Session 8.3: Business Work Improvement Course (Financial Statements and Analysis) developed by DOLE-Bureau of Workers with Special Concerns (BWIC).

1. SESSION 8.3:
FINANCIAL STATEMENTS
AND
FINANCIAL ANALYSIS
Business Work and Improvement Course

2. II. Financial Statements
•Financial statements are the end-product of
the financial accounting process.
•Major financial statements:
•Income Statement
•Statement of Cash Flows
•Balance Sheet

3. Financial Statements
a. Income Statement – tells how much
money does the business earn over a given
period of time.
Gross Profit = Sales – C0st of Sales
Net Profit = Gross Profit – Expenses

4. Options to increase profit
1. Increase Sales – how?
 Quantity/Volume Sold
Or  Selling Price
2. Decrease Expenses – how ?
Reduce overhead expenses
Reduce maintenance/repair costs

5. How to Determine the Cost of Sales
Trading Business
Beginning Inventory xxx
Add: Purchases xxx
Total Inventory xxx
Less: Ending Inventory xxx
Cost of Sales xxx
Beginning Inventory xxx
Add: Direct Materials,
Direct Labor, overhead expenses
(light, water, power, rents,
indirect labor etc.) xxx
Total Inventory
Less: Ending Inventory xxx
Cost of Sales xxx
Manufacturing

6. Sales xxx
Less: Sales Return s and Allowances xxx
Sales Discount xxx xxx
Net Sales xxx
Less: Cost of Sales OR Cost of Goods Sold
Direct Materials xxx
Direct Labor xxx
Mfg. Overhead (indirect labor, heat, light and power,
maintenance of equipment, etc)
Less: Ending Inventory
xxx
xxx xxx
Gross Profit xxx
Less: Operating expenses:
Overhead/Adm. expenses (office supplies, light,water
telephone, utilities, depreciation, equipment, salaries, rentals,
insurance, indirect labor, delivery, interests, etc. )
xxx
Marketing expenses (transpo, PR, etc.) xxx xxx
Operating Profit xxx
Less: Financial expenses (interest, borrowing cost, etc.) xxx
Net Income (Loss) xxx
Pro-forma
Income
Statement

7. Financial Statements
b. Cash Flow Statement – tells how much cash is needed to meet
obligations, when it is needed, and where it is coming from.
• Cash in-flow – cash coming INTO the business i.e. financial investment,
sales revenues, interest on savings, etc.
• Cash out-flow – cash coming OUT of the business i.e. disbursements on:
a. operating expenses (direct materials, direct labor),
b. overhead costs (heat, light water, indirect labor, rental, etc.),
c. acquisition of assets, and d. dividends and income tax payments.
• Covers pre-operating period

8. Particulars
Day/Week/Month
1 2 3 4 5 6 7 8 9
Cash at the beginning of the Period
Add: CASH INFLOW
Assistance from DOLE
Equity from ACP / proponent
Cash Sales /Interest
Income/collections
TOTAL CASH INFLOW
Less: CASH OUTFLOW
Direct Costs (direct materials and
labor, supplies, equipment, etc.)
Indirect Costs(rent, interest, electricity
telephone, depreciation)
Any other cash out (pre-operating
expenses, loan repayment, etc.)
TOTAL CASH OUTFLOW
Cash at the end of the month
Pro-forma
Cash Flow
Statement

9. Financial Statements
c. Balance Sheet – shows the snapshot of a company’s financial
condition at a given period of time showing the business’ growth in
terms of Net Worth. It shows the assets, liabilities and capital/equity at
a given date.
Assets = Liabilities + Capital/Owner’s Equity
ASSETS LIABILITIES OWNER’S EQUITY
CurrentAssets
Fixed Assets
Other Assets
Current Liabilities
Long-term Liabilities
Accrued expenses
Amount invested
(DOLE, ACP,
Beneficiaries, loans)
Retained earnings
reinvested

10. ASSETS
Currents Assets:
Cash
Accounts Receivables
Notes Receivables
Inventories
Prepaid Expenses
Total Current Assets
Fixed Assets (Net of
Depreciation):
Land
Building (Workplace)
Equipment
Machineries
Total Fixed Assets
Other Assets
TOTAL ASSETS
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
LIABILITIES AND OWNER’s
EQUITY
LIABILITIES:
Current Liabilities:
Accounts Payable
Notes Payable
Other Liabilities
Total Liabilities
OWNER’S EQUITY (Capital)
DOLE Equity
ACP Equity
Beneficiary Counterpart
Retained Earnings
Total Owner’s Equity
TOTAL LIABILITIES AND
OWNER’ EQUITY
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Pro-forma
Balance
Sheet

11. Financial Analysis
Test of Profitability: Return of Investment (ROI)
Test of Liquidity: Current Ratio
Test of Operating Leverage: Break-even Analysis

12. ROI - is the expected rate of return on the total cost invested to
the project.
ROI = Net Income/ Total Project Cost
Sources of data:
1. Projected Net Income to be derived from the Projected Income
Statement
2. Total Project Cost to be derived from the Total Project Cost
Schedule
What is ROI and How To Compute It?

13. Computation of ROI ( illustration)
Assumptions:
Net Income - P 72,000.00
Total Project Cost - P 215,000.00
ROI = Net Income/Total Project Cost
= P72,000/P215,000.00 = .33 or 33%
 This indicates that the livelihood is expected to generate a return of
P33.00 for every P 100.00 invested in the project (DOLE + ACP
+beneficiaries’ equity).
The higher the ROI, the more the project is profitable.

14. What is a Current Ratio and How To Compute It?
Current Ratio = Current Assets / Current Liabilities
Cash P11,572
Short-term investments 76,853
Receivables 14,921
Inventory 1,920
Other current assets 3,740
Total Current Assets P109,006
Accounts Payable P 9,958
Short-term debt 2,000
Other Current Liab 21,945
Total Current Liabi P33,903
The higher the ratio, the business is more able to pay its obligations.
A ratio between 1.5 and 3 is generally considered healthy.
CR = P109,006 / P33,903 = 3.22
Current Assets Current Liabilities
Current Ratio (CR) - is a financial ratio which shows the liquidity of a
business and its ability to generate sufficient funds (monetize products) to
meet current operating needs and current debts

15. What is Break-even Analysis / Break-even Point?
Break-evenAnalysis (BEA)
 is a tool in determining the point at which the project’s revenue
(sales) equals the costs (fixed and variable costs) associated
with it, with emphasis on the Break-even Point. It helps
determine how much volume of product will be sold in order to
make a profit.
Break-even Point (BEP)
 is the point at which the company’s sales exactly cover its
expenses in producing and selling its products, without making
a profit or taking a loss.

16. Factors in Figuring out Break-even Point
1. Direct or Variable Costs – are costs that go into
creating the product or service (direct materials and
direct labor).
2. Indirect or Fixed Costs – are costs that do not depend
on the volume of production (rents, water, light and
power, advertising, office supplies, wages of office
staff, staff)

17. Calculating Break-even Point
Break-even Point Volume/Units (BEV):
BEV = Fixed Cost
Price per Unit- Variable Cost Per Unit
Break-even Point Sales (BES):
BES = BESP x Break-even Sales Units
Break-even Point Selling Price (BE SP):
BESP = Total Cost (Variable + Fixed Costs)
Unit Volume

18. Sales:
Sales price per unit P12.50
Sales volume 1,000
Total Sales P12,500.00
TotalVariable Costs P7,600.00
Total Fixed Costs 3,400.00
Net Profit/Loss P1,500.00
Illustration (figures in peso)

19. 1. BEP Vol = ________Fixed Cost______________
Price per Unit- Variable Cost Per Unit
= P 3,400.00 = P 3,400.00
P 12.50-P 7.60 P 4.90
= 694 units
3. BEP Sales = Price per Unit x Break-even Sales Volume
= P 11.00 x 694 units
= P 7,634.00
2. BEP SP = Total Cost
Unit Volume
= P 11,000.00
1,000 units
= P 11.00 per unit
Computation of BEP (illustration)

20. References:
• BRW Manual on Development of Self-Reliant Organization
• Technical Paper on Break-even Analysis
• Start Your Business Flyers of the DTI
• Rasul and Macalindong PPT on Project Development and Management
• https://cnx.org/contents/0OlLxNru@1/Basic -Accounting-Concepts---De
• http://definitions.uslegal.com/b/bookkeeping/

21. SALAMAT PO!
Financial Statements and Financial Analysis
Business Work and Improvement Course