INTRO.

TO FINANCIAL STATEMENT ANALYSIS

COM5024 ROXY PADON | S.Y 2024-2025

aircraft parts
ACCOUNTING FOR MANUFACTURING ENTITY ● Glass used to make windows, bottles, and lenses
● Paper used to make books, newspapers, and
packaging
1.0 CONCEPT OF A MANUFACTURING BUSINESS
● Electronic components (such as chips, transistors,
● A manufacturing business is a type of enterprise and resistors) used in various electronic devices
that transforms raw materials into finished goods ● Food ingredients (such as flour, sugar, and spices)
for sale. used in food manufacturing
● This process involves the use of machinery, tools,
and labor to create products that meet customer 1.1 INDIRECT MATERIALS
needs and demands.
● Source of goods comes from manufacturing ● Used in the manufacturing process but do not
businesses become part of the finished product
● Most manufacturing businesses do not buy in cash ● Ex. factory supplies, oil & grease used in the
but in accounts or credits operation machinery
● Purchases made by a manufacturer are merely
purchases of materials 2.0 DIRECT LABOR

2.0 ASPECT OF A MANUFACTURING BUSINESS ● Assembly line workers who put together
components of a product
● Raw Materials ● Machinists who operate machines to shape and cut
★ These are the basic substances used in the materials
production process. ● Welders who join metal pieces together
★ Ex. wood, metal, plastic, and textiles ● Painters who apply finishes to products
● Manufacturing Process ● Sewing machine operators who create clothing or
★ This is the sequence of steps involved in other textiles
transforming raw materials into finished ● Quality control inspectors who examine products
products to ensure they meet standards
★ Not all direct materials or labor, it also includes ● Operators of specialized equipment (such as
the manufacturing costs furnaces, presses, or injection molding machines)
★ Ex. design, planning, production, quality control, ● Craftsmen who create handcrafted products
and packaging.
● Finished Goods 2.1 INDIRECT LABOR
★ This is the sequence of steps involved in
transforming raw materials into finished ● Includes the wages of employees who are
products indirectly involved in converting materials into
★ Outcome or produced products from raw goods
materials ● Included in the indirect costs of the factory
operation
MANUFACTURING COST
3.0 FACTORY OVERHEAD COSTS
1.0 DIRECT MATERIALS
● Consists of indirect materials, indirect labor and
● Becomes a part of the finished product other factory overhead
● Wood used to make furniture ● Factory rent or lease payments
● Steel used to make cars, bridges, and buildings ● Utilities (electricity, gas, water)
● Plastic used to make toys, bottles, and electronics ● Property taxes
● Cotton used to make clothing and textiles ● Insurance premiums (for the factory, equipment,
● Rubber used to make tires, gaskets, and other and workers)
products ● Depreciation on factory equipment
● Aluminum used to make cans, cookware, and ● Maintenance and repair costs for factory

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 equipment ● During and after production
● Salaries of factory supervisors, foremen, and ● Not directly used in the actual production
quality control inspectors ● Examples:
● Indirect materials (lubricants, cleaning supplies, ★ Production facilities,
tools) ★ Repairs & maintenance costs
● Factory supplies (pens, paper, office supplies) ★ Indirect manufacturing costs (rent, insurance,
● Environmental compliance costs administrative, property taxes & legal)
● Security costs ★ Electricity, water etc. (only related to the facility’s
● Employee benefits (health insurance, retirement ability to operate, not the actual manufacturing of
plans, paid time off) the product)
★ Product quality control
★ Factory supplies
TOTAL MANUFACTURING COST FORMULA
TMC = Direct Material Cost + Direct Labor +
Manufacturing Overhead 2.0 DIRECT COST

● Directly involved with the production and sales of

ASSOCIATED COSTS IN A product
MANUFACTURING BUSINESS ● Can differ based on many variables
● Production
1.0 PRIME COST ● Examples:
★ Direct labor costs, wages and other benefits for
● Cost of raw materials and direct labor, when added those directly involved in product production
together it is prime cost (assembly line workers, associated managers)
● It is the primary costs ★ Direct materials costs including those bought,
● Very important costs to produce goods used to make and directly used in the final
product (raw materials, components, any parts
PRIME COST FORMULA directly used in production)
PC = Raw Materials + Direct Labor ★ Manufacturing supplies & equipment
★ Fuel or power consumption used directly in the
2.0 CONVERSION COST manufacturing of a product

● Raw materials are converted by the laborer and the PRODUCT COSTS VS. PERIOD COSTS
manufacturing overhead.
● Includes indirect labor, materials, utilities incurred 1.0 PRODUCT COST
during the process, physical costs and financial
costs ● Cost incurred during the production
● Direct mats, expenses, labor
CONVERSION COST FORMULA ● Prime and Conversion Costs
CC = Direct Labor + Manufacturing Overhead ● The Cost of Goods Sold
● Examples:
2.1 FACTORY/MANUFACTURING OVERHEAD ★ Direct Material
★ Direct Expenses
● Any costs that are not directly involved (indirect) ★ Direct Labour
in a product. If it is not in the factory, it is a product ★ Manufacturing Overheads
cost
● They support the production process as a whole
● Associated by the factory or warehouse

INDIRECT COSTS VS. DIRECT COSTS

1.0 INDIRECT COST

● Incurred to continue operation and not directly

used in the actual product 2.0 PERIOD COST
● Fixed expenses, stable expenses

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● Cost incurred after the production materials)
● The Operating expenses ● Work in Process, Beg
● Examples: ★ The goods that are currently on production that
★ Administrative Expenses were not finished during the previous period
★ Selling Expenses ● Work in Process, End
★ Finance Costs ★ Goods are not produced during the current
★ Other Expenses period

FIXED COSTS VS. VARIABLE COSTS INCOME STATEMENT FORMULAS

1.0 FIXED COST

● Costs that are consistent and constant regardless

of units sold or produced
● Examples:
★ Rent or lease payments
★ Salaries and wages of permanent employees
★ Depreciation of assets such as machinery or
equipment

1.0 VARIABLE COST

COST OF GOODS MANUFACTURED
● Moves together with the goods sold
COGM = Manufacturing Costs + Work in process,
● Parallel and fluctuate as production or sales
Beg - Work in process, End
changes
● Examples:
★ Costs of raw materials : Number of Units COST OF GOODS AVAILABLE FOR SALE
Sold/Produce COGAS = Finished Goods, Beg + Cost of Goods
★ Cost of wages : Number of units produced/hours Manufactured
of labor
★ Packaging costs : Number of units products COST OF GOODS SOLD
COGS = Finished Goods, Beg + Cost of Goods
PREPARATION OF INCOME STATEMENT OF Manufactured - Finished Goods, End
A MANUFACTURING ENTITY
RAW MATERIALS AVAILABLE FOR USE
KEY TERM DEFINITIONS RMAU = Raw Materials, Beg + Purchases +
Freight In
● Finished Goods, Beg
★ Goods that were not sold during the previous RAW MATERIALS USED/DIRECT MATERIALS
year MU = Raw Materials, Beg + Purchases +
● Cost of Goods Manufactured Freight In - Raw Materials, End
★ Goods produced in the current period and are
ready for selling
DIRECT MATERIALS
● Finished Goods, End
DM = Materials Used - Indirect Materials
★ Goods that are not sold during the current
period, becomes the finished goods inventory
beg of the next period INDIRECT MATERIALS
● Raw Materials, Beg IM = Materials Used - Direct Materials
★ Materials not used from the previous period
● Raw Materials, End MANUFACTURING COST
★ Unused materials during the current period, MC = Direct Materials + Direct Labor +
will become the raw materials beginning of the Factory/Manufacturing Overhead
next period
● Raw Materials Used
★ Used in the manufacturing cost (direct

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SAMPLE PROBLEMS

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 ACCOUNTING FOR CORPORATION ENTITY HOW STOCK WORKS

1.0 CORPORATION ● Issue stocks to IPO

● Sells shares in stock market
● A separate & distinct entity from its owners ● Stocks are bought and sold
● A legal entity
★ Legally Registered HOW ARE CORPORATIONS FORMED?
★ Regulated under law
● No distinct owners ● Through filing incorporation
● Double Taxed ● Initial owners: Articles of incorporation -> By Laws
★ Net Income -> 25% Tax (provisions about managing the corporation) ->
★ Retained earnings to Dividends -> 10% Tax issue stock certificate

CONCEPTS OF CORPORATION 1.0 ARTICLES OF INCORPORATION

● Securities and Exchange ● Name of Corporation

★ Regulates corporations ● Location of the Principal Office
● Management ● Purpose of the Business
★ Owners -> Board Directors ● Description of the Capital Stock
■ Preserves interests of owners ● Names and addresses of the Incorporators
■ Decision and policy makers
★ Agents -> Management KEY TERM DEFINITIONS
■ Preserves interests of employees
■ Implements decision and policies ● Owners
★ Board of Directors
1.0 COMMON STOCK ● Agents
★ Management
● Also called Ordinary Stock ● Organization Costs
● Pure ownership ★ All the cost incurred in forming a corporation
● Shareholders has voting rights in the Board of ● Paid-In Capital
Directors ★ The amount paid by the owners for their shares
● Corporation issues stock (proof of ownership) and of stocks
cert ● Retained Earnings
● More Volatile, dividends are not stable, it grows or ★ Accumulated earnings of the corporation that
declines have not been distributed to the owners
● Dividends
1.0 PREFERRED STOCK ★ The portion of the accumulated earnings of the
corporation that have been distributed to the
● Creditor owners
● No voting rights ● Shareholder
● Constant dividends ★ Paid-In Capital - Investor investing
● Less volatile ★ Retained Earnings - Fruit of investments
● Priority in terms of dividends ● Par Value
★ Amount printed in the stock certificate
1.0 ONE STOCK CORPORATION ★ Value of a stock when first issued
● Market Value
● 1 type of stock ★ Amount that stock can be bought and sold on
● Common stock the open market
● Authorized Share
★ Total number of shares that corporate charter
1.0 TWO STOCK CORPORATION
authorizes a corporation to issue
★ Maximum number of share the a corp can issue
● Ordinary share (common stock) & preferred stocks
★ Corporations can make amendments to
● Ex. PLDT
increase number of shares
● Preferred stock comes before common stock

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● Issued Stock/Shares ● Capital Stock
★ Capital stock that has been sold and issued ★ Ownership rights in a corporation are
● State Value represented by the shares of capital stock
issued by the corporation to the owners
ISSUED STOCK
Issued = Authorized - Unissued SAMPLE PROBLEMS

AUTHORIZED STOCK
Authorized = Issued + Unissued

UNISSUED STOCK
Unissued = Issued + Authorized

● Treasury Shares/Stocks
★ Small portion of stocks that were issued/sold
but bought back by the company
● Outstanding Shares/Stocks
★ Issued stock is deducted from the treasury
stock
★ Basis for getting the Earnings per Share
★ Basis for computing the Dividend per Share
★ Basis for computing Book Value per Share
★ Actual ownership because it goes back to the
issued shares
OUTSTANDING STOCK
Outstanding Stock = Issued Stock - Treasury Stock

TREASURY STOCK
Treasury = Issued - Outstanding

● Shared Premium
★ If issued stock is higher than the par value, we
account for the shared premium
★ Also called additional paid-in capital or paid
in capital
SHARED PREMIUM
Shared Prem = Issued - Par Value

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 ★ Expenses of advertising and other costs of sale
● If there is no bidder
★ Corporation will purchase the delinquent share
and it will become treasury shares

SAMPLE PROBLEMS

ACCOUNTING FOR DELINQUENT SUBSCRIPTION

1.0 CAPITAL STOCK SUBSCRIPTION

● Capital Stock Subscription - An agreement in

which a buyer (subscriber) contracts to buy shares
of stock from a corporation at a specific price
● Corporation does not issue stocks until subscribers
makes the full payment

1.0 SUBSCRIPTION DELINQUENCY

● If the shareholder does not pay on the date fixed,

the shareholder is declared delinquent and the
delinquent share will be sold at public auction
● Board of directors may at any time declare due and
payable unpaid subscriptions
● Call - Official declaration expressed in the form of
board resolution stating the date fixed for payment
of the unpaid subscriptions
● Forfeited Payment - No issuance will be made
● With Highest Bidder
★ To the highest bidder - What he bid
★ To Delinquent Subscriber- Excess

BIDDING OF DELINQUENT SUBSCRIPTION

● Delinquent shares will be sold to the highest

bidder
● Highest Bidder
★ The person willing to pay the offer price of the
delinquent shares in exchange for the
least/small amount of shares
★ Ex. Maria - 140 shares, Rose - 150 shares &
Sheena - 600 shares. Maria is the highest bidder.
● Offer Price contains:
★ Balance due on subscription
★ Interest accrued on the subscription due

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