Fundamentals of

Accountancy, Business and

Management 2
Quarters 1 & 2
Module 1:
Financial Statements & Analysis
Module 2:
Bank Reconciliation, Taxation &
Practice Set

(Compiled and Exclusively Used for Classrom Discussion Only)

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 Module 1 –Financial Statements and Financial Statement Analysis

Chapter 1 – Statement of Financial Position

What is a Statement of Financial Position (SFP)?

The statement of financial position is another name for the balance sheet. It is one of the main financial statements.

The statement of financial position reports an entity's assets, liabilities, and the difference in their totals as of the final moment of an accounting period.

The structure of the statement of financial position is similar to the basic accounting equation. For a corporation the format will be: Assets = Liabilities + Stockholders'
Equity. A nonprofit organization's format will be: Assets = Liabilities + Net Assets.

The statement of financial position must reflect the basic accounting principles and guidelines such as the cost, matching, and full disclosure principle to name a few.
Accordingly, the statement of financial position is more meaningful when it is prepared under the accrual method of accounting.

Classification of Components

Statement of financial position consists of the following key elements:

Assets
An asset is something that an entity owns or controls in order to derive economic benefits from its use. Assets must be classified in the balance sheet as current or
non-current depending on the duration over which the reporting entity expects to derive economic benefit from its use. An asset which will deliver economic benefits
to the entity over the long term is classified as non-current whereas those assets that are expected to be realized within one year from the reporting date are
classified as current assets.

 Assets are also classified in the statement of financial position on the basis of their nature:
 Tangible & intangible: Non-current assets with physical substance are classified as property, plant and equipment whereas assets without any physical
substance are classified as intangible assets. Goodwill is a type of an intangible asset.
 Current assets represent all the assets of a company that are expected to be conveniently sold, consumed, used, or exhausted through standard business
operations with one year. Current assets appear on a company's balance sheet, one of the required financial statements that must be completed each
year.
 Inventories balance includes goods that are held for sale in the ordinary course of the business. Inventories may include raw materials, finished goods and
works in progress.
 Trade receivables include the amounts that are recoverable from customers upon credit sales. Trade receivables are presented in the statement of
financial position after the deduction of allowance for bad debts.
 Cash and cash equivalents include cash in hand along with any short term investments that are readily convertible into known amounts of cash.
Liabilities
A liability is an obligation that a business owes to someone and its settlement involves the transfer of cash or other resources. Liabilities must be classified in the
statement of financial position as current or non-current depending on the duration over which the entity intends to settle the liability. A liability which will be settled
over the long term is classified as non-current whereas those liabilities that are expected to be settled within one year from the reporting date are classified as current
liabilities.
 Liabilities are also classified in the statement of financial position on the basis of their nature:
 Trade and other payables primarily include liabilities due to suppliers and contractors for credit purchases. Sundry payables which are too insignificant to
be presented separately on the face of the balance sheet are also classified in this category.
 Short term borrowings typically include bank overdrafts and short term bank loans with a repayment schedule of less than 12 months.
 Long-term borrowings comprise of loans which are to be repaid over a period that exceeds one year. Current portion of long-term borrowings include the
installments of long term borrowings that are due within one year of the reporting date.
 Current Tax Payable is usually presented as a separate line item in the statement of financial position due to the materiality of the amount.
Equity
Equity is what the business owes to its owners. Equity is derived by deducting total liabilities from the total assets. It therefore represents the residual interest in the
business that belongs to the owners.
 Equity is usually presented in the statement of financial position under the following categories:
 Share capital represents the amount invested by the owners in the entity
 Retained Earnings comprises the total net profit or loss retained in the business after distribution to the owners in the form of dividends.
 Revaluation Reserve contains the net surplus of any upward revaluation of property, plant and equipment recognized directly in equity.

Rationale - Why the balance sheet always balances?

The balance sheet is structured in a manner that the total assets of an entity equal to the sum of liabilities and equity. This may lead you to wonder as to why the
balance sheet must always be in equilibrium.
This leads us to the Accounting Equation: Assets = Liabilities + Equity

In statement form balance sheet assets are shown first. Assets are shown classifying them into:
 Current assets,
 Investment,
 Property, plant, and equipment,
 Intangible assets.

In the later part, liabilities are shown classifying them into current liabilities, long-term liabilities, and owner’s equity.
If assets, liabilities and owner’s equity are written accurately it is evident that the total of assets must be equal to the total of liabilities and owner’s equity.
Thereby the equation A= L + OE is proved.

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EXERCISE 1.

1. Learning is Fun Company had current assets amounting to Php 100,000. Noncurrent assets for the year totaled Php 76,000. How much is the
company’s total assets?
Answer:
2. Happy Selling Company’s total liabilities amounted Php 10,000. Total equity had an ending balance of Php 20,000. How much is total assets?
Answer:
3. Happy Selling’s had the following accounts at year end: Cash-250,000, Accounts Payable-70,000, Prepaid Expense-15,000. Compute for the
company’s current assets.
Answer:
4. Happy Selling’s Accounts Receivable amounted to Php 500,000. Prepaid Expense and Unearned Income totaled Php 30,000 and Php 10,000
respectively. Cash balance amounted to Php 100,000 while Accounts Payable and Inventory totaled to Php 20,000 and Php 10,000 respectively. How
much is the company’s current assets? Current liabilities?
Answer:
5. Company’s Total Liabilities and Equity amounted to Php 285,000. Total noncurrent assets ended at Php 85,000. Cash totaled Php50,000.
Inventory amounted to Php100,000. Assuming the company had no other assets, how much is Accounts Receivable?
Answer:
6. Total assets amounted to Php575,000. Total equity amounted to Php 250,000. Accounts Payable amounted to Php 50,000 while Unearned Income
totaled Php 85,000. Assuming there are no other current liabilities, compute for the company’s noncurrent liabilities.
Answer:

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EXERCISE 2.

Prepare the SFP in good form.

CZAR ZION SHANNON Enterprises

Trial Balance
June 30, 2019

Account Title/s
Debit Credit
Cash Php 50,000
Accounts Receivable 300,000
Allowance for Bad Debts Php 20,000
Merchandise Inventory 400,000
Prepaid Insurance 12,000
Furniture and Fixtures 200,000
Accumulated Depreciation 30,000
Equipment 250,000
Accumulated Depreciation 20,000
Accounts Payable 100,000
Accrued Salaries Expense 15,000
Loans Payable 200,000
Czar Zion Shannon Capital 837,000
Czar Zion Shannon Drawing 10,000
Total Php 1,222,000 Php 1,222,000

Chapter 2 : Statement of Comprehensive Income (SCI)

What is a Statement of Comprehensive Income (SCI) ?

The Statement of Comprehensive Income provides a summary of a company’s net assets over a given period of time. In other words, the statement highlights the
adjustments on equity during a given timeframe. It shows the results of the business operations for a given period. It is also otherwise known as Income Statement.
A statement of comprehensive income contains two main things: the net income and other comprehensive income (OCI). The net income is the result obtained by
preparing an income statement. On the other hand, OCI consists of all the other items that are excluded from the income statement.

Net income only accounts for the earned income and incurred expenses. There are times when companies make gains or losses resulting from the fluctuations in the
value of their assets. The outcome of such events is recognized in the cash flow statement but not in the income statement, which is where other comprehensive
income comes in. Any transactions not captured in the income statement are accounted for in the OCI report.

This overview of income and expenses from the daily operation of the business is commonly referred to as realized income or traditional income. A statement of
comprehensive income, on the other hand, provides more details about the company's financial situation than what is found on a basic income statement.

What are the types of SCI?

 The single-step income statement:
This kind of format required to report and present revenue and expenses into different sections regardless of realize or unrealized.
That means all kinds of revenues are recorded in the revenue sections no mater those revenues are realized or not.

Multiple-step income statement

The second format of Statement of Comprehensive Income is the multiple-step of the income statement. This format divided the statement into two different types.
One is operation profit and the second one is non-operation profit.
The operating profit results from operation revenue fewer operating expenses. As an operation profit, non-operation profit results in non-operation revenue less non-
operation expenses.

Statement of Comprehensive Income records both operating profit and loss and other comprehensive income which is not from normal operating activities.
You still can call this term in your daily works; however, the official term to called and used in official financial statements is Statement of Profit and Loss and Other
Comprehensive Income.
What are the components of SCI?

Comprehensive income is a useful measure of overall performance. However, information about the components that make up overall performance is also needed.
A single focus on the amount of comprehensive income is likely to result in a limited understanding of enterprise performance; information about the components of
comprehensive income often may be more important than the total amount of comprehensive income.

The components of comprehensive income usually consist of the following items:

(1) Items relating to an entity’s on-going major or central operations.
(2) Exchange transactions and other transfers between enterprise and other entities that are not its owners.
(3) Items that are unusual or that occur infrequently, but that do not qualify as “extraordinary items.”
(4) Items that can be estimated with only little reliability.
(5) Results of transactions in investments in other enterprises.
(6) Un-realized changes in the value of assets and liabilities, when these are recognized by the accounting model in use.
(7) Items relating to the payment or recovery of taxes.

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What are the elements of SCI?

Financial performance of the entity is judged by comparing the two of the five elements of financial information namely income/revenue/gain and expense/cost/loss. The entity is
supposed to be doing good if it is able to generate income that exceeds the cost that is incurred to generate such income. If the income exceeds the expenses entity is said to be making
profits and if expenses are more than the income then entity is in losses. Mathematically it is represented as:
Profit/Loss = Income – Expense
Profit if: Income > Expenses
Loss if: Income < Expenses
Entity’s income is a sum of revenues and gains whereas expense is a sum of costs and losses incurred during the period.

There are in total five elements of financial statements as mentioned in IASB Framework:
1.Assets
2. Liabilities
3. Equity
4. Income
5. Expense

The first three are used to measure entity’s financial position and are catered in Statement of Financial Position whereas the last two are used to measure entity’s
financial performance and are catered in Statement of Comprehensive income (Income Statement).

Framework defines Income and Expenses as follows:

Income is increase in the economic benefits of the entity that may be a result of enhancement or inflow of asset or such decrease in the liability that cause equity to increase. However,
this does not include additional investments made by shareholders.

Expense is decrease in the economic benefits of the entity that may be a result in deterioration or outflow of asset or such increase in liability that cause equity to decrease. However, this
does not include distributions to shareholders.

 According to IASB’s Conceptual Framework for Financial Reporting the definition of income includes both revenue  and gain  and are explained as follows:
revenue arises in the course of ordinary activities of the entity i.e. it result from such activities that constitutes entity’s business. For example selling furniture item is the business of
furniture manufacturer. However, it may have different names like turnover, fee, royalty, dividend, sales etc. For example for a teacher the revenue is fee and thus the word fee will be
used in the financial statements to represent benefits (cash flows) arising out of principal business activities.
gain results from such activities that meet the definition of income but may or may not arise in course of ordinary activities of the business. The principal factor that differentiates gain from
revenue is that they are not the result of activities that constitutes the business of entity. For example for furniture manufacturer selling wood cutter or drill machine is not the actual
business activity of the business and thus any gain arising on such activity is not considered as revenue However, even if they are different from revenue but they still represent increase
in economic benefit therefore are not considered as separate element.
 Similarly expenses include losses as well.
Expenses arise in the course ordinary activities of business e.g. cost of units sold, salaries and wages of employees, depreciation of assets etc.
Losses results from such activities that meet the definition of expense but may or may not arise in the course of ordinary activities of the business. For example loss on the sale of fixed
asset of the entity is not part of activities that constitute actual business activity of the business.
Difference in more detail: Income, Profit, Gain, Revenue, Return
Terms i.e. Income, Gain, Return, Revenue and Profit are often used interchangeably but in strict accounting environment these terms have different meanings and significance.
What is the difference between revenue, income, profit, gain and return?  In few words the difference can be summarized as follows:
Revenue is the amount received by the business from selling main goods or services to its customers during the period.
Income is term which is loosely used to mean the total earnings of the business. These earnings can be from the main activities of the business or any other activity which are not
regularly undertaken by the business or such earnings are not generated as a result of activities that business perform as its real business.
Profit is what business is left with after deducting such expenses from revenue which made the receipt of revenue possible.
Gain is what business earns on selling such assets which is not an inventory of the business. Simply put, this sales activity is not the actual trading of the business and is not among
those goods that business sell on regular basis.
Return is anything what business enjoys above principal amount of investment.

ABM Accountants Inc.

Statement of Comprehensive Income
For the period ended December 31, 20XX
Sales revenue
Sales: 8,000,000
Less: Sales discount 50,000
Less: Sales return 125,000 175,000
Net sales 7,825,000
Less: Cost of goods sold
Opening stock 850,000
Purchases 2,250,000
Purchase returns 420,000
Carriage inwards 75,000
Discounts received 56,000 1,849,000
Wages 620,000
Closing stock 960,000
2,359,000
Gross profit 5,466,000
Operating expenses
Administrative expenses
Staff salaries 123,000
Audit fee 560,000
Insurance premium 77,000
Depreciation of office equipment 352,000
Lawyers’ fee 330,000
Heating and lighting 65,000
Stationery and supplies 15,500 1,522,500
Selling and Distribution expenses
Sales commission 460,000
Advertisement 780,000
Carriage outwards 252,000
Depreciation of delivery vehicle 480,000
Ordering expenses 52,600
Miscellaneous selling expenses 25,800 2,050,400 3,572,900
Operating profit 1,893,100
Other incomes
Dividend income 128,000
Rental income 88,000
Interest income 69,000 285,000
Other expenses
Interest on loan 55,000
Profit before tax 2,123,100
Tax expense 323,000
Profit from continuing operations 1,800,100
Discontinued operations
Loss on discontinued operations 1,200,000

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 Total profit for the period 600,100

EXERCISE 1.
1. Learning is Fun Company generated revenues amounting to Php 100,000. Expenses for the year totaled Php 76,000. How
much is the company’s net income for the year?

2. Happy Selling Company’s salaries to sales agents amounted to Php 10,000. Salaries of accountants amounted to Php 20,000.
No other expenses were incurred. How much is the company’s general and administrative expense?

3. Happy Selling’s beginning inventory amounted to 250,000. Net purchases amounted to 70,000. Freight In totaled 15,000.
Compute for the company’s cost of goods available for sale.

4. Happy Selling’s Sales amounted to Php 500,000. Sales returns and sales discounts amounted to Php 30,000 and Php 10,000
respectively. Purchases of the company totaled Php 100,000 while purchase returns and purchase discounts amounted to
Php 20,000 and Php 10,000 respectively. How much is the company’s Net Sales? Net Purchases?\

5. Company’s Cost of Goods Sold amounted to Php 285,000. Net cost of purchases totaled Php 85,000. Beginning inventory
amounted to Php 250,000. Sales amounted to Php 500,000. Compute for the company’s Ending Inventory.

6. Gross profit of Happy Selling amounted to Php 175,000. Beginning Inventory totaled Php 250,000. Ending Inventory
amounted to Php 50,000 while Net Cost of Purchases totaled Php 85,000. Compute for Happy’s Net Sales.

EXERCISE 2. Prepare a Statement of Comprehensive Income in Good Form.

The following as accounts of Czar Shannon Zion Enterprises.

Sales 1,000,000
Salaries Expense 20,000
Supplies Expense 30,000
Depreciation Expense Utilities Expense 24,000
Utilities Expense 16,000
Insurance Expense 8,000
Beginning Inventory 12,500
Purchases 375,000
Ending Inventory 25,000
Sales Discount 1,250

Chapter 3: Statement of Changes in Owner’s Equity

What is a Statement of Changes in Owner’s Equity (SCOE)?

A statement of changes in equity and similarly the statement of changes in owner's equity for a sole trader, statement of changes in partners' equity for
a partnership, statement of changes in shareholders' equity for a company or statement of changes in taxpayers' equity for government financial statement.
The statement of owner’s equity is one of the shorter financial statements because there aren’t many transactions that actually affect the equity accounts. It typically
lists the net income or loss for the period along with the owners’ contributions or withdrawals during the period.
The report itself is presented in a simple equation style format like this.

 Beginning equity balance

Plus:
 Net income
 Owner’s contributions

Less:
 Net loss
 Owner’s withdrawals
 
 Ending equity balance
 
The ending equity account balance is always carried forward to the following year and becomes the future year’s beginning balance. Obviously, the first year a
business is started, it will not have a beginning balance.

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Example
SAFE Cupcakes is a bakery in the city that was started this year with SAFE’s investment of 15,000. During the year, the firm make a profit of 10,000 and Safe
decided to withdraw 5,000 from the business to pay for living expenses. The statement of owner’s equity would calculate the ending balance in the equity account of
20,000 (0 + 15,000 + 10,000 – 5,000). This ending balance will be carried forward to the following year as the future beginning balance.
External users analyze this report to understand the transactions that affect the equity balance. For instance, when a creditor would like to see the amounts that
SAFE put into the business and the amounts that is withdrawn throughout the year. If SAFE were to keep putting money into the business, it would typically indicate
that the business can’t fund its own operations.

The Statement of Changes in Equity is important because it allows analysts and reviewers of financial statements to see what factors caused a change in
owner's equity during the accounting period. You can find the movements of shareholder reserves on the SFP.

The Statement of Owner's Equity helps users of financial statements to identify the factors that caused a change in the owners' equity over the accounting period.

This is how a SCOE looks like:

EXERCISE 1:

1. Which form of business organization puts the least risk on its owners?
2. Which form of business organization is owned by only one person?
3. Increases in owner’s equity without additional investment
4. Decreases to owner’s equity apart from net effect of revenues and expenses.
5. Beginning owner’s equity amounted to P 300,000. Net loss for the year totaled P 45,000. No
additional investments and withdrawals for the period. Compute for total increase/decrease in equity for the year.
7. Ending owner’s equity amounted to P70,000. Additional investments during the year amounted to P30,000. Withdrawals totaled P50,000.
Compute for the company’s net income for the year, assuming beginning equity is P10,000.

EXERCISE 2.

1. Owner, Zion Leigh invested an initial capital amounting P50,000 in order to put up his janitorial services business. During the first year of
operations (200A), the firm had a loss of P25,000. Because of this, Zion Leigh invested additional capital amounting to P50,000 in 200B. In the
second year (200B), the firm had a net income of P100,000 and Zion Leigh withdrew P10,000 for personal use. A.) Compute for the ending capital
balance of Zion Leigh for the year 2017.
B.) Prepare a Statement of Changes in Owner’s Equity in good form.

2. Owner, Czar Kryztoff invested P100,000 to start his laundry business. During the first year of operations (200A) the firm had a net income of
P15,000. Czar invested additional P100,000 to grow the business. In 200B, the business earned P50,000. As of December 31, 200B Czar Kryztoff’’s
capital balance is P200,000. A.) How much is Czar’s withdrawal?
B.) Prepare a Statement of Changes in Owner’s Equity in good form.

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Chapter 4 : Statement of Cash Flows

What is a Cash Flow Statement?

The Statement of Cash Flows (also referred to as the Cash Flow Statement) is one of the three key financial statements that report the cash generated and spent
during a specific period of time (e.g., a month, quarter, or year). The statement of cash flows acts as a bridge between the Income Statement and Balance Sheet by
showing how money moved in and out of the business.

Three Sections of the Statement of Cash Flows:

1. Operating Activities: The principal revenue-generating activities of an organization and other activities that are not investing or financing; any cash flows
from current assets and current liabilities
2. Investing Activities: Any cash flows from the acquisition and disposal of long-term assets and other investments not included in cash equivalents
3. Financing Activities: Any cash flows that result in changes in the size and composition of the contributed equity capital or borrowings of the entity (i.e.,
bonds, stock, dividends)

 The statement of cash flows is very important to investors because it shows how much actual cash a company has generated. The income statement, on the other
hand, often includes noncash revenues or expenses, which the statement of cash flows excludes.

Why do you need cash flow statements?

So long as you use accrual accounting, cash flow statements are essential for three reasons:

1. They show your liquidity That means you know exactly how much operating cash flow you have in case you need to use it. So you know what you can
afford, and what you can’t.
2. They show you changes in assets, liabilities, and equity in the forms of cash outflows, cash inflows, and cash being held. Those three categories are the
core of your business accounting. Together, they form the accounting equation that lets you measure your performance.
3. They let you predict future cash flows. You can use cash flow statements to create cash flow projections, so you can plan for how much liquidity your
business will have in the future. That’s important for making long term business plans.

There’s a fair amount to unpack here. But here’s what you need to know to get a rough idea of what this cash flow statement is doing.

 Red amounts decrease cash. For instance, when we see (30,000) next to “Increase in inventory,” it means inventory increased by 30,000 on the balance
sheet. We bought 30,000 worth of inventory, so cash decreased by that amount. .
 Black amounts increase cash. For example, when we see 20,000 next to “Depreciation,” that 20,000 is an expense on the income statement, but
depreciation doesn’t actually decrease cash. So we add it back to net income.

You’ll also notice that the statement of cash flows is broken down into three sections—Cash Flow from Operating Activities, Cash Flow from Investing Activities, and
Cash Flow from Financing Activities. Let’s look at what each section of the cash flow statement does.

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Exercise 1: CFS

1. Identify which of the following transactions fall under operating, investing and financing activities:
a. Cash received from customers
b. Cash paid to suppliers
c. Cash paid to employees
d. Cash paid to purchase equipment (company does not sell equipment)
e. Cash received from sale of furniture (company’s main line of business is not related to furniture)
f. Depreciation expense
g. Sale of goods on credit
h. Purchase of goods on credit
i. Cash received from getting a loan from a bank
j. Cash paid to owners

Exercise 2: CFS

1. Czar Zion Shannon Ent. had the following transactions during the year:
a. Purchase of goods. Paid cash. 100,000
b. Sale of goods. Received cash. 150,000
c. Paid utilities 30,000
d. Paid rent 10,000
e. Sold equipment for cash 100,000
f. Owner withdraws investment 10,000
Compute for the net cash flow generated by/used in operating activities

2. Using the aboved- given data, compute for the net cash flow generated by/used in investing activities.
3., Using the aboved- given data compute for the net cash flow generated by/used in financing activities.
4. Using the aboved- given data , prepare a Cash Flow Statement. ( Direct Method)

Chapter 5 –Financial Statements Analysis

Definition:

Financial statement analysis is the process of analyzing a company's financial statements for decision-making purposes.

External stakeholders use it to understand the overall health of an organization as well as to evaluate financial performance and business value. Internal constituents
use it as a monitoring tool for managing the finances.

Techniques in Financial Analysis:

Several techniques are commonly used as part of financial statement analysis. Three of the most important techniques include 1. horizontal analysis, 3. vertical
analysis, and 3.  ratio analysis. Horizontal analysis compares data horizontally, by analyzing values of line items across two or more years. Vertical analysis looks at
the vertical affects line items have on other parts of the business and also the business’s proportions. Ratio analysis uses important ratio metrics to calculate
statistical relationships.

Types of Financial Ratios :

1. Liquidity Ratios
Liquidity ratios measure a company's ability to pay off its short-term debts as they become due, using the company's current or quick assets. Liquidity ratios include
the current ratio, quick ratio, and working capital ratio.

2. Solvency Ratios
Also called financial leverage ratios, solvency ratios compare a company's debt levels with its assets, equity, and earnings, to evaluate the likelihood of a company
staying afloat over the long haul, by paying off its long-term debt as well as the interest on its debt. Examples of solvency ratios include: debt-equity ratios, debt-
assets ratios, and interest coverage ratios.

3. Profitability Ratios
These ratios convey how well a company can generate profits from its operations. Profit margin, return on assets, return on equity, return on capital employed, and
gross margin ratios are all examples of profitability ratios.

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4. Efficiency Ratios
Also called activity ratios, efficiency ratios evaluate how efficiently a company uses its assets and liabilities to generate sales and maximize profits. Key efficiency
ratios include: turnover ratio, inventory turnover, and days' sales in inventory.

5. Coverage Ratios
Coverage ratios measure a company's ability to make the interest payments and other obligations associated with its debts. Examples include the times interest
earned ratio and the debt-service coverage ratio.

6. Market Prospect Ratios

These are the most commonly used ratios in fundamental analysis. They include dividend yield, P/E ratio, earnings per share (EPS), and dividend payout ratio.
Investors use these metrics to predict earnings and future performance.

Ratio analysis can predict a company's future performance—for better or worse. Successful companies generally boast solid ratios in all areas, where any sudden
hint of weakness in one area may spark a significant stock sell-off.

Investors can use ratio analysis easily, and every figure needed to calculate the ratios is found on a company's financial statements.
Ratios are comparison points for companies. They evaluate stocks within an industry. Likewise, they measure a company today against its historical numbers. In
most cases, it is also important to understand the variables driving ratios as management has the flexibility to, at times, alter its strategy to make its stock and
company ratios more attractive. Generally, ratios are typically not used in isolation but rather in combination with other ratios. Having a good idea of the ratios in each
of the four previously mentioned categories will give you a comprehensive view of the company from different angles and help you spot potential red flags.

 Ratios are typically only comparable across companies within the same sector. For example, a debt-equity ratio that might be normal for a utility company
might be deemed unsustainably high for a technology play.

There are generally six steps to developing an effective analysis of financial statements.

1. Identify the industry economic characteristics.

First, determine a value chain analysis for the industry—the chain of activities involved in the creation, manufacture and distribution of the firm’s products and/or
services. Techniques such as Porter’s Five Forces or analysis of economic attributes are typically used in this step.

2. Identify company strategies.

Next, look at the nature of the product/service being offered by the firm, including the uniqueness of product, level of profit margins, creation of brand loyalty and
control of costs. Additionally, factors such as supply chain integration, geographic diversification and industry diversification should be considered.

3. Assess the quality of the firm’s financial statements.

Review the key financial statements within the context of the relevant accounting standards. In examining balance sheet accounts, issues such as recognition,
valuation and classification are keys to proper evaluation. The main question should be whether this balance sheet is a complete representation of the firm’s
economic position. When evaluating the income statement, the main point is to properly assess the quality of earnings as a complete representation of the firm’s
economic performance. Evaluation of the statement of cash flows helps in understanding the impact of the firm’s liquidity position from its operations, investments
and financial activities over the period—in essence, where funds came from, where they went, and how the overall liquidity of the firm was affected.

4. Analyze current profitability and risk.

This is the step where financial professionals can really add value in the evaluation of the firm and its financial statements. The most common analysis tools are key
financial statement ratios relating to liquidity, asset management, profitability, debt management/coverage and risk/market valuation. With respect to profitability,
there are two broad questions to be asked: how profitable are the operations of the firm relative to its assets—independent of how the firm finances those assets—
and how profitable is the firm from the perspective of the equity shareholders. It is also important to learn how to disaggregate return measures into primary impact
factors. Lastly, it is critical to analyze any financial statement ratios in a comparative manner, looking at the current ratios in relation to those from earlier periods or
relative to other firms or industry averages.

5. Prepare forecasted financial statements.

Although often challenging, financial professionals must make reasonable assumptions about the future of the firm (and its industry) and determine how these
assumptions will impact both the cash flows and the funding. This often takes the form of pro-forma financial statements, based on techniques such as the percent of
sales approach.

6. Value the firm.

While there are many valuation approaches, the most common is a type of discounted cash flow methodology. These cash flows could be in the form of projected
dividends, or more detailed techniques such as free cash flows to either the equity holders or on enterprise basis. Other approaches may include using relative
valuation or accounting-based measures such as economic value added.

Formulas:

Liquidity Ratios
Also known as Solvency Ratios, and as the name indicates, it focuses on a company’s current assets and liabilities to assess if it can pay the short-term debts. The
three common liquidity ratios used are current ratio, quick ratio, and burn rate. Among the three, current ratio comes in handy to analyze the liquidity and solvency of
the start-ups.
S. No. RATIOS FORMULAS

1 Current Ratio Current Assets/Current Liabilities

10
 2 Quick Ratio Liquid Assets/Current Liabilities

3 Absolute Liquid Ratio Absolute Liquid Assets/Current Liabilities

Profitability Ratios
These ratios analyze another key aspect of a company and that is how it uses its assets and how effectively it generates the profit from the assets and equities. This
also then gives the analyst information on the effectiveness of the use of the company’s operations.
S. No. RATIOS FORMULAS

1 Gross Profit Ratio Gross Profit/Net Sales X 100

2 Operating Cost Ratio Operating Cost/Net Sales X 100

3 Operating Profit ratio Operating Profit/Net Sales X 100

4 Net Profit Ratio Operating Profit/Net Sales X 100

5 Return on Investment Ratio Net Profit After Interest  And Taxes/ Shareholders Funds or Investments  X 100

6 Return on Capital Employed Ratio Net Profit after Taxes/ Gross Capital Employed X 100

7 Earnings Per Share Ratio Net Profit After Tax & Preference Dividend /No of Equity Shares

8 Dividend Pay Out Ratio Dividend Per Equity Share/Earning Per Equity Share X 100

9 Earning Per Equity Share Net Profit after Tax & Preference Dividend / No. of Equity Share

10 Dividend Yield Ratio Dividend Per Share/ Market Value Per Share X 100

11 Price Earnings Ratio Market Price Per Share Equity Share/ Earning Per Share X 100

12 Net Profit to Net Worth Ratio Net Profit after Taxes / Shareholders Net Worth X 100
Working Capital Ratios
Like the Liquidity ratios, it also analyses if the company can pay off the current debts or liabilities using the current assets. This ratio is crucial for the creditors to
establish the liquidity of a company, and how quickly a company converts its assets to bring in cash for resolving the debts.
S. No. RATIOS FORMULAS

1 Inventory Ratio Net Sales / Inventory

2 Debtors Turnover Ratio Total Sales /  Account Receivables

3 Debt Collection Ratio Receivables  x Months or days in a year / Net Credit Sales for the year

4 Creditors Turnover Ratio Net Credit Purchases / Average Accounts Payable

5 Average Payment Period Average Trade Creditors / Net Credit Purchases X 100

6 Working Capital Turnover Ratio Net Sales / Working Capital

7 Fixed Assets Turnover Ratio Cost of goods Sold / Total Fixed Assets

8 Capital Turnover Ratio Cost of Sales / Capital Employed

Capital Structure Ratios
Each firm or company has capital or funds to finance its operations. These ratios, i.e., the Capital Structure Ratios, analyze how structurally a firm uses the capital or
funds.
S. No. RATIOS FORMULAS

1 Debt Equity Ratio Total Long Term Debts / Shareholders Fund

2 Proprietary Ratio Shareholders Fund/ Total Assets

3 Capital Gearing ratio Equity Share Capital / Fixed Interest Bearing Funds

4 Debt Service Ratio Net profit Before Interest & Taxes / Fixed Interest Charges
Overall Profitability Ratio
True to its name, these ratios measure how profitable a particular firm or company is, or how it can turn its assets and capital into profits for future use.
S. No. RATIOS FORMULAS

1 Overall Profit Ability Ratio Net Profit / Total Assets

11
Exercise 1:

1. Which of the following is not a current asset?

a. Inventory b. Prepaid Insurance c. Fixtures

2. Current asset MINUS current liabilities is the

Current Ratio b. Net Worth c. Working Capital

3. Current assets DIVIDED BY current liabilities is the

a. Current Ratio b. c. Net Worth Ratio Working Capital

4. The quick ratio EXCLUDES which of the following?

a. Accounts Receivable d. Inventory c. Cash

Use the following information to answer items 5 - 8:

For its most recent year a company had Sales (all on credit) of $830,000 and Cost of Goods Sold of 525,000. At the beginning of the year its Accounts
Receivable were 80,000 and its Inventory was 100,000. At the end of the year its Accounts Receivable were 86,000 and its Inventory was 110,000.

5 . The inventory turnover ratio for the year was

a. 4.8 b. 5.0 c. 7.9
6. The accounts receivable turnover ratio for the year was
a. 6.3 b. 7.5 c. 10.0
7.On average how many days of sales were in Accounts Receivable during the year?
a. 27 b. 37 c. 49
 8.On average how many days of sales were in Inventory during the year?
a. 14 b. 46 c. 73

Use the following information for items 9 and 10:

A company's net income after tax was 400,000 for its most recent year. The company's income statement included Income Tax Expense of 140,000 and Interest
Expense of 60,000. At the beginning of the year the company's stockholders' equity was 1,900,000 and at the end of the year it was 2,100,000.
9. What is the times interest earned for the company?
a. 6.7 b. 9.0 c. 10.0
 
10. What is the after-tax return on stockholder's equity for the year?
a. 20% b. 25% c. 30%

11. Which of the following are likely to have the reported amounts on the balance sheet being close to their current value?
a. Current Assets b. Long-term Assets c. Stockholders' Equity
 
12. A corporation's excellent reputation will be listed among the corporation's assets on its balance sheet.
a. True b. False

12
 Module 2 - Bank Reconciliation, Taxation & Practice Set

Chapter 6: SPECIAL JOURNALS (Books of Accounts)

Special journals (in the field of accounting) are specialized lists of financial transaction records which accountants call journal entries. In contrast to a general journal,
each special journal records transactions of a specific type, such as sales or purchases.

Types of special journals

The types of Special Journals that a business uses are determined by the nature of the business. Special journals are designed as a simple way to record the most
frequently occurring transactions. There are four types of Special Journals that are frequently used by merchandising businesses: 1.Sales journals, 2. Cash receipts
journals, 3. Purchases journals, and 4. Cash payments journals.
1. Sales Journal is a specialized accounting journal and it is also a prime entry book used in an accounting system to keep track of the sales of items that
customers(debtors) have purchased on account by charging a receivable on the debit side of an accounts receivable account and crediting revenue on
the credit side. It differs from the cash receipts journal in that the latter will serve to book sales when cash is received. The sales journal is used to record
all of the company sales on credit. Most often these sales are made up of inventory sales or other merchandise sales. Notice that only credit sales of
inventory and merchandise items are recorded in the sales journal. Cash sales of inventory are recorded in the cash receipts journal. Both cash and credit
sales of non-inventory or merchandise are recorded in the general journal.
2. Cash Receipts Journal is a specialized accounting journal and it is referred to as the main entry book used in an accounting system to keep track of the
sales of items when cash is received, by crediting sales and debiting cash and transactions related to receipts. Sales on account are booked instead in
the sales journal.
Cash receipts journal is considered as the separate part of Cash account/cash book as it records the cash inflow of the business. The source document of
this prime entry book is Receipt.
3. Purchases Journals record transactions that involve purchases purely on credit.. Source documents are invoices. For instance, the purchase of inventory
on credit is recorded in the purchases journal.
4. Cash Payments Journals record transactions that involve expenditures paid with cash and involves the cash.  Source documents are likely receipts and
checks. The CPJ records the cash outflow of a business. If the owner of a business withdraws cash from the business an entry is made in the CPJ.
Discount received is the cash discount received by a purchaser, it is an income item for the purchaser.
Format
SALES JOURNAL
Date Sale No. To Whom Sold Post. Ref. Accounts Receivable Debit Sales Credit Sales Tax Payable Credit
April 1 900 Kryztoff 1,000.00 940.00 60.00
April 1 901 Alfritz 2,000.00 1,880.00 120.00
April 1 902 Leigh 1,000.00 940.00 60.00
April 4 904 Alcapone 1,000.00 940.00 60.00

CASH RECEIPT JOURNAL

Date Account Credited Post Ref. General Credit Accounts Receivable Credit Sales Credit Sales Tax Payable Credit Cash Debit
May
Alfritz 1,000 1,000
1
May
Leigh 1,000 1,000
3
May
Kryztoff 1,000 1,000
5
May Interest
400 400
8 Receivable

PURCHASES JOURNAL
Date Invoice No. From Whom Purchased Post Ref. Purchased Debit / Accounts Payable Credit
June 2 6321 Schera Corp. 12,000
June 5 12D Earl Inc 800
June
412 Onazol Furniture-X 2,000
21

CASH PAYMENTS JOURNAL

Date Check No. Account Debited Post Ref. General Debit Accounts Payable Debit Purchases Credit Cash Credit
July
1254 Rent Expense 1,200 1,200
1
July
1255 Schera Corp. 1,200 1,200
2
July Onazol Furniture-
1256 1,200 1,200
2 X

13
 A subsidiary ledger is a group of similar accounts whose combined balances equal the balance in a specific general ledger account. The general ledger account that
summarizes a subsidiary ledger's account balances is called a control account or master account.

EXERCISE 1 – FABM 2 –(SPECIAL JOURNALS)

Sales Invoices for January 20X1 are listed below for recording in the journal and postings to the subsidiary ledgers and general ledger. Official receipts for January 20X1 collection are also forwarded to you for
postings.
Account Number Customer’s Name
1 ABM College
2 Kryztoff
3 Alfritz
4 Leigh
5 Allyn
Sales Invoices
Date Sales Invoice No. Customer’s Name Amount of Sales
Jan. 5 1-01 Alfritz P 7,650
6 1-02 Allyn 8,100
8 1-03 Kryztoff 15,000
12 1-04 ABM College 26,000
15 1-05 Kryztoff 6,000
18 1-06 Alfritz 16,000
27 1-07 Leigh 3,500
Official Receipts
Date Official Receipt No. Customer’s Name Cash Receipts
Jan. 7 101 Alfritz P 5,000
13 102 Allyn 4,000
14 103 Kryztoff 10,000
19 104 ABM College 26,000
23 105 Alfritz 1,000
25 106 Kryztoff 5,000

REQUIRED:
1. Record the aboved transactions in the appropriate journal.
2. Post the transactions in the subsidiary ledger ( Customers) ; General ledger ( Accounts Receivable)

EXERCISE 2 – FABM 2 ( SPECIAL JOURNALS)

Purchase invoices for June 20X1 are available for recording in the journal and postings to the subsidiary ledgers and general ledger. Cash vouchers are also forwarded to update the records and to determine
payables on June 30, 20X1. The creditors are:
Account Number Supplier’s Name
AP1 Onazol Foods
AP2 Sapphire Co.
AP3 Emerald Corp..
AP4 Czar Louie Shannon Corp.
Purchase Invoices
Date Purchase Invoice No. Supplier’s Name Amount
June 5 0-001 Onazol Foods P 162,000
6 0-004 Czar Louie Shannon Corp. 192,000
10 0-006 Emerald Corp. 150,000
13 0-820 Sapphire Co. 100,000
16 0-910 Onazol Foods 156,400
20 0-113 Sapphire Co. 83,400
25 0-123 Emerald Corp. 133,000
25 0-709 Czar Louie Shannon Corp. 109,600

Cash Vouchers
Date Cash Voucher No. Supplier’s Name Amount
June 15 6201 Onazol Foods P 162,000
15 6202 Czar Louie Shannon 100,000
15 6203 Emerald Corp. 75,000
30 6204 Sapphire Co. 50,000
30 6205 Onazol Foods 60,000
30 6206 Sapphire Co. 52,000

REQUIRED:
1. Record the aboved transactions in the appropriate journal.
2. Post the transactions in the subsidiary ledger ( Suppliers) ; General ledger ( Accounts Payable)

Chapter 7 – Bank Reconciliation Statement

A Bank Reconciliation Statement is a summary of banking and business activity that reconciles an entity’s bank account with its financial records. The statement
outlines the deposits, withdrawals and other activities affecting a bank account for a specific period. A bank reconciliation statement is a useful financial internal
control tool used to thwart fraud.

 A bank reconciliation statement summarizes banking and business activity, reconciling an entity’s bank account with its financial records.
 Bank reconciliation statements confirm that payments have been processed and cash collections have been deposited into a bank account.
 All fees charged on an account by a bank must be accounted for on a reconciliation statement.
 After all adjustments, the balance on a bank reconciliation statement should equal the ending balance of the bank account.

The following reconciling items commonly arise as part of a bank reconciliation, and require adjustment of the book balance:

 Interest earned. This amount is recorded in the bank statement, and must be added to the company's book balance.
 Service charges. ...
 Adjustments to deposits. ...

14
 Adjustments to checks.
 A bank reconciliation is a process performed by a company to ensure that its records (check register, general ledger account, balance sheet, etc.) are
correct. This is done by comparing the company's recorded amounts with the amounts shown on the bank statement. Any differences must be justified

 Bank reconciliation statements ensure payments have been processed and cash collections have been deposited into the bank. The reconciliation
statement helps identify differences between the bank balance and book balance, in order to process necessary adjustments or corrections.

 Preparing a Bank Reconciliation

In accounting, cash includes coins; currency; undeposited negotiable instruments such as checks, bank drafts, and money orders; amounts in checking and savings accounts; and
demand certificates of deposit. A certificate of deposit (CD) is an interest-bearing deposit that can be withdrawn from a bank at will (demand CD) or at a fixed maturity date (time CD).
Only demand CDs that may be withdrawn at any time without prior notice or penalty are included in cash. Cash does not include postage stamps, IOUs, time CDs, or notes receivable.

Most companies use checking accounts to handle their cash transactions. The company deposits its cash receipts in a bank checking account and writes checks to pay its bills. Keep in
mind, a bank account is an asset to the company BUT to the bank your account is a liability because the bank owes the money in your bank account to you.  For this reason, in your bank
account, deposits are credits (remember, liabilities increase with a credit) and checks and other reductions are debits (liabilities decrease with a debit).

The bank sends the company a statement each month. The company checks this statement against its records to determine if it must make any corrections or adjustments in either the
company’s balance or the bank’s balance.   A bank reconciliation is a schedule the company (depositor) prepares to reconcile, or explain, the difference between the cash balance on the
bank statement and the cash balance on the company’s books. The company prepares a bank reconciliation to determine its actual cash balance and prepare any entries to correct the
cash balance in the ledger.

Example:

XYZ Company is closing its books and must prepare a bank reconciliation for the following items:

 Bank statement contains an ending balance of 300,000 on February 28, 2018, whereas the company’s ledger shows an ending balance of 260,900
 Bank statement contains a 100 service charge for operating the account
 Bank statement contains interest income of 20
 XYZ issued checks of 50,000 that have not yet been cleared by the bank
 XYZ deposited 20,000 but this did not appear on the bank statement
 A check for the amount of 470 issued to the office supplier was misreported in the cash payments journal as $370.
 A note receivable of 9,800 was collected by the bank.
 A check of 520 deposited by the company has been charged back as NSF.(No Sufficient Funds

Amount ADJUSTMENTS

Ending Bank Balance $300,000

Deduct: Uncleared cheques – $50,000 None

Add: Deposit in transit + $20,000 None

Adjusted Bank Balance $270,000

Ending Book Balance $260,900

Deduct: Service charge – $100 Debit expense, credit cash

Add: Interest income + $20 Debit cash, credit interest income

Deduct: Error on check – $100 Debit expense, credit cash

Add: Note receivable + $9,800 Debit cash, credit notes receivable

Deduct: NSF check – $520 Debt accounts receivable, credit cash

Adjusted Book Balance $270,000

XYZ Company
Bank Reconciliation Statement
Month ended, March 31, 2018

Cash balance as per bank statement, Feb. 28 300,000

Add: Deposit in Transit 20,000
320,000
Deduct: Outstanding checks 50,000
Adjusted cash balance 270,000

Balance as per depositor’s book 260,900

Add: Receivable collected by bank 9,800
Interest earned 20 9,820

270,720

15
Deduct/Less: NSF check 520
Service Charge 100
Error in Check 100 720

Adjusted cash balance 270,000

Exercise 1… FABM 2 – Bank Recon

Identify the reconciling items in accordance with the following choices. Write the letter of your answer on the blanks provided.
a. Added to book balance c. Added to bank balance e. Not a reconciling item
b. Subtracted to book balance d. Subtracted to bank balance

_______1. The cash left in the office ready for deposit the next banking day. _______6. Check which was erroneously charged by the bank to the company’s current
account.
_______2. The checks already issued but not yet presented to the bank for encashment. _______7. Errors made by the company in recording the checks issued to a creditor.
_______3. Proceeds of bank loan from Bank X. _______8. Change fund in the custody of the cashier.
_______4. The bank has issued a debit memo representing the checkbooks requested _______9. Checks deposited by the depositor but considered late deposit and, therefore
and was charged to the current account. not shown as addition to the balance of depositor’s cash balance.
_______5. Customer’s checks were already collected by the bank but depositor was not _______10. No sufficient fund check (NSF).
yet informed until the bank statement date.

Exercise 2. Bank Recon

Identify whether the following independent transaction is a book or a bank 3. The bank teller deducted CK 123 for P3,500 from the account of Eagle. The
reconciling. In addition, determine the amount of the error and state whether the said check was issued by Egles Company a different depositor of the bank.
amount will be added or deducted in the preparation of the bank
reconciliation(use adjusted method): 4. The bookkeeper of Eagle recorded Check No. 345 in the Cash Disbursement
Journal as P5,205. The correct amount of the check was P5,250.
1. Eagle Repairs received P1,500 from Jane. The bookkeeper recorded the
amount as P500. 5. The deposits of Eagle earned interest of P100 for the month. Eagle does not
have knowledge of interest earned until it receives the bank statement.
2. Nation Bank collected from the customer of Eagle the sum of P5,000
representing payment of the said customer to Eagle. No entry was made in the
books of Eagle.

Chapter 8 – Taxation

The TRAIN Act aims to address the reputed weaknesses of the Tax Code, specifically through the following objectives:

 First, it intends to simplify the previous system to make it more straightforward and intuitive.
 Second, it intends to create a more "just" taxation scheme, wherein taxation is staggered and distributed on the basis of financial capability and the
underprivileged are able to reap more advantages.
 Third, it intends to improve the efficiency by which tax is collected, particularly tackling issues of compliance.

The Tax Reform for Acceleration and Inclusion (TRAIN) Act, officially cited as Republic Act No. 10963, is the initial package of the Comprehensive Tax Reform
Program (CTRP) signed into law by President Rodrigo Duterte on December 19, 2017. TRAIN consists of revisions to the National Internal Revenue Code of 1997,
or the Tax Code . This reform includes packages that make changes in taxation concerning the personal income tax (PIT), estate tax, donor’s tax, value added tax
(VAT), documentary stamp tax (DST) and the excise tax of petroleum products, automobiles, sweetened beverages, cosmetic procedures, coal, mining and tobacco .
The prominent feature of the tax reform is that people who earn ₱250,000 annually or ₱21,000 monthly and below are exempted from paying personal income tax
(PIT). This includes minimum wage earners, who were also exempted in the former tax system. On the other hand, those earning over ₱250,000 have tax rates
following a set PIT schedule. Essentially, greater income is taxed at higher tax rates .This denotes that low to middle income-earners get to have a higher take home
pay, while high income-earners have a bigger
Annuable Income Tax Tax Rate Percent of Taxpayers contribution to tax revenues. Increase
₱0-250,000 0% 83% in consumption taxes intend to counterbalance PIT
tax exemptions.
Over ₱250,000-400,000 20% of the excess over ₱250,000 8%
The new PIT is summarized in the table below
Over ₱400,000-800,000 ₱30,000 + 25% of the excess over ₱400,000 6%
Over ₱800,000-2,000,000 ₱130,000 + 30% of the excess over ₱800,000 2%
16
Over ₱2,000,000-
₱490,000 + 32% of the excess over ₱2,000,000 1%
8,000,000
₱2,410,000 + 35% of the excess over
Over ₱8,000,000 0.1%
₱8,000,000
Additionally, minimum-wage earners are still exempted from PIT. The Law also ensures a minimum wage earner who incurs a small raise will not have his overall
salary (with the PIT deducted) less than minimum wage. Also, married couples where both parties are working may be exempted up to a total of ₱500,000. This does
not include the exemption from the first ₱90,000 of their thirteenth month pay and additional bonuses. Finally, Self-employed and professionals with gross sales
below VAT can only pay 8% flat tax instead of their income and personal tax.

Simplified Estate and Donor's Tax

The TRAIN aims to simplify property purchases, transfers and donations in order to make the land market more efficient thus ensuring the usage of properties is
maximized.
The estate tax is now reduced to 6% based on the net value of the property. It also has a standard deduction of ₱5 million as well as a ₱10 million exemption on the
family home.
The donor tax is also reduced to 6% of the net donations for gifts above ₱250,000 yearly.
Simplified Value Added Tax
The government's aim to elevate the less fortunate in the Philippines and drive development is exemplified as the TRAIN repeals 54 out of 61 of the non-essential
VAT exemption. In order to protect these less fortunate persons, as well as small and micro businesses, they are exempted from VAT on goods and services of
marginal establishments. VAT exempt tax payers now have the option to:

 PIT schedule with 40% OSD on gross receipts or gross sales plus 3% percentage tax
 PIT schedule with itemized deductions plus 3% percentage tax, or
 Flat tax of 8% on gross sales or gross revenues in lieu of percentage tax and personal income tax.
"TRAIN aims to clean up the VAT system to make it fairer and simpler and lower the cost of compliance for both the taxpayers and tax administrators". As such, VAT
exemptions are now only limited to health, education and raw agriculture food. In 2019, medicines for hypertension, high cholesterol and diabetes will be exempted
from VAT. Similarly, purchases from senior citizens and persons with disabilities. Housing that costs less than ₱2 million shall also be exempted starting in 2021.
Listed below are the new excise taxes for specific fuel products for the year 2018

Petroleum
Excise Tax per Liter
Product
LPG ₱1.00
Bunker Fuels ₱2.50
Diesel ₱2.50
Petcoke ₱2.50
Kerosene Php3.00
Aviation gas ₱4.00
Gasoline ₱7.00
Naphtha ₱7.00
Asphalt ₱8.00
Asphalt ₱8.00
Lubricating oil ₱8.00
Paraffin wax ₱8.00
Refined fuels ₱8.00

Excise Tax of Automobiles increase

The table below summarizes the excise taxes on automobiles. The second column illustrates the tax rate on vehicles based on their specific price range. The third
column portrays the actual average effective tax rate. Because the TRAIN law increases the PIT of 99% of the population, their increase in net income will still be
more than enough to compensate for the effects of the excise tax on automobiles. This means they still benefit from the TRAIN as they incur additional disposable
income in the end. In addition, because richer tax payers tend to purchase more cars, the additional revenue from this tax will mostly come from them.
Automobile prices Tax Rate Average effective tax rate
₱600,000 and below 4% 3%
₱600,000 to ₱1,000,000 10% 8%
₱1,000,000 to
20% 15%
₱4,000,000
₱4,000,000 and above 50% 30%

Excise Tax on Sweetened Beverages\

"The SSB (Sugar-Sweetened Beverages) tax will promote a healthier Philippines".It achieves this by reducing the increasing number of diabetes and obesity cases,
through raising awareness, promoting the consumption of healthier products and encourage companies to innovate healthier alternatives.
TRAIN imposes new taxes of ₱6 per liter on drinks containing sweeteners and ₱12 per liter on drinks containing high-fructose corn syrup. Milk, 100% natural juice
and 3-in-1 instant coffee drinks are exempt from the excise tax

Additional Excise Taxes

There are three additional excise taxes, namely coal, cosmetics and tobacco.

17
Coal Excise Tax
Coal is a cheap source for power generation and has its uses in multiple industries such as the chemical and pharmaceutical industries. It is also a prime ingredient
for activated carbon, carbon fibre and silicon metal.[31] However, it remains a major source for air pollution in the Philippines. The aim of the excise tax is to shift
towards renewable energies and generate additional income for building infrastructures and social services. The excise tax on coal will increase from its original
₱10/Metric Ton(MT) to ₱50/MT on both domestic and imported coal. ₱50/MT will be added each succeeding year until January when the rate would have reached
₱150/MT.

Cosmetics Tax
Starting 2018, all cosmetic surgeries, aesthetic procedures, and body enhancements intended to improve, alter, or enhance a person’s appearance are now subject
to a tax of 5%.
However, procedures necessary to ameliorate a deformity arising from, or directly related to a congenital or developmental defect or abnormality, a personal injury
resulting to an accident or trauma, or disfiguring disease, tumor, virus or infection are tax -exempted.

Tobacco Tax[
The excise tax on cigarettes aims to reduce the amount of smokers and respiratory and cardiovascular diseases one can catch from the act, as well as generate
additional revenue for health oriented programs and services.
From its original excise tax of ₱30 in 2017, the tax on tobacco increased to ₱32.50 on January 1, 2018, ₱35 on July 1, 2018, will increase to ₱37.50 on January 1,
2019, and ₱40 on January 1, 2020. Afterwards, it will increase annually by 4% from January 1, 2024. [

Financial Taxes
There are four taxes that were adjusted along with the TRAIN Law. Firstly, the documentary stamp tax was increased by 100% except on loans with only 50%
increase, but not for savings, property, and non-life insurance. Secondly, the final tax on foreign currency deposit unit (FCDU) was increased from 7.5% to 15% of
interest income. Thirdly, capital gains tax of non-traded stock was increased from 5% to 10% of final net gains. Finally, the stock transaction tax was increased from
0.5% to 0.6% of total transaction value

Others
Finally, there are three additional taxes that do not fall under the aforementioned categories. These are the tax on lottery winnings and  PCSO prizes, documentary
stamp tax, and mining tax. With the implementation of the TRAIN Law, all PCSO lotto prizes are taxed at 20% if the prize exceeds ₱10,000. The documentary stamp
tax has been doubled, resulting in stamp taxes ranging from ₱1.50 to ₱3.00. Finally, excise tax rates on all non-metallic minerals and quarry resources, and all
metallic minerals including copper, gold and chromite, will be doubled, from 2% to 4%, as well as excise tax on indigenous petroleum, which will be doubled from 3%
to 6%.

Taxation is the power by which the sovereign raises revenue to defray the necessary expenses of the government from among those who in some measure are
privileged to enjoy its benefits and must bear its burden.

Tax is the enforced proportional contribution from persons and the properties levied by the State by virtue of its sovereignty for the support of government and for
public needs.

NATURE:
1. It is inherent in sovereignty - it is essential to the existence of every government.
2. It is legislative in character - the power to tax is pecuniary and exclusively vested to the Congress.  
3. It is subject to limitations - inherent and constitutional.

SCOPE:
1. The levy of tax is essentially for public purpose.
2. The subjects or objects to be taxed may be persons (natural or juridical) or property (real or personal, tangible or intangible.  The following may be
included as subject/object: business, transaction, rights or privileges.
3. The amount and rate of tax, which shall be uniform and equitable.
4. The manner and mode of enforcement and collection
5. The situs of taxation - may be exercised only within the territorial jurisdiction of the taxing authority

CHARACTERISTICS:
1. It is an enforced contribution - tax is not voluntary and its imposition is in no way dependent upon the will or assent of the person being taxed.
2. It is proportionate in character - the share of the taxpayer on the public burden is essentially based on one's ability to pay.
3. It is levied by the law-making body of the state - the power to tax is vested unto the Congress i.e. the House of Representatives (from which the tax bill is
introduced) and the Senate.  The Congress determines who to tax, what to tax and how the tax shall be collected.  Take note that they are NOT involved
in the collection thereof.
4. It is levied for public purpose or purposes - taxes are spent to support government i.e. they are not supposed to be used for private purpose.
5. It is generally payable in money - the government, in the exercise of its civil remedy in collecting the tax due may, by distraint of personal property or by
levy of real property, take the same to satisfy the tax liability if the taxpayer has no money
6. It is levied on persons and property by the State which has jurisdiction.

PRINCIPLES OF SOUND TAX SYSTEM

1.  Fiscal Adequacy - the source of revenue should be sufficient to meet the demands of public expenditure.
2. Theoretical Justice - the burden should be in proportion of the taxpayer's ability to pay
3. Administrative Feasibility  - it should be capable of being enforced; not burdensome; convenient as to time and manner of payment

LIMITATIONS 
Inherent Limitations - (by its nature)
1. Public purpose - for general welfare.

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 2. Exemption of Government Agencies/Instrumentalities exercising essential  governmental function.  
3. International comity - the property of a foreign state or government may not be taxed by another
4. Situs or territoriality - As a rule, the taxing power cannot go beyond the territorial limit of the taxing authority.  Situs of taxation is the State or country which
has jurisdiction to tax a person, property or interest.  
STAGES, ASPECTS OR PROCESSES OF TAXATION

1. Levy - it is the legislative act that determines that a tax of a certain amount or of a certain percentage shall be imposed on the persons, properties, or acts
subject thereto.  
2. Assessment - it is the official action of an officer authorized by law in ascertaining the amount of tax due under the law from a taxpayer.
3. Collection - It is the getting by the concerned government agencies of the taxes imposed

BASIS OF TAXATION 

1. Principle of Necessity - without money, the government cannot pay its expenses and therefore cannot exist.
2. Reciprocal Duties - (Benefits-Received or Compensation Theory) In return for the contribution of the taxpayer, he receives the general advantages and
protection which the government affords the taxpayer and his property.

PURPOSES OF TAXATION

1. Primary Purpose (Revenue/Fiscal) - to raise revenues for the support of the government.
2. Secondary Purpose (Non-revenue) - to regulate 

TAX AVOIDANCE VS. TAX EVASION 

Double taxation means (1) taxing twice (2) by the same taxing authority (3) with the same jurisdiction (4)for the same purpose (5) in the same year.  In its strict
sense, it is also referred to as obnoxious or direct duplicate taxation or direct double taxation.  In its broad sense, it is referred to as permissive, indirect duplicate or
indirect double taxation.

As a rule, double taxation is not prohibited.

Forms of escape from taxation:

1. Shifting - the transfer of the burden by the original payer to another
2. Capitalization - the reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser expects to be called to pay. 
3. Transformation - the manufacturer or producer pays the tax and endeavors to recoup himself by improving his process of production thereby turning out
his units of products at a lower cost
4. Tax Evasion - the use of illegal or fraudulent means to defeat or lessen the payment of a tax.  This is punishable by law.  
5. Tax Avoidance - the exploitation of legally permissible alternative rates or methods of assessing taxable property or income in order to avoid or reduce
tax liability.  (Tax minimization - legal)

SOURCES OF TAX LAWS 

1. Constitution
2. Statutes - Tax Code included
3. Presidential decrees
4. Executive orders
5. Court decisions
6. Implementing rules and regulations
7. Administrative issuances
8. Local tax ordinance
9. Tax  treaties and conventions with foreign countries

INHERENT POWERS OF THE STATE 

1. Police Power - State's constitution-granted power to govern, and to make, adopt, and enforce laws for the protection and preservation of public health, justice,
morals, order, safety and security, and welfare. It also gives a government the right to take private property for public use under the doctrine of eminent domain.

2. Eminent Domain - The power of the government to take private property and convert it into public use.

3. Taxation - A means by which governments finance their expenditure by imposing charges on citizens and corporate entities.

EXERCISES:

FABM 2
1. YOU generated annual compensation income of Php 455,000, net of statutory payments. Tax exempt 13th month pay and other bonuses – Php 30,000.

Determine YOUR tax due based on the following possible tax status using the BIR form.

1. YOU are single with no dependent.

2.YOU are single with one qualified dependent.
3. YOU are married with one qualified dependent.
4. YOU are married with three qualified dependent.
5. YOU are married with five dependents.

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2.. YOU generated annual compensation income of Php 455,000, net of statutory payments. Tax exempt 13th month pay and other bonuses – Php 30,000.

Determine YOUR tax due based on the following possible tax status using the BIR form.

1. YOU are single with no dependent.

2.YOU are single with one qualified dependent.
3. YOU are married with one qualified dependent.
4. YOU are married with three qualified dependent.
5. YOU are married with five dependents.

3. YOU generated annual compensation income of Php 455,000, net of statutory payments. Tax exempt 13th month pay and other bonuses – Php 30,000.

Determine YOUR tax due based on the following possible tax status using the BIR form.

1. YOU are single with no dependent.

2.YOU are single with one qualified dependent.
3. YOU are married with one qualified dependent.
4. YOU are married with three qualified dependent.
5. YOU are married with five dependents.

4. YOU generated annual compensation income of Php 455,000, net of statutory payments. Tax exempt 13th month pay and other bonuses – Php 30,000.

Determine YOUR tax due based on the following possible tax status using the BIR form.

1. YOU are single with no dependent.

2.YOU are single with one qualified dependent.
3. YOU are married with one qualified dependent.
4. YOU are married with three qualified dependent.
5. YOU are married with five dependents.

5. YOU generated annual compensation income of Php 455,000, net of statutory payments. Tax exempt 13th month pay and other bonuses – Php 30,000.

Determine YOUR tax due based on the following possible tax status using the BIR form.

1. YOU are single with no dependent.

2.YOU are single with one qualified dependent.
3. YOU are married with one qualified dependent.
4. YOU are married with three qualified dependent.
5. YOU are married with five dependents.

References:

 www.investopedia.com> Personal Finance Banking

 www.accounting tools.com
 accounting-simplified.com
 en.wikipedia.org
 corporatefinanceinstititute.com
 Fundamentals of Accountancy, Business and Management 2 by Josefina L. Beticon, et al. 2016

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