Management Accounting

Date: August 12, 2024 Types of Financial Statements

GAAP / IFRS - General Accepted
Accounting Principles/ International
I. Income Statement
Financial Reporting Standards
 The income of the business
Public Organizations (3 Types) within a year or less than a year
 Monthly, Quarterly, 1 Year
SEC (The Securities and Exchange
 Header: For the Year
Commission)
12/31/2023
 Responsible for corporation and  Note: Having a positive
partnership businesses operating profit/EBITDA is good
for the company
DTI (Department of Trade and  EBITDA – Earnings before
Industry) Interest, Taxes, Depreciation,
 Responsible for sole and Amortization
proprietorship businesses
II. Balance Sheets
BIR (Bureau of Internal Revenue)  A summary of the assets,
liabilities, and equity of the
 Responsible for Salary based
company
employees and Income
 Start from the very beginning to
 All types of Businesses
the current
Note: Before making investments in  Header: As of December
any business establishments as an 31,2023
investor you need to review the  Current – Can be liquidated
financial statements within or less than a year Ex.
Cash, Inventory
Going concern principles  Non-Current – Can’t be
 As a business the establishment liquidated within or less than a
will assume that their business year. Ex. Buildings, Machines,
will stay forever PLE
 Assets = Liabilities + Equity
Cost Accounting
Elements of Cost of Goods Sold III. Statement of Cash Flow
(COGS)  Beginning to end
 Movement of Cash throughout
- Direct Material (DM) the company
o Directly Traceable
o Raw Materials used by a
company
- Direct Labor (DL)
o People Involved in
manufacturing the
product
- Overhead (OH)
o Indirect
o Necessary Materials

For Example: Bautista company is a

table manufacturing business
Direct Materials
- Wood for the table
Direct Labor
- Salary for the laborer
Overhead
- Nails, Varnish, Sandpaper

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 o Rule: The Ideal 1:1

Financial Ratio’s
Date: Aug 19,2024
Type of Ratio’s
 Absolute Liquid Ratio
 Liquidity Ratios
o Used to analyze the
 Leverage Ratios
short-term solvency or
 Efficiency Ratios
financial position of the
 Profitability Ratios
firm
 Market Value Ratios
o Rule: 1:2

Liquidity Ratios
- Used to measure the ability of a
firm to repay both short- and
 Cash Ratio
long-term obligations
o Used to measure the
- This ratio is commonly used by
ability of the company to
creditors and lenders to decide
pay off short-term
whether to extend the credit or
liabilities with cash
debt, respectively, to
equivalents
companies
Types of Liquidity Ratios
 Current Ratio
o It measures the firm’s
ability to pay off short-  Operating Cash Flow Ratio
term liabilities with o Used to measure the
current asset number of times a
o Rule: If the current ratio company can pay off
of the company is high current liabilities with the
then it means the cash generated in a given
company can pay the period
current liabilities with
their current assets.
Thus, if the company has
a current ratio of 2.5X
then it is considered as
liquid than the current Leverage Financial Ratios
ratio of 1.5X - Used to measure the amount of
o The higher the current capital that comes from debt. In
ratio of the company the simpler words, it is used to
more it is more attractive evaluate the company’s debt
to the investors level
Types of Leverage Ratios
 Debt Ratio
o Used to measure the
relative amount of a
company’s asset that are
provided from debt
 Acid Test Ratio o Rule: Debt Ratios that
o It measures the company
are 0.4 or lower are
ability to pay off short considered better, while
term liabilities with quick the debt ratio of 0.6 or
assets higher is bad which

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 makes it difficult to a general rule the ideal
borrow money ratio is 2 or higher

Efficiency Ratio
- Also known as “Financial Ratio”
 Debt to Equity Ratio - Used to measure how well a
o Used to calculate the company is utilizing its asset
weight of the total debt and resources
and financial liabilities
against the shareholders
equity
o Rule: A good debt to
Types of Efficiency Ratio
equity ratio is anything
lower than 1.0. A ratio of  Asset Turnover Ratio
2.0 or higher is o Used to measure the
considered risky. Also, if company’s ability to
the debt-to-equity ratio is generate sales from
negative it means that assets
the company has more o Rule: In the retail sector,
liabilities than assets a ratio of 2.5 or more is
which makes it more considered as good, while
risky in the utilities sector
companies would likely
aim between 0.25 and
0.5
 Interest Coverage Ratio
o It shows how a company
can easily pay the
interest expense
o Rule: An interest
coverage ratio of 2 is a
minimum acceptable  Inventory Turnover Ratio
amount for a company, o Used to measure how
but analysts always many times a company’s
prefer companies with 3 inventory is sold and
or more replaced over a given
period
o Rule: A good inventory
turnover ratio is between
 Debt service coverage ratio 5 to 10 for most
o It shows how a company industries, which
can easily pay their debt indicates that you sell
obligations and restock your
o Rule: If the company has inventory every 1 to 2
a ratio of 1 or above then months.
it means the company is
generating sufficient
operating income to
cover annual debt and
interest payments. But as

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 company to its net sales
to determine operating
efficiency
o Rule: Having a margin
ratio higher than 15% is
considered good

 Accounts Receivable
Turnover Ratio
o Used to measure how
many times the company
can turn receivables into
cash over a given period
 Return on Assets Ratio
o Used to measure how
efficiently a company is
using its asset to
 Days Sales in Inventory generate profit
Ratio o Rule: Having a 5% or
o Used to measure the higher is considered good
average number of days while having a 20% is
the company holds considered great. The
inventory before selling higher the ratio the more
to customers the company is efficient
in generating profits

Profitability Ratios
- Used to measure the company’s
ability to generate income
relative to revenue, balance
sheets assets, operating costs  Return on Equity Ratio
and equity o Used to measure how
efficient a company is
Types of Profitability Ratios
using its equity to
 Gross Margin Ratio generate profit
o Used to compare the o Rule: Having a ratio of
gross profit of a company 15 – 20% is generally
to its net net sales to considered good.
show how much profit a
company makes after
paying its cost of goods
sold (COGS)
o Rule: The ideal ratio is
65%

Market Value Ratio

- Used to evaluate the share price
of a company’s stock/share
 Operating Margin Ratio
Types of Market Value Ratio
o Used to compare the
operating income of a  Book Value Per Share Ratio

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 o Used to calculate the per- Find the Current Ratio:
share value of a company
Solution:
based on the equity
available to shareholders Current Asset: 450,000
Formula: Current Liabilities: 200,000
450,000 / 200,000 = 2.25 (It is liquid)
BVR = (Shareholder’s Equity –
Preferred Equity) / Total Common Note: It is liquid since it is greater than
Shares Outstanding equal to 1.5
 Dividend Yield Ratio Find the Quick Ratio/Acid Test
o Used to measure the Ratio:
amount of dividends
attributed to Accounts Receivable: 200,000
shareholders relative to Cash: 100,000
the market value per
share Current Liabilities: 200,000

Formula: 300,000 / 200,000 = 1.5

DYR = Dividend Per Share / Share Find the Debt-to-Equity Ratio:

Price Solution:

 Earnings Per Share Ratio Total Liabilities: 450,000

o Used to measure the Total Equity: 600,000
amount of net income
earned for each share 450,000/600,000 = 0.75 (Good)
outstanding
Note: Good since it is lower than 1
Formula:
Find the Interest Coverage Ratio:
ESR = Net Earnings / Total Shares
EBIT: 200,000
Outstanding
Interest Expense: 30,000
 Price-Earnings Ratio
o Used to compare the 200,000/30,000 = 6.67 (Good)
company’s share price to
Note: Good since it is higher than 3
its earnings per share
Find the Gross Margin Ratio:
Formula:
Total Revenue: 1,000,000
PER = Share Price / Earnings Per Share
COGS: 600,000
(1,000,000 – 600,000) / 1,000,000 =
Sample Exercise
40%
Find the Return on Asset Ratio:
Solution:
Net Income: 119,000
Average Total Asset: 1,050,000
119,000 / 1,050,000 = 11.33%
(Better)
Note: It is a better or good ratio since
it is greater than or equal to 5
Find the Return on Equity Ratio:
Solution:
Net Income: 119,000
Shareholder’s Equity: 600,000
119,000 / 600,000 = 19.83% (Good)

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Note: It is considered good since it is - External Users
between 15 to 20% o Investors, Creditors,
Regulatory Agencies,
Find the Inventory Turnover Ratio:
Stock Market Analysts
Solution: and Auditors
 Uses: Used for
COGS: 600,000 assessing past
Average Inventory: 150,000 performance and
current financial
600,000 / 150,000 = 4 (Bad) position and
Note: Since the ratio that is considered making predictions
good is between 5 to 10 about the future
profitability and
Find the Asset Turnover Ratio:
solvency of the
Solution: company as well as
evaluating the
Net Sales: 1,000,000
effectiveness of
Average Total Assets: 1,050,000 the management

1,000,000 / 1,050,000 = 0.9523 Primary Information Sources

Information is available from the
following:
- Published Annual Reports
o Financial Statements
o Notes to Financial
Statements
o Letter to Stockholders
o Audit Report
(Independent
Accountants)
o Management’s discussion
Analysis of Financial Statements
and analysis
Date: Aug 21,2024 - Reports filled with the
government
o Form 10-K, Form 10-Q,
Analysis Form 8-K

- A process of breaking a complex

topic or substance intro smaller
Secondary Information Sources
parts to gain a better
understanding of it Information is available from the
following:
Financial Statement Analysis /
Financial Analysis - Other Sources
o Newspaper (Ex. Wall
- A process of understanding the
Street Journal)
risk and profitability of a firm
o Periodicals (Ex. Forbes,
through analysis of reported
financial information, by using Fortune)
different accounting tools and o Financial Information
techniques Organization such as:
(Moody’s Standard &
Who analyzes financial Poor’s Dun & Bradstreet,
statements? Inc, and Robert Morries
Associates
- Internal Users
o Other Business
o Internal Management
Publications
 Uses: Used for
planning, Methods / Tools of Financial
evaluating and Statement Analysis
controlling the
company  Horizontal Analysis
operations  Vertical Analysis

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  Common-Size Statements - Used to show only percentages
 Trend Percentages and no absolute dollar amounts
 Ratio Analysis
Trend Percentages
Horizontal Analysis
- It shows the changes overtime
- Used to calculate dollar or in a given financial statement
percentage changes in a items (can help evaluate
financial statement item from financial information of several
one period to the next years)

Note: To get the percentage of -

48.9% Note: Every beginning year will
always be 100%, to get the 109%,
Solution: 23,500 / - 11,500 = - 48.9% 116%, 123% and so on, you need to
Note: If the amount of difference divide the current year value with the
between the two years is negative, the beginning of year value. Based on the
percentage must also be negative dollar value amounts. Always round off
to the whole number
Solution: 1,991 / 1,820 = 109%
2,112 / 1,820 = 116%
Vertical Analysis
2,244 / 1,820 = 123%
- For a single financial statement,
each item is expressed as a Ratio Analysis
percentage of a significant total, - Expression of logical
e.g., All income statement items relationships between items in a
are expressed as percentage of financial statement of a single
sales period (e.g., percentage
relationship between revenue
and net income)

Note: To get the percentage of the

total assets of the years, you need to
divide each account to the total
Solution: 82,000 / 483,000 = 16.97%
but will be round off to 17%
30,000 / 387,000 = 7.75% but
again will be rounded off to 8%
Note: Again, same with the horizontal
analysis if there is a negative amount
of any account the percentage will
also be negative
Common-Size Statements

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 Income Statement (Service
Company)

Income Statement (Merchandising

Company)

Two types of manufacturing cost

- Product Cost
o Cost related to inventory
o Cost that are recorded as
Cost Concept, Classification and an asset in inventory
Accounting Cycle when incurred and
Date: September 2,2024 expensed as Cost of
Goods Sold when sol
- Period Cost
o Non-manufacturing cost
What is a cost?
related to the firm
A cost is a sacrifice of o Cost recognized for
resources. financial reporting when
incurred
Type of Cost
Direct Cost
- Outlay Cost
o Past, Present, or Future - Cost that, for a reasonable cost,
Cash Outflow can be directly traced to the
- Opportunity Cost product
o Forgone benefit from the
Types of Direct Cost
best alternative course of
action  Direct Materials
o Materials directly
Expense
traceable to the product
- Cost charged against revenue in  Direct Labor
a accounting period o Work directly traceable to
transforming materials
into the finished product

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Indirect Cost o Finished Goods Inventory
 Completed
- Cost that cannot reasonably be
products that have
directly traced to the product
not yet been sold
Manufacturing Overhead
FORMULAS FOR THE 3 INVENTORY
- All production cost except direct ACCOUNTS
materials and direct labor
Types of Manufacturing Overhead
 Indirect Materials
 Indirect Labor
 Other Indirect Cost
Prime Cost
- The “primary” cost of the
product.
Cost Behavior
- Direct Materials & Direct
Labor - How costs respond to a change
in activity level within the
Conversion Cost
relevant range
- Cost necessary to “convert”
Relevant Range
materials into a product
- Direct Labor & - Activity levels within which a
Manufacturing Overhead given total fixed cost or unit
variable cost will be unchanged
Non-Manufacturing Cost
Fixed Cost
- Recognized as expenses when
the cost are incurred - Fixed costs remain unchanged
as volume changes within the
Types of Non-Manufacturing Cost
relevant range
 Marketing Cost - Fixed cost per unit varies
o Cost necessary to sell the inversely to a change in activity
product - Fixed cost are “fixed” in “total”
o Advertising, Sales as activity changes
Commissions, Shipping - Ex. Rent
Cost
 Administrative Cost
o Cost necessary to
operate the business
o Executive Salaries,
Data Processing, Legal
Costs
Details of Manufacturing Cost
Flows
- Products costs are recorded in
inventory when cost are
Variable Cost
incurred
- A manufacturing company has - Cost that change in direct
three inventory accounts: proportion with a change in the
o Raw Materials Inventory volume within the relevant
 Materials range.
purchased to make - Variable cost “vary” in “total”
a product as activity changes
o Work-In-Process - Variable cost per unit stays
Inventory constant when activity changes
 Products currently within the relevant range
in the production - Ex. Groceries
process, not yet o The cost of food can vary
completed based on how much and

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 what type of food you o Req: SEC & BIR
purchase each week or  Variable Cost
day o The sum of all variable
cost of manufacturing
and selling a unit of the
product

Semivariable Cost
- Cost that has both fixed and
variable components
- Also known as “Mixed Cost”
- Ex. Taxi Fare
o Have a fixed cost of ₱45
but increases per km

Step Costs
- Cost that increases in total with
steps when the volume changes
to a particular level
- Ex. Office Space or
Warehouse Rent:
o A company may need to
rent additional space
when inventory or staff
exceeds current capacity.
Rent stays the same until
a larger space or
additional space is
needed, then it jumps to
a new level.

Components of Product Costs

 Full Cost
o The sum of all cost of
manufacturing and selling
a unit of a product
 Full Absorption Cost
o The sum of all variable
and fixed cost of
manufacturing a unit of
the product

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 FORMULA FOR HI-LOW COST
ESTIMATION

Statistical Cost Estimation

- Analyze cost within a relevant
range, which is the limits within
which a cost estimate may be
valid
- Relevant range for a projection
is usually between the upper
and lower limits (bounds) of
past activity levels of which
data is available

Regression Analysis
- Regression is a statistical
procedure to determine the
relation between variables
- It helps managers determine
how well the estimated
regression equation describes
the relations between costs and
activities
o Hi-Low Method
 Uses two data
points
o Regression
 Uses all of the data
points
Hi-Low Cost Estimation
PRACTICE PROBLEM
- This is a method to estimate
cost based on two cost
observations, the highest and
lowest activity level

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Fundamentals of Cost-Volume-
Profit Analysis
Date: September 4,2024

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