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Chapter V

FINANCIAL ASPECT

This chapter aims to conclude the financial feasibility of the project investment.
This aspect presents an evaluation of the financial condition and operating performance
of the project investment as well as forecasting its future condition and performance. For
potential investors to engage in a new investment project, the project has to be financially
viable. Invested capital must show the potential to generate an economic return to
investors at least equal or higher to that available from other similarly risky investments.
For owners and executives, analyzing financial aspect is an essential part of effective
decision making for the firm. Presented in this chapter are the pro-forma financial
statements, financial projections data and estimation of all costs that are necessary to
estimate the profitability of the project investment. Financial data includes information on
generation of revenues and associated expenses, seed capital, capital cost, operation and
maintenance cost, financing requirements, taxes and depreciation rates, and other
financially related assumptions.

Statement of Financial Position


The statement of financial position, also known as the balance sheet, is a formal
statement that comprises the entity’s assets, liabilities and equity. It pertains to the
liquidity, solvency, and the need of the entity for additional financing. This information will
help statement users to assess the financial soundness of the entity in terms of liquidity
risk, financial risk, credit risk, and business risk. This statement also predicts the entity’s
ability to comply with its future financial commitments.

Statement of Financial Performance


The statement of financial performance popularly known as the income statement,
reports on a company’s income, expenses, and profits over a given period of time. This
statement shows the efficient and effective use of the company’s resources depending on
its performance evidenced by its level of income. Information projected by this statement,
particularly its profitability, is useful in assuming the entity’s capacity to generate cash
flows from its existing resources.

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Statement of Cash Flows
The statement of cash flows reports on a company’s cash flow activities. It shows
the cash receipts and cash payments that arise from the operating, investing and financing
activities of the business. The cash flow statement helps the user to evaluate the ability of
the entity to generate cash and cash equivalents.

Statement of Changes in Shareholders’ Equity


The statement of changes in shareholder’s equity is the financial statement that
details changes to the equity portion of the balance sheet, including common and
preferred shares (as well as treasury stock), revaluation reserves and retained earnings it
presents the total net income for the period, the effects of changes in accounting policies
and error corrections for each component of equity, and a reconciliation between the
carrying amount at the beginning and end of the period, separately disclosing changes
from profit or loss and transactions with owners in their capacity as owners.

Notes to Financial Statements


The notes to financial statements provide narrative description or disaggregation
of items presented in the financial statements and information about items that do not
qualify for recognition. It reports the details, additional information and clarification of some
items on the face of financial statement. These notes contain important information on
such things as the accounting methodologies used for recording and reporting
transactions.

Statement of Assumptions
The financial assumption of a company is a statement about the possible future
behavior of certain factors affecting the business. It is the fundamental premises on which
the company’s accounting process is based. This is the foundation of the formulation of
the projected financial statements. It serves as a guide to the company to estimate present
and future revenues and expenses as attainable and realistic as possible.

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Financial Assumptions
Financial assumptions are the building blocks of all financial projections for it will
provide us the grounds in projecting all financial data to be used in this study. The following
financial assumptions exercised by Wackakatol Inc. served as a guide in formulating the
financial plan that includes the financial position and financial performance of the company
for the current period. These provide as the bedrock for estimating the present and future
revenues and expenses as results of the operations of the company. The basis on how
the projected financial statements are formulated as follows:

Major Assumptions
 Authorized Capital Stock would be two million two hundred thousand (2,200,000)
shares with five peso (P5) par value for eleven million pesos (P 11,000,000). The
total project costs will be financed by seventy percent (70%) coming from the
shareholders (owners) and thirty percent (30%) borrowings;
 Interest on loan will be seven percent (7%) annually;
 The company reports on a calendar year basis starting in the month of January;
 Project capitalization is based on the total of capital and operating expenditures;
 Capital expenditures are incurred during the first year of operation which includes
the land, building, office equipment, office furniture and fixtures, machineries,
factory furniture and fixtures, delivery van, and safety equipment;
 Orientation and training of workers which will be provided for a span of five (5)
days with a daily allowance of two hundred pesos (200php) for each worker will be
part of startup costs;
 Operating expenditures are the average operating expenses for five (5) years
which is the basis for the working capital requirement;
 Working capital is set for three (3) months. The working capital then will be utilized
for manufacturing costs, as well as other operating expenses;
 Contingency fund equivalent to three percent (3%) of the total project cost will be
assumed by the company used for unexpected expenses;
 Corporate income tax will be thirty percent (30%);
 Retained Earnings amounting to Php 500,000 per year, starting in the second year,
will be appropriated for expansion that is projected to happen in the company’s
seventh (7th) year;

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 Computation of VAT will be disregarded;
 Cash amounting to Php 500,000 per year starting the second year will be put into
long-term investments (time deposit; 1 year term), gaining interest of one point five
percent (1.5%) annually as deposited on Checking Account;
 The company employs accrual basis and going concern assumption. Moreover, it
assumes that the company is separate from the owners, managers, and
employees who constitute the company.
Sales
 The company will have a selling price per unit based on the value-based pricing it
computed in the Marketing Aspect ;
 The company will anticipate all sales will be on credit;
 Sales are spread evenly throughout the year;
 The company will have terms of payment of 2/10 n/30, to induce early collection of
sales on account. This means the company will give cash discount: 2% if customer
will pay full amount within 10 days. It is implied that 20% of the total sales on
account shall take advantage of the cash discount;
 The payment collection terms will be fifty percent (50%) on the month of sale and
the other fifty percent (50%) on the month following the sale;
 Cash will be deposited in the bank in order to earn an interest income of
approximately one point twenty-five percent (1.25%) per annum.
Assets
 Petty cash fund of 30,000php is established;
 The company anticipates a two percent (2%) allowance for doubtful accounts due
to receivables that might be uncollectible while actual writing off of accounts are
estimated at one percent (1%);
 Inventories of the company are composed of the raw materials inventory and
finished goods inventory;
 Ending inventory will be five percent (5%) of production for the current year;
 The company will avail of factory insurance (covers fire, lightning, earthquake,
typhoon, flood, riots, falling aircraft, vehicle impact, smoke damage, explosion,
landslide, and broad water damage) amounting to Php 2,000 per month;

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 Straight line method of depreciation will be used to deflate assets given their useful
lives. All depreciation expenses will be charged to the manufacturing overhead and
operating expenses where it is utilized;
 It will be disclosed that all assets will have no salvage value. It is assumed that all
of them are valueless at the end of their useful life. As long as the equipment and
furniture and fixtures are in proper condition, they will still be used by the company
even if the value were already fully depreciated.
Table 5.1

SCHEDULE OF USEFUL LIVES OF ASSETS

Useful Useful
Asset Lives Asset Lives
Building 20 Factory Furnitures & Fixtures
Machine Monoblock Chairs (Set of 6) 5
Dry Powder Homogenizing 15 Locker 5
Raw Material Mixer 15 Multipurpose Table 5
Coil Forming Machine 15 LED High Bay Light 5
Mosquito Coil Drying
Machine 15 Ladder 5
Carabao Manure Drying
Machine 15 Office Equipment
Packaging Machine 15 Computer Set 5
Office Furniture & Fixtures Printer 5
Office Table 5 CCTV Camera 5
Office Chair 5 Wall Clock 5
Filling Cabinet 5 Air Conditioner 5
Couch 5 Ceiling Fan 5
Coffee Table 5 Exhaust Fan 5
Flourescent Light 5 Water Dispenser 5
Bathroom Mirror 5 Aluminum Suzuki Multicab Van 15
Sink and Toilet Bowl 5 Safety Equipment
Visitor Chair 5 First Aid Kit 5
Emergency Light 5
Fire Extinguisher 5

Purchases
 All direct materials shall be purchased on account;
 Indirect materials will be replenished one hundred percent (100%) every year;

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 Purchasing requirement shall be fifty percent (50%) of the next month’s
requirements purchased a month prior the production and fifty percent (50%)
during the month of production;
 Payment terms of direct material purchases will be 50% on the month of purchase
and the remaining 50% on the month following the month of purchase;
 All indirect materials shall be purchased on a cash basis;
 The company maintains 10% of total supplies purchased in the current year as
ending balance of prepayments/supplies inventory; and
 A two point seven percent (2.7%) increase in the variable costs and fixed cost will
be applied due to the effect of inflation, which is average of the past five (5) years.

Labor

 The salaries and contribution expenses of machine operators and factory workers
working in the factory will be included in the direct labor as part of cost of goods
sold;
 The salary and contribution expenses of the productions supervisor will be
included in the indirect labor as part of cost of goods sold;
 The salaries and contribution expenses of the general manager, security guard,
bookkeeper and maintenance personnel will be allocated to administrative
expenses; and
 The salaries and contribution expenses of the marketing supervisor and delivery
personnel will be charged to the selling and marketing expenses.

Operating Expenditures

 Organization costs incurred is paid during the year and will be considered as an
outright expense;
 Business registration and renewal costs will be expensed outright in the year
incurred;
 Salaries and wages are paid semi-monthly, that is, every 15th day and 30th day of
the month. There will be an increase of five percent (5%) per annum in the gross
compensation of workers and employees;
 SSS, PhilHealth, HDMF, and Withholding Contributions will be paid for eleven (11)
months. December contributions are accrued and will be paid on the next
accounting period;
 Repairs and maintenance expenditure were set at two percent (2%) of total
property, plant and equipment balance except land;
 The Building, based on floor space utilization, will be divided among the expenses
as follows: 20% for Selling and Marketing expenses, 30% for Administrative
Expenses, and 50% as Manufacturing Overhead;
 Company’s monthly utility expense consists of the following: electricity, water,
telephone and internet. Utilities expenses are paid for eleven (11) months and

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accrued for one (1) month for December bills, to be paid the next month following
the year of reporting period;
 Supplies will be recorded as expense as purchased; 10% will be retained at the
end of the year and expensed the following year; and supplies will be repurchased
one hundred percent (100%) every year;
 13th month pay will be distributed in full to workers and employees which is
equivalent to a month’s salary;
 Uniform for administrative employees shall be expensed outright and uniforms for
the employees shall be included in the overhead and operating expense, according
to where the employee is categorized. Every year, three sets of the said uniform
shall be given to the employees;
 Grand opening of P 3,000 will be charged as advertising expense on the first year.
Other promotional strategies will be charged as advertising expense annually.

Dividend Policy

 The company will declare dividends annually after the 1st year;
 Forty percent (40%) of the Earnings After Taxes (EAT) of the current year will be
declared as dividends;
 Total dividends declared will be divided by the total number of outstanding shares
to get the dividends per share; and
 Sufficient retained earnings must be maintained to provide for possible
appropriations of contingencies, treasury shares, and other appropriations
required by law.

Project Costs (in Php)

Schedule
Building 1,400,000
Land 700,000
Machineries A 2,713,650
Office Furniture & Fixtures B 61,400
Office Equipment C 111,850
Factory Furniture & Fixtures D 33,400
Aluminum Suzuki Multicab Van 200,000
Safety Equipment E 13,600
Organization Cost F 132,149
Business Taxes and Licenses G 40,270
Working Capital H 984,197
Project Cost 6,390,516
Contingency (3%) 191,715
Total Project Cost 6,582,231

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Sched A: Machineries (in Php)
Dry Powder Homogenizing 625,000
Raw Material Mixer 102,500
Coil Forming Machine 257,500
Mosquito Coil Drying Machine 750,000
Carabao Manure Drying Machine 500,000
Packaging Machine 478,650
TOTAL 2,713,650

Sched B: Office Furniture & Fixtures (in Php)


Office Table 12,000
Office Chair 6,000
Filing Cabinet 6,000
Couch 8,000
Coffee Table 3,500
Fluorescent Light 4,950
Bathroom Mirror 950
Sink and Toilet Bowl 10,000
Visitor Chair 10,000
TOTAL 61,400

Sched C: Office Equipment (in Php)


Computer Set 30,000
Printer 7,000
CCTV Camera 12,000
Wall Clock 1,800
Air Conditioner 52,000
Ceiling Fan 3,000
Exhaust Fan 2,550
Water Dispenser 3,500
TOTAL 111,850

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Sched D: Factory Furniture & Fixtures (in Php)
Monobloc Chairs (Set of 6) 3,000
Locker 9,500
Multipurpose Table 4,000
LED High Bay Light 15,000
Ladder 1,900
TOTAL 33,400

Sched E: Safety Equipment (in Php)


First Aid Kit 1,600
Emergency Light 4,500
Fire Extinguisher 7,500
TOTAL 13,600

Sched F: Organization Cost (in Php)

Attorney Fee 5,000


CPA Fee 10,000
BIR Registration 500
OR and Invoicing Requirements 1,000
Documentary Stamp Tax 100,500
Filing Fee 13,400
Legal Research Fee 134
Articles and By-Laws 1,010
Reservation Fee 120
Stock and Transfer Book 470
Stamping 15
TOTAL 132,149

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Sched G: Business Taxes and Licenses (in Php)
Mayor's Permit Fee 20,000
BIR Registration & Business TIN 900
Documentary Stamp Tax 100
Garbage Charges 200
Sanitary Inspection Fee 500
Business Plate/Sticker 100
Health Certificate Fee 1,600
Occupation Fee 1,000
Zoning Certificate 1,000
Zoning Clearance Fee 9,000
Fire Inspection 50
Barangay Clearance Fee 50
Electrical Inspection Fee 1,500
License on Business Tax 4,000
Inspection Fee 100
Sanitary Permit Fee 50
Fire Clearance Fee 60
Regulatory Fee 60
TOTAL 40,270

Renewal Fee

Mayor's Permit 2nd year (20%


increase/yr) 24,000
SEC Registration 500
BIR Registration 500
Fire Permit 500
Zoning Permit 1,000
OR and Invoicing
Requirements 1,000
Garbage Charges 200
Sanitary Inspection Fee 500
Plate/Sticker 100
TOTAL 28,300

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Sched H: Working Capital (in Php)
Direct Materials Purchases 201,232
Direct Labor 178,750
Manufacturing Overhead 123,209
General and Administrative Salaries 263,623
Selling and Marketing Salaries 135,066
SSS, Philhealth, HDMF 33,543
Office Utilities 3,974
Employees' Training Allowance 18,000
Advertising Expense 3,175
Office Supplies 5,425
Repairs and Maintenance 2,000
Uniform Expenses 16,200
TOTAL 984,197

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FINANCIAL HIGHLIGHTS

Financial Highlights

Year 1 Year 2 Year 3 Year 4 Year 5


Financial Condition
(in Php):
Current Assets 3,251,469 3,483,683 3,602,755 3,560,685 3,292,481
Current Liabilities 318,330 359,075 384,670 406,461 435,005
Total Assets 8,177,076 9,100,997 9,911,775 10,561,411 10,984,914
Total Liabilities 2,227,830 2,097,725 1,832,875 1,360,910 550,068
Net Assets 5,949,246 7,003,271 8,078,900 9,200,502 10,434,846

Financial
Performance (in
Php):
Net Income 1,259,246 1,557,724 1,698,718 1,801,089 1,954,780
Net Sales 5,431,188 6,042,911 6,398,154 6,699,592 7,080,841

Financial Ratios:
LIQUIDITY
RATIOS
Current Ratio 10.21 9.70 9.37 8.76 7.57
Working Capital 2,933,140 3,124,608 3,218,085 3,154,223 2,857,475
Acid Test / Quick
Ratio 9.48 9.01 8.68 8.07 6.88
Monetary Assets 2,698,213 2,874,632 2,952,819 2,875,003 2,559,154

ACTIVITY RATIOS
Accounts
Receivable
Turnover 11.23 X 11.23 X 11.23 X 11.23 X 11.23 X
Inventory Turnover 7.95 X 8.97 X 9.06 X 9.10 X 9.09 X
Accounts Payable
Turnover 24.00 X 24.53 X 25.26 X 25.48 X 25.73 X
Average Collection
Period 32.5 days 32.5 days 32.5 days 32.5 days 32.5 days
Average 45.94
Conversion Period days 40.7 days 40.3 days 40.11 days 40.16 days
Average Payment 15.21 14.88 14.45
Period days days days 14.32 days 14.19 days
Normal Operating 78.44
Cycle days 73.2 days 72.8 days 72.61 days 72.66 days

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Cash Conversion 63.23 58.32 58.35
Cycle days days days 58.29 days 58.48 days

SOLVENCY
RATIOS
Debt Ratio 0.27 0.23 0.18 0.13 0.05
Equity Ratio 0.73 0.77 0.82 0.87 0.95
Debt-Equity Ratio 0.37 0.30 0.23 0.15 0.05
Times Interest
Earned / Interest
Coverage Ratio 13.79 X 16.55 X 19.50 X 24.22 X 37.62 X

PROFITABILITY
RATIOS
Return on Assets 15.40% 18.03% 18.31% 18.16% 18.70%
Return on Sales 23.19% 25.78% 26.55% 26.88% 27.61%
Return on Equity 21.17% 22.24% 21.03% 19.58% 18.73%
Earnings Per Share 0.35 0.43 0.47 0.49 0.54
Book Value Per
Share 1.63 1.92 2.22 2.53 2.87

MARKET TEST
RATIOS
Dividend Payout
Ratio 0% 32% 37% 38% 37%

CASH FLOW
RATIOS
Payback Period 3.76 years

Summarized above are the most commonly used financial ratios and noted
financial statement elements that serves as basis for the evaluation of the company’s
performance, health, potential growth, trend and operations. Meanwhile, the following
pages will present the financial statements with notes and schedule

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WACKAKATOL INC.
Statement of Financial Position
As of December Pre-Operations to Year 5
Pre-
Notes Operations Year 1 Year 2 Year 3 Year 4 Year 5

ASSETS
Current Assets
Cash and cash equivalents 3 1,466,100 2,633,708 2,807,939 2,886,762 2,809,548 2,495,459
Trade and other receivables 4 - 380,664 423,539 448,437 469,565 496,286
Inventories 5 - 234,927 249,976 265,266 279,221 298,322
Other Current Assets 6 - 2,170 2,229 2,289 2,351 2,414
Total Current Assets 1,466,100 3,251,469 3,483,683 3,602,755 3,560,685 3,292,481
Non Current Assets
Property and Equipment (net) 7 5,233,900 4,925,607 4,617,313 4,309,020 4,000,727 3,692,433
Long-Term Investments 8 - - 1,000,000 2,000,000 3,000,000 4,000,000
Total Non-current Assets 5,233,900 4,925,607 5,617,313 6,309,020 7,000,727 7,692,433
TOTAL ASSETS 6,700,000 8,177,076 9,100,997 9,911,775 10,561,411 10,984,914

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LIABILITIES AND SHAREHOLDERS EQUITY

LIABILITIES
Current Liabilities
Trade and Other Payables 9 - 183,411 192,176 202,664 213,487 225,565
Income Tax Payable 10 - 134,919 166,899 182,005 192,974 209,441
Total Current Liabilities - 318,330 359,075 384,670 406,461 435,005
Long Term Liabilities
Loans Payable 11 2,010,000 1,909,500 1,738,650 1,448,205 954,449 115,062
Total Non Current Liabilities 2,010,000 1,909,500 1,738,650 1,448,205 954,449 115,062
Total Liabilites 2,010,000 2,227,830 2,097,725 1,832,875 1,360,910 550,068
SHAREHOLDER'S EQUITY
Share Capital 12 4,690,000 4,690,000 4,690,000 4,690,000 4,690,000 4,690,000
Appropriated Retained
Earnings - Expansion Fund 13 - - 1,000,000 2,000,000 3,000,000 4,000,000
Unappropriated Retained
Earnings 13 - 1,259,246 1,313,271 1,388,900 1,510,502 1,744,846
Total Shareholders’ Equity 4,690,000 5,949,246 7,003,271 8,078,900 9,200,502 10,434,846
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY 6,700,000 8,177,076 9,100,997 9,911,775 10,561,411 10,984,914

See Notes to the Financial Statements.

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WACKAKATOL INC.
Statement of Financial Performance
For the Year Ended December 31, Year 1 to Year 5
Notes Year 1 Year 2 Year 3 Year 4 Year 5
Net Sales 14 5,431,188 6,042,911 6,398,154 6,699,592 7,080,841
Cost of Goods Sold 15 1,866,579 2,174,071 2,299,106 2,425,400 2,566,623
Gross Profit 3,564,609 3,868,840 4,099,048 4,274,192 4,514,217
Add: Interest Income 16 18,326 32,921 50,099 66,085 80,119
Total Income 3,582,935 3,901,761 4,149,147 4,340,277 4,594,337
Less: Selling and Marketing Expense 17 542,062 564,580 588,414 613,032 639,016
General and Administrative Expense 18 1,101,249 968,753 1,002,843 1,043,442 1,086,522
Net Income before Interest and Taxes 1,939,623 2,368,429 2,557,890 2,683,803 2,868,799
Less: Interest Expense 19 140,700 143,109 131,150 110,819 76,256
Net Income before Taxes 1,798,923 2,225,319 2,426,740 2,572,984 2,792,543
Less: Income Taxes (30%) 539,677 667,596 728,022 771,895 837,763
Net Income 1,259,246 1,557,724 1,698,718 1,801,089 1,954,780

See Notes to the Financial Statements.

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WACKAKATOL INC.
Statement of Cash Flows
For the Year Ended December 31, Year 1 to Year 5
Notes Year 1 Year 2 Year 3 Year 4 Year 5
CASH FLOWS FROM OPERATING ACTIVITIES
Profit (Loss) before Income Tax 1,798,923 2,225,319 2,426,740 2,572,984 2,792,543
Adjustments for:
Depreciation 308,293 308,293 308,293 308,293 308,293
Operating profit (loss) before working capital changes 2,107,217 2,533,613 2,735,033 2,881,277 3,100,836
(Increase)/decrease in:
Trade and other receivables 4 (380,664) (42,875) (24,898) (21,127) (26,721)
Inventories 5 (234,927) (15,050) (15,290) (13,954) (19,101)
Other current asset 6 (2,170) (59) (60) (62) (63)
Increase/(decrease) in:
Accrued and other payables except income tax 9 183,411 8,766 10,488 10,823 12,077
Net cash inflows (outflows) from operations 1,672,866 2,484,396 2,705,272 2,856,957 3,067,028
Income tax paid 10 (404,758) (635,616) (712,915) (760,927) (821,296)
Net cash provided by (used in) operating activities 1,268,108 1,848,779 1,992,357 2,096,030 2,245,732

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CASH FLOWS FROM INVESTING ACTIVITIES

Construction of Warehouse 7 (1,400,000) - - - -


Acquisition of Land 7 (700,000) - - - -
Acquisition of Machineries 7 (2,713,650) - - - -
Acquisition of Office Furniture & Fixtures 7 (61,400) - - - -
Acquisition of Office Equipment 7 (111,850) - - - -
Acquisition of Factory Furniture & Fixtures 7 (33,400) - - - -
Acquisition of Aluminum Suzuki Multicab Van 7 (200,000) - - - -
Acquisition of Safety Equipment 7 (13,600) - - - -
Investment in Time Deposits 8 - (1,000,000) (1,000,000) (1,000,000) (1,000,000)
Net cash provided by (used in) investing activities (5,233,900) (1,000,000) (1,000,000) (1,000,000) (1,000,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Investment from Shareholders 12 4,690,000 - - - -
Borrowing from Bank 11 2,010,000 - - - -
Dividends 13 - (503,699) (623,089) (679,487) (720,436)
Payment of Borrowings 11 (100,500) (170,850) (290,445) (493,757) (839,386)
Net cash provided by (used in) financing activities 6,599,500 (674,549) (913,534) (1,173,244) (1,559,822)
Net increase (decrease) in cash 2,633,708 174,231 78,822 (77,214) (314,090)
Cash balance, beginning - 2,633,708 2,807,939 2,886,762 2,809,548
CASH BALANCE, END 3 2,633,708 2,807,939 2,886,762 2,809,548 2,495,459

See notes to financial statements

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WACKAKATOL INC.

Statement of Changes in Shareholders' Equity


As of December Year 1 to Year 5

Year 1 Year 2 Year 3 Year 4 Year 5


Shareholders' Equity, Beginning
Share Capital 4,690,000 4,690,000 4,690,000 4,690,000 4,690,000

Beginning Unappropriated Retained Earnings - 1,259,246 1,313,271 1,388,900 1,510,502


Add: Net Income 1,259,246 1,557,724 1,698,718 1,801,089 1,954,780
Total 1,259,246 2,816,970 3,011,989 3,189,989 3,465,282
Less: Increase in Appropriated Retained Earnings
- Expansion Fund - 1,000,000 1,000,000 1,000,000 1,000,000
Less: Dividends (40% of NI) - 503,699 623,089 679,487 720,436
Ending Unappropriated Retained Earnings 1,259,246 1,313,271 1,388,900 1,510,502 1,744,846
Beginning Appropriated Retained Earnings -
Expansion Fund - - 1,000,000 2,000,000 3,000,000
Add: Increase in Appropriated Retained Earnings -
Expansion Fund - 1,000,000 1,000,000 1,000,000 1,000,000
Ending Appropriated Retained Earnings - 1,000,000 2,000,000 3,000,000 4,000,000
Shareholders' Equity, Ending 5,949,246 7,003,271 8,078,900 9,200,502 10,434,846

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Notes and Schedules to Financial Statements

Note 1 – Statement of Compliance


The financial statements have been prepared in compliance with the Philippine Financial Reporting Standards (PFRS) for Small
and Medium-sized Entities and Philippine Securities and Exchange Commission rulings and regulations.
The accounting policies adopted in the preparation of financial statements have been consistently applied to all the years
presented, unless otherwise stated.

Note 2 – Significant Accounting Policies

Measurement Basis
The financial statements have been prepared under the historical cost basis.
Functional and Preparation of Currency
The financial statements are presented in Philippine peso, which is the Wackakatol Inc.’s functional and presentation currency.
Use of Judgments and Estimates
The preparation of the financial statements in conformity with the PFRS for SMEs mandates the use or certain critical accounting
estimates. It also requires management to exercise its judgment in the process of applying the company’s accounting policies.
Revenue Recognition
Revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of the
company’s activities. The company recognizes revenue when: the amount of revenue can be measured reliably and it is probable that
future economic benefits will flow to the entity.

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Income is recognized at the point of sale which the company deems is at the point of delivery. Other revenues of the same type
are recognized when earned.
Interest income from bank deposit is acknowledged on a time proportion basis that reveals the effective yield on the assets.
Cost Recognition
Expenses are recognized when incurred. The company recognizes cost when: it is probable that there is a decrease in future
economic benefits and the amount of decrease can be measured reliably.
Cash
The company’s cash includes cash on hand and cash in bank. As part of cash control and monitoring, the company shall
reconcile the books and bank balances on a regular basis. Petty Cash Fund shall be utilized for petty transactions not covered by
checks.
Trade and Other Receivable
Trade receivables are recognized initially at transaction price. They are subsequently measured at amortized cost less provision
for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the group will not
be able to collect all amounts due according to the original terms of the receivables.
The management employs the estimation that 2% of the total ending receivables will be set as an allowance for doubtful
accounts.
Inventories
Inventories are stated at the lower of FIFO cost and net realizable value. The First-In-First-Out (FIFO) method shall be used by
the company in determining the cost of inventories. The cost shall include all costs of purchase and other costs incurred in bringing the
inventories to their present location and condition.
The company’s inventories comprise raw materials and finished goods that are valued at lower of cost or the estimated selling
price in the ordinary course of business less estimated cost of completion and the estimated cost necessary to make the sale. No
impairment for inventories shall be employed by the company.

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Property, Plant and Equipment
Property, Plant and Equipment are recorded at cost. The straight line method is used in recording depreciation on the basis of
the estimated useful life of the assets. Subsequently, they are stated at cost less any accumulated depreciation and any accumulated
impairment losses.
The element of cost of an item of Property, Plant and Equipment includes the purchase price and cost directly attributable to
bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
Costs not qualifying for recognition are the following: cost of opening a new facility, costs of introducing a new product or service
(including costs of advertising and promotional activities), costs of conducting business in a new location or with a new class of customer
(including costs of staff training), administration and other general overhead costs and borrowing costs. The company shall recognize
them as an expense when they are incurred.
Trade and Other Payables
Trade and other payables are recognized initially at transaction price and subsequently measured at amortized cost.
Trade payables and liabilities are recognized for goods or services that have been received from the supplier in compliance
with the agreement established. Other payables include accrued expenses during the month and payments to government agencies
which are normally settled the month following the month of accrual.
Loans Payable
Loan Payable is long-term borrowings measured at transaction price and subsequently recognized at amortized costs less
settlement payments. Interest-bearing loans are recorded at proceeds received, net of direct issue costs.
Share Capital
Share Capital is the portion of the paid in capital representing the total par value of the shares issued.

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Retained Earnings
Retained Earnings represents the cumulative balance of earnings reported, dividend distributions, fundamental errors and any
capital adjustments.
Short-term Benefits
The company records a liability net of amounts already paid an expense for services rendered by employees during the
accounting period. Short-term benefits given by the company to its employees include salaries and wages, social security contributions,
short-term compensated absences, bonuses and other non-monetary benefits, if any.
Income Taxes
Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from
or paid to the taxation authorities. The tax rates and tax laws shall be in accordance with the prevailing laws as of the balance sheet
date. The current tax liability shall be based on the corporate tax rate of thirty percent (30%).

Note 3 - Cash and Cash Equivalents (in


Php)

Year 1 Year 2 Year 3 Year 4 Year 5


Cash in Bank and on Hand 2,603,708 2,777,939 2,856,762 2,779,548 2,465,459
Petty Cash Fund 30,000 30,000 30,000 30,000 30,000
Ending Balance 2,633,708 2,807,939 2,886,762 2,809,548 2,495,459

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Note 4 - Trade and Other Receivables
(in Php)
Year 1 Year 2 Year 3 Year 4 Year 5
Total Receivable 388,433 432,183 457,589 479,148 506,414
Less: Allowance for Doubtful Accounts
(2% of A/R) 7,769 8,644 9,152 9,583 10,128
Net Accounts Receivable 380,664 423,539 448,437 469,565 496,286

Note 5 - Inventories (in Php)

Year 1 Year 2 Year 3 Year 4 Year 5


Raw Materials Inventory 34,927 37,976 40,816 44,326 49,937
Finished Goods Inventory 200,000 212,000 224,450 234,895 248,385
Total Inventories 234,927 249,976 265,266 279,221 298,322

Note 6 - Other Current Assets (in Php)

Year 1 Year 2 Year 3 Year 4 Year 5


Supplies 2,170 2,229 2,289 2,351 2,414
Total Other Current Assets 2,170 2,229 2,289 2,351 2,414

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Note 7 - Property, Plant and Equipment
(in Php)
Year 1 Year 2 Year 3 Year 4 Year 5
Cost:
Building 1,400,000 1,400,000 1,400,000 1,400,000 1,400,000
Land 700,000 700,000 700,000 700,000 700,000
Machineries 2,713,650 2,713,650 2,713,650 2,713,650 2,713,650
Office Furniture & Fixtures 61,400 61,400 61,400 61,400 61,400
Office Equipment 111,850 111,850 111,850 111,850 111,850
Factory Furnitures & Fixtures 33,400 33,400 33,400 33,400 33,400
Aluminum Suzuki Multicab Van 200,000 200,000 200,000 200,000 200,000
Safety Equipment 13,600 13,600 13,600 13,600 13,600
Less: Accumulated Depreciation:
Building 70,000 140,000 210,000 280,000 350,000
Machineries 180,910 361,820 542,730 723,640 904,550
Office Furniture & Fixtures 12,280 24,560 36,840 49,120 61,400
Office Equipment 22,370 44,740 67,110 89,480 111,850
Factory Furnitures & Fixtures 6,680 13,360 20,040 26,720 33,400
Aluminum Suzuki Multicab Van 13,333 26,667 40,000 53,333 66,667
Safety Equipment 2,720 5,440 8,160 10,880 13,600
Total 4,925,607 4,617,313 4,309,020 4,000,727 3,692,433

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Note 8: Long-Term Investments (in Php)
Year 1 Year 2 Year 3 Year 4 Year 5
Time Deposit (1 year term) - 1,000,000 2,000,000 3,000,000 4,000,000
Total Long-Term Investments - 1,000,000 2,000,000 3,000,000 4,000,000

Note 9: Trade and Other Payables (in


Php)
Year 1 Year 2 Year 3 Year 4 Year 5
Accounts Payable 33,539 35,054 38,094 40,963 44,560
Utilities Payable 5,073 5,209 5,350 5,495 5,643
Withholding Taxes Payable (December) 849 1,100 1,364 1,640 1,930
Salaries and Wages Payable (December
net pay) 126,060 132,363 138,981 145,930 153,227
SSS, HDMF, and Pag-ibig Premium
(December) 17,890 18,450 18,875 19,460 20,205
Total Trade and Other Payables 183,411 192,176 202,664 213,487 225,565

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Note 10: Income Tax Payable (in Php)
Year 1 Year 2 Year 3 Year 4 Year 5
Income Tax Incurred in Previous Year 539,677 667,596 728,022 771,895 837,763
1st Quarter Payment (134,919) (166,899) (182,005) (192,974) (209,441)
2nd Quarter Payment (134,919) (166,899) (182,005) (192,974) (209,441)
3rd Quarter Payment (134,919) (166,899) (182,005) (192,974) (209,441)
Income Tax Payable 134,919 166,899 182,005 192,974 209,441
Total Income Tax Payable 134,919 166,899 182,005 192,974 209,441

Note 11: Long-Term Payable (in Php)

Year 1 Year 2 Year 3 Year 4 Year 5


Beginning Amount of Loans Payable 2,010,000 1,909,500 1,738,650 1,448,205 954,449
Payment of Loans Payable (100,500) (170,850) (290,445) (493,757) (839,386)
Ending Amount of Loans Payable 1,909,500 1,738,650 1,448,205 954,449 115,062
Total Long-Term Payable 1,909,500 1,738,650 1,448,205 954,449 115,062

Note 12: Share Capital (in Php)

Year 1 Year 2 Year 3 Year 4 Year 5


Ordinary Share Capital (P5 par, 938000
shares) 4,690,000 4,690,000 4,690,000 4,690,000 4,690,000
Total Share Capital 4,690,000 4,690,000 4,690,000 4,690,000 4,690,000

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Income Tax Incurred in Previous Year 539,677 667,596 728,022 771,895 837,763
1st Quarter Payment (134,919) (166,899) (182,005) (192,974) (209,441)
2nd Quarter Payment (134,919) (166,899) (182,005) (192,974) (209,441)
3rd Quarter Payment (134,919) (166,899) (182,005) (192,974) (209,441)
Income Tax Payable 134,919 166,899 182,005 192,974 209,441
Total Income Tax Payable 134,919 166,899 182,005 192,974 209,441

Note 13: Retained Earnings (in Php)

Year 1 Year 2 Year 3 Year 4 Year 5


Net Income 1,259,246 1,557,724 1,698,718 1,801,089 1,954,780
Beginning Retained Earnings - 1,259,246 2,313,271 3,388,900 4,510,502
Dividends (40%) - (503,699) (623,089) (679,487) (720,436)
Total Retained Earnings 1,259,246 2,313,271 3,388,900 4,510,502 5,744,846
Less: Accumulated Retained Earnings -
Expansion Fund - 1,000,000 2,000,000 3,000,000 4,000,000
Unappropriated Retained Earnings 1,259,246 1,313,271 1,388,900 1,510,502 1,744,846

Note 12: Share Capital (in Php)

Year 1 Year 2 Year 3 Year 4 Year 5


Ordinary Share Capital (P5 par, 938000
shares) 4,690,000 4,690,000 4,690,000 4,690,000 4,690,000
Total Share Capital 4,690,000 4,690,000 4,690,000 4,690,000 4,690,000

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Note 14: Net Sales (in Php)

Year 1 Year 2 Year 3 Year 4 Year 5


Sales with Cash Discount (80% of sales) 1,090,600 1,213,436 1,284,770 1,345,300 1,421,856
Less: Cash Discount (2%) 21,812 24,269 25,695 26,906 28,437
Sales on Account (20% of sales) 4,362,400 4,853,744 5,139,079 5,381,198 5,687,422
Total 5,431,188 6,042,911 6,398,154 6,699,592 7,080,841

3rd Quarter Payment


(134,919) (166,899) (182,005) (192,974) (209,441)
Income Tax Payable 134,919 166,899 182,005 192,974 209,441
Total Income Tax Payable 134,919 166,899 182,005 192,974 209,441

Note 11: Long-Term Payable (in Php)


Year 1 Year 2 Year 3 Year 4 Year 5

Payment of Loans Payable


(100,500) (170,850) (290,445) (493,757) (839,386)
Ending Amount of Loans Payable 1,909,500 1,738,650 1,448,205 954,449 115,062
Total Long-Term Payable 1,909,500 1,738,650 1,448,205 954,449 115,062

Note 15: Cost of Goods Sold (in Php)

Year 1 Year 2 Year 3 Year 4 Year 5


Direct Materials Used 770,000 838,237 911,426 979,593 1,063,817
Direct Labor 784,740 823,738 863,201 905,890 951,859

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Manufacturing Overhead 511,839 524,096 536,929 550,361 564,437
Total Manufacturing Costs 2,066,579 2,186,071 2,311,556 2,435,845 2,580,113
Add: Finished Goods Inventory, Beg - 200,000 212,000 224,450 234,895
Total Goods Available for Sale 2,066,579 2,386,071 2,523,556 2,660,295 2,815,008
Less: Finished Goods Inventory, End 200,000 212,000 224,450 234,895 248,385
Total Cost of Goods Sold 1,866,579 2,174,071 2,299,106 2,425,400 2,566,623

Note 16: Interest Income (in Php)

Year 1 Year 2 Year 3 Year 4 Year 5


Beginning Amount-Cash in Checking
Account 1,466,100 2,633,708 2,807,939 2,886,762 2,809,548
Multiplied by Rate 1.25% 1.25% 1.25% 1.25% 1.25%
Interest - Checking Account 18,326 32,921 35,099 36,085 35,119
Beginning Amount of Time Deposit - - 1,000,000 2,000,000 3,000,000
Multiplied by Rate 1.50% 1.50% 1.50% 1.50% 1.50%
Interest - Time Deposit - - 15,000 30,000 45,000
Interest Income 18,326 32,921 50,099 66,085 80,119

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Note 17: Selling & Marketing Expense
(in Php)
Year 1 Year 2 Year 3 Year 4 Year 5
Uniform Expense 1,800 1,849 1,899 1,950 2,002
Program Expense
Clean Up Drive 17,200 17,664 18,141 18,631 19,134
Seminar on Mosquito Prevention 7,975 8,190 8,411 8,639 8,872
Advertising Expense 12,700 13,043 13,395 13,757 14,128
Salaries and wages 351,120 368,676 387,110 406,465 426,789
Employer's Contributions 32,274 33,017 34,050 34,793 35,774
13th month pay 29,260 30,723 32,259 33,872 35,566
Depreciation:
Delivery Van 13,333 13,333 13,333 13,333 13,333
Building (20%) 14,000 14,000 14,000 14,000 14,000
Gas & Oil 62,400 64,085 65,815 67,592 69,417
Total 542,062 564,580 588,414 613,032 639,016

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Note 18: General & Administrative
Expenses

Year 1 Year 2 Year 3 Year 4 Year 5


Organization Cost 132,149 - - - -
Employees' Training Allowance 18,000 - - - -
Uniform Expense 3,600 3,697 3,797 3,900 4,005
Taxes & Licenses 40,270 28,300 28,300 33,100 38,860
Security Expenses 120,000 123,240 126,567 129,985 133,494
Bookkeeping Expenses 192,000 197,184 202,508 207,976 213,591
Maintenance Expenses 120,000 126,000 132,300 138,915 145,861
Salaries and Wages 300,960 316,008 331,808 348,399 365,819
Employer's Contributions 19,454 19,604 19,754 20,054 20,204
13th month pay 25,080 26,334 27,651 29,033 30,485
Doubtful Accounts Expense 7,769 4,759 4,830 5,007 5,337
Supplies 21,702 22,229 22,769 23,323 23,889
Utilities 15,895 16,325 16,765 17,218 17,683
Insurance Expense 24,000 24,648 25,313 25,997 26,699
Depreciation
Building (30%) 21,000 21,000 21,000 21,000 21,000
Office Equipment 22,370 22,370 22,370 22,370 22,370
Office Furniture & Fixtures 12,280 12,280 12,280 12,280 12,280
Safety Equipment 2,720 2,720 2,720 2,720 2,720
Repairs and Maintenance Expense 2,000 2,054 2,109 2,166 2,225
Total 1,101,249 968,753 1,002,843 1,043,442 1,086,522

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Note 19: Interest Expense (in Php)

Year 1 Year 2 Year 3 Year 4 Year 5


Beginning Amount of Loans 2,010,000 1,909,500 1,738,650 1,448,205 954,449
Beginning Amount - Current Portion of
Loans - 134,919 134,919 134,919 134,919
Total Loans 2,010,000 2,044,419 1,873,569 1,583,124 1,089,368
Multiplied by Rate 7.00% 7.00% 7.00% 7.00% 7.00%
Interest Expense 140,700 143,109 131,150 110,819 76,256

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Financial Ratios
Financial Ratios are used to assess the suitability for investment of businesses, budgets, projects, and other finance-related
entities. Financial analysis is needed to determine whether an investment is feasible on the basis of stability, solvency, and profitability.
It also involves looking into the past of the company to estimate its future capabilities and performance. Ratio analysis is looking at the
relationships of financial statement items, and identifying trends of the company over time, or comparing the company’s ratios with
another company at one point in time.

Liquidity Ratios
This will provide the information about the ability of the firm to pay its current obligations and continue its operations.

Current Ratio
Year 1 Year 2 Year 3 Year 4 Year 5
Current Assets 3,251,469 3,483,683 3,602,755 3,560,685 3,292,481
Current Liabilities 318,330 359,075 384,670 406,461 435,005
Current Ratio 10.21 9.70 9.37 8.76 7.57

Current Assets
Current Ratio=
Current Liabilities

The current ratio measures a company's ability to pay short-term and long-term obligations and is mainly used to give an idea
of a company's ability to pay back its liabilities with its assets. The trend of Wackakatol Inc.’s current ratio is increasing from year 1 to
year 5. The increase of current ratio through the years is favorable to the company because it may indicate a company is "growing
into" its capacity.

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Working Capital
Year 1 Year 2 Year 3 Year 4 Year 5
Current Assets 3,251,469 3,483,683 3,602,755 3,560,685 3,292,481
Current Liabilities 318,330 359,075 384,670 406,461 435,005
Working Capital 2,933,140 3,124,608 3,218,085 3,154,223 2,857,475

Working Capital = Current Assets - Current Liabilities

Working capital is the amount of an entity's current assets minus its current liabilities and is the measure of both a company's
efficiency and its short-term financial health. The company’s working capitals from Year 1-5 show favorable results for the company
because it is increasing through the years. Positive working capital generally indicates that a company is able pay off its short-term
liabilities almost immediately. It also shows that the company is properly utilizing the short term assets into its day-to-day operations.

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Acid Test / Quick Ratio
Year 1 Year 2 Year 3 Year 4 Year 5
Quick Assets 3,016,543 3,233,707 3,337,488 3,281,464 2,994,159
Current Liabilities 318,330 359,075 384,670 406,461 435,005
Acid Test / Quick Ratio 9.48 9.01 8.68 8.07 6.88

Quick Assets
Acid Test Ratio=
Current Liabilities

The acid test ratio measures the ability of a company to use its near cash or quick assets to extinguish or retire its current
liabilities immediately. Quick assets are assets that can be converted into cash quickly. The company’s acid test ratio from year 1 to
year 5 show an increasing trend through the years. It is important that a company have enough cash on hand to meet its expenses
and payables. The result is favorable to the company because an increasing quick ratio may mean that the company is not solely
depending on its inventories and the higher the ratio, the more financially secure a company is in the short term.

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Monetary Assets
Year 1 Year 2 Year 3 Year 4 Year 5
Quick Assets 3,016,543 3,233,707 3,337,488 3,281,464 2,994,159
Current Liabilities 318,330 359,075 384,670 406,461 435,005
Monetary Assets 2,698,213 2,874,632 2,952,819 2,875,003 2,559,154

Monetary Assets = Quick Assets - Current Liabilities

A monetary asset is an asset whose value is stated in or convertible into a fixed amount of cash. We can compute monetary
assets by subtracting current liabilities from quick assets. The monetary assets of the company from Year 1 to Year 5 show an
increasing trend through the years. This is favorable to the company because it can support the daily expenses.

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Activity Ratios
This will measure the ability of the firm to convert various asset, liability and capital accounts into cash or sale.

Accounts Receivable Turnover


Year 1 Year 2 Year 3 Year 4 Year 5
Net Credit Sales 4,362,400 4,853,744 5,139,079 5,381,198 5,687,422
Average Accounts Receivable 388,433 432,183 457,589 479,148 506,414
Accounts Receivable Turnover 11.23 X 11.23 X 11.23 X 11.23 X 11.23 X

Net Credit Sales


Accounts Receivable Turnover =
Average Accounts Receivable

Accounts receivable turnover measures how efficiently a company uses its asset. It is an important indicator of a company’s
financial and operational performance. To get the accounts receivable turnover, we just divide the net credit sales and average accounts
receivable and we arrive the amount of 11.23 from year 1 to year 5, meaning that the WACKAKATOL INC. accounts receivable turnover
indicates an efficient business operation or tight credit policies for the regular operations from start to year 5. A high ratio can also
suggest that the WACKAKATOL INC. has a conservative policy regarding its extension of credit. This can often be a good thing, as
this filters out customers who may be more likely to take a long time in paying their debts which can drive away potential customers
and give business to competitors.

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Inventory Turnover
Year 1 Year 2 Year 3 Year 4 Year 5
Cost of Goods Sold 1,866,579 2,174,071 2,299,106 2,425,400 2,566,623
Average Inventory 234,927 242,451 253,859 266,540 282,431
Inventory Turnover 7.95 X 8.97 X 9.06 X 9.10 X 9.09 X

Cost of Goods Sold


Inventory Turnover =
Average Inventory

Inventory turnover is a ratio showing how many times a company's inventory is sold and replaced over a period. You can get
the total inventory turnover of every year by dividing the cost of goods sold and the average inventory. The greatest change was from
year 1 to year 2, because the company is just starting and more overhead is deferred to ending inventory because there is no beginning
inventory yet in year 1. The inventory turnover is continuously increasing even though in 4th year, it decreased and continues to
decrease in year 5. Still, the basis is the beginning, which is the year 1 so the turnover is still high which means that WACKAKATOL
INC. has a high ratio, strong sales and conservative and strict inventory policies.

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Accounts Payable Turnover
Year 1 Year 2 Year 3 Year 4 Year 5
Net Credit Purchases 804,927 841,287 914,266 983,103 1,069,429
Average Accounts Payable 33,539 34,296 36,195 38,579 41,569
Accounts Payable Turnover 24.00 X 24.53 X 25.26 X 25.48 X 25.73 X

Net Credit Purchases


Accounts Payable Turnover =
Average Accounts Payable

The accounts payable turnover ratio is a short-term liquidity measure used to quantify the rate at which a company pays off its
suppliers. Accounts payable turnover ratio is calculated by taking the total purchases made from suppliers, and dividing it by the
average accounts payable amount during the same period. The results for the year 1 to year 5 is very good because of continuously
increasing every year which means that WACKAKATOL INC. is paying off suppliers at a faster rate. This could indicate the company
is being responsible in paying its creditors and forging good relationship with its suppliers. As a manufacturing company, it will work to
the benefit of the company because it will be able to get its supply with better quality, and quicker, if the company pays responsibly
and quicker.

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Average Collection Period
Year 1 Year 2 Year 3 Year 4 Year 5
Days in a Year 365 365 365 365 365
Accounts Receivable Turnover 11.23 11.23 11.23 11.23 11.23
Average Collection Period 32.5 days 32.5 days 32.5 days 32.5 days 32.5 days

Days in a Year
Average Collection Period =
Accounts Receivable Turnover

The average collection period is the approximate amount of time that it takes for a business to receive payments owed in terms
of accounts receivable. The average collection period is calculated by dividing the number of working days in a period by the Accounts
Receivable Turnover ratio. For 5 years, the Accounts Receivable Turnover ratio of the company is at a constant value of 11.23 times.
Dividing the number of days in a year which is 365 days will result in 32.5 days. The collection period of the company for 5 years is
good since it will only take nearly a month on average for the company to collect its receivables from the customers. The company
must have stricter collection policies and give more cash discounts so that the collection period will improve. This is important because
the collection period can determine when the company can use the cash for further operations, safety stock, or for opportunities to
earn interest through investments.

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Average Conversion Period
Year 1 Year 2 Year 3 Year 4 Year 5
Days in a Year 365 365 365 365 365
Inventory Turnover 7.95 8.97 9.06 9.10 9.09
Average Conversion Period 45.94 days 40.7 days 40.3 days 40.11 days 40.16 days

Days in a Year
Average Conversion Period =
Inventory Turnover

The average conversion period is the time required to obtain materials for a product, manufacture it, and sell it. The inventory
conversion period is essentially the time period during which a company must invest cash while it converts materials into a sale. The
formula to compute for the Average Conversion Period is the number of days in a period divided by the Inventory Turnover ratio. The
conversion period of the corporation declines as it starts to settle down in the industry which is a good sign that may mean that the
corporation is getting more and more efficient when it comes to its production process. Although it increased from its lowest in Year 3,
it is far from the conversion period in the first year. The amount is reasonable because the company purchases 50% of needed materials
the previous month, which could explain why the amount is in excess of 30 days. Although this amount could still be improved by
having a faster production and selling so inventory, both materials and finished goods don't stay too long in the warehouse, trapping
all that cash that could be utilized in better ways. The company could also purchase materials near to when it needs them.

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Average Payment Period
Year 1 Year 2 Year 3 Year 4 Year 5
Days in a Year 365 365 365 365 365
Accounts Payable Turnover 24.00 24.53 25.26 25.48 25.73
Average Payment Period 15.21 days 14.88 days 14.45 days 14.32 days 14.19 days

Days in a Year
Average Payment Period =
Accounts Payable Turnover

Average payment period means the average period taken by the company in making payments to its creditors. It is computed
by dividing the number of working days in a year by the Accounts Payable Turnover ratio. Based from the facts laid above, it is seen
that as years pass by, the time it takes for the company to pay off its creditors are getting shorter. This is a good sign for the company
as it shows that the corporation manages its debts well and pays them off quickly which can signify a start of a good relationship
between the company and its creditors.

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Normal Operating Cycle
Year 1 Year 2 Year 3 Year 4 Year 5
Average Collection Period 32.5 days 32.5 days 32.5 days 32.5 days 32.5 days
Average Conversion Period 45.94 days 40.7 days 40.3 days 40.11 days 40.16 days
Normal Operating Cycle 78.44 days 73.2 days 72.8 days 72.61 days 72.66 days

Normal Operating Cycle = Average Collection Period + Average Conversion Period

The operating cycle is the average period of time required for a business to make an initial outlay of cash to produce goods,
sell the goods, and receive cash from customers in exchange for the goods. This is useful for estimating the amount of working capital
that a company will need in order to maintain or grow its business. Currently, the company's provision for working capital is for 3
months, which exceeds the values for normal operating cycle as computed for years 1-5. Because the provision is greater than the
computed normal operating cycle, it is good for the company. Also, the trend is that the cycle is fluctuating, although within plus-minus
5 days, which indicates consistency. This could mean reasonable changes that affect collection or conversion. This amount could be
improved so that the company would have cash quicker, and cash requirements for the business could be reduced, and cash could be
used for other, more fruitful purposes. This could mean more production for the company because the operating cycle may be reduced,
and in turn, increase sales.

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Cash Conversion Cycle

Year 1 Year 2 Year 3 Year 4 Year 5


Normal Operating Cycle 78.44 days 73.2 days 72.8 days 72.61 days 72.66 days
Average Payment Period 15.21 days 14.88 days 14.45 days 14.32 days 14.19 days
Cash Conversion Cycle 63.23 days 58.32 days 58.35 days 58.29 days 58.48 days

Cash Conversion Cycle = Normal Operating Cycle - Average Payment Period

The cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert
resource inputs into cash flows. The cash conversion cycle attempts to measure the amount of time each net input is tied up in the
production and sales process before it is converted into cash through sales to customers. This metric looks at the amount of time
needed to sell inventory, the amount of time needed to collect receivables, and the length of time the company is afforded to pay its
bills without incurring penalties. The cash conversion cycle is a metric used to gauge the effectiveness of a company's management
and, consequently, the overall health of that company. It measures how fast a company can convert cash on hand into inventory and
accounts payable, through sales and accounts receivable, and then back into cash. By combining these activity ratios, the
measurement indicates the efficiency of the management's ability to employ short-term assets and liabilities to generate cash for the
company. The cash conversion cycle is computed as the difference between normal operating cycle and average payment period, the
subtrahend being average payment period because that is the benefit of the company that cash stays within the company before it is
turned to creditors. The amounts of CCC are within a plus-minus 5 days range, which fluctuates, although not considerably. The amount
could still be improved by maximizing the payment period of the suppliers without impairing the relationship with them, and quickening
the cash conversion cycle by stricter A/R terms and inventory management.

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Solvency Ratios
Solvency addresses the relationship between assets and obligations, including the respective investment levels of both
owners and creditors.

Debt Ratio
Year 1 Year 2 Year 3 Year 4 Year 5
Total Liabilities 2,227,830 2,097,725 1,832,875 1,360,910 550,068
Total Assets 8,177,076 9,100,997 9,911,775 10,561,411 10,984,914
Debt Ratio 0.27 0.23 0.18 0.13 0.05

Total Liabilities
Debt Ratio =
Total Assets

The debt ratio measures the extent of a company’s leverage. The higher the debt ratio, the more leverage a company is,
implying greater financial risk. The debt ratio of the firm showed a decreasing trend from Year 1 to Year 5 because of the decrease in
the total debts of the company as well as a decrease in the total assets. Wackakatol Inc. debt ratios in Year 1 to Year 5 indicate that
the firm has more assets than debt and relatively heavy reliance on equity rather than on borrowed capital.

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Equity Ratio
Year 1 Year 2 Year 3 Year 4 Year 5
Total Shareholders' Equity 5,949,246 7,003,271 8,078,900 9,200,502 10,434,846
Total Assets 8,177,076 9,100,997 9,911,775 10,561,411 10,984,914
Equity Ratio 0.73 0.77 0.82 0.87 0.95

Total Shareholders' Equity


Equity Ratio =
Total Assets

The equity ratio measures the portion of company resources that are funded by contributions of its equity participants and its
earnings. Since the entity has low debt ratio, this means that the company has high equity ratio. As indicated by Years 1-5 equity ratios,
the capital structure of the company is composed of mainly equity. Higher equity ratios are typically favorable for companies because
higher investments levels by shareholders shows that the company is worth investing since so many investors are willing to finance
the company. Also, it shows potential creditors that the company is more sustainable and less risky to lend future loans. Although
relying on equity is good and since the notion of debt seems unfavorable for businesses because it implies risk, debt on the other hand
provides the potential for increased benefits to the firms owners than equity.

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Debt-Equity Ratio
Year 1 Year 2 Year 3 Year 4 Year 5
Total Liabilities 2,227,830 2,097,725 1,832,875 1,360,910 550,068
Total Shareholders' Equity 5,949,246 7,003,271 8,078,900 9,200,502 10,434,846
Debt-Equity Ratio 0.37 0.30 0.23 0.15 0.05

Total Liabilities
Debt-Equity Ratio =
Total Shareholders' Equity

The debt to equity ratio shows the percentage of company financing that comes from creditors and investors. A higher debt to
equity ratio indicates that more creditor financing is used than investor financing. Wackakatol Inc. shows decreasing trend in debt to
equity ratio from Year 1 to Year 5. Lower values of debt to equity ratio are favorable indicating less risk and more financially stable
business. However, low debt-to-equity ratios may also indicate that a company is not taking advantage of the increased profits that
financial leverage may bring.

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Times Interest Earned / Interest Coverage Ratio
Year 1 Year 2 Year 3 Year 4 Year 5
Earnings before Interest and Taxes 1,939,623 2,368,429 2,557,890 2,683,803 2,868,799
Interest 140,700 143,109 131,150 110,819 76,256
Times Interest Earned / Interest Coverage Ratio 13.79 X 16.55 X 19.50 X 24.22 X 37.62 X

Earnings before Interest and Taxes


Times Interest Earned =
Interest

The time interest earned ratio measures the ability of a business to pay its debt obligations. The Wackakatol Inc. shows
increasing trend in time interest earned ratio. A higher times interest earned ratio is favorable because it means the company presents
less of a risk to investors and creditors in terms of solvency. Although a higher times interest earned ratio is favorable, it does not
necessarily mean that a company is managing its debt repayment or its financial leverage in the most efficient way. Instead, a times
interest earned ratio that is far above the industry average of a business points to misappropriation of earnings. This means the
business is not utilizing excess income for reinvestment in the company through expansion or new projects, but rather paying down
debt obligations too quickly. For the long term, a company with a high times interest earned ratio may lose favor with investors.

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Profitability Ratios
These assess the firm’s ability to generate earnings.

Return on Assets
Year 1 Year 2 Year 3 Year 4 Year 5
Earnings Available to Common Shareholders 1,259,246 1,557,724 1,698,718 1,801,089 1,954,780
Average Total Assets 8,177,076 8,639,036 9,275,405 9,918,408 10,451,661
Return on Assets 15.40% 18.03% 18.31% 18.16% 18.70%

Earnings available to Common Shareholders


Return on Assets =
Average Total Assets

Return on Assets (ROA) shows the percentage of profit a company earns in relation to its overall resources. It is commonly
defined as net income divided by total assets. It is an indicator of how profitable the company is relative to its total assets. ROA gives
an idea as to how efficient the management is at using its assets to generate earnings. It is a favorable result because the level of
income relative to the employed assets gained returns. This could signify that, given a level of total assets, the company utilize their
resources efficiently and effectively. This is why, to be able to increase these ratios further, the company can try to generate more sales
or decrease its expenses while ensuring that its overall resources are properly utilized and no idle assets are employed, if possible.

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Return on Sales
Year 1 Year 2 Year 3 Year 4 Year 5
Net Income 1,259,246 1,557,724 1,698,718 1,801,089 1,954,780
Total Sales 5,431,188 6,042,911 6,398,154 6,699,592 7,080,841
Return on Sales 23.19% 25.78% 26.55% 26.88% 27.61%

Net Income
Return on Sales =
Total Sales

Return on Sales (ROS) measures the performance of a company by analyzing the percentage of total revenue that is converted
into operating profits and is used to evaluate a company's operational efficiency. It is calculated by dividing the earnings before interest
and taxes by the sales. This financial ratio is very relevant because investors, creditors and other debt holders rely on this. It accurately
communicates the percentage of operating cash a company derives on its revenue and can provide insight into potential dividends,
probable reinvestment and the company's ability to repay its debt. The ROS is increasing because although the Cost of Goods Sold,
General and Administrative Expense and Marketing Expense are increasing, the increase in sales can compensate it. Compared with
the based year, the ROS continually increases respectively.

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Return on Equity
Year 1 Year 2 Year 3 Year 4 Year 5
Net Income 1,259,246 1,557,724 1,698,718 1,801,089 1,954,780
Total Shareholders' Equity 5,949,246 7,003,271 8,078,900 9,200,502 10,434,846
Return on Equity 21.17% 22.24% 21.03% 19.58% 18.73%

Net Income
Return on Equity =
Total Shareholders' Equity

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity
measures a company's profitability by revealing how much profit a company generates with the money shareholders have invested.
ROE is calculated by dividing the net income by the shareholders' equity. Increasing ROE is favorable because it shows that the
company is efficient in generating income on new investments and the shareholders will be confident on their investments.

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Earnings Per Share
Year 1 Year 2 Year 3 Year 4 Year 5
Earnings Available to Common Shareholders 1,259,246 1,557,724 1,698,718 1,801,089 1,954,780
Number of Common Shares 3,640,000 3,640,000 3,640,000 3,640,000 3,640,000
Earnings Per Share 0.35 0.43 0.47 0.49 0.54

Earnings Available to Common Shareholders


Earnings Per Share =
Number of Common Shares

Earnings per share (EPS) is the portion of the company's profit allocated to each outstanding share of common stock. Earnings
per share serves as an indicator of a company's profitability. The EPS of Wackakatol, Inc. in five consecutive years increased, being
compared with the base year. This implies that the company is capable of generating a significant amount of dividends to investors
because of the increasing earnings or it may be buying back its stock for growth.

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Book Value Per Share
Year 1 Year 2 Year 3 Year 4 Year 5
Total Shareholders' Equity 5,949,246 7,003,271 8,078,900 9,200,502 10,434,846
Number of Common Shares 3,640,000 3,640,000 3,640,000 3,640,000 3,640,000
Book Value Per Share 1.63 1.92 2.22 2.53 2.87

Total Shareholders' Equity


Book Value Per Share =
Number of Common Shares

Book value per common share is a measure used by owners of common shares in a firm to determine the level of safety
associated with each individual share after all debts are paid accordingly. It would be the amount of money that the holder of a common
share would get if the company would liquidate. It is calculated by dividing the difference between total shareholders' equity and
preferred shares by the outstanding shares. This gives the holders of common stocks confidence in case of liquidation. Thus, more
investors will be willing to fund the company.

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Market Test Ratios
These help investor to estimate the attractiveness of a potential or existing investment and get an idea of its valuation.

Dividend Payout Ratio


Year 1 Year 2 Year 3 Year 4 Year 5
Dividends - 503,699 623,089 679,487 720,436
Divide by No. of Common Shares 3,640,000 3,640,000 3,640,000 3,640,000 3,640,000
Dividends Per Share - 0.14 0.17 0.19 0.20
Earnings Per Share 0.35 0.43 0.47 0.49 0.54
Dividend Payout Ratio 0.00% 32.34% 36.68% 37.73% 36.86%

Dividends Per Share


Dividend Payout Ratio =
Earnings Per Share

The dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the
company. It is the percentage of earnings paid to shareholders in dividends. Investors are particularly interested in the dividend payout
ratio because they want to know if companies are paying out a reasonable portion of net income to investors. The formula for Dividend
Payout Ratio is Dividends per share over earnings per share. Dividends per share is computed by dividing the dividends distributed by
the company by the number of common shares. The resulting dividend per share is in accordance with the company’s policy of declaring
and paying dividends starting on the second year of operations.

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Cash Flow Ratios
These focus on the cash being generated in terms of how much is being generated and the safety net that it provides to the
company.

Payback Period
Net Cash
Year Flow Investment
Pre-
Operating (6,700,000)
1 1,268,108 (5,431,892)
2 1,848,779 (3,583,112)
3 1,992,357 (1,590,755)
4 2,096,030 505,275
5 2,245,732 2,751,007
Payback Period in Years 3.76

Absolute Value of Net Cash Flow in the Year


Payback Period = Last Year with Negative Cash Flow =
Amount of Cash Flow in the Following Year

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Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows
generated by the investment. The payback period of a given investment or project is an important determinant of whether to undertake
the position or project, as longer payback periods are typically not desirable for investment positions. The payback period disregards
the time value of money. Simply, it is determined by counting the number of years it takes to recover the funds invested. The Payback
Period is determined by adding the Investment (shown as negative at first) by the Net Cash Flow, then when the investment becomes
0, that becomes the payback period. The decimal is computed by dividing the amount still needed to make the investment zero, by the
net cash flow for the year when negative turns to positive. The payback period of the company is attractive, in that it returns the
investment within 5.83 years, meaning the investors could reinvest soon as intended.

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