CHAPTER VII
FINANCIAL ASPECT
In business, financial information is very important. In the case of a sole proprietorship form of business, users of the information are the proprietor/owner, its creditors and future investors. They serve as basis of making economic decision and evaluation. Financial information also shows the capacity of a company to settle its obligation. Thus, helps a creditor to decide on matters like extending credit to a company or business. For the investors, it allows them to determine their future rate of return. All financial information of a company is reflected on its financial statements.
Financial statements are official records or documents reflecting the performance and activities engaged by a business, person or other entity. Basically, financial statements comprise of five basic documents namely; Statement of Financial Position, Statement of Comprehensive Income, Statement of Changes in Owner’s Equity, Statement of Cash Flows and Notes to Financ ial Statements. A statement of financial position reports on a company’s assets, liabilities, and ownership equity at given point in time. A statement of comprehensive income, reports on a company’s income, expenses and profits over a period of time. The statement of changes in equity, on the other hand, explains the changes of the company’ s equity throughout while a statement of cash flow reports on a company’s cash used on its operating, investing and financing activities.
FINANCIAL ASSUMPTIONS
1. The business shall start its operation on June 1, 2013, fiscal year. There will be more or less 312 working days in a year. 2. The business shall operate 6 days a week from Mondays to Saturdays. Time-in will be at 8:00 in the morning until 5:00 in the afternoon. 12:00 – 1:00 shall not be counted as a working hour and will serve as a lunch break for the workers. 3. All purchase and sale transactions shall be made on cash basis. 4. Assume an increase in sales of 30% every year based on the previous year’s sales. 5. There shall be an annual mark-up of the product by 10% based on last year’s sale. 6. The straight-line method shall be used in computing for the annual depreciation. For production tools, replacement method shall be used. Replacement cost shall be charged to the price of the product resulting to an increase of 4% every two years. Depreciation for the cutting machine, sewing machine and finishing machine shall be charged to factory overhead.
The following are the assets to be depreciated using the straight-line method with their corresponding estimated useful life:
Fixed Assets
Estimated Useful Life
a. Cutting machine
15 years
b. Heavy Duty Sewing Machine
15 years
c. Finishing Machine
15 years
d. Office Table
5 years
e. Office Chair
5 years
f. Working Table
5 years
g. Mono block Chair
5 years
h. Fire Extinguisher
7 years
i.
Filing Cabinet
5 years
j.
Leasehold Improvements
10 years
7. Repairs and maintenance is 1% of the cost of the sewing machines, cutting machines and finishing machines which will be charged to production. An annual increase of 5% shall be based on the prior repairs and maintenance expense. 8. Transportation expense shall be charged to selling expense. 9. Pre-operating cost including advertising expense shall be treated as outright expense charged off during the pre-operating period. 10. Direct and Indirect materials shall be purchased when level of inventory reaches its 20% lower limit. Assume an annual increase of 5% on the purchase price. 11. Office supplies and cleaning supplies shall be purchased annually. Assume an annual increase of 2% on the purchase price.
12. For water and electricity expense, assume an annual increase of 5%. 90% will be allocated to factory overhead while the remaining 10% will be charged to administrative expense including the telephone expense. 13. For the rent expense in the production site, 80% will be allocated to factory overhead while the 20% will be charged to administrative expense. 14. The rent expense for the stall shall be charged fully to selling expense. Assume an annual increase of 10%. 15. The following shall be considered accrued for the last month of each calendar year. a. Utilities expense b. Rent expense c. SSS contribution d. PhilHealth contribution e. PAG-IBIG contribution f. Income tax g. VAT payable 16. Salaries and wages of the employees will increase by 5% every year. There will be no accrued salaries to be considered. If pay day falls on a holiday or weekend, salaries will be given the day before the pay day. 17. All employees are entitled to a 13 th month pay equivalent to a whole month pay. 18. PhilHealth, PAG-IBIG, SSS and 13 th month pay shall be charged proportionately to factory overhead, selling and administrative expense.
19. Assume no. of deliveries will be 48 times a year.
Presented in the succeeding pages are the financial statements of and their related documents. These were used as bases for the computation of the various ratios as well as for making conclusions and financial analysis.
