Prof.

2 Financial Analysis
and Reporting
Xerez A. Singson, CPA
Introduction to Accounting
Accounting
-it is a service activity. Its function is to provide
quantitative information primarily financial in
nature about economic entities that is intended
to be useful in making economic decision.
 Business Organizations
1. Sole Proprietorship-Owned and managed by
only one person.
2. Partnership-under Article 1767 of the Civil
Code of the Philippines, it is two or more
persons bind themselves together to contribute
money, property or industry into a common
fund, which has the intention of dividing the
profits among themselves
3. Corporation-It is an artificial being. Created by
operation of law, having the rights of
successions, the powers, properties and
attributes are expressly authorized by law or
incident to its existence.
 Business Activities
1. Service-rendering service, expertise to
obtain profit
2. Merchandising-involves buy and sell of
products. What you buy is what you sell.
3. Manufacturing-involves conversion of raw
materials into finished products
 MANUFACTURING
It is the process of converting raw materials into finished
products.

Elements of Manufacturing
1. Direct Materials-directly seen in the product
1. Indirect materials-that cannot be directly seen
2. Direct Labor-those work directly on the product
1. Indirect labor-those worked indirectly on the product
3. Factory Overhead-word factory

Direct Materials + Direct Labor = Prime Cost

Direct Labor+ Factory Overhead = Conversion Costs
Wood -DM
Salary of Direct Laborer -DL
Nail -FOH
Paint -DM
Supervisor fee -FOH
Factory insurance -FOH
Indirect materials -FOH
Indirect labor -FOH
DM = 500,000
DL = 200,000
FOH = 100,000

Prime Cost? DM+DL=500,000+200,000=700,000

Conversion Cost?
DL+FOH=200,000+100,000=300,000

DM+DL+FOH=MANUFACTURING COSTS=800,000
 MANUFACTURING
Three inventories of Manufacturing business:
1. Raw Materials Inventory- Materials
2. Work in Process Inventory-UNFINISHED
3. Finished Goods Inventory-FINISHED BUT
NOT YET SOLD

The finished goods inventory is similar to the

ending inventory of the Merchandising
business.
 Financial Statement
Financial statement is said to be the end
product of accounting. This is the document
where users understand the status of the
company or business. This serves as the
communication link between the company and
the various interested parties.
 Kinds of Financial Statements
Under Philippine Accounting Standards 1 (PAS 1),
there are six (6) types of financial statements:
1. Statement of Comprehensive Income

2. Statement of Financial Position as at earliest

comparative period
3. Statement of Financial Position as of the
current period
4. Statement of Cash Flows

5. Statement of Changes in Equity

6. Notes to Financial Statements

USERS OF FINANCIAL STATEMENTS
The following are the users of the financial
statements:
1. Creditors
2. Investors
3. Employees
4. Customers
5. Government
6. Public
 Financial Statement Analysis
It involves assessment and evaluation of the
firm’s past performance, its present condition,
and future business potentials. It involves
careful selection of data from financial
statements for the primary purpose of
forecasting the financial health of the
company.
 INCOME STATEMENT
For Service

Income xx
Less: Expenses (x)
xx

If Income >Expenses=Profit
If Expenses>Income=Loss
Example
Income 500,000
Discount 20,000
Salaries Expense 100,000
Rent Expense 80,000
Repairs & Maintenance 50,000

Compute for net income or net loss

Income 480,000
Less: Expenses
Salaries (100,000)
Rent (80,000)
Repairs (50,000)
Profit 250,000
 INCOME STATEMENT
FOR MERCHANDISING

Sales xx
Less: Cost of Sales* (x)
Gross Income xx
Less: Expenses (x)
Profit/Loss x(x)

If Gross Income>Expenses=Profit
If Expenses>Gross Income=Loss
 INCOME STATEMENT
To compute for Cost of Sales

Beginning Inventory xx
Add: Purchases xx
Freight In xx NET
Less: Purchase Discount (x) PURCHASES

Purchase Returns & Allow. (x)

Total goods available for sale xx
Less: Ending Inventory (x)
Cost of Sales xx
Example 1
Sales 500,000
Sales discount 20,000
Beginning Inventory 10,000
Purchases 200,000
Freight In 10,000
Ending Inventory 50,000
Operating expenses 100,000

Compute for:
1. Cost of Sales
2. Net income or net loss
Sales 480,000
Less: Cost of Sales* (170,000)
Gross Income 310,000
Less: Expenses (100,000)
Profit 210,000
To compute for Cost of Sales

Beginning Inventory 10,000

Add: Purchases 200,000
Freight In 10,000
Less: Purchase Discount 0
Purchase Returns & Allow. 0
Total goods available for sale 220,000
Less: Ending Inventory (50,000)
Cost of Sales 170,000
Example 2
Sales 500,000
Gross Profit ratio 25%
Operating Expenses 100,000
Ending inventory 25,000
Beginning Inventory 50,000
Freight Out 10,000

Compute for:
1. Net purchases

2. Net income or net loss

Sales 500,000 100%
Less: Cost of Sales* (375,000) (75%)
Gross Income 125,000 25%
Less: Expenses (100,000)
Freight Out (10,000)
Profit 15,000
Beginning Inventory 50,000
Add: Purchases 350,000
Freight In 0
Less: Purchase Discount 0
Purchase Returns & Allow. 0
Total goods available for sale 400,000
Less: Ending Inventory (25,000)
Cost of Sales 375,000
Sales 500,000
Sales Discount 100,000
Gross Profit ratio 30%
Operating Expenses 100,000
Ending inventory 80,000
Purchases 300,000

Compute for:
1. Beginning Inventory
2. Net income or net loss
Sales 500,000
Sales Discount (100,000)
Net Sales 400,000 100%
Cost of Sales (280,000) (70%)
Gross Income 120,000 30%
Less: Expenses (100,000)
Profit 20,000
Beginning Inventory 60,000
Add: Purchases 300,000
Freight In 0
Less: Purchase Discount 0
Purchase Returns & Allow. 0
Total goods available for sale 360,000
Less: Ending Inventory (80,000)
Cost of Sales 280,000
 INCOME STATEMENT

FOR MANUFACTURING

Sales xx
Less: Cost of goods sold* (x)
Gross Incomexx
Less: Expenses (x)
Profit/Lossx(x)

If Gross Income>Expenses=Profit
If Expenses>Gross Income=Loss
 INCOME STATEMENT
COST OF GOODS SOLD
Raw Materials Beginning xx
Add: Net Purchases xx
Raw Materials Available for Use xx
Less: Raw materials Ending (x)
Raw Materials Used xx
Add: Direct Labor xx
Factory Overhead xx
Total Manufacturing Costs xx
Add: Work in Process Beginning xx
Total goods placed in Process xx
Less: Work in Process Ending (x)
Cost of goods Manufactured xx
Add: Finished goods Beginning xx
Total Goods Available for Sale xx
Less: Finished Goods Ending (x)
Cost of Goods Soldxx
Example 1
Sales 500,000
Sales Discount 20,000
Purchases 200,000
Freight In 10,000
Raw Materials Beginning 0
Direct Labor 50,000
FOH 100% of DL
Work in process beginning 0
Raw materials ending 20,000
Work in process ending 10,000
Finished goods beginning 0
Finished goods ending 20,000
Expenses 30,000

1. Cost of Goods sold

2. Gross Income
3. Net income or loss
Sales 480,000
Less: Cost of goods sold* (260,000)
Gross Income 220,000
Less: Expenses (30,000)
Profit 190,000
Raw Materials Beginning 0
Add: Net Purchases 210,000
Raw Materials Available for Use 210,000
Less: Raw materials Ending (20,000)
Raw Materials Used 190,000
Add: Direct Labor 50,000
Factory Overhead 50,000
Total Manufacturing Costs 290,000
Add: Work in Process Beginning 0
Total goods placed in Process 290,000
Less: Work in Process Ending (10,000)
Cost of goods Manufactured 280,000
Add: Finished goods Beginning 0
Total Goods Available for Sale 280,000
Less: Finished Goods Ending (20,000)
Cost of Goods Sold260,000
Net Purchases
Purchases 200,000
Add: Freight In 10,000
Less: Discount 0
Returns 0
Net Purchases 210,000
Sales 500,000
GP Rate 40%
Operating Expenses 100,000
Net Purchases 150,000
Raw materials beginning20,000
Raw materials used 140,000
Total Manufacturing Costs 250,000
Direct labor 40,000
Work in process beginning 0
Work in process ending 20,000
Finished goods beginning 120,000
Finished goods ending 50,000

1. Gross Income
2. Raw materials ending
3. Total goods placed in process
4. Cost of goods sold
5. Cost of goods manufactured
6. Net income or loss
Sales 500,000 100%
Less: Cost of goods sold* (300,000) (60%)
Gross Income 200,000 40%
Less: Expenses (100,000)
Profit 100,000
Raw Materials Beginning 20,000
Add: Net Purchases 150,000
Raw Materials Available for Use 170,000
Less: Raw materials Ending (30,000)
Raw Materials Used 140,000
Add: Direct Labor 40,000
Factory Overhead 70,000
Total Manufacturing Costs 250,000
Add: Work in Process Beginning 0
Total goods placed in Process 250,000
Less: Work in Process Ending (20,000)
Cost of goods Manufactured 230,000
Add: Finished goods Beginning 120,000
Total Goods Available for Sale 350,000
Less: Finished Goods Ending (50,000)
Cost of Goods Sold300,000