CHERRY VIRGIE D.

CUANTIOSO BUSINESS FINANCE

XII- MSGR. FALCON

EXERCISES

1) A statement of financial position is a formal statements showing the three elements

comprising financial position, namely assets, liabilities and equity. It represents similarly
to the basic accounting equation which states that Assets = Liabilities + Owner’s equity.
Like for example the given shown in the module, it has total assets of 30,650,000 and a
total liabilities of 8,550,000 added to the owner’s equity 22,100,000 which results to the
equal amount of total assets. Asset is an economic resource controlled by an entity as a
result of past event, it can be classified only into two, namely current assets and
noncurrent assets. Liability is a present obligation of an entity to transfer an economic
resource as a result of past event, it is classified as current and noncurrent. The term
equity is the residual interest in the assets of the entity after deducting all of its
liabilities.
2) A. Liquidity - A measure of a company's ability to meet its short-term obligations using
its most liquid assets. That is, accounting liquidity is the ease with which a company can
pays its bills and liabilities over the next year, especially if it must convert its assets into
cash in order to do so. Two common ways to measure accounting liquidity are the
current ratio and the quick ratio.
B. Solvency - Solvency refers to the business’ long-term financial position. A solvent
business is one that has positive net worth – the total assets are more than the total
liabilities. Solvency is assessed using solvency ratios. These ratios measure the ability of
the business to pay off its long-term debts and interest on debts.
C. Financial structure - Financial structure refers to the mix of debt and equity that a
company uses to finance its operations. This composition directly affects the risk and
value of the associated business. The financial managers of the business have the
responsibility of deciding the best mixture of debt and equity for optimizing the financial
structure.
D. Capacity of adaptation - is the ability of the enterprise to use its available cash for
unexpected requirements and investment opportunities.
3) Functional presentation classifies expenses according to their function as part od cost of
goods sold, distribution costs, administrative expenses and other expenses. The
functional presentation is also known as the cost of goods sold method. An entity
classifying expenses by function shall disclose additional information on the nature of
expenses, including depreciation, amortization and employee benefit costs.
The natural presentation, on the other hand, is referred to as the nature of expense
method. Under this form expenses are aggregated according to their nature and not
allocated among the various functions within the entity. In other words, the expenses
are no longer classified as cost of goods sold, distribution costs, administrative expenses
and other expenses. The expenses which are of the same nature are grouped or
aggregated and presented as one item. For example, depreciation, purchases of raw
materials, transport costs, employee benefit costs and advertising costs are presented
separately.
4) The statement of changes in equity is a basic statement that shows the movements in
the elements or components of the shareholders’ equity.
 The statement of retained earnings is no longer a required basic statement but it is a
part of the statement of changes in equity.
An entity shall present a statement of changes in equity showing the following:
1. Comprehensive income for the period.
2. For each component of equity, the effects of changes in accounting policies and
corrections of errors.
3. For each component of equity, a reconciliation between the carrying amount at the
beginning and end of the period, separately disclosing changes from:
a. Profit or loss
b. Each item of other comprehensive income
c. Transactions with owners in their capacity as owners showing separately
contributions by and distributions to owners.
5) The statement of cash flows shall report cash flows during the period classified as
operating, investing and financing activities.

 OPERATING ACTIVITIES
Operating activities are the cash flows derived primarily from the principal revenue
producing activities of the entity.
In other words, operating activities generally result from transactions and other events
that enter into determination of net income or loss.

 INVESTING ACTIVITIES
Investing activities are the cash flows derived from the acquisition and disposal of long-
term assets and other investments not included in cash equivalent.
As a simple guide, investing activities include cash flows from transactions involving
nonoperating assets.

 FINANCING ACTIVITIES
Financing activities are the cash flows derived from the equity capital and borrowings of
the entity.
In other words, financing activities are the cash flows that result from transactions:
a. Between the entity and the owners – equity financing
b. Between the entity and the creditors – debt financing
As a simple guide, financing activities include the cash flows from transactions involving
nontrade liabilities and equity.

TRUE OR FALSE

1. True

2. False, because statement of financial position shows only the assets, liabilities, and equity of a
business entity

3. False, as assets are a result of past events and from which the entity expects future economic
benefits
4. False, because liabilities are present obligations of an entity

5. True

6. True

7. True

8. False, because current assets are usually listed in the order of liquidity

9. False, because noncurrent assets include not only tangible but also intangible assets

10. True

11. False, because it should be comprehensive income instead of profit or loss

12. True

13. False, because under nature of expense method, expenses are aggregated according to their
nature and not allocated among the various functions within the entity. In other words, the expenses
are no longer classified as cost of goods sold, distribution costs, administrative expenses and other
expenses.

14. True

15. True

16. True

17. False, because statement of Comprehensive income shows only the income and expenses of a
business entity.

18. False, because income is increases in economic benefits in the form of inflows

19. True

20. False, because it should be the reduction in assets that is attributable solely to the expenses
incurred by the business
PROBLEM 1

CAMPOS MERCHANDISING
Statement of Financial Position
As of December 31, 2020

ASSETS

Note

Current assets:

Cash and cash equivalents (1) 1,372,500

Trading securities 675,000

Trade and other receivables (2) 2,287,500

Inventories 600,000

Prepaid expenses (3) 90,0000

Total current assets 5,025,000

Noncurrent assets:

Property, plant, and equipment (4) 2,625,000

Long-term Investment (5) 1,350,000

Total noncurrent assets 3,975,000

Total assets 9,000,000

LIABILITIES AND OWNER’S EQUITY

Current liabilities:

Trade and other payables (6) 4,162,500

Total liabilities 4,162,500

Owner’s equity:

Jenny, capital 5,087,500

Jenny, drawing (250,000)

Total owner’s equity 4,837,500

Total liabilities and owner’s equity 9,000,000

Note 1 – Cash and cash equivalents

Cash in bank 1,350,000

Petty cash fund 22,500

Total cash and cash equivalents 1,372,500

Note 2 – Trade and other receivables
Accounts receivable 1,575,000

Notes Receivable 750,000

Allowance for doubtful accounts (187,500)

Advances to employees 150,000

Total trade and other receivables 2,287,500

Note 3 – Prepaid expenses

Prepaid advertising 52,500

Office supplies 37,500

Total prepaid expenses 90,000

Note 4 – Property, plant, equipment

Property, plant, equipment 3,750,000

Accumulated depreciation 1,125,000

Carrying amount 2,625,000

Note 5 – Long-term investments

Long-term investments in bonds 1,125,000

Land held for speculation 225,000

Total other long-term investments 1,350,000

Note 6 – Trade and other payables

Accounts payable 900,000

Accrued expenses 262,500

Bank loan payable 3,000,000

Total trade and other payables 4,162,500

PROBLEM 2

FRATES MERCHANDISING

Income Statement

Year ended December 31, 2020

Note

Net Sales (1) 7,350,000

Decrease in inventory (2) (150,000)

Total income 7,200,000

Expenses:

Net purchases (3) 4,470,000

Employee benefit costs (4) 1,050,000

Supplies expense (5) 187,500

Depreciation (6) 750,000 6,457,500

Income before tax 742,500

Income tax expense 222,750

Net income 519,750

Note 1 – Net sales

Sales 7,500,000

Sales returns and allowances (90,000)

Sales discounts (60,000)

Net sales 7,350,000

Note 2 – Decrease in inventory

Merchandise inventory, January 1 1,500,000

Merchandise inventory, December 31 1,350,000

Decrease in inventory 150,000

Note 3 – Net purchases

Purchases 4,500,000

Freight in 150,000

Purchase returns and allowances (105,000)

Purchase discounts (75,000)

Net purchases 4,470,000

Note 4 – Employee benefit costs

Sales salaries 600,000

Office salaries 450,000

Total employee costs 1,050,000

Note 5 – Supplies expense

Office supplies 112,500

Store supplies 75,000

Total supplies expense 187,500

Note 6 – Depreciation
Depreciation – office equipment 150,000

Depreciation – building 375,000

Depreciation – store equipment 225,000

Total depreciation 750,000

 FRATES MERCHANDISING

Income Statement

Year ended December 31, 2020

Note

Net Sales (1) 7,350,000

Cost of goods sold (2) (4,620,000)

Total income 2,730,000

Expenses:

Distribution costs (3) 900,000

Administrative expenses (4) 1,087,500 1,987,500

Income before tax 742,500

Income tax expense 222,750

Net income 519,750

Note 1 – Net Sales

Sales 7,500,000

Sales Returns and allowances (90,000)

Sales discounts (60,000)

Net Sales 7,350,000

Note 2 – Cost of goods sold

Merchandise inventory, January 1 1,500,000

Purchases 4,500,000

Freight in 150,000

Total 4,650,000

Purchase return and allowances (105,000)

Purchase discount (75,000) 4,470,000

Goods available for sale 5,970,000

Merchandise inventory, December 31 (1,350,000)

Cost of sales 4,620,000

Note 3 – Distribution costs
Sales salaries 600,000

Depreciation – store equipment 225,000

Store supplies 75,000

Total distribution costs 900,000

Note 4 – Administrative expenses

Office supplies 112,500

Depreciation – building 375,000

Office salaries 450,000

Depreciation – office equipment 150,000

Total administrative expenses 1,087,500

PROBLEM 3

ANGEL MERCHANDISING

Income Statement

Note

Net sales (1) 9,075,000

Other income (2) 525,000

Total income 9,600,000

Expenses:

Increase in inventory (3) (975,000)

Net purchases (4) 5,437,500

Employee benefit costs (5) 1,200,000

Salesperson’s commission 300,000

Freight out 90,000

Depreciation (6) 600,000

Doubtful accounts 112,500

Other expense (7) 75,000 6,840,000

Income before tax 2,760,000

Income tax expense 828,000

Net income 1,932,000

Note 1 – Net sales

Sales 9,375,000

Sales returns and allowance (195,000)

Sales discount (105,000)

Net sales 9,075,000

Note 2 – Other income

Interest income 150,000

Rent income 225,000

Dividend income 150,000

Total 525,000
Note 3 – Increase in inventory
Merchandise inventory, ending 4,350,000

Merchandise inventory, beginning 3,375,000

Increase in inventory 975,000

Note 4 – Net purchases

Purchases 5,475,000

Freight in 187,500

Purchase returns and allowances (135,000)

Purchase discounts (90,000)

Net purchases 5,437,500

Note 5 – Employee benefit cost

Sales salaries 525,000

Office salaries 675,000

Total employee costs 1,200,000

Note 6 – Depreciation
Depreciation – delivery truck 112,500

Depreciation – office equipment 112,500

Depreciation – building 300,000

Depreciation – store furniture 75,000

Total depreciation 600,000

Note 7 – Other expense

Loss on sale of equipment 75,000
 ANGEL MERCHANDISING

Income Statement

Notes

Net sales (1) 9,075,000

Cost of goods sold (2) (4,462,500)

Gross income 4,612,500

Other income (3) 525,000

Total Income 5,137,500

Expenses:

Distribution cost (4) 1,102,500

Administrative expenses (5) 1,087,500

Doubtful accounts 112,500

Other expense (6) 75,000 2,377,500

Income before tax 2,760,000

Income tax expense 828,000

Net income 1,932,000

Note 1 – Net sales

Sales 9,375,000

Sales returns and allowances (195,000)

Sales discount (105,000)

Net sales 9,075,000

Note 2 – Cost of goods sold

Merchandise inventory, beginning 3,375,000

Purchase 5,475,000

Freight in 187,500

Total 5,662,500

Purchase return and allowance (135,000)

Purchase discount (90,000) 5,437,500

Goods available for sale 8,812,500

Merchandise inventory, ending (4,350,000)

Cost of sales 4,462,500

Note 3 – Other income

Interest income 150,000

Rent income 225,000

Dividend income 150,000

Total 525,000

Note 4 – Distribution costs

Salesperson’s commission 300,000

Sale salaries 525,000

Depreciation – delivery truck 112,500

Freight out 90,000

Depreciation – store furniture 75,000

Total distribution costs 1,102,500

Note 5 – Administrative expenses

Depreciation – office equipment 112,500

Office salaries 675,000

Depreciation – building 300,000

Total administrative expenses 1,087,500

Note 6 – Other expense

Loss on sale of equipment 75,000
PROBLEM 4

Net cash provided by operating activities

Interest received 75,000

Cash dividends received 225,000

Cash collections from customers 4,500,000

Cash payment to employees (600,000)

Interest payment on bank loan (225,000)

Cash payment for equipment (1,125,000)

Cash dividends paid (300,000)

Cash payment to suppliers (1,500,000)

Income tax paid (150,000)

Total 900,000

FINANCE TERMS

1. Going concern assumption - An accounting guideline which allows the readers of financial
statements to assume that the company will continue on long enough to carry out its objectives
and commitments. In other words, the accountants believe that the company will not liquidate
in the near future. This assumption also provides some justification for accountants to follow the
cost principle.
2. Accrual accounting - is one of two accounting methods; the other is cash accounting. Accrual
accounting measures a company's performance and position by recognizing economic events
regardless of when cash transactions occur, whereas cash accounting only records transaction
when payment occurs.
3. Offsetting principle - is another term for netting. With offsetting, you show your company's
assets and liabilities on the balance sheet on a net basis. In offset accounting, you decrease the
total, or net, of a different account balance to create a net balance.
4. Liquidity status - refers to the ease with which an asset, or security, can be converted into ready
cash without affecting its market price. Cash is the most liquid of assets while tangible items are
less liquid and the two main types of liquidity include market liquidity and accounting liquidity.
The liquidity position is the difference between the sum of liquid assets and incoming cash flows
on one side and outgoing cash flows resulting from commitments on the other side, measured
over a defined period, being the measure of the liquidity risk.
5. Solvency - is the ability of a company to meet its long-term debts and other financial
obligations. Solvency is one measure of a company's financial health, since it demonstrates a
company's ability to manage operations into the foreseeable future. Investors can use ratios to
analyze a company's solvency.
6. Financial structure - refers to the mix of debt and equity that a company uses to finance its
operations. This composition directly affects the risk and value of the associated business. The
financial managers of the business have the responsibility of deciding the best mixture of debt
and equity for optimizing the financial structure.
7. Sinking fund - is an account that is used to deposit and save money to repay a debt or replace a
wasting asset in the future. In other words, it's like a savings account that you deposit money in
regularly and can only be used for a set purpose.
8. Return on investment - measures the ability of an investment to generate income. The ratio is
used to compare alternative investment choices, as well as to determine if an existing
investment represents an efficient use of resources. This is one of the most popular investor
 measurements, given the easy availability of the required information and the simplicity of the
formula.
9. Amortization - is an accounting technique used to periodically lower the book value of a loan or
intangible asset over a set period of time. In relation to a loan, amortization focuses on
spreading out loan payments over time. When applied to an asset, amortization is similar to
depreciation.
10. Share capital - is the portion of a corporation's equity that has been obtained by the issue of
shares in the corporation to a shareholder, usually for cash. "Share capital" may also denote the
number and types of shares that compose a corporation's share structure.