2. Financial Statements
Is a formal record of the financial activities
and position of the business, person, or other
entity.
3. Form of Business Organizations
1. Sole or single proprietorship
is a business owned by one person.
2. Partnership
is a business owned by two or more owners.
General partnership, profits and losses are shared by all
partners.
Limited partnership, who will not actively participate in the
management of the business.
3. Corporation
is the most complicated form of business organization.
4. Type of Business Activities
1. Service type of Business
Offers products with no physical form like skills, field of
expertise, and consultancy.
2. Merchandising type of Business
is the “buy and sell” business.
3. Manufacturing type
buys products known as raw materials, with an intention of
transforming them into a new products.
5. Basic Financial Statements
1. Income statement
shows the performance of the business for a given
period of time.
2. Balance sheet
shows the financial position of the business as of a
particular date.
6. Performance Measurements
1. Liquidity
is the ability of the business to pay its currently maturing
liabilities as they fall in its due date.
2. Solvency
is the ability to pay long-term liabilities.
3. Profitability
addresses a very basic goal of any business- to earn the
highest possible profit or return on its investment.
7. Vertical and Horizontal Analyses
1. Vertical Analysis ( common-size)
is the process of comparing amounts in the financial
statements within the same accounting period.
2. Horizontal Analysis ( trend analysis)
involves comparing amounts in the financial statements of
two or more consecutive periods.
8. Financial Ratios
1. Liquidity Ratios
• Current Ratio, also known as working capital ratio, is one way to
assess the overall liquidity of a company by comparing current
assets to current liabilities.
• Acid Test Ratio, also known as quick ratio, is another way to assess
the overall liquidity of a firm.
• Receivables Turnover and Age of Receivables, to assess the
liquidity of these assets, compute how long it takes for the company
to convert assets into cash.
• Inventory Turnover and Age of Inventory, it measures the
number of times the inventory is replaced during the accounting
period.
9. Financial Ratios
2. Solvency and Stability Ratios
• Times interest earned, measures the extent to which a company’s
operations cover interest expense.
• Debt Ratio, measures the percentage of assets funded by creditors.
• Equity Ratio, indicates the percentage of assets funded by the
owners.
10. Financial Ratios
3. Profitability Ratios
• Gross Profit Margin, measures the average markup on every peso
sale or for each product sold.
• Operating Profit Margin, is computed by deducting operating
expenses from the gross profit.
• Net Profit Margin or Return on Sales, it measures the overall
profitability of a company.