ACLCCM Property

GRADE 12
Senior High School Department
ABM

BUSINESS FINANCE
2ND SEMESTER
QUARTER 1 MODULES

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1 | P a g e A C L C C o l l e g e o f MTABLE
a n d a u e ● OF
S H S CONTENTS
Department●Prepared by: M. Jumadas
Lesson 1 Introduction to Business Finance
Introduction…………………………………………………………………………………….4
What I need to know………………………………………………………………………….4
Pretest……………………………………………………………………………………………4
Review……………………………………………………………………………………………5
Discussion………………………………………………………………………………………5
References……………………………………………………………………………………..10
Individual Activity……………………………………………………………………………10
Summary………………………………………………………………………………………10
Assessment……………………………………………………………………………………10

Lesson 2 Review of Financial Statement Preparation, Analysis, and

Interpretation
Introduction……………………………………………………………………………………12
What I need to know…………………………………………………………………………12
Pretest…………………………………………………………………………………………..12
Review…………………………………………………………………………………………..13
Discussion……………………………………………………………………………………..13
References……………………………………………………………………………………...21
Individual Activity…………………………………………………………………………….21
Summary……………………………………………………………………………………….21
Assessment…………………………………………………………………………………….21
Lesson 3 Horizontal, and Vertical Analysis
Introduction……………………………………………………………………………………24
What I need to know…………………………………………………………………………24
Pretest…………………………………………………………………………………………..24
Review…………………………………………………………………………………………..24
Discussion……………………………………………………………………………………..25
References……………………………………………………………………………………...27
Individual Activity…………………………………………………………………………….27
Summary……………………………………………………………………………………….28
Assessment…………………………………………………………………………………….28
Lesson 4 Financial Ratio Analysis
Introduction……………………………………………………………………………………30
What I need to know…………………………………………………………………………30
Pretest…………………………………………………………………………………………..30
Review…………………………………………………………………………………………..31
Discussion……………………………………………………………………………………..31
References………………………………………………………………………………………36
Individual Activity…………………………………………………………………………….36
Summary……………………………………………………………………………………….36
Assessment…………………………………………………………………………………….36

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Lesson 5 Financial Planning Tools and Concept
Introduction…………………………………………………………………………………….39
What I need to know………………………………………………………………………….39
Pretest……………………………………………………………………………………………39
Review……………………………………………………………………………………………40
Discussion………………………………………………………………………………………40
References………………………………………………………………………………………44
Individual Activity…………………………………………………………………………….44
Summary……………………………………………………………………………………….44
Assessment…………………………………………………………………………………….44
Lesson 6 Source of Funds
Introduction…………………………………………………………………………………….46
What I need to know………………………………………………………………………….46
Pretest……………………………………………………………………………………………46
Review……………………………………………………………………………………………46
Discussion………………………………………………………………………………………46
References………………………………………………………………………………………49
Individual Activity…………………………………………………………………………….49
Summary……………………………………………………………………………………….49
Assessment…………………………………………………………………………………….49

Answer Key………………………………………………………………………..54-58

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 LESSON 1 INTRODUCTION TO BUSINESS FINANCE
Introduction:
Finance is the art and science that describes the management, creation and study
of money, banking, credit, investments, assets and liabilities. Finance is needed in
business because financing decisions often involve large financial amounts that are
very significant to the business and once made, such decision is not easily reversed.
Financial management decision function includes areas such as investment,
financing, and asset management decisions.

What I need to know

At the end of this chapter, the students should be able to:
1. Explain the major role of financial management and the different individuals
involved;
2. Enumerate the various functions of the Financial Manager;
3. Compare and contrast the basic types of financial instruments;
4. Distinguish a financial institution from financial market;
5. Classify institutions as banking and non-banking financial institutions;
6. Enumerate and distinguish the different types of financial institutions and
financial markets; and
7. Explain the flow of funds

Pretest
1. Which of the following is not a definition of business finance?
a) It is the art and science that describes the management, creation and study of
money, banking, credit, investments, assets and liabilities.
b) It is not needed for businesses.
c) It is needed for asset management decision.
d) None of the above
2. What is the most important objective of business finance?
a) Profit and wealth maximization
b) Business decision making
c) Asset management decision
d) None of the above
3. It is a traditional and narrow approach where business entities determine the
best output and price levels in order to maximize its return
a) Wealth maximization
b) Profit maximization
c) Business decision making
d) All of the above
4. It is a modern concept which deals with the increase of the value of a business in
order to increase the share of stockholders or the owners.
a) Wealth maximization
b) Profit maximization
c) Business decision making
d) All of the above
5. Who is in charged in the overall finance functions of the business?
a) Cashier
b) Financial manager
c) Treasurer

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 d) Manager

Review
Ask the learner to briefly about their understanding of business finance and what is
the role towards business success.

DISCUSSION
What is finance?
 Finance is a broad term that describes activities associated with
banking, leverage or debt, credit, capital markets, money, and
investments. Basically, finance represents money management and the
process of acquiring needed funds.
 Finance is the art and science that describes the management, creation
and study of money, banking, credit, investments, assets and liabilities.
What is business finance?
 Business finance, the raising and managing of funds
by business organizations. ... Much of the day-to-day work of business
finance is conducted by lower-level staff; their work includes handling
cash receipts and disbursements, borrowing from commercial banks on a
regular and continuing basis, and formulating cash budgets.
Two main objective of business finance;
1) Profit maximization
o The main aim of any kind of economic activity is to earn profit. When we
say profit, we usually refer to the financial benefit that is realized when
the amount of revenue gained from a business activity exceeds the
expenses, costs and taxes needed to sustain the activity. Profit
maximization is a traditional and narrow approach where business
entities determine the best output and price levels in order to maximize
its return. The company will usually adjust influential factors such as
production costs, sale prices, and output levels as a way of reaching its
profit goal.
2) Profit maximization
o Wealth maximization is a modern concept which deals with the increase
of the value of a business in order to increase the share of stockholders
or the owners. It is widely accepted as the ultimate goal of a business.
The concept requires the management team to continually search for the
highest possible returns on funds invested in the business, while
mitigating any associated risk of loss. This calls for a detailed analysis of
the cash flows associated with each prospective investment, as well as
constant attention to the strategic direction of the organization.
Key individuals in business finance;
 Finance manager
 He is in charge of the overall finance functions of a business.
 He develops strategies and plans to achieve the financial goals of
the organization.
 In large companies, this position is usually termed as Chief
Financial Officer.
 The financial manager is to whom the controller and the treasurer
reports.
 Controller
 He is the one responsible for managing the accounting staff that
provides managerial accounting information used for internal
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 decision making, financial accounting information for external
reporting purposes, and tax accounting information to meet tax
filing requirements.
 The controller is usually the head accountant of the company.
 Treasurer
 His primary duties include asset safekeeping and cash
management.
 He is also responsible for obtaining investment capital as well as
obtaining loans and credit from outside sources.
Function of Financial Management
 The finance manager plays a very big role in the finance function which
requires him to have possessed knowledge in the area of accounting, finance,
economics and management. He is responsible for the performance of the
accountant and the treasurer since he is the head of that department. His
position is highly critical and analytical to solve various problems related to
finance. He performs the following major functions;
 Forecasting financial requirements
-the financial manager is responsible to estimate the financial
requirements of the business. He is the one who should estimate how
much resources are required to acquire fixed assets and forecast the
amount needed in order to have a continuous business operation.
 Acquiring necessary capital
-financial managers are also in charge of the acquisition of the necessary
capital to be used in the business. He should concentrate on how where
and when to obtain finances.
 Investment decision
-the finance manager must carefully select best investment alternatives
and consider the reasonable and stable return from the investment. He
must be well versed in the field of capital budgeting techniques to
determine the effective utilization of investment. The finance manager
must concentrate to principles of safety liquidity and profitability while
investing capital.
 Cash management
-the financial manager must see to it that the entity has enough cash for
its business operations as well for the payment of debts or liabilities.
Furthermore this deals with the proper management of cash on hand
and cash in bank.
 Interrelation with other departments
-the finance manager must maintain a good relationship with all the
functional departments of the business organization. He should have
sound knowledge not only in finance related area but also in other areas
as well.
Financial System
 Financial system is a framework which collectively describes the financial
markets financial institutions borrowers and lenders within the economy.
The functions of financial system is to channel the funds from lenders to
the borrowers provide a medium of exchange provide a mechanism for
risk sharing and provide a channel through which the central bank can
influence the economy.
Financial instruments
 These things are crucial to the operation of the economy. A financial
instrument is the written legal obligation of one party to transfer a thing
of vale usually money to another party at some future date, under

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 certain conditions. According to Philippine Accounting Standards 32 a
financial instrument is any contract that gives rise to both a financial
asset of one entity and a financial liability or equity instrument of
another entity. With this definition we can also consider currency bills
and coins as financial instruments because they are financial assets of
the person holding the money and a financial liability of the government
issuing it. In business when we say financial instruments we basically
refer to stocks bonds and notes.
Stocks
 This is a type of securities that signifies ownership in a corporation and
represents a claim on part of the corporation’s assets and earnings.
Stocks are issued by companies in order to raise funds for the business.
Generally this can be classified as common and preferred stock. This is a
financial asset of the stockholder and an equity instrument of the issuing
company.
Bonds
 A bond is a debt security in which an investor lends his money to an
entity which borrows the funds for a defined period of time at defined
interest rate. Bonds are usually issued by companies’ municipalities’
sates and sovereign governments to raise money and finance their
economic activities. A bond is a financial asset of the investor reflected as
Bonds Receivable and a financial liability of the issuing company-
reflected as bonds payable.
Notes
 This is a debt security obligating repayment of a loan with a
corresponding interest within a defined period of time. Notes are being
issued by the borrower to signify its indebtedness. A note is the financial
liability of the debtor-reflected as Notes Payable and a financial asset of
the creditor-reflected as Notes Receivable.
Financial Markets
 A financial market is where stocks bonds and other financial securities
can be purchased or sold. Funds are transferred in financial markets
when one party purchases financial assets previously held by another
party. Financial markets facilitate the flow of funds and thereby allow
financing and investing by households firms and thereby allow financing
and investing by households firms and government agencies.
 Financial markets maybe classified into two namely the money market
and capital market. The money market is where debt securities with an
original maturity of one year or less are traded as well as long-term
securities having at least six months left to maturity. The capital market
is where securities with maturity of more than one year are traded. The
capital market is subdivided into bond market stock market and
mortgage market.
 Some financial markets may exist but have few activities> in the country
the large financial markets and those being regulated by the Banko
Sentral ng Pilipinas. These are the foreign exchange market the fixed
income exchange market and the stock market. The BSP upholds and
maintains the efficient and safe operations of these financial markets.
Financial exchange markets
 In the country, the Foreign Exchange is where participants can be able to
buy, sell, exchange and speculate on currencies. The BSP maintains a
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 floating exchange rate system. Exchange rates are determined on the
basis of supply and demand in the foreign exchange market. The role of
the BSP in the foreign exchange market is principally to ensure orderly
conditions in the market. The market-determination of the exchange rate
is consistent with the Government’s commitment to market-oriented
reforms and outward-looking strategies of achieving competitiveness
through price stability and efficiency.
Fixed Income Exchange Market
 The Fixed Income Exchange is the country’s first centralized electronic
infrastructure for trading of fixed-income securities. The FIE is a
comprehensive financial market infrastructure that aims to provide an
electronic platform for trading, clearing and settlement, and depository
and custodianship fixed-income securities and its derivatives. When we
say fixed-income securities, these are investments that provide return in
the form of fixed periodic payments and the eventual return of principal
at maturity. This may include treasury bonds and certificate of deposits.
Stock Market
 The Philippine Stock Exchange (PSE) is a private organization created to
provide and maintain a fair, efficient, transparent and orderly market for
the purchase and sale of stocks and other securities.
Financial Intermediaries
 A financial intermediary is an entity that acts as the middleman between
two parties in a financial transaction. Financial intermediaries are
businesses which move money from the individual into the markets.
With this statement, we can say that those who are borrowing in
financial intermediaries are said to be engaged in indirect financing.
Financial institutions are considered as the financial intermediaries.
 A financial institution is an establishment that provides financial
services such as investments, loans and deposits. Typically, these are the
key entities that control the flow of money in the economy. Financial
institutions may either be a banking institution or nonbanking
institution.
Banking Institutions
 A bank is a financial institution that accepts deposits from the public and
creates credit which is being supervised by a regulatory agency.
Commercial Bank
 This is a financial institution that provides various financial services, such as
accepting deposits, offering savings and checking account services, and
issuing loans for both private individuals and businesses. Furthermore, it
may also provide safety deposit boxes, mortgages, debit and credit cards,
automated teller machines, online banking and other financial services. A
commercial bank also has the power to accept drafts and issue letters of
credit; discount and negotiate promissory notes, drafts, bills of exchange, and
other evidences of debt; accept or create demand deposits; receive other types
of deposits and deposit substitutes; buy and sell foreign exchange and gold or
silver bullion; acquire marketable bonds and other debt securities; and extend
credit.
Investment Banks
 Unlike commercial banks, investment banks do not take deposits. Their focus
is assisting individuals, corporations, and governments in raising capital by
underwriting or acting as the client's agent in the issuance of securities. An
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 investment bank may also assist companies involved in mergers and
acquisitions.

Non-Banking Financial Institutions

 A non-banking financial institution is a financial institution that does not
have a full banking license or is not supervised by a national or international
banking regulatory agency.
Credit Unions
 These are non-profit financial cooperatives owned by and operated for the
benefit of its members. These member-owned financial cooperatives are
democratically controlled by its members, and operated for the purpose of
offering its members economical financial services. Membership is available
through affiliation with an employer, a union, religious organization,
community organization, or some other group.
Savings and Loan Associations
 These are also known as thrift banks, these are financial institutions that
specialize in savings type deposits, mortgages and other loans. They provide
dividends to their depositors. Today savings and loan associations offer most
of the services commercial banks do. They can also serve both consumers and
businesses. However, by law, they can have no more than twenty percent of
their lending in commercial loans.
Insurance Companies
 These are corporate entities that insure people against loss. The client pays a
fee, known as a premium, in exchange for the promise of the company to
protect the client financially in the event of certain potential misfortunes. The
common types of insurance include health, life and property insurances.
Flows of funds
 The figure below shows how the funds flow from the participants in the
financial system. As you can see we have the direct and the indirect
finance.
 In indirect finance, a financial institution stands between lender and
borrower. For example, a bank receives money from its savers or
depositors. The bank has now the money on hand. Then, a spender
decides to borrow funds from the bank to buy a car. The bank lends out
the money of the saver to a borrower.
 In direct finance, the borrowers sell securities directly to lenders in the
financial markets. There are no intermediaries involved. For example a
corporation offers its stocks to the stock exchange and the investor
acquires it by paying the required amount. In exchange of the
corporation issues a stock certificate to the investor which is now
considered as the stockholder.

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 C. Paramasivan and T. Subramanian. (2005). “Financial Management”,
New Age International Ltd., Publishers. J. Van Horne and J. Wachowics
(2008). “Fundamentals of Financial Management”, Pearson Education
Limited. Investopedia, (2016).

Individual Activity:
As discussed in the “History of Accounting” section of this chapter,
accounting is used even in the early ancient periods. In a one-page paper, give
at least three examples of how people from earlier periods made use of the
accounting process. How did the accounting process help such persons in
their lives?
Summary
Financial Manager- the one in charge of all the organization’s finance and
accounting functions and typically reports to the chief executive officer.
Controller –the one responsible for managing the accounting staff that
provides managerial accounting information used for internal decision making,
financial accounting information for external reporting purposes, and tax
accounting information to meet tax filing requirements.
Finance - is the art and science that describes the management, creation
and study of money, banking, credit, investments, assets and liabilities
Financial institution is an establishment that provides financial services
such as investments, loans and deposits.
Financial market – this is where financial securities such as stocks and
bonds can be purchased or sold.
Financial system - a framework for describing set of markets,
organizations, and individuals that engage in the transaction of financial
instruments, as well as regulatory institutions.
Profit – the difference between income and expenses
Treasurer- the one responsible for obtaining sources of financing for the
organization, projecting cash flow needs, and managing cash and short-term
investments.
Wealth – the true value or net worth of business

SUMMATIVE ASSESSMENT

1. The finance manager has a regular meeting with all the heads of each
department. What is being described in the situation?
a) Forecasting financial requirements
b) Acquiring necessary capital
c) Cash management
d) Interrelation with other departments
2. This is a debt security obligating repayment of a loan with a corresponding
interest within a defined period of time.
a) Bonds
b) Notes
c) Stock
d) All of the above

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 3. The financial manager must see to it that the entity has enough cash for its
business operations as well for the payment of debts or liabilities. What is
being described in the situation?
a) Forecasting financial requirements
b) Acquiring necessary capital
c) Cash management
d) Interrelation with other departments
4. Their focus is assisting individuals, corporations, and governments in raising
capital by underwriting or acting as the client's agent in the issuance of
securities.
a) Cooperative
b) RBC Capital Market
c) Philhealth
d) Palawan Pawnshop
5. Which of the following institutions has the power to accept drafts and issue
letters of credit; discount and negotiate promissory notes, drafts, bills of
exchange, and other evidences of debt; accept or create demand deposits;
receive other types of deposits and deposit substitutes; buy and sell foreign
exchange and gold or silver bullion; and acquire marketable bonds and other
debt securities; and extend credit.
a) Cebuana Lhuillier Pawnshop
b) SSS
c) Cooperative
d) BPI
6. He is the one responsible for managing the accounting staff that provides
managerial accounting information used for internal decision making,
financial accounting information for external reporting purposes, and tax
accounting information to meet tax filing requirements.
a) Treasurer
b) Operations manager
c) Controller
d) Financial manager
7. Where controller and treasurer do reported and submitted their monthly and
yearly reports?
a) Treasurer
b) Operations manager
c) Controller
d) Financial manager
8. He is responsible for safekeeping of cash
a) Treasurer
b) Operations manager
c) Controller
d) Financial manager
9. Which of the statements is false?
a) The treasurer is the one holding cash accounts of the company
b) The controller reports to the treasurer
c) The controller and his staff is responsible to meet the tax filing
requirements
d) The CFO is sometimes called as the financial manager
10. These are corporate entities that insure people against loss.

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 a)
SSS
b)
Stock market
c)
RD Pawnshop
d)
None of the above
LESSON 2 REVIEW OF FINANCIAL STATEMENT
PREPARATION, ANALYSIS AND INTERPRETATION

Introduction:
This topic might already be familiar with you for this was discussed in your past
courses. So let’s just have a review on the financial statement preparation by going
over the accounting cycle. In this lesson you should be able to review of the
Accounting Cycle and Basic Financial Statements.

What I need to know

At the end of this chapter, the students should be able to:

1. Discuss about accounting cycle;
2. Prepare financial statement;

Pretest

1. It is a series of steps starting with recording business transactions and leading up

to the preparation of financial statements.
a) Financial process
b) Accounting cycle
c) Business finance cycle
d) None of the above
2. This is to test if the debits are equal to credits after adjusting entries are made
a) Bookkeeping
b) Trial Balance
c) Auditing
d) Adjusted trial balance
3. It is the most important step in the accounting cycle because it represents the
purpose of financial accounting.
a) Adjusted trial balance
b) Recording transactions
c) Preparation of financial statements
d) Closing journal entries
4. It is a list of all accounts and their balances after the closing entries have been
journalized and posted to the ledger.
a) Adjusted trial balance
b) Preparation of post-closing trial balance
c) Preparation of financial statements
d) Closing journal entries
5. It is a financial Statement that gives the result of the business operation or
financial performance of a business for a given period.
a) Income statement
b) Statement of change in equity
c) Statement of cash flows
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 d) Statement of financial position

Review
Ask the learner to explain the following terms;
1. Stock
2. Business Finance
3. Financial markets
4. Financial instruments

DISCUSSION

The accounting cycle

 This part is a brief review of your learning from your ABM subjects.
 The accounting cycle is a series of steps starting with recording business
transactions and leading up to the preparation of financial statements. This
financial process demonstrates the purpose of financial accounting–to create
useful financial information in the form of general-purpose financial
statements. In other words, the sole purpose of recording transactions and
keeping track of expenses and revenues is turn this data into meaning
financial information by presenting it in the form of a balance sheet, income
statement, statement of owner’s equity, and statement of cash flows.
 The accounting cycle is a set of steps that are repeated in the same order every
period. The culmination of these steps is the preparation of financial
statements. Some companies prepare financial statements on a quarterly basis
whereas other companies prepare them annually. This means that quarterly
companies complete one entire accounting cycle every three months while
annual companies only complete one accounting cycle per year.
 This cycle starts with a business event. Bookkeepers analyze the transaction
and record it in the general journal with a journal entry. The debits and credits
from the journal are then posted to the general ledger where an unadjusted
trial balance can be prepared.
 After accountants and management analyze the balances on the unadjusted
trial balance, they can then make end of period adjustments like depreciation
expense and expense accruals. These adjusted journal entries are posted to
the trial balance turning it into an adjusted trial balance.
 Now that all the end of the year adjustments are made and the adjusted trial
balance matches the subsidiary accounts, financial statements can be
prepared. After financial statements are published and released to the public,
the company can close its books for the period. Closing entries are made and
posted to the post closing trial balance.
 At the start of the next accounting period, occasionally reversing journal
entries are made to cancel out the accrual entries made in the previous period.
After the reversing entries are posted, the accounting cycle starts all over again
with the occurrence of a new business transaction.
Here are the main steps in the traditional accounting cycle.
1. Identification of events to be recorded
o The accounting process starts with identifying and analyzing business
transactions and events. Not all transactions and events are entered into
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 the accounting system. Only those that pertain to the business entity are
included in the process.
o First, the business transaction has to be identified. Obviously, if you
don’t know a transaction occurred, you can’t record one. After an event is
identified to have an economic impact on the accounting equation, the
business event must be analyzed to see how the transaction changed the
accounting equation.
2. Journalizing of Transactions
o After the business event is identified and analyzed, it can be recorded.
Journal entries use debits and credits to record the changes of the
accounting equation in the general journal. Traditional journal entry
format dictates that debited accounts are listed before credited accounts.
Each journal entry is also accompanied by the transaction date, title,
and description of the event. Here is an example of how the vehicle
purchase would be recorded.
o Since there are so many different types of business transactions,
accountants usually categorize them and record them in separate journal
to help keep track of business events. For instance, cash was used to
purchase this vehicle, so this transaction would most likely be recorded
in the cash disbursements journal. There are numerous other journals
like the sales journal, purchases journal, and accounts receivable
journal.
3. Posting to the General Ledger
o The Ledger is also known as the book of final entries, it is a collection of
accounts that shows the changes made to each account as a result of
past transactions, and their current balances.
o Ledger accounts use the T-account format to display the balances in
each account. Each journal entry is transferred from the general journal
to the corresponding T-account. The debits are always transferred to the
left side and the credits are always transferred to the right side of T-
accounts.
o Since most accounts will be affected by multiple journal entries and
transactions, there are usually several numbers in both the debit and
credit columns. Account balances are always calculated at the bottom of
each T-account. Notice that these are account balances—not column
balances. The total difference between the debit and credit columns will
be displayed on the bottom of the corresponding side. In other words, an
account with a credit balance will have a total on the bottom of the right
side of the account.
o After the posting all transactions to the ledger, the balances of each
account can now be determined.
4. Preparation of Unadjusted Trial Balance
o An unadjusted trial balance is a listing of all the business accounts that
are going to appear on the financial statements before year-end adjusting
journal entries are made. That is why this trial balance is called
unadjusted.
o An unadjusted trial balance is displayed in three columns: a column for
account names, debits, and credits.
o Accounts with debit balances are listed in the left column and accounts
with credit balances are listed on the right. Accounts are usually listed in
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 order of their account number. Most charts of accounts are numbered in
balance sheet order, so the unadjusted trial balance also displays the
account numbers in balance sheet order starting with the assets,
liabilities, and equity accounts and ending with income and expense
accounts.
o Both the debit and credit columns are calculated at the bottom of a trial
balance. As with the accounting equation, these debit and credit totals
must always be equal. If they aren’t equal, the trial balance was prepared
incorrectly or the journal entries weren’t transferred to the ledger
accounts accurately.
o As with all financial reports, trial balances are always prepared with a
heading. Typically, the heading consists of three lines containing the
company name, name of the trial balance, and date of the reporting
period.
5. Adjusting Entries
o Adjusting entries, also called adjusting journal entries, are journal
entries made at the end of a period to correct accounts before the
financial statements are prepared. This is the fourth step in the
accounting cycle. Adjusting entries are most commonly used in
accordance with the matching principle to match revenue and expenses
in the period in which they occur.
o Here are the main financial transactions that adjusting journal entries
are used to record at the end of a period. Prepaid expenses or unearned
revenues –
o Prepaid expenses are goods or services that have been paid for by a
company but have not been consumed yet. Insurance is a good example
of a prepaid expense. Insurance is usually prepaid at least six months.
This means the company pays for the insurance but doesn’t actually get
the full benefit of the insurance contract until the end of the six-month
period. This transaction is recorded as a prepayment until the expenses
are incurred. The same is true at the end of an accounting period. Only
expenses that are incurred are recorded, the rest are booked as prepaid
expenses.
o Unearned revenues are also recorded because these consist of income
received from customers, but no goods or services have been provided to
them. In this sense, the company owes the customers a good or service
and must record the liability in the current period until the goods or
services are provided.
o Accrued expenses and accrued revenues – Many times companies will
incur expenses but won’t have to pay for them until the next month.
Utility bills are a good example. December’s electric bill is always due in
January. Since the expense was incurred in December, it must be
recorded in December regardless of whether it was paid or not. In this
sense, the expense is accrued or shown as a liability in December until it
is paid.
o Non-cash expenses – Adjusting journal entries are also used to record
paper expenses like depreciation, amortization, and depletion. These
expenses are often recorded at the end of period because they are usually
calculated on a period basis. For example, depreciation is usually
calculated on an annual basis. Thus, it is recorded at the end of the year.
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 This also relates to the matching principle where the assets are used
during the year and written off after they are used.
6. Preparation of Adjusted Trial Balance

o An adjusted trial balance may be prepared after adjusting entries are

made and before the financial statements are prepared. This is to test if
the debits are equal to credits after adjusting entries are made.
o An adjusted trial balance is formatted exactly like an unadjusted trial
balance. Three columns are used to display the account names, debits,
and credits with the debit balances listed in the left column and the
credit balances are listed on the right.
o Like the unadjusted trial balance, the adjusted trial balance accounts are
usually listed in order of their account number or in balance sheet order
starting with the assets, liabilities, and equity accounts and ending with
income and expense accounts.
o Both the debit and credit columns are calculated at the bottom of a trial
balance. As with the accounting equation, these debit and credit totals
must always be equal. If they aren’t equal, the trial balance was prepared
incorrectly or the journal entries weren’t transferred to the ledger
accounts accurately.
o As with all financial reports, trial balances are always prepared with a
heading. Typically, the heading consists of three lines containing the
company name, name of the trial balance, and date of the reporting
period.
7. Preparation of Financial Statements
o Preparing financial statements is the most important step in the
accounting cycle because it represents the purpose of financial
accounting.
o In other words, the concept financial reporting and the process of the
accounting cycle are focused on providing external users with useful
information in the form of financial statements. These statements are the
end product of the accounting system in any company. Basically,
preparing these statements is what financial accounting is all about.
o Preparing general-purpose financial statements can be simple or complex
depending on the size of the company. Some statements need footnote
disclosures while other can be presented without any. Details like this
generally depend on the purpose of the financial statements.
o Financial statements are prepared by transferring the account balances
on the adjusted trial balance to a set of financial statement templates.
8. Closing Journal Entries
o Closing entries, also called closing journal entries, are entries made at
the end of an accounting period to zero out all temporary accounts and
transfer their balances to permanent accounts. In other words, the
temporary accounts are closed or reset at the end of the year. This is
commonly referred to as closing the books.
o Permanent accounts are balance sheet accounts that track the activities
that last longer than an accounting period. For example, a vehicle
account is a fixed asset account that is recorded on the balance. The
vehicle will provide benefits for the company in future years, so it is
considered a permanent account.
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 o At the end of the year, all the temporary accounts must be closed or
reset, so the beginning of the following year will have a clean balance to
start with. In other words, revenue, expense, and withdrawal accounts
always have a zero balance at the start of the year because they are
always closed at the end of the previous year. This concept is consistent
with the matching principle.
9. Preparation of a Post-closing Trial Balance
o The post-closing trial balance is a list of all accounts and their balances
after the closing entries have been journalized and posted to the ledger.
In other words, the post-closing trial balance is a list of accounts or
permanent accounts that still have balances after the closing entries
have been made.
o This accounts list is identical to the accounts presented on the balance
sheet. This makes sense because all of the income statement accounts
have been closed and no longer have a current balance. The purpose of
preparing the post-closing trial balance is verify that all temporary
accounts have been closed properly and the total debits and credits in
the accounting system equal after the closing entries have been made.
o A post-closing trial balance is formatted the same as the other trial
balances in the accounting cycle displaying in three columns: a column
for account names, debits, and credits.
o Since only balance sheet accounts are listed on this trial balance, they
are presented in balance sheet order starting with assets, liabilities, and
ending with equity.
o As with the unadjusted and adjusted trial balances, both the debit and
credit columns are calculated at the bottom of a trial balance. If these
columns aren’t equal, the trial balance was prepared incorrectly or the
closing entries weren’t transferred to the ledger accounts accurately.
o As with all financial reports, trial balances are always prepared with a
heading. Typically, the heading consists of three lines containing the
company name, name of the trial balance, and date of the reporting
period.
10. Reversing Journal Entries
o Reversing entries, or reversing journal entries, are journal entries made
at the beginning of an accounting period to reverse or cancel out
adjusting journal entries made at the end of the previous accounting
period. This is the last step in the accounting cycle.
o Reversing entries are made because previous year accruals and
prepayments will be paid off or used during the new year and no longer
need to be recorded as liabilities and assets. These entries are optional
depending on whether or not there are adjusting journal entries that
need to be reversed.
o Reversing entries are usually made to simplify bookkeeping in the new
year. For example, if an accrued expense was recorded in the previous
year, the bookkeeper or accountant can reverse this entry and account
for the expense in the new year when it is paid. The reversing entry
erases the prior year’s accrual and the bookkeeper doesn’t have to worry
about it.
o If the bookkeeper doesn’t reverse this accrual enter, he must remember
the amount of expense that was previously recorded in the prior year’s
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 adjusting entry and only account for the new portion of the expenses
incurred. He can’t record the entire expense when it is paid because
some of it was already recorded. He would be double counting the
expense.
Financial Statements
 Financial statements are reports that outline the financial activities of a
business. These are meant to present the financial information of the entity as
clearly and concisely as possible for both the entity itself and for other users of
the financial information.
 Financial statements are needed by several people and business enties for these
things provide valuable information about the financial position and the
financial performance as well as the cash flows of an entity that is useful to a
wide range of users in making economic decisions (Valix, 2015).
 The elements of financial statement include the financial position and financial
performance. Whn we talk about financial position, this refers to the status of
the assets, liabilities, and owners' equity while the financial performance refers
to the subjective measure of how well a business entity utilizes its assets to
generate revenues. A complete set of financial statements comprises an Income
Statement, Statement of Comprehensive Income, Statement of Changes in
Equity, Statement of Financial Position, Statement of Cash Flows and Notes to
Financial Statements.
Income Statement
It is a financial Statement that gives the result of the business operation or
financial performance of a business for a given period. Its elements include
income or revenue, costs, expenses and net profit or loss.
Example;

Statement of Comprehensive Income

This includes the profit or loss elements of income statement with an
additional component for other comprehensive income. This additional
component includes items of income and expense or gains and losses from
reclassification adjustments that are not recognized in the income statement.
ADC CORPORATION
Statement Comprehensive Income
For the year ended

2016
Gross Sales 750,900.
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 00
Less: Sales Return 5,800.00
745,100.
Net Sales
00
210,000.
Less: Cost of Goods Sold
00
535,100.
Gross Profit
00
116,000.
Less: Selling and Administrative Expense
00
419,100.
Operating Income
00
12,000.0
Interest Expense
0
407,100.
Net Income/loss
00
Statement of Changes in Equity
It is a financial statement that shows the movements in equity accounts at a
given period of time. Its elements are the beginning capital, net income/loss,
additional investments, owner’s withdrawals and the ending capital.

Statement of Financial Position

This type of financial statement is also known as the balance sheet. It is a
document that shows the financial position or financial condition of a business
for a given period of time. It can reflect an entity’s financial structure, liquidity
and solvency. Its elements include Assets, Liabilities and Equity.
ADC CORPORATION
Statement Financial Position
As of December 31

Description 2016
310,000.
Cash
00
180,000.
Accounts Receivable
00
110,890.
Inventory
00
Prepaid Expense 40,300.0
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 0
641,190.
Total Current Assets
00
80,700.0
Delivery Vehicle
0
230,500.
Machineries and Equipment
00
311,200.
Total Non-current assets
00
952,390.
Total Assets
00

89,000.0
Accounts Payable
0
34,900.0
Salaries Payable
0
15,500.0
Utilities Payable
0
139,400.
Total Current Liabilities
00
210,700.
Long-term liabilities
00
350,100.
Total Liabilites
00
602,290.
Capital
00
952,390.
Total Liabilities and Capital
00

Statement of Cash Flows

This financial statement summarizes the operating activities, investing
activities as well as the financing activities of an entity. It provides a list of
information about cash receipts and cash disbursements of an entity at a
given period of time.

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Notes to Financial Statements
These are additional notes which are usually placed at the last part of the
compilation of financial statements. This describes the summary of significant
accounting policies adopted by the business entity and other important
explanatory information regarding the things stated in the other financial
statements. This statement provides a narrative description or disaggregation
of items presented in the financial statements and information about items
that do not qualify for recognition since these items are non-accountable or
not quantifiable.

C. Valix and C.A. Valix, (2015). ―Theory of Accounts‖, GIC Enterprises &
Co. Inc. R.S. Roque, (2013). ―Management Advisory Services‖, GIC
Enterprises & Co. Inc. Investopedia, (2016). My Accounting Course, (2016).

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 Individual Activity:
Identify the following accounts that can be found in the Financial
Statements. Just simply put it in the table what financial statements the
accounts belongs.

Net income Sales Computer Office Supplies

Cash Collection Loans Payable Interest Expense Sales of
Computer
Building Receivable Collection Cost of goods
Sold
Additional Capital Interest Payable Land Tax
Payable
Statement of Statement of Statement of Statement of
Financial Comprehensive Change in Equity Cash Flows
Position Income

Summary

Accounting Cycle - refers to a series of sequential steps performed to accomplish the

accounting process
Financial statements - records that outline the financial activities of a business, an
individual or any other entity

SUMMATIVE ASSESSMENT
Test 1. Multiple choice
1. In 2001, Total sales were P 500,000; in 2002, Total sales P 620,000, in 2003,
Total sales is P 850,000. If you will apply the index analysis, what is the
percentage for the 2002?
a) 124%
b) 170%
c) 150%
d) 100%
2. A finance professional is using a percent change analysis of financial
statements. He used the formula (Most recent value-Base period value)/Base
period value. He is using a __________type of analysis.
a) Vertical
b) Diagonal
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 c) Horizontal
d) Zigzag
3. Lea is the owner of LG Merchandise. She wants to know the total sales, the
cost of sales, expenses and net income. What financial statement does she
need?
a) Statement of Financial Position
b) Statement of Change in Equity
c) Statement of Cash Flows
d) Income Statement
4. ABC Merchandise has P 100,000 current assets, P 120,000 non-current
assets, P 80,000 current liabilities and P 100,000 non-current liabilities. If we
apply the common size analysis. What is the percentage of the current
liabilities?
a) 36.36%
b) 36.37%
c) 45.45%
d) 45.46%
5. Lea want to know the information about cash receipts and cash disbursements
of an entity at a given period of time. What financial statement she needed?
a) Statement of Financial Position
b) Statement of Change in Equity
c) Statement of Cash Flows
d) Income Statement
6. What financial statement that summarizes the operating activities, investing
activities as well as the financing activities of an entity.
a) Statement of Financial Position
b) Statement of Change in Equity
c) Statement of Cash Flows
d) Income Statement
7. ABC Merchandise has P 100,000 current assets, P 120,000 non-current
assets, P 80,000 current liabilities and P 100,000 non-current liabilities. If we
apply the common size analysis. What is the percentage of the current assets?
a) 36.36%
b) 36.37%
c) 45.45%
d) 45.46%
8. JGC Company want to know the updated cash balance of the company
because they want to purchase a set of machine. What reports do they need?
a) Statement of Financial Position
b) Statement of Change in Equity
c) Statement of Cash Flows
d) Income Statement
9. In 2008, Total sales were P 100,000; in 2009, Total sales P 120,000, in 2010,
Total sales is P 150,000. If you will apply the index analysis, what is the
percentage for the 2010?
a) 124%

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 b) 150%
c) 170%
d) 100%
10. What reports that describes the summary of significant accounting policies
adopted by the business entity and other important explanatory information
regarding the things stated in the other financial statements.
a) Notes to Financial Statements
b) Business Notes
c) Preparation of Financial Statement
d) None of the above

LESSON 3 HORIZONTAL AND VERTICAL ANALYSIS

Introduction:
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Financial statement analysis is the process of evaluating risks, performance,
financial health and future prospects of a business using computational and
analytical techniques with the objective of making economic decisions. Horizontal
analysis is known as trend analysis. It is a technique that involves the comparison
of a line item over a number of periods. Vertical Analysis- is a preparation of a
common sized financial statement.
What I need to know

At the end of this chapter, the students should be able to:

1. Discuss about horizontal and vertical analysis; and
2. Perform vertical and horizontal analyses of financial statements of a single
proprietorship.

Pretest

Based on your past subject FABM2. Prepare a horizontal analysis based on the
following data.

Review
Ask the learner to discuss and explain the following;
1. The different steps in accounting cycle.
2. The different financial statements.

DISCUSSION
Horizontal Analysis
 From the word itself, we can say that the figures subject to mathematical
analysis is on a horizontal basis. For instance, we compare figures from
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 several years, so we are comparing the amounts in each account from the past
up to the present. An example of a horizontal analysis is the index analysis
 An index analysis is a percentage analysis of financial statements where all
figures are expressed for a base year equal 100 percent and subsequent
financial statement items are expressed as percentages of the values in the
base year.

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Vertical Analysis
 Under this type of analysis, the financial statements are measured based on
the relationship of each item in the financial statement with respect to the
amount of a certain account. So this facilitates analysis that is on a vertical
basis. An example of a vertical analysis is the common size analysis.
 In common size analysis, figures reported are converted into percentage of a
common base account. It is usually considered as the vertical analysis. For the
common size analysis of the statement of financial position, the total assets
figure is assumed to be 100%. For the common size analysis of the income
statement, the total amount of sales is assumed to be 100%. All other figures
are expressed as percentages with respect to these amounts.

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 C. Valix and C.A. Valix, (2015). “Theory of Accounts”, GIC Enterprises &
Co. Inc. R.S. Roque, (2013). “Management Advisory Services”, GIC
Enterprises & Co. Inc. Investopedia, (2016). My Accounting Course, (2016).

Individual Activity:
Prepare a vertical Analysis

Summary
Horizontal Analysis - is a financial statement analysis technique that shows
changes in the amounts of corresponding financial statement items over a
period of time Vertical Analysis - is the proportional analysis of a financial
28 | P a g e A C L Cstatement,
C o l l e g e where
o f M a each
n d a u line
e ● S item
H S Don
epaa rfinancial
t m e n t ● Pstatement
r e p a r e d is
b ylisted
: M . as
Juma adas
percentage of another item.
 SUMMATIVE ASSESSMENT

Prepare horizontal and vertical analysis of ADC Corporation’s Statement of Financial

Position and Comprehensive Income.
ADC CORPORATION
Statement Financial Position
As of December 31

Description 2016 2015

Cash 310,000.00 280,000.00

Accounts Receivable 180,000.00 195,600.00

Inventory 110,890.00 176,500.00

Prepaid Expense 40,300.00 38,900.00

Total Current Assets 641,190.00 691,000.00

Delivery Vehicle 80,700.00 58,000.00

Machineries and Equipment 230,500.00 270,400.00

Total Non-current assets 311,200.00 328,400.00

1,019,400.0
Total Assets 952,390.00 0

Accounts Payable 89,000.00 88,700.00

Salaries Payable 34,900.00 30,000.00

Utilities Payable 15,500.00 16,200.00

Total Current Liabilities 139,400.00 134,900.00

Long-term liabilities 210,700.00 230,000.00

Total Liabilites 350,100.00 364,900.00

Capital 602,290.00 654,500.00

1,019,400.0
Total Liabilities and Capital 952,390.00 0

ADC CORPORATION
Statement Comprehensive Income
For the year ended

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 2016 2015

Gross Sales 750,900.00 780,900.00

Less: Sales Return 5,800.00 8,690.00

Net Sales 745,100.00 772,210.00

Less: Cost of Goods Sold 210,000.00 189,700.00

Gross Profit 535,100.00 582,510.00

Less: Selling and Administrative
Expense 116,000.00 231,970.00

Operating Income 419,100.00 350,540.00

Interest Expense 12,000.00 11,300.00

Net Income 407,100.00 339,240.00

LESSON 4 FINANCIAL RATIO ANALYSIS

Introduction:
Ratio is a mathematical relationship between one numbers to another number. This
is used as an index for evaluating the financial performance of the business

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concern. We can classify ratio in various types. This includes liquidity ratio, activity
ratio, leverage ratio and profitability ratio.

What I need to know

At the end of this chapter, the students should be able to:

1. compute, analyze, and interpret financial ratios such as current ratio, working
capital, gross profit ratio, net profit ratio, receivable turnover, inventory
turnover, debt to- equity ratio, and the like

Pretest

1. What ratios are financial metrics that are being used to determine a company's
ability to pay off its short-terms debts obligations?
a) Leverage Ratio
b) Activity Ratio
c) Liquidity Ratio
d) Profitability Ratio
2. What ratios that relate to profits to sales and investments?
a) Leverage Ratio
b) Activity Ratio
c) Liquidity Ratio
d) Profitability Ratio
3. What ratios that helps us understand how the long-term funds are used by the
business entity?
a) Leverage Ratio
b) Activity Ratio
c) Liquidity Ratio
d) Profitability Ratio
4. What activity ratio that shows a business entity’s ability to pay off its accounts
payable?
a) Payable Turnover
b) Receivable Turnover
c) Sales Turnover
d) Profit Turnover
5. What ratio that focus primarily on how effectively the firm is managing two
specific asset groups, receivables and inventories, and its total assets in
general?
a) Leverage Ratio
b) Activity Ratio
c) Liquidity Ratio
d) Profitability Ratio

Review
Ask the learner the learner about their understanding about vertical and horizontal
analysis.

DISCUSSION
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Financial Ratios
 Liquidity Ratio
 These ratios are financial metrics that are being used to determine a
company's ability to pay off its short-terms debts obligations. The following
are some of the liquidity ratios.
 Current Ratio
The current ratio is a liquidity that measures a firm's ability to pay off
its short-term liabilities with its current assets. The current ratio is an
important measure of liquidity because short-term liabilities are due
within the next year.
Formula
Current Ratio= Current Assets
Current Liabilities

Example:
Charlie's Cake Shop sells cakes and other pastries in their municipality.
Charlie is applying for loans to help fund his dream of building an indoor skate
rink. Charlie's bank asks for his balance sheet so they can analysis his current
debt levels. According to Charlie's balance sheet he reported Php100,000 of
current liabilities and only Php25,000 of current assets.

Charlie's current ratio would be calculated like this:

Current Ratio= P 25,000.00 = 0.25
P100,000.00
As you can see, Charlie has more liabilities than his current assets. The
current ratio is only 0.25. This means that Charlies only has Php0.25
worth of assets that can be paid to Php1.00 worth of liability. This
means that his business is highly leveraged and highly risky. The
banks usually prefers that the prospective borrowers must have a
current ratio of at least 1. This is to ensure that all the current
liabilities of the business would be covered by its current assets. Since
Charlie's ratio false below 1, it is unlikely that his loan will be granted.
 Quick Ratio
The quick ratio or acid test ratio is a liquidity ratio that measures the
ability of a company to pay its current liabilities when they come due
with only quick assets. Quick assets are current assets that can be
converted to cash within 90 days or in the short-term. Cash, cash
equivalents, short-term investments or marketable securities, and
current accounts receivable are considered quick assets. Quick assets
include all current assets except for inventories and prepaid expenses.

Formula
Quick Ratio = Current Assets-Inventories-Prepaid Expenses
Current Liabilities
Example

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 Carole's Clothing Store is applying for a loan to remodel the storefront.
The bank asks Carole for a detailed balance sheet, so it can compute the
quick ratio. Carole's balance sheet has Php21,500 total current assets.
There were Php5,000 inventories and the balance sheet depicted a
prepaid tax expense of Php500. In addition, she has current liabilities
worth Php15,000.

Carole's quick ratio can be computed like this

Quick Ratio= P21,500-P5,000-P500 = 1.07
P 15,000
As you can see Carole's quick ratio is 1.07. This means that Carole
can pay off all of her current liabilities with quick assets and still
have some quick assets left over.

 Activity Ratio
 This is also known as efficiency or turnover ratio for this measures how
effectively the firm is using its assets. This focus primarily on how
effectively the firm is managing two specific asset groups, receivables and
inventories, and its total assets in general. The following are the activity
ratios.
 Receivable Turnover
This can also be called as the accounts receivable turnover. This is a
type of efficiency ratio or activity ratio that measures the frequency of
turning accounts receivable into cash within a period of time. Simply
stated, this ratio measures how many times a business can be able to
collect its average accounts receivable throughout the year. This can
also be considered as a liquidity ratio. This ratio can also be converted
into days by dividing the turnover to the total number of days in a year.

Formula
Receivable Turnover = Annual Credit Sales
Average Accounts Receivable

Average Collection Period = Days in Inventory

Receivable Turnover
Example:

Bill's Grocery Store sells different types of merchandise that are usually
consumed by the people in their locality. At the end of the year, Bill's balance
sheet shows Php20,000 in accounts receivable, Php75,000 of gross credit
sales, and Php25,000 of returns. Last year's balance sheet showed Php10,000
of accounts receivable.

In order to calculate the accounts receivable turnover, the first thing to

be obtained are the values of net credit sales and average accounts receivable.
Net credit sales can be obtained by deducting the sales returns from the
gross credit sales (Php75,000 – Php25,000 = Php50,000). On the other hand,
the average accounts receivable of Bill can be obtained by adding the
beginning and ending accounts receivable balances and dividing it by two
((Php10,000 + Php20,000) / 2 = 15,000).
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 Finally, Bill's accounts receivable turnover ratio and average collection
period can be like this.
Receivable Turnover = P 50,000.00 = 3.33
P15,000.00

Average Collection Period = 365 days =110 days

3.33

As you can see, the turnover of Bill’s Grocery Store is 3.33. This
means that the business entity collects its receivables about 3.3
times a year. Within the 365 days of a year, we can say that the
entity can be able to collect its receivables every 110 days. In other
words, when Bill’s Grocery Store makes a credit sale, it will take
the entity about 110 days to collect the cash from such sale
transaction. Note: If the beginning balance of accounts receivable is
not given, you may simply use the amount of ending balance. Do
not apply the averaging of amounts since only one amount is given.
 Payable Turnover
This is also known as the accounts payable turnover ratio. This is an
activity ratio that shows a business entity’s ability to pay off its accounts
payable. This is done by comparing the value of net credit purchases to
the average accounts payable of the entity during a period. This ratio
refers to how many times a business entity can be able pay off its
average accounts payable balance within the year. This can also be
considered as a liquidity ratio. This ratio can also be converted into days
by dividing the turnover to the total number of days in a year.
Formula
Payable Turnover = Annual Credit Purchase
Average Accounts Payable

Average Payment Period = Days in the Year

Payable Turnover
Example:
BBB Construction Supplies buys constructions materials from wholesalers
and resells these inventories through its retail store. During the current year,
the entity purchased Php1,000,000 worth of construction materials.
According to the balance sheet of BB Construction Supplies, the beginning
accounts payable was Php55,000 and the ending accounts payable was
Php958,000.
Here is how they would calculate the entity’s payable turnover ratio and
average payment period:
Payable Turnover = P1,000,000 = 1.97
P506,000

Average Payment Period = 365 days = 185 days

1.97
As you can see, the average accounts payable of BBB Construction
Supplies for the year was Php506,500. This is obtained by adding the
beginning and ending accounts payable and dividing the sum by 2.

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 Based on the formula of the turnover ratio, we obtained a value of
1.97. This means that BBB Construction Supplies pays back at an
average of 185 days after the date of incurring the liability.
Note: If the beginning balance of accounts payable is not given, you
may simply use the amount of ending balance. Do not apply the
averaging of amounts since only one amount is given.

 Profitability Ratios
These are ratios that relate profits to sales and investment. From word its self,
this ratio deals with profitability. The following are some of the profitability
ratios
 Gross Profit Margin
This is a type of profitability ratio that relates the gross margin or gross
profit of a business to the net sales. This financial ratio measures how
profitable a business entity is at selling its merchandise. In other words,
the gross profit margin or gross profit ratio is essentially the percentage
of markup on the price of the merchandise from its cost.

Formula
Gross Profit Margin = Gross Profit
Net Sales
Example
Assume John’s Apparel is a business engaged in selling clothing’s and
accessories. It paid Php100,000 on inventory bought for the year. The
business was able to sell all of the inventory for Php450,000.
The gross profit margin is computed below.
Gross Profit Margin = P350,000 = 0.78
P450,000
The gross profit means total sales less the cost of sales. So for the
gross profit, we have Php450,000 less Php100,000. For the net
sales we have Php450,000. As you can see, John’s Apparel has a
gross profit ratio of 0.78. This means that after the business pays
off the inventory costs, it still has 78% of its sales revenue to cover
the operating costs.
Note: If given in the problem, sales returns are being deducted
from the total sales to get the net sales. This may as well affect the
amount of the gross profit.
 Net Profit Margin
This is a type profitability ratio that measures the amount of net income
earned in every peso of sale made by the business. In other words, this
ratio shows what percentage of revenue was left after all expenditures
are paid.

Formula
Net Profit Margin = Net Profit
Net Sales

Example

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 Trisha's Tackle Shop is an outdoor fishing store that selling lures and other
fishing gear to the public. Trisha's net sales were Php1,000,000 and her net
income was Php100,000.
Here is Trisha's net profit margin is computed below

Net Profit Margin = P100,000 = .10

P1,000,000
Trisha’s Tackle Shop has a net profit margin of 10%. This means that the
entity earns Php0.10 for every one peso worth of sale.

 Leverage Ratios
This measures the long-term obligation of the business. Leverage ratios helps
you understand how the long-term funds are used by the business entity. A
few types of these ratios are discussed below.
 Debt to Equity Ratio
The debt to equity ratio is a liquidity ratio that compares the total debt
to the total equity of a business entity. The debt to equity ratio shows
the percentage of entity’s financing that comes from creditors and
investors.

Formula
Debt to Equity Ratio = Total Debt
Total Equity
Example
A company has loans amounting to Php600,000 and the equity of the
company is Php1,200,000.
The debt to equity ratio is computed below.
Debt to Equity Ratio = P600,000 = .50
P1,200,000

Having a debt ratio of 0.5 depicts that there are half as many loans
as there is shareholder financing. In other words, the assets of the
company are funded 1-to-2 by creditors to investors.
 Debt to Total Assets Ratio
The debt to asset ratio is a leverage ratio that measures the amount of
total assets that are financed by creditors. This can also depic the
percentage of assets that were paid with loans or credits. This may also
provide a measure of the business entity’s ability to meet its financial
obligations.
Formula
Debt to Total Assets Ratio = Total Debt
Total Assets
Example
Mark’s Auto Shop is an automotive repair shop in the locality.
Currently, Ted has Php100,000 assets and Php50,000 liabilities.
His debt-to-equity ratio would be calculated like this:
Debt to Total Assets Ratio = P50,000 =.50
P100,000
As you can see, the debt to equity ratio is 0.5. This means that Mark’s
Autoshop has Php1 assets for every Php0.50 worth liabilities.

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 C. Valix and C.A. Valix, (2015). “Theory of Accounts”, GIC Enterprises &
Co. Inc. R.S. Roque, (2013). “Management Advisory Services”, GIC
Enterprises & Co. Inc. Investopedia, (2016). My Accounting Course, (2016).

Individual Activity:
Solve for a profitability ratios using the following data;
EDMAR Construction Company
Statement Comprehensive Income
For the year ended 2016

2016

1,100,400.0
Gross Sales 0

Less: Sales Return 60,980.00

1,039,420.0
Net Sales 0

Less: Cost of Goods Sold 410,000.00

Gross Profit 629,420.00

Less: Selling and Administrative
Expense 278,900.00

Operating Income 350,520.00

Interest Expense 30,876.00

Net Income 319,644.00

Summary
Activity – effectiveness of the firm in managing specific asset groups
Leverage – the use of debt to finance assets and operations
Liquidity – ability to pay current obligations
Profitability – the ability of the business to earn profit
Ratio - a mathematical relationship between one numbers to another number

SUMMATIVE ASSESSMENT

1. A business has a total assets worth P 500,000, total liabilities worth P

125,000. What is the debt to total assets ratio?
a) 25.00
b) .25
c) .40
d) 40

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 2. According to ABC balance sheet, the accounts payable P 40,000 and annual
credit purchases amounted to P 150,000. Compute for average payment period
a) 97.33
b) 98.33
c) 97
d) 96.33
3. According ADC balance sheet, the accounts payable is P 120,000 and annual
credit sales if P 320,000. What is the payable turnover?
a) 2.66
b) 2.67
c) .375
d) .38
4. ACD Merchandise has inventories worth P 20,000, cash worth 50,000, prepaid
expense worth P 6,000 and equipment worth P 15,000. She has the current
liability of P 60,000. How much is the current ratio?
a) 1.26
b) 1.51
c) 1.27
d) 1.52
5. ABN Store paid P 100,000 on inventory bought for the year. The business was
able to sell all the inventory for P 350,000. What is the net profit margin?
a) 29
b) 71
c) .29
d) .71
6. A business has a total assets worth P 200,000 and total liabilities worth P
85,000. Equity can be computed by deducting liabilities from assets. What is
the debt to equity ratio?
a. 1.35
b. .74
c. .43
d. 73
7. ABC Store paid P 150,000 on inventory bought for the year. The business was
able to sell all of the inventory of P 450,000. Business expense were 20,000
and tax rate is 20%. What is the gross profit margin?
a) 66.67
b) .67
c) .66
d) 66.66
8. AR Store paid P 250,000 on inventory bought for the year. The business was
able to sell all of the inventory of P 850,000. Business expense were 20,000
and tax rate is 20%. What is the gross profit margin?
a) .71
b) 71
c) .50
d) 1.30
9. At the end of 2015 ABC Company balance sheet shows P 60,000 in accounts
receivable, P 150,000 of annual sales. The 2014 year-end balance sheet
showed 40,000 of accounts receivable. This amount became the beginning
inventory for the year 2015. What is the receivable turnover ratio?

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 a) .3
b) 2.5
c) 3
d) 3.75
10.ABC Company has inventories worth P25,000, cash worth P120,000,
Prepaid expense P 50,000 and equipment worth P 200,000. The company has a
current liability of P 90,000. How much is the quick ratio?
a) 2.17
b) .133
c) 1.33

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 LESSON 5 FINANCIAL PLANNING TOOLS AND CONCEPT

Introduction:
Financial planning is the task of determining how a business will afford to achieve
its strategic goals and objectives. The Financial Plan describes each of the activities,
resources, equipment and materials that are needed to achieve these objectives, as
well as the timeframes involved.

What I need to know

At the end of this chapter, the students should be able to:
1. Know the steps in financial planning;
2. Identify the different types of financial budget; and
3. Understand the basics of working capital management

Pretest

1. This includes budgets for direct material, direct labor and manufacturing
overhead
a) Selling and administrative expense budget
b) Production budget
c) Sales budget
d) Direct materials budget
2. A statement of financial position and income statement stated in future date
are examples of ____________.
a) Budgeting
b) Cash budget
c) Projected financial statement
d) Financial planning
3. This is the process of estimating the revenue and expenses over a specified
future period of time
a) Cash budget
b) Financial planning
c) Projected financial planning
d) Budgeting
4. This is used to calculate the number of labor hours that will be needed to
produce the units itemized in the production budget
a) Production budget
b) Direct labor budget
c) Direct material budget
d) Sales budget
5. This budget calculates the materials that must be purchased, by time period,
in order to fulfill the requirements of the production budget.
a) Direct material budget
b) Production budget
c) Selling and administrative budget
d) Sales budget

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 Review
Ask the learner summarize their learnings from last discussion

DISCUSSION
Financial Planning
 Financial Planning is a comprehensive and ongoing evaluation process of an
entity’s financial state to help them make sensible financial decisions to help
generate greater return on assets, larger growth in market share and solve
foreseeable problems.
The following are the steps in financial planning
1) Determining your current financial situation
2) Developing financial goals
3) Identifying alternative courses of action
4) Evaluating alternatives
5) Creating and implementing a financial action plan, and
6) Re-evaluating and revising the plan.
Step 1. Determine Your Current Financial Situation
The first step is to evaluate your current financial situation. Try to assess
your assets and liabilities as well as your income and expenses. One of the
basic foundations of financial planning activities is the listing of your current
and non-current assets, current and non-current liabilities, income generated
and expenses incurred. Using the financial ratios in the previous chapter
would also help you.
Step 2. Develop Financial Goals
Financial goals are your financial targets which are planned to be achieved
within a specified period of time. You must set your financial goals may it be
short-term, medium-term or long term. Setting a specific financial goal is very
important in financial planning. Your financial goal may include spending
your income to your desired activities, saving or investing money for your
future financial security. You should have a regular analysis and tracking of
your goals and how far have you achieved.
Step 3: Identify Alternative Courses of Action
Thinking and developing of alternative courses of action is essential for
making decisions. Many factors should be considered for these may influence
the alternative activities that you must have in order to achieve the goal that
you have set. You may decide to continue on your current course of action.
You may have an expanded and more intensive course of action. You may also
consider having a new course of action. Careful thought of alternatives will
help you have a more effective financial decision.
Step 4: Evaluate Alternatives
After identifying the alternative courses of action, you must evaluate them
and take many things into consideration. Careful evaluation is needed
because every decision closes off all alternatives. This talks about opportunity
costs. This is a trade-off of a decision. This refers to the loss of potential
advantage or gain from other alternative courses of action when one
alternative course of action is chosen. You must also evaluate the risk
involved in making your decision. To do this you must gather information
based on your experiences, information based on the experiences of others

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 and the information on the changing personal, social and economic
conditions.
Step 5: Create and Implement a Financial Action Plan
A financial action plan is a list of steps that must be done to achieve your
financial goal. This involves choosing ways to achieve your goals. As you
achieve your short-term goals, the goals next in significance will come into
focus. You may need assistance from other to implement your action plan. For
instance, you may seek the expertise of a broker in purchasing stocks, bonds
or other types of investments.
Step 6: Reevaluate and Revise Your Plan
There are many events which may affect your financial goals so you need to
regularly assess your financial decisions. Since it is a dynamic process, you
must reconsider and reassess the changing personal, social and economic
conditions from time to time. You must also regularly review the decision-
making process to help you adapt to changes and prioritize things and
activities which are in line with your financial goals.

Financial budgeting
 Budgeting is the process of estimating the revenue and expenses over a
specified future period of time. The master budget is the aggregation of all
lower-level budgets produced by a company's various functional areas. This
typically includes the sales budget, production budget, selling and
administrative expense budget and the projected financial statements.
 Sales Budget
This contains an itemization of a company's sales expectations for the
budget period, in both units and amount. This may include cash sales
and credit sales.
 Production Budget
This calculates the number of units of products that must be
manufactured, and is derived from a combination of the sales forecast
and the planned amount of finished goods inventory to have on hand.
This includes budgets for direct material, direct labor and
manufacturing overhead.
 Selling and Administrative Expense Budget
This is comprised of the budgets of all non-manufacturing divisions
such as the sales, marketing, accounting, engineering, and facilities
departments. This usually includes expenses regarding advertising,
insurance, rent, salaries, and utilities.
 Cash Budget
This contains an itemization of the projected sources and uses of cash
in a future period. This budget is used to ascertain whether company
operations and other activities will provide a sufficient amount of cash
to meet projected cash requirements.
 Projected Financial Statements
This includes projected Income Statement, Statement of Financial
Position and Cash Flow Statement.
Working Capital Management
 Usually, when we say working capital, we are referring to the current assets,
it is also known as the gross working capital. Net Working Capital on the
other hand considers both current assets and current liability. This is the

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 excess of current assets over the current liability during a particular period
and is therefore represented by the formula.
 Net Working Capital = Current Assets - Current Liabilities
 If the current assets exceed the current liabilities it is said to be positive
working capital. However, if the current liabilities exceed the current assets it
is said to be Negative working capital. The formula above depicts that working
capital management is essentially an accounting strategy with a focus on the
maintenance of a sufficient balance between a company’s current assets and
liabilities. An effective working capital management system allows businesses
to not only cover their financial obligations, but it also helps companies boost
their earnings. Managing working capital means managing inventories, cash,
accounts payable and accounts receivable. Working capital management is
needed in the proper cash controlling in purchase of raw materials or goods,
payment of salaries and wages, coping with daily expenses and providing
credit obligations. This also strengthens solvency, improves inventory
management, smoothens business operations and gives the firm the ability to
face crisis.
 Cash Management
The business needs cash to make payments for acquisition of resources
and services for the normal conduct of business. Cash is one of the most
important parts of the current assets. This is the money which a
business concern can disburse immediately without any restriction. The
term cash includes cash on hand such as bills and coins and the cash
in bank.
Cash management is the maintenance of appropriate level of cash to
meet the firm’s cash requirements and to maximize income on idle
funds.
 Motives of Holding Cash
o Transactions Motive – to meet payments arising in the ordinary
course of business
o Speculative Motive – to take advantage of temporary opportunities
o Precautionary Motive – to maintain a cushion or buffer to meet
unexpected cash needs
 Principles and Techniques in Cash Management
o Cash Collections
-Speed up the preparation and mailing of invoice
- Accelerate the sending of payments from customers
- Utilize technology to fasten the collection process
o Cash Payments
- Slow down the disbursement of cash
- Do not disburse large cash amounts immediately.
Instead, use checks as payment so that cash will be
deducted in a longer period of time
- Decelerate cash payment through lockbox system
 Inventory Management
Inventories constitute the most significant part of current assets
especially if the entity is engaged in merchandising activities. This is
needed in order to have a smooth running of the business activities.
Inventory management involves correct purchasing of raw material,
appropriate handling, secured storing and accurate recording. It also
considers things such as what to purchase, how to purchase, how much
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 to purchase, from where to purchase, where to store and when to use
for production.

 Principles and Techniques in Inventory Management

o Forecast demand and establish when to order and re-order
quantity
o Use the economic order quantity. This involves
determining the optimal order size for an inventory item
given its expected usage, carrying costs, and ordering costs
o Employ a cost-benefit analysis. Compare the benefits of
economies of production, purchasing, and product
marketing against the cost of the additional investment in
inventories.
o ABC method of inventory control may be useful. This is a
method which controls expensive inventory items more
closely than less expensive items.
o The business must have a Safety Stock. This is the
inventory stock held in reserve as a cushion against
uncertain demand (or usage) and replenishment lead time.
o Utilize Just-in-Time Inventory management if applicable
and economical. This is an approach to inventory
management and control in which inventories are acquired
and inserted in production at the exact times they are
needed.
 Receivable Management
Accounts receivable is the amount of money owed to a firm by
customers who have bought goods or services on credit. A current asset,
the accounts receivable account is also called receivables.
Receivable management is defined as the process of making decision
resulting to the investment of funds in these assets which will result in
maximizing the overall return on the investment of the firm. This also
refers to the decision that a business makes regarding to the overall
credit, collection policies and the evaluation of individual credit
applicants.
 Principles and Techniques in Receivable Management
o Offer cash discounts so that creditors will be encouraged
to pay at the discount period
o Offer Seasonal Dating – these are credit terms that
encourage the buyer of seasonal products to take delivery
before the peak sales period and to defer payment until
after the peak sales period.
o Utilize technology in receiving payments
o The financial manager may continually lower the firm’s
credit standards as long as profitability from the change
exceeds the extra costs generated by the additional
receivables.
o Anticipate bad debts by utilizing aging of receivables and
allowance method. Aging of receivables is a schedule of
customer balances classified by the length of time they
have been unpaid. Allowance method is a method of

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 accounting for bad debts that involves estimating
uncollectable accounts at the end of each period.

C. Paramasivan and T. Subramanian. (2005). “Financial Management”, New

Age International Ltd., Publishers. J. Van Horne and J. Wachowics(2008).
“Fundamentals of Financial Management”, Pearson Education Limited.
Novella (2013). The Financial Planning Process”, Mc Graw Hill.

Individual Activity:
Choose and plan any event. Prepare for the budget and how you are
going thru the entire process of your planning. Write this in a one whole sheet
of paper.
Summary
Financial Planning - an ongoing process to help you make sensible financial
decisions aimed at generating greater return on assets, growth in market share
and solving foreseeable problems.
Budgeting is the process of estimating the revenue and expenses over a specified
future period of time.
Working Capital - a measure of both a company's efficiency and its short-term
financial health.
SUMMATIVE ASSESSMENT

1. What working capital management that involves the correct purchasing of raw
material, appropriate handling, secured storing and accurate recording.
a) Receivable management
b) Cash management
c) Inventory management
d) None of the above
2. It is the most important part of current asset
a) Accounts receivable
b) Prepaid expense
c) Inventories
d) Cash
3. It means managing inventories, cash, accounts payable and accounts
receivable.
a) Inventory Management
b) Managing cash
c) Managing working capital
d) Receivable management
4. It is the maintenance of appropriate level of cash to meet the firm’s cash
requirements and to maximize income on idle funds.
a) Receivable management
b) Cash management
c) Inventory management
d) None of the above
5. It is defined as the process of making decision resulting to the investment of
funds in these assets which will result in maximizing the overall return on the
investment of the firm.
a) Receivable management

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 b) Cash management
c) Inventory management
d) None of the above
6. This is the amount of money owed to a firm by customers who have bought
goods or services on credit
a) Cash management
b) ABC
c) Working capital management
d) Accounts receivable
7. The __________motive of holding cash is to meet payments arising in the
ordinary course of business.
a) Receivable management
b) Working capital management
c) Transaction
d) Accounts receivable
8. The economic order quantity involves determining the optimal order size for an
inventory item given its expected usage, carrying costs, and ordering costs.
a) True
b) False
9. Receivable management considers things such as what to purchase, how to
purchase, how much to purchase, from where to purchase, where to store and
when to use for production.
a) True
b) False
10. It comprised the budgets of all non-manufacturing divisions such as the
sales, marketing, accounting, engineering, and facilities departments.
a) Production budget
b) Cash Budget
c) Selling and administrative budget
d) Sales budget

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 LESSON 6 SOURCE OF FUNDS

Introduction:
You may be wondering where to get funding for your business. Well, there many
sources. Let‟s uncover them in this chapter.

What I need to know

At the end of this chapter, the students should be able to:
1. Know the financial requirements of a business
2. Enumerate and classify the common sources of financing

Pretest

1. It is a type of funding is for private and non-banking companies.

a) Public deposits
b) Private deposit
c) Individual deposits
d) None of the above
2. This is financing method in which a business owner sells accounts receivable
at a discount to a third-party funding source to raise capital.
a) Lease financing
b) Trade credit
c) Factoring
d) Commercial paper
3. Maturities on commercial paper rarely range any longer than 280 days.
a) True
b) False
4. The terms of trade credit may vary from one entity to another and are specified
on the invoice issued.
a) True
b) False
5. This refers to the amount of net earnings not paid out as dividends.
a) Retained earning
b) Preference shares
c) Debentures
d) None of the above

Review
Ask the learner to explain the following;
1. Financial planning
2. Steps in Financial Planning
3. Budgeting

DISCUSSION

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Financial Requirements
 The financial needs of a business can be categorized as follows:
 Fixed Capital Requirement
In order to start business, funds are required to purchase fixed assets
such as land, building, plant, machinery, furniture and fixtures. This is
termed as fixed capital requirements of the enterprise. The funds
required in fixed assets remain invested in the business for a long period
of time.
 Working Capital Requirement
No matter how small or large a business is, it needs funds for its day to-
day operations. This fund is known as the working capital. This is used
for holding current assets such as stock of material, bills receivables
and for meeting current expenses like salaries, wages, taxes, and rent.
Common Sources of Funds
 If you are operating a business in form of single proprietorship or partnership,
your basic source of finance will be your personal savings and borrowings. The
following are the common sources of financing in the corporate world.
 Equity Shares
The company can obtain funds by offering their stocks to the general
public. An equity share, also termed as common stock or common share
is a form security that represents the holders‟ fractional ownership in a
corporation. Common shareholders are risk bearers due to their
fluctuating earnings. Their dividends or share in profits are given if
there are remaining amount after dividend payments to preference
shareholders. They have the right to vote on corporate policy decision
making and board of director election.
 Preference Shares
This is also a form of fund sourcing from the general public. Preference
shareholders are being paid first if there are dividend declarations but
they do not have voting rights. People who want to have a stable income
without undertaking higher risks prefer to invest in these shares
 Retained Earnings
This refers to the amount of net earnings not paid out as dividends. This
is usually being reserved by the company for its growth and
development.
 Debentures
This is a debt instrument which is usually used by large business
entities to borrow money at a fixed interest rate. This is not secured by
physical assets or collateral. This instrument is only supported by the
general creditworthiness and reputation of the issuer. Governments and
high standing private companies usually issue debenture bonds to
secure capital funding.
 Loan from Banks and Financing Institutions
This is a source of funding by borrowing money from banks or financing
institutions and is expected to be paid back with interest. These
institutions include commercial banks, investment banks, credit unions,
savings and loans associations and insurance companies.
 Public Deposits
This type of funding is for private and non-banking companies. They
may invite the general public to deposit their money with their company

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 to finance their working capital needs. This is usually unsecured and
has higher risks so the rate of interest on public deposits is usually
higher than that offered by banks and other financial institutions.
 Lease Financing
Lease may be defined as a contractual arrangement in which a party
owning an asset provides the asset for use to another, the right to use
the assets to the user over a certain period of time, for consideration in
form of periodic payment, with or without a further payment.
 Trade Credit
Trade credit is very common in business. This is the purchasing of
goods or services on credit. Meaning, there is no outlay of money yet,
the value of goods or services acquired will be paid on a specified future
date. The terms of trade credit may vary from one entity to another and
are specified on the invoice issued.
 Factoring
This is financing method in which a business owner sells accounts
receivable at a discount to a third-party funding source to raise capital.
Here the risk of credit, risk of credit worthiness of the debtor and as
number of incidental and consequential risks are involved. These risks
are taken by the factor which purchase these credit receivables without
recourse and collects them when due
 Commercial Paper
It is an unsecured promissory note issued by a firm to raise funds to
meet short-term debt obligations. Maturities on commercial paper rarely
range any longer than 270 days.
Classification of the source of funds
 The sources of financing mentioned above can be furthermore be classified
based on period, ownership and source of generation.
 Based on Period
On the basis of period, the different sources of funds can again be
categorized into three parts. These are long-term sources, medium term
sources and short-term sources.
Short term source of finances are those which are required for a period
not exceeding one year.
Medium-term source of finances are those which are required for a
period of more than one year but less than five years.
Long-term source of finances are those which are required for a period
of more than five years.
 Based on Ownership
On the basis of ownership, the sources can be classified into „owner’s
funds‟ and „borrowed funds‟.
Owner’s funds are those that are provided by the proprietors, partners
or shareholders of an entity. This is also termed as equity financing.
Borrowed funds refer to the funds raised through loans or borrowings.
This also called debt financing.
 Based on the Source of Generation
Another basis of categorizing the sources of funds can be whether the
funds are generated from within the organization or from external
sources.

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 Internal sources of funds are those that are generated from within the
business.
External sources of funds include those sources that lie outside an
organization

C. Paramasivan and T. Subramanian. (2005). “Financial Management”,

New Age International Ltd., Publishers. Investopedia.com J. Van Horne and
J. Wachowics(2008). “Fundamentals of Financial Management”, Pearson
Education Limited. “Sources of Business Finance”, Business Studies.

Individual Activity:
Explain in your own understanding the common source of financing
funds. Write your answer in a one whole sheet of paper.

Summary
Fixed Capital - funds are required to purchase fixed assets.
Working Capital - funds used for its day-to-day operations.
Common source of funds are; equity shares, preference shares, retained
earnings, debentures, loan from banks and financing institutions, public
deposits, lease financing, trade credit, factoring, and commercial papers

SUMMATIVE ASSESSMENT

1. These are a debt instruments which are backed only by the general credit
worthiness and reputation of the issuer.
a) Debentures
b) Lease financing
c) Public deposits
d) Factoring

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 2. Companies offer these shares initially at the stock exchange. This specific type
of shares has unstable earnings.
a) Public deposits
b) Commercial paper
c) Factoring
d) Equity shares
3. Fixed capital requirement includes resources for paying salaries and wages.
a) True
b) False
4. This is financing method in which a business owner sells accounts receivable
at a discount to a third-party funding source to raise capital.
a) Debentures
b) Lease financing
c) Public deposits
d) Factoring
5. This may be defined as a contractual arrangement in which a party owning an
asset provides the asset for use to another, the right to use the assets to the
user over a certain period of time, for consideration in form of periodic
payment, with or without a further payment.
a) Debentures
b) Lease financing
c) Public deposits
d) Factoring
6. A company can raise funds by inviting the public to deposit their savings with
their company.
a) Debentures
b) Lease financing
c) Public deposits
d) Factoring

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 LONG QUIZ

1. If current assets is Php100,000 and current liabilities is Php50,000. What is

the Net working capital?
a) P 100,000
b) P 200,000
c) P 150,000
d) P 50,000
2. This is the inventory stock held in reserve as a cushion against uncertain
demand (or usage) and replenishment lead time.
a) Beginning inventory
b) Safety stock
c) Demand stock
d) Inventory stock
3. When classified on the basis of source of generation, which does not belong to
the group?
a) Preference shares
b) Retained earnings
c) Debentures
d) Loan from banks
4. If Debt to Equity ratio is 1:2 or 0.50 and Total Equity is Php500,000, what is
the amount of Total Debt?
a) P 250,000
b) P 1,500,000
c) P 500,000
d) P 1,000,000
5. In this step in financial planning, one should periodically analyze your
financial values and goals.
a) Development of financial goals
b) Identification of Alternatives Courses of Action
c) Reevaluation and Revision of Plan
d) Evaluation of Alternatives
6. When classified on the basis of period, which does not belong to the group?
a) Factoring
b) Commercial paper
c) Common shares
d) Trade credit
7. When classified on the basis of period, which does not belong to the group?
a) Funding obtained from a financing company loan
b) An asset financing where there is a contractual arrangement to use an
equipment over a certain period of time, for consideration in form of
monthly payments.
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 c) Funding obtained from common stocks being offered to the general
public.
d) Funding obtained from a commercial bank loan.
8. Which is not a classification of funds based on the period
a) Short term
b) Long term
c) Continuous term
d) Medium term

9. In FPL's Income statement, Total sales is Php32,000,000 Cost of sales is

Php20,000,000 and Operating expenses is Php5,000,000. If you will be making
a vertical analysis what is the percentage of net income?
a) 65%
b) 22%
c) 35%
d) 78%
10. When classified on the basis of ownership, which does not belong to the
group?
a) Commercial papers
b) Debentures
c) Loan from banks
d) Equity shares
11. When classified on the basis of source of generation, which does not belong
to the group?
a) Common shares
b) Factoring
c) Commercial papers
d) Trade credit
12. Which of the following measures the firm's ability to pay its short-term
debts from its most liquid assets without having to rely on inventories
a) Quick ratio
b) Gross profit rate
c) Current ratio
d) Asset to debt ratio
13. In conducting a vertical analysis, which of the following accounts are not
used as a base?
a) Net income
b) Total assets
c) Total liabilities and equity
d) Sales
14. He is responsible for the accounting operations of the company.
a) Treasurer
b) Operations manager
c) Controller
d) Chief financial officer
15. Borrowed funds are also called as debt financing.
a) True
b) False
16. Which is a short term source of financing

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 a) A debt instrument used by large companies to borrow money, at a fixed
rate of interest.
b) The amount of net earnings not paid out as dividends.
c) Loan from a bank
d) Selling of accounts receivable
17. "Statement I. Financial statements are records that outline the
financial activities of a business, an individual or any other entity. These
are meant to present the economic information of the entity in question as
clearly and concisely as possible for both the entity and for readers.

Statement II. The elements of financial statement include the financial

position and financial performance. Financial performance is the status of
the assets, liabilities, and owners' equity while the financial position is a
subjective measure of how well a firm can use assets from its primary
mode of business and generate revenues."
a) Statement I is false; Statement II is True
b) Statement II is true; Statement II is false
c) Both Statement are False
d) Both Statements are true
18. These are the ratios that relate profits to sales and investment.
a) Liquidity ratios
b) Activity ratios
c) Leverage ratios
d) Profitability ratios
19. In 2014 and 2015, FPL Company’s total sales was P 10,000,000 and
P 15,000,000 respectively. What is the percent change in sales?
a) 5%
b) 33%
c) 3.3%
d) 50%
20. When classified on the basis of ownership, which does not belong to
the group?
a) Commercial papers
b) Loan from banks
c) Equity shares
d) debentures

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 Answer key:

Lesson 1
Pretest
1. B
2. A
3. B
4. A
5. B

Lesson 2
Pretest
1. B
2. D
3. C
4. B
5. A
Individual Activity
Statement of Statement of Statement of Statement of Cash
Financial Position Comprehensive Change in Equity Flows
Income
Computer Net Income Additional Capital Cash Collection
Office Supplies Sales Interest Expense
Cash Collection Interest Expense Collection
Building Sales of Computer Sales of Computer
Additional Capital Cost of goods Sold
Loan Payable
Receivables
Interest Payable
Collection
Land
Tax Payable

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Lesson 3
Pretest

Individual Activity

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Lesson 4
Pretest
1. C
2. D
3. A
4. A
5. B
Individual Activity
Gross Profit Margin = Gross Profit
Net Sales
= P629,420.00 = .61 or 61%
P1,039,420.00
Net Profit Margin = Net Profit
Net Sales
= P319,644.00 = .31 or 31%
P1,039,420.00

Lesson 5
Pretest
1. B
2. C
3. D
4. B
5. A
Lesson 6
Pretest
1. A
2. C
3. B
4. A
5. A

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