FINANCIAL ACCOUNTING AND REPORTING

For Service Providers and Merchandisers

 MODULES
1. Introduction to Accounting and Business
2. Business and Accounting in the 21st Century
3. Starting a Business
4. Analyzing a business to show result of
operating activities
5. Four steps in the accounting process
6. Completing the accounting process
7. Accounting for a merchandiser
8-10. Completing the accounting process for a merchandiser
Professor Zenaida Vera Cruz- Manuel
 THE BASIC BUSINESS ENVIRONMENT

Module 1

FINANCIAL ACCOUNTING AND REPORTING

For Servicers and Merchandisers
 Financial Accounting and Reporting

LEARNING OUTCOMES
A B C
Explain Net Worth Explain Business Role of Accounting

Define Assets Objective of business Business Transactions

Define Liabilities Types of operation Financial Reports

Accounting Equation Decision makers Financial Information

 The success of a business hinges on quality service and people. Accounting will
show how the three kinds of activities are transformed into relevant financial
reports to help the stakeholders make right and timely decisions. This chapter will
illustrate the business activities, and how these are summarized into financial
reports. The last pages explain the financial information provided by the financial
reports - profitability, liquidity and solvency.
A summary of the very essence of accounting, its concepts and financial
reports in Fig 1.2 next slide shapes the accounting environment. The shape is
further crystallized with the preparation of the formal accounting records and the
proper presentation of the financial reports in Chapters 5 to 7.

FINANCIAL ACCOUNTING AND REPORTING

For Service Providers and Merchandisers
FINANCIAL ACCOUNTING AND REPORTING
For Service Providers and Merchandisers
FINANCIAL ACCOUNTING AND REPORTING
For Servicers and Merchandisers
 A) Explain net worth
 Net worth is about your wealth and is measured in the form of
properties or assets. DO IT!!! Look around you, what assets
do you see?

 Ifyou do not owe anybody, that means no obligations to be paid, then

this wealth is your net worth. DO IT!!! Interview parents or relatives. What
obligations do you owe?

 Wealth or net worth gives a picture of your financial state. To measure

net worth or wealth, you have to put a value or price to the assets or
properties owned:
 A) Explain how net worth is measured.
Cellphone P 10,000
Laptop 40,000

Dresses 12,000

Shoes 4,000

Bike 15,000
Net worth is measured in terms of ______ such as the
Philippine peso. Total assets which represents
Jewelries ones net worth
15,000
amounts to P96,000. Cost Principle is one of the accounting
principles which guides accountants in computing for net worth.
 A) define assets and liabilities.
 Assets include cash and other properties owned, be it personal or real. It represents your net
worth, if there are no obligations or debts.
 But what if you purchased the laptop for P40,000 using a credit card? Then not all your assets
really belong to you as the credit company has a claim over the laptop until it is fully paid. The
obligation to the credit company or what you owe is called liability. From total assets of P96,000
deduct the liability of P40,000, this time your net worth (assets that you can really call your own)
will only be P56,000:

Total Assets P 96,000

Less liability 40,000
Net Worth P 56,000
DO IT!!
What are the three business values ?
What is another title for net worth?
WHAT IS NET WORTH AND WHY IS THIS IMPORTANT?
Net worth represents your Wealth or Finance which is made up of properties or assets.
You probably own several gadgets such as computer, cellphone, iPad, iPhone, as well as clothes,
shoes, bags and which amount to two hundred thousand pesos (P200,000). These are your
ASSETS that make up your wealth or NET WORTH. However, if the computer was purchased
for forty thousand pesos (P40,000) using a credit card, then not all the assets belong to you. The
credit company has a claim over the computer. This is a LIABILITY or obligation to pay which
will decrease your net worth from P200,000 assets minus P40,000 liability equals your NET
WORTH which is now only P160,000 in Philippine pesos.

Net Worth affects your status in life. For one, a big net worth means a stable life. Second,
knowing how much is your net worth helps you plan on how to improve it and make it grow.
Knowing how much is your net worth at the end of every year will give you a clear picture of where
your wealth or finances are going. Has it been growing (if you have more assets than liabilities) or
deteriorating? From your P160,000 net worth, if you borrow cash of P50,000, will your net worth
improve? No. Although your assets will grow, so will your liabilities, too. It is only profit that
will make your net worth grow. You must put up a business to earn profit and make your net
worth grow.
 A) Explain net worth in an Accounting Equation

 Accounting equation for net worth:

Assets P96,000 – Liability P40,000 = Net Worth P56,000

Liabilities have priority over assets. Your claim is measured after liabilities
have been considered.

 The equation can be expressed another way:

Assets 96,000 = Liabilities 40,000 + Net Worth 56,000

 Net worth is also called owner’s equity, appropriately termed if you are
talking about your own business venture.
 THE BEST WAY FOR YOUR NET WORTH TO GROW IS TO PUT UP A BUSINESS.
Let’s Do It!! Assets – Liabilities= Net Worth
Marny's Hostel showed the following which you should group into two.
Cash P120,000 Loan Due to BDO P280,000
Building 750,000 Payable to Suppliers 360,000
Food Inventory 120,000
Car 850,000
Equipment 100,000
Mortgage Payable 300,000 Furniture & Fixture 156,000

ASSETS
LIABILITIES
Cash P Mortgage Payable P
Building, Loan due to BDO
Food inventory, Payable to Suppiers _________
Equipment Total Liabilities P
Car
Furniture and Fixture ________ How much is the net worth of Marny?
Total Assets P Total Assets P -Total Liabilities P = NW P
Learning Outcome B. Business, and
Accounting as Information Provider
 Explain what is business and how to keep it financially well.
 Identify the users of accounting
 Define accounting and explain its uses.
 Describe the four financial reports prepared in business.

 Illustrated in the next module

ACCOUNTING AS A BUSINESS LANGUAGE
Accounting is defined as a service activity whose function is to prepare financial reports
that will provide relevant information about the business. It is difficult for users to make
financial decisions that are not supported by facts. These facts are contained in the accounting
reports. Accounting may also be defined as a process of recording, classifying and
summarizing transactions and events which are financial in nature and interpreting the
results thereof.
Accounting is a bridge between the company and the interested parties or statement users.
From the business activities which accounting accumulates, reports will be prepared and vital
information communicated to the users. Accounting speaks in a language that users must
understand, so that when they read the reports they will know what information it is trying to
convey to the interested parties.

BUSINESS ACTIVITIES ACCOUNTING REPORTS STAKEHOLDERS

 A business is an entity engaged in trade, an occupation or a
professional practice. What is its primary motive? What form
DO IT! Read page 6
 And answer ex 3
of business would you want to put up?

THE BASIC BUSINESS ENVIRONMENT

LET’S DO IT
 THE BASIC BUSINESS ENVIRONMENT
 If you are using your money for a business venture, you must track down the following
activities: from the money you put in, you buy goods and sell this at a mark up and collect
the monies from the customers. Of course you may need cash to pay for rent, telephone,
light and water to operate the business. Be sure you receive more money from
customers/clients than what you spend for the cost of goods or services. The difference
between what you received and what you paid is called profit.
 TYPES
TYPES OF
OF BUSINESS
BUSINESS OPERATION
OPERATION

SERVICE MERCHANDISING MANUFACTURING

Provides service to Buys and sells good Buys raw materials and
clients and to customers. converts these into
customers. Examples: shoe store, finished products before
Examples: beauty bookstore, drugstore, selling to customers.
parlor, school, travel and supermarket. Garment factory, shoe
agency and airline. factory, drug laboratory.
n
next
 Solve ex. 1 and 2 page 19LET’S DO IT slide
of the textbook.
1.May Perez of Manila is a graduate of culinary arts and an OFW working in a hotel in London. After
working for ten years she was able to save 100,000 pounds. She decided to go back to Manila and put
up her own Café de Malate. She used only the best local coffee beans for her brewed coffee and since
pastry is her expertise, she baked sweet bread, cakes and rolls on the side. The exchange rate of a peso
to a pound increased by 10% from the rate of P65 two years ago.
a. How much did she invest translated to Philippine pesos? 65 x 1.1=
b. Give the type of operation and the form of business that was set up.
c. Other than for profit, explain why people like May engage in business.

2.Refer to no. 1. She wants to buy the lot beside her house which is practically located in a business
district. This way she can expand her business and put up a Tour and Travel Agency. To do so, she
thinks she will need around P5,000,000. She remembered her two high school friends who are now
both working- Ann as a tour guide in France and Jean in the finance department of a food processing
company. They decided to make a go for it but their cash fund put together amounted only to
P1,500,000. They decided to apply for a loan.
a. What is the form of business and type of operation of the second venture?
b. List the sources of financing. What will they need to submit for this to be approved?
c. If they offer tour trips around Luzon, what additional assets will they need to buy? Will a
P5,000,000 capital be sufficient?
How a business earns profit
B. THE ROLE OF ACCOUNTING
 Accounting does this for a business:
 1) tracks down business activities,
 2) analyzes, calculates and records these activities, and
 3) prepares a progress report

DO IT! Define Bookkeeping

 What information will the progress report provide?

 And who are the interested parties who need these information?
 DO IT! Define Accounting
B. ACCOUNTING DEFINED

 It is a _______ activity whose function is to prepare

___________ reports that will provide relevant __________
about the business to statement users also called
___________. They make _________ but these must be
supported by facts. These facts are contained in the reports
prepared in accounting.

 Accounting may also be defined as a process of recording,

classifying and summarizing transactions and events which
are financial in nature and interpreting the results thereof.
B. The Accounting Process
Accounting as a language of business
DO IT! Read page 10, 12 and 13.
Who Uses Accounting Data?
USERS OF FINANCIAL INFORMATION
Users of financial statements are called stakeholders. A stakeholder is a person or entity who has a “stake” or interest in the
business. Aside from the owners or investors, the other stakeholders are the managers, lenders, suppliers, employees, government
and customers.
Investor or owner- the one who puts in capital (such as money or property) in a business endeavor. To minimize risk of losing
money, an owner or investor must read the financial reports and seek answers to the following questions: 1) Is the business
profitable?
2) Has it accumulated sufficient financial wealth to remain stable?
Manager- the one who is responsible for running the business. Financial reports make it possible to evaluate performance of
the business. 1) Are the plans being implemented beneficial to the business?
2) Is the business operating profitably?
A lender or creditor (example Banco de Oro) assesses the paying ability of the business-borrower by reading the financial
reports: 1) Will the business be able to pay its debt when it falls due?
2) Does it have liquid assets?
A supplier (example Divisoria Textile Store) offers goods or merchandise on cash basis or on credit term.
1) If offered on credit, will the business who is buying merchandise (such as T Shirts) in bulk be able to pay its account on the
date it becomes due?
2) Does it have liquid assets?
The government seeks to answer the following questions by reading the accounting reports:
1) Is the business paying the right taxes?
2) Is it filing all the required documents?
The employee wants: a) higher wages b) benefits c) good working conditions and d) security of tenure
The employee will assess the ability of the business to grant these demands through the financial reports
 DO IT!!!
Match the accounting users based on
the questions asked?
Matching Type:

Can we afford to ask for medical care? C _____ A. Financial

Manager

Is the company earning a satisfactory rate of return? F _____ B. Creditor

Do we have funds to expand or should we borrow? A _____ C. Employees

Is the cash sufficient to pay dividends to stockholders? A, F _____ D. Customers

Will the company be able pay for its short term debts? A, B _____ E. Government

Is the price of their product appropriate compared to _____ F. Investors

prices of competitors? D

Are they overpricing products which are considered G. Financial

basic needs? D, E ______ Manager

DO IT!! Answer exercise 12

DO IT!!
6. Various reports are prepared for the users. Identify the reports described below as either: A.
audited financial statements B. tax reports C. managerial reports D special reports
____1. A comparative report of Philippine Airlines which shows a down trend of operation for three
years starting 2019 as a result of the lockdown and travel restrictions.
____2. A performance report submitted to the Finance head of PAL showing the variances between
the actual costs and expenses incurred in 2020 by the marketing department and the 2020 budget
prepared for this department.
____3. A report prepared by the Finance Head of PAL and submitted to the judicial court in New
York showing the proposed rehabilitation plan with capital infusion by Lucio Tan.
____4. A sales report for the Vice President for Sales of Philippine Air Lines showing number of
flights and passengers based on specific routes being serviced.
____5. As the rehabilitation mentioned in 3) affected the operation of the company, comparative
financial reports showing result of operation were prepared for the years ending December 31 2020
and 2021.
 C. BUSINESS TRANSACTIONS
A business starts with FINANCING activities. The owner “finances” the
business with a start up capital in cash and other resources. If owner’s
contribution is insufficient, additional financing can be extended by banks
and other financing institutions. Financing activities also include
withdrawals (capital withdrawn) made by the owner/investor as well as loans
repaid to lenders.
As a business needs resources other than cash to be able to operate, it
engages in INVESTING activities such as the acquisition of properties in
land, furniture, machineries and equipment. Eventually these properties are
disposed or retired on its maturity date.
A business engages in OPERATING activities to earn profit. Related to
earning of income will be receiving money by selling goods or services.
DORelated
IT!! to incurring of expenses will be paying money for salaries and wages
for services of employees, for rent when using office space, for utilities when
7. You are given some activities done by an owner-manager of a health resort. Based on these activities,identify it
as Ai) financing B) investing C) operating D) personal activity

Example (1) A

Mr. Masikap is the owner of a piece of property situated in Tagaytay. He retired last March and decided to
put up a health resort.
(1) From his pension of P6,000,000, he invested P5,000,000 in the business.
(2) He deposited the rest in his personal account.
(3) He applied for a business loan from BDO and received cash of P5,000,000 to be paid in five instalments.
(4) A building was constructed for the resort which amounted to P7,000,000.
(5) P2,000,000 worth of furniture, fixtures and equipment were bought and paid in cash.
(6) Total sales revenue of P1,200,000 was collected in cash.
(7) P750,000 cash was paid for salaries, utilities and maintenance of the resort.
(8) The first instalment for the bank loan was paid.
Questions: a) How much was the net income earned by the resort?
b) Give the cash balance after transaction 8
c) Give the net worth of Masikap after transaction 8.
FINANCIAL REPORTS ILLUSTRATED
As mentioned in the early part of this chapter, there are four financial statements from
which vital information can be extracted:

a) Income Statement- shows how wealth is produced by listing the revenues earned
and expenses incurred by the business.

b) Statement of Owner’s Equity- shows why the net worth changed by listing the
activities that caused it to increase or decrease.

c) Statement of Cash Flows- shows what happened to the cash by enumerating the
activities of cash received and cash used by the business.

d) Statement of Financial Position- shows how the wealth of the business stands by
enumerating the assets, liabilities and net worth of the business.
Doria Xerox Center Activities for June
 The financial reports are illustrated using the business set up by Ms. Doria who opened a Xerox Service Center
with the following business activities:
 1) Invested on June 1 P200,000 out of her P300,000 pension.
 2) She also borrowed from UCPB another P200,000 for use in the business.
 3) With this she bought a copying machine for P350,000, and supplies for P20,000. The remaining P30,000 she
set aside for operating needs of the business.
 4) For June, she received P48,000 from the customers for reproduction work
 5) She paid P5,000 for rent and P3,000 for power and water.
 6) Of the supplies bought, 40% were used up. :

DO IT ! Identify the business activities: a) financing,

b) investing , c) operating
DO IT ! Answers:
Using the Doria problem in the previous slide ,
identify (by numbers) the following activities:

Financing- Nos _1___, _2____

Investng- Nos ___3__, _____

Operating- Nos __4__, __5 and 6___

 DO IT ! Answers:
Using the Doria problem, prepare the reports (slide 40): profit
statement (transactions 5, 6 and 7 will appear in this statement),
capital statement (owner’s contribution and the net profit), cash
flow statement (cash receipts and disbursements) and statement
of financial position (assets, liabilities and net worth)

Review slides 14 and 23.

ACCOUNTING REPORTS ILLUSTRATED
How to assess the Doria business using the accounting reports:
 The Income Statement or Profit Statement describes how the business operated or
produced wealth over a period of one month. It lists the revenues (reproduction service
of P48,000) earned and the expenses (operating expenses of P16,000) incurred by the
business. A favorable operation called profit P32,000 was obtained since revenues
exceeded expenses.
 The Statement of Changes in Owner's Equity explains what happened to her net
worth. It grew from P200,000 to P232,000 because of the profit. There are four
activities affecting owner’s equity or net worth
1) Investment (P200,000)
2) Withdrawals (none)
3) Profit P32,000
4) Loss (none)
, In this
DO ITillustration only two of these factors were affected: investment and net profit.
What if the business incurs a net loss, what will be the effect on the
 Accounting Reports explained
 The Statement of Cash Flows explains why the amount of cash changed over a period of time. The report makes a

listing of where the cash came from (investment, borrowing, operating, a total of P448,000) and where the cash was

used (copying machine and expenses, a total of P378,000) resulting in a cash balance of P70,000 at the end of the

month.
 The Statement of Financial Position gives information about the financial status of the business by listing its

assets (cash, supplies and copying machine) and liabilities (debt to pay BDO) and from which the net worth of the

owner over the business is determined. In the above illustration, the scarce wealth (initially a total of P200,000) was

used productively to earn profit (P32,000) which enhanced the wealth of the owner (P232,000). Total assets is

now P432,000, but the bank has a claim of P200,000 over it, so net worth is only P232,000.
 Accounting Reports explained

 Profitability- the income statement shows whether the business is profitable. A list of
_______ and ________ of a business for a period (say one month) shows whether the
business is a ___________, or _________ or ________, Refer to page 9.
 Solvency and Liquidity- The statement of financial position lists the ________ and
_________ and shows whether the business is liquid or not. The ________ must be
adequate to cover the _________ and leave a satisfactory net worth to make it financially
strong to withstand financial pressures or problems like the pandemic. A business is
_________ if it can pay promptly obligations which are immediately due. Liquid assets
consists of ________, _______, and ________, A business which can stand financial
pressure over a long period of time is ________.
 Profitability, Solvency, and Liquidity are three very important information stakeholders will look for when
reading the accounting reports.
 In summary:
 The accounting reports prepared are used to assess the following:

 Is the business profitable?

 Is the business liquid?
 Is the business solvent?
The Doria business shows it earned profit. Is it also
Let’s Do It!! liquid and solvent?
  Continue with the Doria illustration, refer to slide 39. The following transactions
took place for the month of July. Sales amounted to P52,000. Paper and ink were
purchased and paid for P20,000. Total supplies available amounted to P32,000, half of
these were used up. Monthly rent was again paid. Power and water were paid but it
increased by P1,500. Doria made a P5,000 cash withdrawal. She paid her UCPB loan for
P50,000.

Let’s Do It!!
Let’s Do It!!
 In summary:
 The accounting reports prepared are used to assess the following:

 Is the business profitable?

 Is the business liquid?
 Is the business solvent?
The Doria business shows it earned profit. Is it still
Let’s Do It!! liquid and solvent?
11. Two business proprietors approached you for a loan. Maamo has a travel agency with assets worth
P500,000 and liabilities of P200,000. Maganda has a beauty parlor with assets worth P400,000 and liabilities of
P200,000. Both businesses are doing well and earning P100,000. They plan to borrow P300,000 and put up a
branch. You will need to know:
a. how much is net worth. The higher the net worth, the more solvent the business is.
b. whether business is profitable. Compute for return on equity: net income divided by net worth x
100. Compute for return on assets: net income divided by assets x 100.
c. Based on a) who is more solvent? Based on b) who is more profitable?
Let’s Do It!!

12. Gary, a businessman, plans to sell his Rent A Car Agency and go abroad to join his family. He offers to sell
his business to a friend, Willy. The assets amount to P1,500,000 but there is a liability amounting to a third of
the assets. Willy wants to know what will be a fair price for Gary's business. He has only P750,000 and thinks
that it may not be enough. You agreed to help her and asked for Gary’s statement of financial position.
The assets include accounts due from clients P150,000 whose whereabouts Gally could not for certain know
anymore except for one customer who owes him P50,000. Repair equipment is another asset listed in the
statement as P500,000 which was bought ten years ago but is currently worth half its cost price. Given this
information, what will be the revised total assets of the business and what will be its net worth to the owner?
Will the money of Willy be sufficient to buy the business of Gary?
Use the following as a guide:
Reported net worth (assets less liabilities) P xx
Less: Worthless receivables (xx)
Decrease in value of equipment (xx)
Revised net worth at its current market value P xx

Can willy afford to pay? Compare the revised net worth with the money Willy has.

Let’s Do It!!
15. Mr. Siojo opened an internet shop on October 1 with a cash investment of P200,000. After three months of
operation, the following activities were given to you for study:

Cash received from customers P205,000

Cash borrowed from the bank 150,000
Siojo’s cash withdrawal 15,000
Utilities, salaries, supplies and rent paid 115,000
Cash paid to the bank 50,000
Cash purchase for equipment 100,000
Cash purchase for furniture 25,000

The policy of the store is: No Credit allowed. Likewise, all expenses are paid in cash.
Required: Follow the Doria format and
a) Compute for the profit or loss after three months of operation.
b) Prepare a statement of changes in equity for the three-month period.
c) Compute for the cash flows for three months ending December.
d) Prepare a statement of financial position as at December 31.
Let’s Do It!!
16. The cash balance of Waterfront Hotel on December 31 of the previous year was P750,000. For
2021, the finance manager made the following forecast:
a) Total revenues will amount to P1,200,000 but P200,000 will be uncollected.
b) Total expenses will amount to P550,000 but P150,000 will be unpaid.
c) Business loans will be paid P300,000.
d) Owner’s personal drawings will amount to P100,000
e) New equipment will be acquired and paid in cash for P175,000.

The forecast for cash is that this will decrease because of the loan payment and new equipment
acquisition. Is the finance manager right?
Use the following as a guide:
Cash inflows from sales revenues P xx
Less Cash outflows for: Expenses paid P xx
Owner's cash drawing xx
Payment of loans xx
Acquisition of equipment xx (xx)
Net cash inflow (or outflow) during the month P xx
Let’s Do It!!Cash balance December 31, 2020
Add: xx
Cash balance January 31, 2021 P xx
Preparation of a statement of cash flows is discussed extensively in Chapters 4 and 8.
 17. Refer to Exercise 16. Using the same information, what will be the projected net income
of Waterfront Hotel? Use the following as guide:

Sales Revenues earned (cash and credit) P xx

Expenses incurred (cash and credit) xx
Net Income P xx

The income statement is discussed extensively in Chapters 4, 8 and 11.

18.Refer to Exercises 16 and 17. Using the same information, if the owner's equity was
P1,250,000 on December 31 of the previous year, what was the owner's equity as at
January 31 of the current year? Did the owner’s equity increase? Explain why or why
not. Use the following as guide:

Owner's Equity, December 31 P xx

Net Income xx
Owner's Drawing ( xx)
Let’s DoOwner's
It!! Equity, January 31 P xx

The statement of owner's equity is discussed extensively in Chapters 4, 8 and 11.

TO MY DEAR COLLEAGUES,

THANK YOU SO MUCH. MORE POWER AND GOD BLESS YOUR

ENDEAVORS.

YOURS TRULY,

PROF ZEN MANUEL

JULY 18, 2022
 INTRODUCTION TO ACCOUNTING AND BUSINESS

END OF MODULE 1

Financial Accounting and Reporting 1

(for Service Providers and Providers)
Author: Prof Zenaida Vera Cruz-Manuel