RIZAL SPECIAL EDUCATION LEARNING CENTER, INC.

Member, Association of LASSSAI-Accredited Superschools

Owned and Management by The Rizal Memorial Colleges, Inc.
Pardo de Tavera St., Davao City
Tel. No: 244-1301/222-4028

WEEK 6_Q2 APP2 - ENTREPRENUERSHIP

INPUT 22 Financial Forecasting

Specific Learning Objectives:

In this lesson, the students will be able to do the following:

● Understand the meaning of financial forecasting.
● Identify the different investment prerequisites in entrepreneurship.
DepEd Competencies
● Forecast the revenues of the business. (CS_EP11/12ENTREP-0h-j-14)
● Forecast the costs to be incurred. (CS_EP11/12ENTREP-0h-j-15)
● Compute for profits. (CS_EP11/12ENTREP-0h-j-16)

Lesson 1 Investment Prerequisites

To be able to reach out to potential investors, it is very important to maintain the financial projection of the business.
These forecasts may be a bit tricky every time a business owner anticipates his expenses. However, with a precise outline
and careful consideration, financial forecasting can be dealt with easily.

Financial forecasting is the act of estimating the future financial outcomes of a business, such as its income and expenses,
over a period of time. The forecasts obtained by the business are used to analyze the income statements, balance sheets,
and other cash flow statements.

Generally, financial forecasting can be performed through the use of accounting and sales data and other economic
indicators. For a typical business, a short-term projection will account for the first year of the business, whereas a mid-
term projection will account for the first three to five years of the business.

Investment Prerequisites

In relation to financial forecasting, another challenging part for the entrepreneur is to determine how much money or
capital is needed to start with his own venture. These investment prerequisites will allow him to assess the expenditures
he will incur with consideration to the technologies and operating levels required for his proposed business. There are
three established investments that have to be funded:

1. Organizational and Pre-operating Costs

The organizational and pre-operating costs pertain to those expenses in

preparation for the official launch or start of the business. These expenses
comprise those that are incurred during the start of a business. They may
also include those costs associated with the registration of a business with
the governing authority. In essence, any purchases made before the start
of business are deemed pre-operating costs for taxing and accounting
purposes.

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Analyzing the pre-operating costs of a business helps prevent incurring any expenses that are not related to the
business. For this reason, pre-operating costs are otherwise known as startup costs or pre-opening costs.

Example: Pre-Operating Costs of Business

The table below presents the most common pre-operating costs of business:

2. Production or Service Facilities Costs

These costs pertain to long-term investments that are needed for actual business operations. They include all
facilities, equipment, and tools needed to run the day-to-day operations of a business. The three basic categories
of production costs are the following:

a. Direct Material - The cost of direct materials refers to the purchasing of raw materials that go with production.
For instance, if a business manufactures or produces leather bags, then an example of its direct material cost
would be the leather that is used to make the bags.
b. Direct Labor - This refers to the benefits, fees, salaries, and other forms of payment given to employees and
staff who are directly involved in manufacturing the products. For instance, a business that gives benefits to
the workers in the assembly line would fall under direct labor costs.
c. Factory Overhead- The costs required in maintaining the overall production are categorized under factory
overhead costs. Likewise, these are the costs incurred in producing a product, such as the cost of operating
the machinery, tool, or equipment.

In substance, the production or service facilities cost include investment on land, building, machinery, tools, equipment,
furniture and fixtures, leasehold improvements, vehicles, computer, software systems, and all other things needed for
making or producing the product, running the business, and servicing its customers.

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 3. Working Capital Investments
Working capital refers to the liquid assets that a business has on hand. This
investment is important in entrepreneurship, for it is the source of payment
for all unforeseen and planned expenses of the business as well as its short-
term monetary obligations.
In a typical business scenario, one would be able to obtain working capital
investments and startup capital from grants, partners, and investors. On the
other hand, there are also other entrepreneurs who prefer using their own personal resources for funding their
businesses.

Working capital investment consists of the investment needed to be able to operationalize the business. It
primarily includes cash, accounts receivable, inventories (raw materials, work-in-process, and finished goods),
accounts or trade receivables, and other fees to maintain the business operations such as utility fees, rent, or
lease expenses, license fees, franchise fees, and insurance premiums.

Lesson 2: Income Statement Preparation

Specific Learning Objectives:

In this lesson, the students will be able to do the following:
● Identify the concept and purpose of income statements.
● Understand the steps involved in income statement preparation.
DepEd Competencies
● Forecast the revenues of the business. (CS_EP11/12ENTREP-0h-j-14)
● Forecast the costs to be incurred. (CS_EP11/12ENTREP-0h-j-15)
● Compute for profits. (CS_EP11/12ENTREP-0h-j-16)

An income statement, otherwise known as the profit and loss statement, is a detailed report that shows all the income or
earnings, expenses, and the resulting profits or losses of a business for a given accounting period. This is the primary
financial statement that must be prepared because the resulting net income or loss incurred by the business must be
calculated before preparing other financial statements.

The calculations made in an income statement shows potential investors the overall financial performance and
profitability of the business, most especially the efficiency of the business in generating profits from its total revenues. In
contrast to the balance sheet, the income statement focuses on net income or loss over a range of time. In short, yearly
income statements use revenues and expenses incurred over a 12-month period, whereas quarterly statements use
revenues and expenses incurred for a 3-month period.

Purpose of Income Statement

It has to be remembered, however, that different types of income statements are used for various reasons. The annual
income statement is prepared yearly for stockholders and potential investors of the business. There are those who also
prepare interim financial statements so that the management will be able to check the status of business operations
during the year. In some cases, departmental statements are likewise used to be able to assess the revenues and expenses
of a certain business segment. But in the end, the main purpose of an income statement is to communicate the profitability
and all activities of the business with its end-users, stockholders, and investors.

There are two groups of people who use an income statement - internal users and external users. Internal users are
composed of people who are in charge of the business as well as the board of directors in big corporations. These people
use the income statement to analyze the performance of the business and to be able to make effective decisions. For
example, the calculations or estimates shown in the statement will allow them to gauge whether it is better to expand the
business, close a department, make new product lines, and so forth.

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On the other hand, external users are composed of the investors and creditors of the business. These people are the
outside forces in the business who are indirectly related to its operations. Investors are interested in the income statement
of the business, for they are mainly concerned about whether or not investing their money in the business will yield
positive returns or not.

Income Statement Formula and Preparation

Since the income statement is meant to measure the performance of a business with respect to its revenues and expenses,
the formula is:

Revenues - Expenses = Income or Profit (Loss)

In summary, from the forecasted revenues of the business, the entrepreneur has to deduct the estimated cost of goods
sold. The difference between those two should give the gross profit of the business. The operating expenses must then
be subtracted from the gross profit to arrive at the operating profit. Afterward, the taxes due are then subtracted to
determine the net profit after taxes.

Example: Income Statement

Parts of Income Statement

1. Gross Sales or Sales Revenue

Every income statement would always start with the business’s gross sales or revenues. The approach to be taken
in calculating this figure will depend on the accounting method adopted by the business and how it assesses its
overall revenues.

Generally, gross sales represent the total revenue generated by the business for whatever period of time is
covered by its income statement. For instance, in the sample income statement shown, the time period is the year
ending on December 31, 2019.

2. Cost of Goods Sold (COGS)

The cost of goods sold refers to the direct costs associated with producing all of the products and/or services sold
by the business.

COGS comprises all direct expenses incurred, such as raw materials, labor fees, and shipping costs. In the case of
a milk tea shop, its cost of goods sold would include the cost of raw tea leaves, sugar, milk, and the packaging
used for the product.

When calculating the cost of goods sold, the cost of producing products or services that are not sold by the
business must not be included in the calculation. In essence, COGS does not include indirect expenses, such as
overhead costs, utility expenses, marketing or advertising expenses, rental expenses, and so forth.

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 3. Gross Profit/Margin
Gross profit/margin is derived from subtracting the total cost of goods sold from the sales revenue. This variable
of the income statement manifests the profitability of the business after taking into account the direct costs
incurred, i.e., the costs associated with making and selling its products, prior to subtracting its overhead costs.
In short, gross profit is one of the variables that analysts use to be able to assess the financial health and
performance of a business by calculating the amount of money that was left from product sales after deducting
its cost of goods sold.

4. Operating Expenses
Also referred to as general expenses, operating expenses mainly include rent or lease, bank fees, equipment or
machinery expenses, marketing and advertising expenses, and all other expenditures to keep the business going.
In some cases, income statements group these similar expenses into one broad category called “Selling, General,
and Administrative Expenses.”

5. Operating Profit/Margin
The operating profit in an income statement reflects the residual income after deducting all expenses or costs of
doing business, excluding deductions of interests and taxes. Also referred to as “operating income,” operating
profit serves as a good indicator of the potential profitability of a business because it does not include all other
external factors from the calculation.

6. Taxes Due
Taxes basically refer to the total amount of tax debt owed by the business to the Bureau of Internal Revenue (BIR),
the taxing authority in the Philippines.

7. Net Profit after Taxes

Net profit after taxes is the variable that always marks the end of an income statement. It is a financial term that
reflects the profit of a business after all taxes have already been paid. It represents the earnings after all expenses
have been deducted from the sales revenue of the business.

Lesson 3: Balance Sheet Preparation

Specific Learning Objective/s:

In this lesson, the students will be able to do the following:

● Identify the concepts in the balance sheet financial statement.

● Understand the steps involved in balance sheet preparation.
DepEd Competencies:

● Forecast the revenues of the business. (CS_EP11/12ENTREP-0h-j-14)

● Forecast the costs to be incurred. (CS_EP11/12ENTREP-0h-j-15)
● Compute for profits. (CS_EP11/12ENTREP-0h-j-16)

Introduction to Balance Sheet

A balance sheet, which is sometimes referred to as the “statement of

financial position,” is one of the financial statements that provide for
the so-called “book value” of a business. The balance sheet gives
information as to the ability of a business to meet its long-term
financial obligations. It is a statement that shows the assets, liabilities,
and equity of a business during a certain period of time. The period
of time being pertained to is the close of business on the date of the
balance sheet itself.

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Unlike other financial statements, a balance sheet primarily dwells on the internal and external performance of a business,
its previous performance, and how it is foreseen to perform in the future.

Purpose and Uses of a Balance Sheet

The main purpose of the balance sheet is to inform interested third parties about the financial health or financial position
of a business at a particular point in time by showing them what the business owns (assets), how much it still owes
(liabilities), and the capital invested in the business (equity). These third parties pay attention to the financial notes and
reviews provided by the management in its annual reports. Through this, they will be able to look into the results of the
business operations, the ability of the business to meet its liabilities with its current assets (liquidity), the number of tools
and elements it has in producing goods (capital resources), and so forth. The details included in the statement unveil
important relationships between data and trends that are capable of assessing the previous performance and the current
financial status of a business.

The balance sheet shows the assets, liabilities, and equity of the business. The pieces of information collected from
consecutive periods of time are grouped together to be able to forecast the financial trends of the business.

Components of Balance Sheet

The equation used in any balance sheet is Assets = Liabilities + Equity. Such equation is classified into three broad
categories, the value of which must be accounted for:

1. Assets
Assets represent all of the investments of a business, which include cash, accounts receivable, inventory of goods,
machinery, tools, equipment, facilities, and so forth. It is anything that a business owns, which holds an amount
of a quantifiable value that could be liquidated and converted into cash. Assets can be further categorized into
the following:
a. Current assets - These assets are generally what the business expects to turn into cash within a period of one
year. Examples of current assets include cash and cash equivalents, marketable securities, inventory, accounts
receivable, and prepaid expenses.
b. Noncurrent assets - These assets are referred to as the long-term investments that the business reckons to
hold for at least one year. The typical noncurrent assets of the business would include its fixed assets (business’s
plant, property, and office equipment), bonds, stocks, and intangible assets (patents, trademarks, and goodwill).

2. Liabilities
The liabilities of business pertain to anything that it owes to the suppliers, banks, the government, to its
employees, and to other financial institutions. These liabilities may include payroll expenses, rental payments,
bonds payable (long-term debts), and other debt payments. Similar to assets, the liabilities of a business can be
further broken down into the following:

a. Current liabilities - These are the liabilities of a business that are usually due within a period of one year. The
settlement of these liabilities may be from the use of current assets such as ash or from the sale of inventory.
Examples of current liabilities would include short-term notes payable, accounts payable, dividends payable, and
payroll liabilities.
b. Noncurrent liabilities - As with noncurrent assets, noncurrent liabilities are those that a business doesn’t expect
to settle within a period of one year. These long-term obligations would include long-term leases, bonds payable,
product warranties, and loans.

3. Equity
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 Equity primarily refers to the net worth of a business—the amount of money left after selling all its assets and
after paying its liabilities. In addition, the equity of business consists of share capital plus retained earnings. By
rearranging the original formula used in a balance sheet, the equation for equity would be Equity = Assets -
Liabilities.

Balance Sheet Preparation

A balance sheet should always be balanced in the sense that the assets of a business should be equal to the sum
of its liabilities and equity. Otherwise, any disparity might be caused by incomplete or misplaced data, errors in
inventory, and miscalculations.
Here are the basic steps in preparing for a balance sheet:

1. Determine the reporting period. A balance sheet is created to be able to show the business’s assets, liabilities,
and equity on a particular date, which is referred to as the reporting date.
2. List down the assets and liabilities. After identifying the reporting date, the next step would be tallying of all
the assets of the business on one side and all its liabilities on the other side. Categorizing these components
into different items would be easier for the analysts to understand the financial statement of the business.
3. Calculate and list down the equity. If a business is owned by a sole proprietor, the equity would be direct and
easier to point out. For bigger companies and corporations, the calculation for this item would be more
complicated depending on the stocks issued to their stockholders.
4. Add the total liabilities and total equity and compare them to assets. The final step is very crucial since this
is the phase where it will be determined whether the balance sheet is accurately done. The total assets of the
business must be equal to the sum of its total liabilities and total equity.

Example: Balance Sheet

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 Lesson 4: Financial Ratios and Measurements

Specific Learning Objectives:

In this lesson, the students will be able to do the following:
● Identify the most commonly used financial ratios and measurements.
● Explain the uses of different financial ratios.
DepEd Competencies
● Forecast the revenues of the business. (CS_EP11/12ENTREP-0h-j-14)
● Forecast the costs to be incurred. (CS_EP11/12ENTREP-0h-j-15)
● Compute for profits. (CS_EP11/12ENTREP-0h-j-16)

Financial ratios and measurements refer to the comparative magnitude of two statistical variables that are taken from
the different financial statements of a business. These values are oftentimes used to evaluate the overall financial health
of a business, most especially large companies and corporations. In a particular sector or industry, these ratios are
primarily used by the investors to help them in analyzing and comparing the different pieces of information contained in
the financial statements of a business.

In resorting to financial ratios, analysts will first gather the income statement, balance sheet, and cash flow statement of
a business that will help them in their assessment or evaluation. Calculating ratios are relatively easy, but understanding
and interpreting them are another thing. Analysis of these ratios will give out information as regards to the liquidity,
profitability, growth, and asset management of a business. In essence, financial ratio analysis serves two main purposes:

1. Keep track of the business’s performance

Being able to determine different financial ratios per period will help the business or the analyst in spotting trends,
developments, and any growth in a business. For instance, a record that shows an increasing debt-to-asset ratio
may signify that the business has incurred a lot of debts and may eventually become insolvent.
2. Make comparisons with competitors
Analysis of financial ratios is performed to determine if a business is performing better based on the industry
average. For instance, analysts will depend on the results of the return on assets ratio to know if the business is
using its assets efficiently or not.

Income Payback Period

In any business endeavor, if the entrepreneur wants to know how long it will take him to get back what he has invested
in the business, he must calculate the income payback period. The income payback period, simply known as the payback
period, is a financial ratio used to identify the time required to earn back the amount of investment in an asset from the
business net cash flows. In simpler terms, the income payback period is the period of time it would take to return the
initial investment to the entrepreneur. This can be computed as follows:

Income Payback Period = Total Investment / Annual Net Income after Taxes

A shorter payback period is better, for it indicates that an investor’s initial outlay is only at risk for a shorter period of
time.

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Example: Income Payback Period

Situationer:
Juan Dela Cruz, Inc. invested P500,000 for a new production line, and the production line produces a cash flow of P100,000
annually. Identify the payback period.

Income Payback Period = Total Investment / Annual Net Income after Taxes
Income Payback Period = P500,000 / P100,000 per year
Income Payback Period = 5 years
From the computation above, it can be concluded that it would take around five years for the business to recover its
investment.

It must be noted, however, that the income payback period should not be used as the only criterion for the approval of
the capital investment. Other considerations must be taken into account when making a capital investment decision, such
as whether lower-cost units must be purchased then the more expensive ones.

Return on Sales
Return on sales, more commonly known as the operating profit margin, is a financial ratio and measurement that is used
to calculate the efficiency of a business in generating profits from its revenue. This ratio is used to gauge the percentage
of revenues that are actually converted into business profits. In substance, the entrepreneur uses this ratio to calculate
how much profit the business is earning for each peso sold.

Investors, creditors, and financial analysts are interested in using this efficiency ratio, for it shows the percentage of money
that a business makes on its revenues during a certain period. Moreover, they can even make a comparative analysis of
the business’s performance from one period to another or compare two businesses for a particular period. The formula is
as follows:

Return on Sales = Net Profit after Taxes / Sales

Example: Return on Sales

Situationer: Juan Dela Cruz, Inc. is in the business of manufacturing leather bags. At the end of the financial year 2019,
Juan Dela Cruz, Inc. earned P500,000 in total net sales and recorded an operating profit of P120,000 after deducting all
operating expenses.
Return on Sales = Net Profit after Taxes / Sales
Return on Sales = P120,000 / P500,000
Return on Sales = 0.24 or 24%

Based on the computation above, it can be inferred that Juan Dela Cruz, Inc. is able to convert 24% of its sales into
profits, and it spends 76% of the money in running or operating the business. To be able to increase the business’s net
operating income, it may choose to focus on reducing its expenses or increasing its revenues.

Return on Assets or Return on Investments

Return assets (ROA), otherwise referred to as return on investments (ROI), is a financial ratio used by a business to
determine the percentage of profit that it earns in relation to its total resources. It is a profitability ratio that effectively
measures or gauges the rate of return on the resources owned by the business. In other words, the return on assets ratio
determines if a business can efficiently manage its assets in order to produce profits during a certain period.

9
If the entrepreneur is eager to know the return on investments made, which come in the form of assets, the following
computation may be used:
Return on Assets = Net Profit after Taxes / Total Assets (or Investments)

Example: Return on Assets

Situationer: Juan Dela Cruz, Inc. posts a net income of P2,000,000 in its current operations and owns P10,000,000 worth
of assets as stated in its balance sheet. What is its return on assets?

Return on Assets = Net Profit after Taxes / Total Assets (or Investments)
Return on Assets or Return on Investments = P2,000,000 / P10,000,000
Return on Assets or Return on Investments = 0.2 or 20%

From the computation above, it can be concluded that for every peso of assets the business invests in, it is able to obtain
returns of 20 cents in net profit per year.

10
 RIZAL SPECIAL EDUCATION LEARNING CENTER, INC.
Member, Association of LASSSAI-Accredited Superschools
Owned and Management by The Rizal Memorial Colleges, Inc.
Pardo de Tavera St., Davao City
Tel. No: 244-1301/222-4028
APP2- ENTREPRENUERSHIP- WEEK 6

NAME OF STUDENT: _______________________________________ DATE: _______________

GRADE/SECTION: __________________________________________ SCORE: ______________

Exercise 22.1

Direction: Briefly explain the three different investment prerequisites. Provide your answers in the table provided below.

Investment Prerequisites Definition

1. Organizational and Pre-operating costs

2. Production or Service Facilities Costs

3. Working Capital Investments

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 RIZAL SPECIAL EDUCATION LEARNING CENTER, INC.
Member, Association of LASSSAI-Accredited Superschools
Owned and Management by The Rizal Memorial Colleges, Inc.
Pardo de Tavera St., Davao City
Tel. No: 244-1301/222-4028
APP2- ENTREPRENUERSHIP- WEEK 6

NAME OF STUDENT: _______________________________________ DATE: _______________

GRADE/SECTION: __________________________________________ SCORE: ______________

Exercise 22.2

Direction: Read the situation below, then follow the given instructions.

A startup manufacturing business produces various office and home furniture. Its products range from computer
desks, office tables, study tables, conference tables to dining tables. You were asked by the business owner to give
suggestions or recommendations on how he can prepare his business’s income statement. Provide suggestions on how
he should prepare an income statement.

12
 RIZAL SPECIAL EDUCATION LEARNING CENTER, INC.
Member, Association of LASSSAI-Accredited Superschools
Owned and Management by The Rizal Memorial Colleges, Inc.
Pardo de Tavera St., Davao City
Tel. No: 244-1301/222-4028
APP2- ENTREPRENUERSHIP- WEEK 6

NAME OF STUDENT: _______________________________________ DATE: _______________

GRADE/SECTION: __________________________________________ SCORE: ______________

Exercise 22.3

Direction: Read the situation below, then follow the given instructions.

An entrepreneur owns a small supplies store that sells different school and office items such as pens, pad paper, bond
paper, printers, envelopes, and so forth. His store is located along Timog Avenue in Quezon City, and he pays P20,000 for
its monthly lease. It also has one delivery van that is used for the shipment of bulk orders to various customers.

Based on the information above, identify the current and possible assets, liabilities, and equity of the supplies store.

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 RIZAL SPECIAL EDUCATION LEARNING CENTER, INC.
Member, Association of LASSSAI-Accredited Superschools
Owned and Management by The Rizal Memorial Colleges, Inc.
Pardo de Tavera St., Davao City
Tel. No: 244-1301/222-4028
APP2- ENTREPRENUERSHIP- WEEK 6

NAME OF STUDENT: _______________________________________ DATE: _______________

GRADE/SECTION: __________________________________________ SCORE: ______________

Exercise 22.4

Direction: Answer the following questions briefly and coherently:

1. What are the financial ratios and measurements?

2. What is the importance of using financial ratios in entrepreneurship?

3. Why do entrepreneurs and third parties use financial ratios?

4. What analysis can entrepreneurs get from using the income payback period?

5. How would you generalize the interpretation of the return on sales ratio?

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