SOURCES OF FINANCING

Short Term Financing

Bank Sources

Nonbank Sources

Long Term Financing

Debt Financing
Types of Debt Securities:

Equity Financing
Types of Equity Securities:
Common Shares
 It represents a residual claim on firm assets.
Callable Common Shares
 It gives a firm the right to repurchase the stock at a pre – specified call price.
Putable Common Shares
 It gives the shareholder the right to sell the shares back to the firm at a specific price.
Preference Shares
 Shares that have features of both common stock and debt.
Cumulative Preference Share
 It require that the current period dividends
Participating Preference Share

Convertible Preference Share

COST ACCOUNTING
Cost
- A measurement, in monetary terms, of the amount of resources used for some purpose. When
notified by a term that defines the purpose, cost become operational.
Cost Pool
- An account in which a variety of similar cost are accumulated oprior to allocation to cost objects.
Cost Object
- The intermediate and final disposition of cost pools.
Cost Driver
- A factor that causes a change in the cost pool for a particular activity. Itis used as a basis for cost
allocation; any factor or activity that has a direct cause effect relationship.
Activity
- Any event, action, transaction, or work sequence that incurs costs when producing a product or
providing a service.

Cost Behavior
- describes how a cost behaves or changes as the amount of cost driver changes.

Classification of Cost based on Behavior

1. Variable Cost
- In total; varies directly proportional within the relevant range ass activity output changes
per unit: changes as activity level changes.
2. Fixed Cost
- in total; constant with the relevant range as an activity output changes; per unit; changes
as activity level changes.
a. Committed Fixed Cost
b. Discretionary Fixed Cost
3. Mixed Cost / Semi-Variable Cost
- has both fixed and variable components

Cost Behavior Assumptions

1. Time Period Assumption
- The cost behaviour patterns identified are true only over a specified period of time.
Beyond this, the cost may show different behaviour.
2. Relevant Range Assumption
- Relevant range refers to the band of activity within which the identified cost behaviour patterns
are valid. Any level outside the range may have a different cost behaviour pattern.

Methods of Classifying Mixed Cost

Y=a+bX

Where: Y = Mixed Cost

 a = Total Fixed Cost
b = Variable cost per unit
X = Activity Level

1. Account Analysis
2. Engineering Approach
3. Scatter Graph Method
- Various costs are plotted on a vertical line and measurement figures are plotted on a
horizontal line. A straight line is drawn through the points and using this line, the rate of
variability and fixed cost are computed.
4. High Low Method
- The fixed and variable elements of the mixed costs are computed from two data points –
the high and the low periods as to activity level or cost driver.

y 1− y 2
b=
x 1−x 2
Illustration.
The company had the following mixed cost for the three month period starting January 2017.

Activity Level Total Cost

January 2000 units $7000
February 3500 units $9700
March 4000 units $10800

$ 10800−$ 7000
b=
4000−2000

$ 3800
b=
2000
b = $1.90 per unit

Y=a+bX
$10800 = a+($1.90)(4000units)
$10800 = a+$7600
a = $10800 - $7600

a = $3200

The cost formula is Y = $3200+1.90X

5. Linear Regression Analysis

- Mathematically determines a line of best fit or a regression line through a set of plotted
points so that the sum of the squared deviations of each actual plotted points from the
point directly above or below it on the regression line is at minimum.
- The method uses the following equations in computing for the values of unit variable cost
and fixed cost:
Equation 1: ΣY=na+bΣX
Equation 2: ΣXY=AΣx+BΣX2

COST – VOLUME PROFIT ANALYSIS

2 ways of preparing an Income Statement

Traditional / Conventional Approach Variable Costing / Absorption Costing

Sales Sales
Less: Cost of Sale / Cost of Goods Sold Less: Variable Manufacturing Cost
Gross Earnings Variable Non Manufacturing Cost
Less: Operating Expenses Contribution Margin
Earnings before Interest and Taxes Less: Fixed Manufacturing Cost
Less: Interest and Taxes Fixed Non Manufacturing Cost
Earnings Earnings before Interest and Taxes
Less: Interest and Taxes
Earnings

This is used in Financial Accounting and Reporting This is used only by management and for internal
 to External Users. reporting.
This is considered as GAAP in preparing financial This is not considered as GAAP in preparing
statements. financial statements.
The costs are classified as product cost or period The costs are classified as to behaviour.
cost.

COST VOLUME PROFIT ANALYSIS

- It examines the behaviour of the total revenue, total costs, and operating income as changes
occur in the output level, selling price, variable cost per unit, or fixed cost of the product.

Break-Even Sales
- That point of activity level where total revenues equal total costs, i.e. there is neither profit nor
loss.

Methods of Computing Break – Even Point

1. Equation Method
2. Contribution Margin Method or Formula Approach
3. Graphic Method

Summary of Formulas:

BES (in units) = Fixed Expenses / Contribution Margin

Eq.1
BES (in pesos) = Fixed Expenses / Contribution Margin Ratio
Eq. 2
Contribution Margin Ratio = Contribution Margin / Net Sales
Eq.3
Target Sales (in units) = (Fixed Expenses +Income before Taxes) / Contribution Margin
Eq.4
Target Sales (in pesos) = (Fixed Expenses +Income before Taxes) / Contribution Margin
Eq.5
Income before Taxes = Income after Taxes / (1 – Tax Rate)
Eq.6
Margin of Safety = Target Sales (in units/in pesos) – BES(in units/in pesos)
Eq.7
Margin of Safety Ratio = Margin of Safety / Target Sales
Eq.8
BES Ratio = BES / Target Sales
Eq.9
100% = MSR + BESR
Eq.10
Degree of Operating Leverage = Contribution Margin / Operating Income
Eq.11