SUMMARY NOTES IN MANAGEMENT SERVICES

Sources: Sir Brad (pinnacle), Integ Review Handouts & Studytwt Notes

By: CJB (@CPAriaaa)

SUMMARY NOTES IN Overall Objective of Management Accounting:
Provision of a quality service.
STANDARD OF ETHICAL CONDUCT FOR
MANAGEMENT ACCOUNTANTS
MANAGEMENT SERVICES Sub-Objective:
1. Competence
2. Confidentiality
INTRODUCTION TO 1. Provision of Good Information – relevant,
3. Integrity
reliable, timely, clear, comprehensive, 4. Credibility
MANAGEMENT ACCOUNTING appropriately communicated
Management Services 2. Provision of A Value-For-Money Service – 2 LEVELS OF POSITIONS
1. Management Accounting – field of benefits must exceed the cost 1. Line Positions – directly involved in the
accounting that provides economic and 3. The Availability of Informed Personnel – MA revenue generating activities.
financial information for internal user such as staff available to answer queries and resolve 2. Staff Positions – supporting the line positions.
managers for decision making. problems
2. Financial Management 4. Flexibility

Management Financial COST ACCOUNTING - A technique or method for

Accounting Accounting determining the cost of a project, process, or thing.
User Managers, Officer Investors, Creditors, This cost is determined by direct measurement,
(internal user) Government (external arbitrary assignment, or systematic and rational
user) allocation.
Standard No PFRS, GAAP
AccountingStandard (required to prepare ROLE AND ACTIVITIES OF CONTROLLER AND
s (Prepares specific Financial Statement TREASURER
needs only when monthly/quarterly/ann CONTROLLER - deals with records, systems, and
needed) ually) processes to attain the objectives of internal controls
Basis of Related to future, Relates to past and good managing.
Report Historical transactions only
TREASURER - He serves as the protector of a
Reportin Segment, Product- Business as a whole
company’s value and finances from financial risks.
g Entity line, supplier.
Deals with money, cash, or wealth of an organization.
Others Timeliness Precision
Controller Treasurer
1. Planning and controlling 1.Cash flow management:
The information provided by management accounting 2. Reporting & Interpreting a. Operating – credit and
covers all areas of strategy and operations, and 3. Evaluating and consulting collection
4. Government relations, b. Investing – investments
includes information to assist with planning,
compliance, and reporting c. Financing – capital
directing/motivating & control, and other decision- 5. Economic appraisal provision, investor relations,
making by management. 6. Tax planning and short-term financing, banking
• Planning – setting goal, strategies. administration and custody
• Directing/Motivating – overseeing day-to-day 7. Protection of Asset 2. Risk management –
activities insurance
• Controlling – evaluation of performance against
the plan.
SUMMARY NOTES IN 4. As to Behavior
a. Variable Cost – total amount varies directly
THE COST FUNCTION
Y = a + bx
MANAGEMENT SERVICES with change in activity, per unit is constant.
b. Fixed Cost – total amount is constant, per
Y= total cost
a = fixed cost
unit varies inversely with change in activity. b = variable cost
COST & COST CONCEPTS i. Committed Fixed Cost x = # of units

Cost - measurement, in monetary terms, of the amount ii. Discretionary Fixed Cost
COST SEGREGATION TECHNIQUES FOR MIXED COST
of resources used for some purpose. c. Mixed Cost – variable + fixed cost 1. High-Low Method – the cost driver is the basis
d. Step Cost 2. Scatter graph Method – plots the data point, visual
➢ Cost Object – is often a product or department method
for which costs are accumulated or measured. 3. Least Square/Regression Method – most accurate
➢ Cost Driver – is the unit of an activity that
causes the change in activity's cost (variable)
➢ Cost Pool – is a grouping of individual costs,
typically by department or service center. GOODNESS IN FIT
➢ Activity – refers to any event, action, Correlation – measure of co-variation between dependent
transaction. and independent variables
a. Coefficient of Correlation ( r) - measure the
o Value Adding – necessary to produce
degree of relationship between two variables.
product
Range of values: -1 to 1
o Non-Value Adding – do not make the Positive (1) – direct relationship
product more valuable Zero – no relationship
Negative (-1) – indirect relationship
CLASSIFICATION OF COST
b. Coefficient of Determination (r^2) – amount of
1. As to type variation in the dependent variable explained by
a. Product Cost – manufacturing cost independent variables. Strength of liner equation
or cost function. The closer to 1 the better, the
b. Period Cost – selling & admin cost
more accurate.
2. As to traceability
a. Direct Cost – DM, DL
b. Indirect Cost – FOH
3. For decision making
a. Relevant Cost – will differ from options
b. Differential cost – difference of 2 costs
i. Incremental Cost – increase in cost from
alternative to another
ii. Decremental Cost - decrease in cost from
alternative to another
c. Opportunity Cost – income given up from
choosing an alternative
d. Sunk/Historical Costs – past cost, irrelevant
SUMMARY NOTES IN 7. Production equals sales.
8. Technology, as well as productive efficiency
TARGET PROFIT

MANAGEMENT SERVICES is constant. RS(u) = FC + Target Profit*

CM in Unit
CONTRIBUTION MARGIN INCOME
COST VOLUME PROFIT STATEMENT – focuses on the behavior of cost.
RS(peso) = FC + Target Profit*
ANALYSIS Sales xx CM ratio
(Variable Cost)* (xx) *before tax
CVP Analysis examines the behavior of total
Contribution Margin xx
revenues, total costs, and operating income as If the given profit is after tax, we need to gross up:
(Fixed Cost)** (xx)
changes occur in the output level, selling price, variable
Net Income xx
cost per unit, or fixed costs of a product. RS(u) = FC + Target Profit/1-tax rate
CM in Unit
Elements of CVP: *Manufacturing cost- DL, DM, VOH, VS&A
1. Sales – in volume or in peso **FOH, FS&A RS(peso) = FC + Target Profit/1-tax rate
2. Fixed Cost CM ratio
3. Variable Cost BREAK-EVEN POINT
4. Sales Mix ➢ no income
➢ sales equal total cost MARGIN OF SAFETY
CVP assumes the following: ➢ CM equal FC
➢ The amount of peso sale or number of units which
1. Changes in the level of revenues and costs ➢ The lower the better, meaning few sales only will
actual or budgeted sales may be decreased
arise only because of changes in the number cover the cost already.
without resulting into a loss. The higher the better.
of product (or service) units produced and
sold. BEP(unit) = Fixed Cost
Sales in Unit– BEP in Unit = MOS in unit
2. Total costs can be separated into a fixed CM in unit
Sales in Peso – BEP in pesos = MS in peso
component and a component that is variable.
BEP(peso) = Fixed Cost
3. When represented graphically, the behavior *Sales – can be actual or planned sales
CM ratio*
of total revenues and total costs are linear or BEP(unit) x selling price/unit
(represented as a straight line) in relation to DEGREE OF OPERATING LEVERAGE
output level within a relevant range and time *CM ratio = CM/ sales ➢ Each percentage change in sales what is the
period. effect in profit.
4. The selling price, variable cost per unit, and
DOL = Contribution Margin
fixed costs are known and constant. SALES MIX Income
5. The analysis either covers a single product or
assumes that the sales mix, when multiple Composite BEP = Fixed Cost Sensitivity Analysis is a “what if” technique that
products are sold, will remain constant as the weighted average contribution margin*
examines the impact of changes on any variables. For
level of total units sold changes. *WACM = use proportion
example, changes in prices, variable costs, and fixed costs
6. All revenues and costs can be added and on expected profits.
compared without taking into account the time
value of money.
SUMMARY NOTES IN SUMMARY OF EFFECT TO PROFIT OR LOSS
Inventory Situation Profit or Loss
THROUGHPUT COSTING (or SUPERVARIABLE
COSTING)

MANAGEMENT SERVICES Increase

Decrease
Production > Sales AC > VC
Production < Sales AC < VC
➢ An extreme form of variable costing in which only
direct material costs are included as inventoriable
Equal Production = sales AC = VC costs. All other costs are costs of the period in
ABSORPTION VS. VARIABLE which they are incurred.
RECONCILIATION
Absorption Costing (Full Costing and Conventional Throughput margin =
Costing) Variable Net Income Revenue – Direct material cost of the goods sold
+/ - Change in Inventory* x FOH/Unit
➢ Costing method that includes all Absorption Net Income SUMMARY OF DIFFERENCES BETWEEN VARIABLE
manufacturing costs (direct materials, direct *if decrease, less/ if increase, add AND ABSORPTION COSTING:
labor and both variable and fixed or
manufacturing overhead) in the cost of a unit
of product. Absorption Net Income
Add: Fixed OH, Beg Inv.
Sales xx Less: Fixed OH, End Inv.
(COGS)* xx Variable Net Income
Gross Profit xx
(Operating Expense)** xx Unit Fixed OH = Difference in Income
Profit/Net Income xx Change in Inventory

*Product Cost – DL, DM , OH Difference in Income =

**Period Cost – Selling & Admin Change In production x Fixed OH/Unit

Variable Costing (Direct Costing) ARGUMENTS AGAINST VARIABLE COSTING

1. Segregation of costs into fixed and variable might
➢ Costing method that includes only variable be difficult, particularly in the case of mixed costs.
manufacturing costs (direct materials, direct 2. The matching principle is violated by using
labor, and variable manufacturing overhead) variable costing which excludes fixed overhead
in the cost of a unit of product. from production costs and charges the same to
period costs regardless of production and sales.
Sales xx 3. With variable costing, inventory costs and other
(Variable Cost)* xx related accounts, such as working capital, current
Contribution Margin xx ratio, and acid-test ratio are understand because
(Operating Expense)** xx of the exclusion of fixed overhead I the
Profit/Net Income xx computation of product cost.

*Product Cost – DM, DL, VOH

*Selling & Admin, FOH

Fixed Overhead – the only difference of the two costing

➢ Under Absorption – Product Cost (inventoriable)
➢ Under variable – Period Cost (expense)
SUMMARY NOTES IN Purchased (silent)
BUDGET VS. STANDARD
Budget – internal, usually express in total
MANAGEMENT SERVICES *Actual Quantity
in MVP Produced
Standard – external, usually express in per unit
Normal/Practical –
-in MQV, always produced challenging yet attainable.
STANDARD COSTING & STANDARD
Ideal – maximum efficiency,
VARIANCE ANALYSIS no error, perfect
Standard – ideal, benchmark, measure of
performance. The “should be”. Flexible budget - this is a budgeted amount that is
adjusted to the actual level of activity that has occurred.
Standard Costing – should be cost. Best estimate of
management of what the cost should be. Static budget is a fixed budget. It is a budget that is
prepared for one specific level of planned activity, and
Uses: that level of planned activity does not change, no
1. Evaluate the performance of managers matter what the actual activity is.
2. Simplify costing of inventories
MANAGE BY EXCEPTION - this means that
VARIANCE ANALYSIS is the process of comparing
management can focus time in areas where there are
the actual expenses and revenues during a certain
problems, as identified by the fact that there is a
period to the budgeted amounts for that same period.
variance from the standard.

RESPONSIBILITY FOR VARIANCES

Other way of Formula: VARIANCE POSSIBLE CAUSES RESPONSIBLE
LRV = AH (AR – SR) PERSON
LEV = SR (AH – SH) Materials Quality of materials, Purchasing
spending or Quantity purchases, Manager
price variance Delivery time (rush
orders)
Materials Quality of materials, Production
efficiency or Defective machines, Manager
quantity Unskilled workers, poor
variance supervision
Labor Workers skill, overtime Supervisors,
Spending or premiums if premium is Person
rate variance added to the labor cost responsible for
account setting labor
rates
Labor Workers skills Production
Efficiency or Change in workers managers
Other way of Formula: time variance efficiency, Imposition of
MPV = AQ (AP – SP) control measures in the
production process
MQV = SP (AQ – SQ)
SUMMARY NOTES IN PRODUCTION BUDGET
Budgeted Sales xx
MANAGEMENT SERVICES Ending Finished Goods
(Beginning Finished Goods)
xx
(xx)
Budgeted Production xx
BUDGETING
MATERIALS PURCHASED BUDGET
➢ Budgeting is a planning tool used by the Budgeted Production xx
management to set goals, targets and can x number of materials need xx
also used for performance review in order to Materials Used xx
Ending Material Inventory xx
achieve the objectives of the entity. (Beginning Material Inventory) (xx)
➢ Budgeting is spearheaded by the budgeting Materials Purchases xx
committee. Overall responsibility for budget.
President, Treasurer, Controller and manager DIRECT LABOR BUDGET
per department, headed by budget director. Budgeted Production xx
X direct labor hours needed xx
Types of Budgets: X direct labor rate xx
Direct Labor Cost xx
➢ Short Term – for 1 year
➢ Long Term (capital budgeting)– for more CASH BUDGET
than 1 year Beginning Cash Balance xx
Collection xx
Master Budget – end result of budgeting. Cash Available xx
(Disbursement) (xx)
Operating Budget – production, sale. Sales budget, (Minimum Cash Balance) (xx)
DM budget, DL, OH, COGS, Selling & Admin expenses Excess/Deficiency xx
– budgeted income statement. Financing xx
(Investing) (xx)
Financial Budget – budgeted statement of cashflow, Ending Cash Balance xx
budgeting balance sheet
OVERHEAD BUDGET
SALES BUDGET Budgeted Production xx
Cash Sales xx X OH Rate/Unit xx
Credit Sales xx Overhead Cost xx
Total Sales xx
OPERATING EXPENSE BUDGET
COLLECTION BUDGET Rent xx
Current Month Collection xx Advertisement xx
Prior Month Collection xx Salaries xx
Total Collection xx Wages xx
Others xx
MERCHANDISE PURCHASE BUDGET Total Operating Expense xx
Budgeted Sale xx
Ending Inventory xx
(Beginning Inventory) (xx)
Merchandise Purchase xx
SUMMARY NOTES IN DECISION CRITERIA
General Rule:
MANAGEMENT SERVICES ✓ Variable Cost are relevant.
✓ Fixed Cost are irrelevant except when
avoidable.
RELEVANT COSTING Types Decision Criteria
Make or Buy General Rule
INCREMENTAL ANALYSIS (a.k.a differential/marginal
Accept or With excess capacity = General rule
cost)
Reject a Without excess capacity = General
➢ Another tool used by management in decision
special order rule + contribution margin of lost sale
making. from regular order
➢ Method of choosing the best options among Retain or Relevant: Cost of new equipment,
alternatives. Replace Salvage Value of old equipment,
Equipment difference in future operating cost
DEFINITIONS
❖ Relevant Costs – future costs that are expected Irrelevant: BV/Original Cost &
to be different under each alternative course of Accumulate Depreciation of old
action. equipment
❖ Differential Costs – increases (increments) or Retain of Segment Margin = Positive = Retain
decreases (decrements) in total costs that result Eliminate
from selecting one alternative instead of another. Unprofitable Segment Margin = Negative =
❖ Avoidable Costs – costs that will be saved or Segment or Eliminate
those that will not be incurred if a certain decision Product
is made. Segment Margin = Sales – VC =
❖ Opportunity Costs – the benefit lost by taking Avoidable FC
one action as opposed to another. Sell Incremental Revenue > Incremental
Immediately or Cost = Process Further
❖ Sunk Costs – refer to the non-recoverable costs
Process
incurred in the past.
Further Incremental Revenue < Incremental
❖ Joint Costs – costs incurred in simultaneously Cost = Sell at split-off
processing or manufacturing two or more products
which are difficult to identify individually as Incremental Revenue = Revenue
separate types of products until a certain after processing further – Revenue
processing stage known as the point of separation at split off point
or split-off point.
❖ Further Processing Costs – costs incurred Incremental Cost = Cost of further
beyond the split off point as separated joint processing
products are to be processed further. What product Rank the product using Contribution
❖ Split-Off Point – the earliest stage in the to produce Margin per scares resources. The
production where joint products can be recognized with given highest rank will be the priority
scares product to sell & produce.
as distinct and separate products.
resources
❖ Shutdown Costs – usual costs that a company
CM x Scares Resource Required =
will continue even if it decides to discontinue or CM/Scare resources
shutdown the operation of a company segment.
SUMMARY NOTES IN Profit manager
responsible
SM Mall,
SM
Controllable
Profit
RESIDUAL INCOME

for both Department Margin Operating Income* xx

MANAGEMENT SERVICES Revenue and Store, SM (Less: Average Operating Asset** x Minimum Rate of
Cost Cinema Return***) xx
RESPONSIBILITY ACCOUNTING Investment manager Head office Return on
Residual Income xx
responsible of SM Investment, *** A.K.A. Interest Rate
RESPONSIBILITY ACCOUNTING involves
for Revenue, Residual *** Required/Acceptable Return of Company
accumulating and reporting costs (and revenues) on Cost & Income,
the basis of the manager who has the authority to make Investment Economic
the day-to-day decisions about the items. Value ECONOMIC VALUE ADDED (EVA)
Added
Objective: Proper evaluation of responsibility Operating Income After Tax xx
centers. (Less: Average Operating Asset**** x Weighted
CONTROLLABLE PROFIT MARGIN Average Cost of Capital***) xx
Responsibility Centers Economic Value Added xx
Sales xx
1. Division Less: Variable Cost (xx) **** Operating Asset is at MV
2. Departments Less: Controllable Fixed Cost (xx) ****Total Asset – Current Liabilities
3. Branches Controllable Profit Margin xx
4. Segments SERVICE ALLOCATION METHODS
Headed by Managers, who has the overall RETURN ON INVESTMENT 1. Direct Method
responsibility for the centers. Service → Production Department
Operating Income*
Controllability – we can only evaluate managers Average Operating Asset** 2. Step Method
based on the factors they can control. Considers other relationships.
*income before interest & taxes Service → Service & Production Department
FOUR TYPES OF RESPONSIBILITY CENTERS Allocate first the SD who has the highest cost.
** Beg + End / 2
Centers Responsibili Example Evaluation ** A.K.A. Investment
3. Reciprocal/Algebraic Method
ty used **Operating Asset is at BV
Relationship of all departments to each other’s.
Cost manager Maintenanc Variance
responsible e, IT, HR, Analysis Du Pont Formula:
Step 1: Solve for X. Step 2: Allocate
only for Cost Payroll, (Actual Cost Profit Margin* x Asset Turnover**
Production vs. BALANCE SCORECARD – more holistic and used
Department Standard *Profit Margin= for evaluation for future performance.
Cost) Operating Income
Revenue manager Sales, Variance Sales 1. Financial – return on investment
responsible Marketing Analysis ** Asset Turnover = 2. Customer – pricing customer service
only for Department (Actual Sales 3. Internal Process – production bottlenecks
Revenue Revenue vs. Average Operating Asset
Standard breakdown
Revenue) Operating Income x Sales 4. Learning & Growth – development of
Sales x Average Operating Asset employees.
SUMMARY NOTES IN PRICING DECISION

MANAGEMENT SERVICES Factors Affecting Pricing Decision

1. Customer demand
2. Competitors’ actions
TRANSFER PRICING & PRICING 3. Cost
DECISION 4. Market forces
5. Government relations
TRANSFER PRICE
➢ the monetary value, or the price charged by Pricing Strategies
one segment of a firm for the goods and 1. Cost-Plus Pricing
services it supplies to another segment of the 2. Competitive Pricing
same firm. 3. Value-Base Pricing
➢ Objectives: Set transfer price to achieve goal 4. Price Skimming
congruence. 5. Penetration Pricing
➢ Goal Congruence – maximize the net
income of the whole company. FORMULA
RULES IN TRANSFER PRICING ➢ Selling Price = Desired Income + Cost
1. Maximum Transfer Price = the market price. ➢ Selling Price = Murk-up % x Cost Base
2. Minimum Transfer Price ➢ MU% = Desired Income + excluded in the base
a. With excess capacity = variable cost Cost Base
b. Without excess capacity = Selling Price
c. With excess capacity but insufficient =
allocation method and average.
Other Transfer Pricing Method (only if mentioned as
the method in the problem)
1. Cost + markup
2. Variable Cost
3. Full Production Cost
4. Negotiated Price
SUMMARY NOTES IN 1.3 Internal Rate of Return – is the interest rate that
makes the present value of cash inflows equal to
2.2 Accounting Rate of Return (ARR) – measures
the profitability of project base on income.

FAR/AP present value of cash outflows. IRR is the interest rate

makes the NPV equal to zero. Annual Income
CAPITAL BUDGETING ➢ IRR compares to cost of capital. Investment*
o IRR > Cost of Capital = accept the project
➢ Long term investment decisions. o IRR < Cost of Capita = reject the project *If problem is silent:
➢ Involved are the top management and Board ➢ Trial and Error to get the IRR = rate of return that With salvage value – average investment
or Investment – accept and reject investment the present value of annual cash inflows will be (initial investment + salvage value / 2)
proposals. equal to the initial investment (PV of outflow). Without salvage value – initial investment
o Choose from the choices.
TECHNIQUES IN CAPITAL BUDGETING o Choose to try first the middle %. Advantage
1. Discounting – considering the time value of o If the middle % does not result to equal the • Easy to compute.
money. Using discounted Cash Flow. initial investment, try another percentage. Disadvantages
1.1. Net Present Value o Take note that the higher the rate, the lower • Ignores Time Value of Money
1.2. Profitability Index the present value computed. • Based on income
1.3. Internal Rate of Return
2. Non-discounting TWO THINGS TO REMEMBER:
❖ EVEN CASH INFLOWS = use Ordinary Annuity
2.1 Payback period 1. To convert Net Income to Cashflows
❖ UNEVEN CASH INFLOWS = use Annuity Due
2.2 Accounting Rate of Return
Net income + Depreciation Expense
1.1 Net Present Value
2.1 Payback period – the time it takes to recover the
Present Value of Cash Inflows xx 2. Tax Shield/ Savings
initial investment. Express in number of years.
(*Present Value of Cash Outflows) xx Allowable Deduction increases, taxable
✓ Even Cashflow
+/- Net Present Value xx income increases, tax payable decrease.
Initial Investment
Positive = Accept Annual Cashflow* *Source of Deduction x Tax Rate
Negative = Reject *Depreciation expense, loss on sale
*Initial Value *Does not include the depreciation expense

1.2 Profitability Index – used in mutually exclusive ✓ Uneven Cashflows – analyze which year the
project. Accepting one project will reject another investment will be recover.
project. Advantage:
• Easy to use and understand.
Present Value of Cash Inflows Disadvantages:
Present Value of Cash Outflows • Ignores Time Value of Money
• Ignores performance of budget
Project with highest PI is the one that will be chosen. beyond payback period
SUMMARY NOTES IN 2. THE DIVIDEND DISCOUNT MODEL (OR
DIVIDEND/GORDON GROWTH MODEL)
What if more than one source of capital:
Weighted Average Cost of Capital (WACC) –
MANAGEMENT SERVICES a. Cost of Retained Earnings
considers capital structure of a company.

COST OF CAPITAL Next Dividends + G

Current Price Retained Earnings Breakpoint = the firms capital
budget where the firm does not need to issue any new
common stock.
Where:
G = growth rate in dividends per share (it Retained Earning
is assumed that the dividend payout Equity %
ratio, retention rate, and therefore the
EPS growth rate are constant)

b. Cost of New Common Stock

FORMULA FOR COST OF CAPITAL Next Dividends +G

CP x (1 – Flotation Cost)
COMMON (COST OF COMMON SHARES)
Flotation Cost = the cost of issuing new
1. CAPITAL ASSET PRICING MODEL (CAPM) securities.
R = Rf + β (Rm – Rf)
CREDITORS (COST OF DEBT)
where:
R = rate of return Interest Rate x (1 – Tax Rate)
Rf = risk-free rate determined by government
securities
Rm = average rate of return in market/PSE PREFERRED (COST OF PREFERRED
Market Risk Premium = Rm - Rf SHARES)
β = beta coefficient of an individual stock
which is the correlation between the volatility Dividends
(price variation) of the stock market and the Stock Price
volatility of the price of the individual stock.
(+1 beta during pandemic are pharmaceutical *always deduct the floatation cost in stock price
company)
(-1 beta during pandemic are airline
company)
SUMMARY NOTES IN MANAGEMENT Formula
LIQUIDITY
Meaning

Working Capital Current Asset (Current

SERVICES Liability)
Current Ratio It is a measure of
FINANCIAL STATEMENT ANALYSIS Current Asset
adequacy of working
capital. It is the primary
➢ Users analyze FS of a company to help them in their decision making. Current Liabilities test of liquidity to meet
current obligations from
TOOLS IN FINANCIAL ANALYSIS current assets.
Quick/Acid Test Ratio It measures the number
1. Horizontal (Trend Analysis) – evaluate FS items over a period of time. (how of times that the current
Quick Asset
much is the changes very year) / Percentage Change. liabilities could be paid
Current Liabilities
with the available cash
Y2-Y1 or Y2 -1 and near-cash assets
Y1 Y1 Cash Ratio C&Cash Eq
Current Liabilities
ASSET MANAGEMENT
2. Vertical (Common Size Analysis) – evaluate items within the financial Inventory Turnover It measures the number
statements as a percentage of base amount. Use in comparing two COGS/Sale of times that the inventory
companies (inter-company comparison) Ave. Inventory is replaced during the
Base Amounts: period.
a. Balance Sheet – Total Asset Average Age of It indicates the average
Inventory* (Inventory number of days during
b. Income Statement – Sales 360 days
Conversion Period) which the company must
Inventory Turnover
(Days’ in Inventory) wait before the
3. Ratio Analysis – evaluate relationship amount FS items. inventories are sold.
a. Liquidity Ratio – ability to pay short term obligations Receivable Turnover It measures the number
i. Asset Management Ratio Sales on Credit of times receivables are
ii. Debt Management Ratio Ave. Receivable recorded and collected
during the period.
b. Profitability Ratio – analysis of the performance of the entity
Average Age of It indicates the average
c. Solvency – ability to pay long term obligations Receivables/Collection number of days during
d. Market Ratio 360 days
Period which the company must
Receivables Turnover
wait before receivables
PATERN are collected.
Operating Cycle The time it takes a
➢ Return – Net Income is the numerator. company to acquire
➢ Turnover – Sales is the numerator.* inventory, sell that
Ave. Selling Period + Ave.
➢ Margin – Sales is the denominator. inventory, and receive
Collection Period
cash from its customers
*not always, but most of the time. in exchange for the
inventory sold.
Fixed Asset Turnover Sales It measures how
Ave. Fixed Asset efficiently a company
 fixed asset are being Operating Profit Measures profit
used to generate sales Margin Operating Profit generated after
Total Asset Turnover It measures how Sales consideration of
Sales efficiently a company operating costs.
Ave. Total Asset asset are being used to Profit Margin/Return Determines the portion of
Net Income
generate sales on Sales sales that went into
Sales
DEBT MANAGEMENT RATIO company’s earnings
Accounts Payable It measures the speed Cash Flow Margin Measures the ability of
Purchase Operating Cash Flow
Turnover with which a company the firm to translate sales
Ave. Account Payable Net Sales
pays its suppliers. to cash.
Average Age of It indicates the length of Return on Assets Efficiency with which
Income
Accounts 360 days time during which assets are used operate
Average Asset
Payable/Payment Payables Turnover payables remain unpaid. the business.
Period Return on Equity Measures the amount
Income
Cash Conversion The time (measured in earned on the owner’s or
Average Equity
Cycle days) it takes for a stockholders’ investment.
Ave. Selling Period + Ave. Earnings Per Shares Net Income – Preferred Measures the amount of
company to convert its
Collection Period – Average Dividends net income earned by
investments in inventory
Payment Period Weighted Ave. Common each common share.
and other resources into
cash flows from sales. Shares Outstanding
SOLVENCY Book Value Per Share Total Common Equity
Weighted Ave. Common
Debt Ratio Total Liabilities Proportion of total assets Shares Outstanding
Total Asset provided by creditors.
Dividends Per Share Dividends available to
Debt to Equity Ratio Proportion of assets common
Total Liabilities provided by creditors Weighted Ave. Common
Total Equity compared to that Shares Outstanding
provided by owners.
Dividend Pay-out It indicates the proportion
Equity Ratio Total Equity Proportion of total assets Dividend Per Share Earnings
Ratio of earnings distributed as
Total Asset provided by owners. Per Share
dividends.
Equity Multiplier It indicates the portion of Earnings Yield Earnings Per share
Ave. Total Asset
a company’s asset that Market Price
Ave. Total Liability
are funder by equity.
MARKET RATIO
Times Interest Earned It determines the extent to
EBIT Price-Earnings (PE) It indicates the number of
which operations cover Price Per Share
Interest Expense Ratio pesos required to buy P1
interest expense. Earnings Per Share
Fixed Charge EBIT + Fixed Charges of earnings.
Coverage Ratio Interest Expense + FC Market Book Ratio Price Per Share Book
PROFITABILITY Value per Share
Dividend Yield Measures the rate of
Gross Profit Margin It indicates how much of Dividend Per Share return in the investor’s
cash sales peso is left Price Per Share common stock
Gross Profit after deducting the cost of investments.
Sales goods sold to cover
Market Price per share Earnings price per share
expenses and provide
Cost of equity
profit.
 ➢ Management of Float/delay.
SUMMARY NOTES IN o Positive Float = Cash in Bank > Cash per Book
INVENTORY MANAGEMENT
➢ Inventory Management objective is to maintain

MANAGEMENT SERVICES o
(goal: maximize)
Negative Float = Cash in Bank < Cash per
optimal level of inventory.
o To meet customer demands
Book (goal: minimize) o To minimize cost
WORKING CAPITAL ▪ Mail Float – check not yet received ➢ Two issued to resolve in inventory management.
from the customer o How many units to order? (EOQ)
MANAGEMENT ▪ Processing Float – received but not o When to order? (ROP)
yet deposited ➢ Optimal Order Quantity (EOQ)
➢ Working Capital = Current Asset – Current Liabilities
▪ Clearing Float – deposited but not yet
➢ Working Capital is the resources of the business used
cleared 2 x D x OC At EOQ, ordering
in everyday operation.
➢ Working Capital Management objective is to achieve C cost = carrying cost
balance between risk and return.
➢ Prepare Cash Budget
Beginning Cash Balance xx Where:
➢ General Policies:
+Cash Receipt xx D, is annual cash demand
o Matching – current asset are financed by current
Total Cash Available xx TC, is transaction cost per activity (shipping, set-up,
liabilities
-Cash Disbursement (xx) ordering)
o Conservative – high working capital
-Maintaining Cash Balance (xx) R, is carrying cost (insurance, freight, storage cost)
o Aggressive – low working capital
Excess/Deficit xx
+Financing xx ➢ Re-order point (ROP)
CASH MANAGEMENT -Investment (xx) o Without Safety Stock, ROP is the normal lead
➢ Cash Management objective is to maintain Ending, Cash Balance xx time.
optimal level of cash. o With Safety Stock, ROP is normal lead time +
o To meet cash requirements. ➢ Total Cost safety stock.
o To avoid idle cash. Annual Transaction Cost xx o Normal lead time = lead time x daily usage
Annual Holding Cost xx o Safety Stock = buffer incase of delay
➢ Cash Conversion Cycle Total Cost xx
Days in Receivable ➢ Frequency = 360 days/ number of order
+ Days in Inventory Transaction Cost x no. of transaction
– Days in Payable OCB/2 x interest rate ➢ Average Inventory = Order Quantity / 2
Cash Conversion Cycle C / OCB
➢ Total Cost of Inventory
➢ BAUMOL MODEL ➢ Aggressive Funding Strategy Annual Transaction Cost xx
Optimal Cash Balance = o Seasonal: Short-term debt Annual Carrying Cost xx
o Permanent: Long-term debt Total Cost xx
2 x C x TC ➢ Conservative Funding Strategy
r o Seasonal & Permanent: Short-term debt Transaction Cost x no. of transaction
EOQ/2 x carrying cost
Where: C / OCB
C, is annual cash requirement
TC, is transaction cost per activity
R, is interest rate/opportunity cost of holding the
cash
RECEIVABLE MANAGEMENT ACCOUNTS PAYABLE MANAGEMENT
➢ Goal of Accounts Payable Management is to delay
➢ Account Receivable Management objective is the payment of payable.
to use effective credit policies. ➢ There are instances where there’s a need to forgo
➢ Credit Policies (period, discount) cash discount.
o Conservative (low discount, short period) o When there is existing loan that needs to be
▪ Low Sales paid first.
▪ Low Receivable o When there is investment opportunity that will
▪ Low Bad Debt Expense benefit more than availing the discount.
o Aggressive (high discount, long period)
▪ High Sales ➢ Cost of Giving up the cash discount:
▪ High Receivable Cash Discount % x 360
▪ High Bad Debt Expense 100% - CD % n
➢ Net Advantage/Disadvantage in Changing n = number of days that payment can be delayed
the Credit Policies (credit period – discount period)
OLD NEW
Contribution Margin xx Contribution Margin xx ➢ Average Accounts Payable =
(Cost of Investment) (xx) (Cost of Investment) (xx) AP x Ave. Payment Period / 365
(Bad Debt Expense) (xx) (Bad Debt Expense) (xx) (or, AP / AP turnover)
(Discount) (xx) (Discount) (xx)
Income xx Income xx SHORT TERM LOANS MANAGEMENT
➢ Effective Interest Rate
Net Advantage / Disadvantage
Financing Charges
Interest Rate in Borrowing x Ave. Investment in AR Net Proceed
VC x Ave. Collection Period / 365 (or, VC / AR turnover)
Interest expense + other fees - savings
➢ Average Account Receivable = Usable amount
AR x Ave. Collection Period / 365
(or, AR / AR turnover) *remember to make the effective interest to
annual.
SUMMARY NOTES IN 3. PERT-CPM (Project Evaluation Review
Technique- Critical Path Method)/Ganth Chart
MANAGEMENT SERVICES – project management specifically for project
scheduling and monitoring. Applicable for large
scale projects.
QUANTITATIVE ANALYSIS Steps:
Quantitative Analysis is the application of 1. List of activities
mathematics in solving business problems. a. Planning
Parallel Activities: can be
b. Excavation done at the same time.
Techniques c. Structuring Predecessor Activities: cannot
d. Finishing be done at the same time.
1. Linear Programming – optimization model. The
2. Time required for each activity.
goal is to find the optimal solutions in business
3. Identify the critical path (the longest path or the
operations.
minimum time to complete the project)
Objectives:
Crashing – to speed up the process, applicable when
✓ Maximize income or minimize cost, subject
there’s a delay in the project. Example is adding of
to constraint (scares resources)
labor worker. Crash only the activities within the
✓ Best combination of products.
critical path.
Steps:
1. Equation of what to maximize.
4.Learning Curve – the process is improved overtime
2. Equation of constraints.
due to learning and efficiency. It requires less time and
3. Substitute the choices.
resources as we produce additional units.
Percentage decrease in learning curve takes effect
2. Decision Tree Analysis – calculate the expected
every doubling of units.
monetary value of each outcome based on the
decisions. Applying the probabilities.
5.Forecasting – used of mathematics to predict future
Steps:
behavior of customers.
1. Identify each alternative course of action
Time Series Forecasting:
2. Apply the associated probabilities.
✓ Trend
3. Computation of EMV/Pay-off
✓ Seasonal
4. Decisions
✓ Cyclical
EMV under uncertainty Difference: Expected Value of
✓ Irregular
EMV under certainty Perfect Information (EVPI)

EVPI – the price to pay to get access to perfect

information.
SUMMARY NOTES IN b. As the income increases, the demand
for normal goods increases.
LAW OF DIMINISHING RETURN – adding additional input
results in a smaller increase in output.

MANAGEMENT SERVICES c. As the income increases, the demand

for inferior goods decreases. ELASTICITY OF SUPPLY

Formula:
ECONOMICS LAW OF DIMINISHING *MARGINAL UTILITY - The more Change in Supply
Microeconomics
we consume the less marginal utility we receive. (explains Change in Price
Branches
Macroeconomics why receiving more income doesn’t always mean the > 1 Elastic – supply is sensitive (luxury, with substitute)
demand is constantly increasing) = 1 Unitary – what change in price, same change in supply
*Additional Satisfaction < 1 Inelastic – supply is insensitive (no close substitute,
MICROECONOMICS – individuals & businesses. necessary)
➢ Law of Demand & Supply ELASTICITY OF DEMAND – sensitivity of demand due to
➢ Demand – POV of Buyer price change.
SHORT RUN SUPPLY - 1-5 years
➢ Supply – POV of Seller Formula: We produce as long as the price is equal to marginal cost.
Demand Supply Change in Demand Produce as long as the contribution margin is 0 or positive.
Price Increase Decrease Increase Change in Price
LONG RUN SUPPLY – more than 6 years
Price Decrease Increase Decrease > 1 Elastic – demand is sensitive (luxury, with substitute) Economies of scale – average cost decrease.
Extreme Elastic – a change in price, demand will
be 0. EQUILIBRIUM PRICE – perfect/optimal price. Price that
= 1 Unitary – what change in price, same change in demand the buyer is willing to pay and seller willing to sell.
< 1 Inelastic – demand is insensitive (no close substitute, ➢ If price is above equilibrium → surplus goods
necessary) (price ceiling)
Extreme inelastic – any change in price, demand ➢ If price is below equilibrium → shortage of goods
will remain. (price floor)

FOUR MARKET STRUCTURE

MOVEMENT ALONG THE DEMAND CURVE – this is
always about the effect of price. # of
Product
Control
Example
seller in Price
SHIFT IN DEMAND – other factors also affect. Perfect/Pure Large Identical No Divisoria
Factors Affecting Demand Downward Sloping Differentiat Jollibee,
Monopolistic Many Limited
ed Mcdo
1. Substitution Effect – price increases demand PLDT,
decreases, while demand increases to substitute Affecting Supply Upward Sloping Standardiz Globe,
Oligopoly Few Yes
ed Shell,
goods.
1. Number of Sellers – number of seller increases, Petron
2. Complementary – price increases of main Monopoly 1 Unique Yes Meralco
the supply increases.
product, demand decreases in its complementary
2. Substitute Goods with Higher Return– seller
goods.
will produce goods with higher returns.
3. Income Effect
3. Complementary goods – price of complementary
a. If price decreases, same income =
goods increase, the price of main goods
demand increases
increases.
MACROECONOMICS – entire economy Three Reasons for Unemployment: MONEY SUPPLY CYCLE
1. Frictional – mismatch between workers and jobs
Gross Domestic Product – measure of income and output (delay). HOUSEHOLD
of a country. Primary measure of the wealth of the country. 2. Structural – change in structure in business
The higher the GDP the better. (example: automation)
3. Cyclical – business cycle. Income Spend
Philippines: $3,300 GDP/Capita (rank 120th)
a. Peak – more job
How to measure? b. Recession – less job
c. Trough – super low job BUSINESS
1. Expenditure Approach d. Recovery – adding more job
Consumption + Investment + Government
Spending + (Export – Import) Money Multiplier (MM) = 1 / Reserve Requirement
Alsos known as the aggregate amount. ROLE OF GOVERNMENT
1. Fiscal Policy – through the use of taxes and M1 = cash in bank
2. Income Approach government spending to influence the economy. M2 = cash & cash equivalents
Salaries + Wages (individual) a. Taxes M3 = cash & CE & Short-Term Investment
Revenue (business) i. Decreases – disposal income increases,
Natural Resources/Depreciation* consumption increase, GDP increases Laffer Curve – as
*known in economics ii. Increase – revenue of government increase, government
Taxes (Government) disposal income decreases, consumption increases tax rate,
Less: income earned abroad decrease, GDP decreases. revenue increases,
b. Government Spending – project such as but there will be
GDP + income earned abroad = Gross National Product
infrastructure, employment increases, income point that it will
How to Compute? increases, consumption increases, GDP decrease because
increases. a higher increase in
1. Nominal GDP – measure GDP using current tax rate will discourage people from doing business.
prices. 2. Monetary Policy – money supply.
2. Real GDP – measure GDP adjusted for inflation Bangko Central ng Pilipinas controls the money supply.
(removing the effect of inflation) Increase in Income of an individual
Nominal GDP 3 ways to control money supply: ➢ Consume – Marginal Propensity to consume
GDP Deflator 1. Discount Rate/Interest Rate ➢ Save – Marginal Propensity to save
a. Increase – MS decreases
Two Types of Inflation: 2. Through Bank Reserve Requirement- MPC = consumption / income
1. Demand Pull Inflation – demand > supply percentage of deposits the bank is not allowed to MPS = savings / income
2. Cost Push Inflation – increase in cost of input lend. (October 2023 – 9.5% PH) *use the margin
a. Increase – MS decreases *if asking for average, use the total
Inflation has inverse relationship with unemployment – 3. Engaged in Open Market Operation – BSP
increase in GDP, decreases in unemployment, increases in through the bureau of treasury can buy and sell
income, increases in consumption, then prices of goods will treasury share.
increase. (Philips Curve) a. When BSP issue treasury bill, public
pays cash –MS decreases
b. When BSP buys treasury bill to public –
MS increases