
PROFESSOR:___________________________________________TIME SCHEDULE:______________________
MODULE 4
I. CASH FLOW ANALYSIS
II. OPERATING AND FINANCIAL LEVERAGE
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flows in order to adopt to changing circumstances and
opportunities,
the ability of the enterprise to generate cash and cash
equivalents and enables the users to develop models to
assess and compare the present value of the future cash
flows of different enterprises; and
it enhances the comparability of the reporting of
operating performance by different enterprises because it
eliminates the effects of suing different accounting
treatments for the same transactions and events.
Formula:
Formula:
Net cash provided by operating
Cash debt coverage ratio = activities
Average Total Liabilities
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Enterprises are encouraged to report major
classes of gross cash receipts and gross cash
payments and the net cash flow from operating
activities. At minimum, the following classes of
operating cash receipts and payments should be
separately reported:
1. Cash collected from customers, including
lessees, licensees and the like
2. Interest, fees, royalties and dividends
received
3. Other operating cash receipts, if any
4. Cash paid to employees and other
suppliers of goods or services
5. Interest paid
6. Income taxes paid
7. Other operating payments, if any
8. Contracts held for dealing or trading
purposes
Indirect Method
Enterprises that choose not to provide the
major classes of operating cash receipts and
payments by the direct method shall determine
and report the same amount of net cash flow
from operating activities indirectly by adjusting
net income to reconcile it to net cash flow from
operating activities.
Adjustments to Convert Net Income to Net Cash
Flow from Operating Activities(INDIRECT
METHOD).
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Decrease in current assets (except cash,
marketable securities and non-trade
accounts)
Increases in current liabilities (except
financing or non-operating accounts, e.g.,
bank loan, current maturities of long-term
debt)
Depreciation, depletion, and amortization
expense
Amortization of discount on bonds payable
Amortization of premium on investment in
bonds
Increase in deferred income taxes
Loss (net) on disposal of assets and
liabilities
Subsidiary loss under the equity method
Interest Expense
Income Taxes
-Minus-
Increases in current assets (except cash,
marketable securities, and non-trade
accounts)
Decreases in current liabilities (except
financing or non-operating accounts, e.g,
bank loan, current maturities of long-term
debt)
Amortization of premium on bonds payable
Amortization of discount on investment in
bonds
Decrease in deferred income taxes
Gain (net) on disposal of assets or liabilities
Subsidiary gain under the equity method
-Equals-
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Net Cash Flow From Operations
Interest paid
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What is likely to happen if specific changes are made
in prices, costs and volume?
Formula:
CM per unit = Unit selling price – unit variable costs
Formula:
CM Ratio = Contribution Margin
Sales
Formulas:
Formula:
or
Sales Mix
Refers to the relative proportions in which a company’s
products are sold.
To achieve the combination, or mix that will yield the
greatest amount of profits.
Profits will be greater if high-margin rather than low-
margin items make up a relatively large proportion of total
sales.
Illustration:
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Trump, Inc. produces only two products of A and B.
These account for 60% and 40% of the total sales pesos of
Trump’s respectively. Variable costs as a percentage of
sales pesos are 60% for A and 85% for B. Total fixed costs
are P 150,000. There are no other costs.
Required:
Solutions:
A B
1. Sales mix ratio 60% 40%
Multiplied by: CM ratio 40% 15%
Wieghted CM ratio 24% + 6% = 30%
2. Fixed costs
BEP (P) = Weighted
CMR
150,000.00
30%
500,000.00
Operating Leverage
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Is measure of how sensitive net operating income is to a
given percentage change in peso sales.
Acts as a multiplier
If operating leverage is high, a small percentage increase
in sales can produce a much larger percentage increase
in net operating income.
Formula:
Or
Degree of operating leverage = Contribution Margin
Net Operating Income
Degree of operating leverage = Percent change in operating income
The Percent change in unit volume
degree
of operating leverage is a measures, at a given level of sales, of how a
percentage change in sales volume will affect profits.
Financial Leverage
Reflects the amount of debt used in the capital
structure of the firm.
It affects the liabilities and Owner’s Equity
Formula:
Or
Degree of financial leverage Percent change in Earnings Per Share
= (EPS)
Degree of financial leverage = Percent change InEBIT
Earnings before
IV. EBIT -1
interest and taxes(EBIT)
ACTIVITIES
A. PROBLEM SOLVING
Fixed Assets:
Gross pland and equipment 4,743.00
Leess: Depreciation 640.00 840.00
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Net Income 1,105.00 1,327.00
2019
A. Cash flows from operating activities
Net income
Additions (sources of cash)
Depreciation
Increase accrued wages and taxes
Increase in account payable
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Marcus Company manufactures and sell a single product,
Product E. The product sell for P 60 per unit has a C/M ratio of 40%.
The company’s monthly fixed expenses are P 28,800.
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Redwood Furniture Company produces two kinds of chairs: an oak
model and a chestnut wood model. The oak model sell for P 60 and the
chestnut wood model sell for P100. The variable expenses are as follows:
Oak Chestnut
Variable production costs per unit P 30 P 35
Variable selling expenses per unit 6 5
Expected sales in units next year are : 5,000 oak chairs and 1,000
chestnut chairs. Fixed expenses are budgeted at P 135,000 per year.
5. The yearly break-even point in total sales for the sales mix expected
is
a. P 270,000
b. P 300,000
c. P 485,000
d. P 500,000
6. The company’s overall contribution margin ratio for the sales mix
expected is
a. 40%
b. 45%
c. 50%
d. 60%
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Sales (30,000 units) P 600,000
Less Operating Expenses: 390,000
Variable 140,000 530,000
Net income P 70,000
7. The break-even point for 20x4 is
a. 26,600 units
b. 17,500 units
c. P 460,000
d. P 400,000
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10. Suppose Kristin sell 400,000 pictures frames in 1,000 shipments
in 20x4, what is the Kristin’s operating income for 20x4?
a. P 300,000
b. P 420,000
c. P 240,000
d. P 450,000
-END-
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