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CHAPTER VII

FINANCIAL ASPECT

When starting a business, the biggest factor that determines its success is

its capital. There are many reasons to understand and evaluate the financial

aspects of a business. For owners and executives, understanding the financial

aspects is essential in making economic decisions. Moreover, potential investors

may also care about a company's financial aspects as a means of gaining

knowledge to help predict future performance.

FINANCIAL ASSUMPTIONS

The following assumptions were used as basis in the projected financial

statements:

Operations

1. The normal business operation will commence on January 2, 2017.

2. The proposed business will adopt a calendar method as its reporting period.
3. The business will operate for 7 days a week.

Inflation Rate Assumed

Considering that the price of the product constantly changes, the

proponents set inflation rate as a basis for the future increase of amounts of

commodities. The information regarding the inflation rate of the Philippines for

the past five (5) years are gathered from National Statistics Office which is an

average of 3.78%
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Sales

1. The selling price of the proposed product will increase annually by 4% starting in

the third year.

2. There will be no trade discount for sales on cash and credit basis. The credit

term will be n/30 for credit sales with discount of 5% if payment is made within 7

days.
3. There will be no sales returns.
4. Sales are made in cash and credit, 80% and 20% respectively.

Accounts Receivable

1. Ninety-five percent of credit sales were collected.

2. Thirty percent of paid credit sales availed of the sales discount.
3. There will be a bad debts expense of 2% based on net credit sales using direct

write off method.

Inventory (Produce)
1. There shall be an ending inventory equivalent to the first week market share of

the next period.

2. The inventory valuation to be used is First In First Out.
3. Spoilage is 10% of the total goods available for sale but shall decrease by 1% on

the succeeding years but shall never reach below 2%.

Direct Materials Inventory

1. Direct materials are to be purchased on account starting on the third production

of the first year of operation.

2. No ending inventory shall be maintained for dried banana leaves, sawdust and

spawn because it will be used directly once purchased.

3. The Raw Material Purchases- Dried Banana Leaves is the amount to be included

in the computation of direct materials.

4. There will be no VAT imposed on the purchase of dried banana leaves.
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Indirect Materials

1. The inventory valuation used is First In First Out.

2. Indirect materials are maintained at the end of the year which is equivalent to one

(1) production need.

Labor and Salary

1. Compensation will be paid during the 15 th and 30th day of the month.
2. All regular employees shall be given 13 th month pay every December 15 each

year which is equivalent to 1/12 of the total basic salary earned within the year.
3. Salaries shall 50% direct labor and 50% selling expense.

Bookkeepers Retainers Fee

1. Bookkeepers fee shall be paid on the 30 th day of the month.

2. 10% withholding tax shall be withheld.

Production tools, Supplies, Equipment, Furniture and Fixtures

1. All tools, supplies, equipment, furniture and fixtures for production shall be

purchased in cash.
2. All tools, supplies, equipment, furniture and fixtures shall not have a salvage

value.
3. The tools as capital assets shall be depreciated by its useful life of 3 years.
4. Production supplies shall be included in the production cost and their cost of

purchases shall be immediately added to the manufacturing overhead.

5. Property and equipment, and furniture and Fixture shall be depreciated by their

useful life of 5 years using straight-line.

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6. Property and Equipment depreciation shall be fully allocated to selling expense

while depreciation for furniture and fixtures shall be fully allocated to general and

administrative.

Office Tools, Office Equipment, Office Furniture and Fixtures, and

Motorcycle

1. All office property and equipment, and office furniture and fixtures shall be

purchased in installment, payable for one (1) year.

2. The vehicle shall be purchased through installment method payable for three (3)

year and shall have a useful life of five (5) years with no salvage value.
3. Interest for motorcycle shall be 10% for three years, payable every month.
4. Interest for the office property and equipment, and furniture and fixtures shall be

6% annually, payable monthly.

5. The depreciation method used is the straight-line method.
6. Office tools, equipment, and furniture and fixtures and motorcycle shall have a

useful life of five (5) years with no salvage value.

7. Depreciation Expense of Motorcycle shall be allocated fully to selling expense.

Office Supplies

1. Office supplies shall be purchased in cash and shall be expensed as incurred.

2. Office supplies like ballpens, folders, fasteners, etc are purchased every

beginning of the fiscal year.

3. Ending inventory shall be 10% of the total supplies available for use.

Cleaning Supplies

1. Cleaning supplies shall be purchased in cash and shall be expensed as incurred.

2. Cleaning supplies expense shall be allocated to factory overhead and to general

administrative expense at 80% and 20%, respectively.

3. Cleaning Supplies shall be purchased every month.
4. Ending Inventory shall be 5% of the total supplies available for use.
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Utilities

1. All monthly utility bills shall be paid on the succeeding month.

2. Electricity and Water Utility Expense shall be allocated to factory overhead at

80% while 20% shall be allocated to general and administrative expenses.

3. Fuel Expense shall be allocated fully to selling expense.
4. Telephone Expense shall be entirely charged to general and administrative

expense.
5. Electricity, water and fuel expenses shall increase by 3.78% every year.

Leasehold Improvements

1. Leasehold Improvements shall be made during the pre-operating period.

2. Leasehold improvements shall be depreciated for five (5) years since its lease

term and useful life are five (5) years.

3. Depreciation expense for leasehold improvements shall be allocated to factory

overhead at 80% and for general and administrative expenses at 20%.

Rent

1. The lease term for the lease agreement shall be five (5) years, and renewed

every five (5) years.

2. Rent shall be paid at the end of the month.
3. There shall be a one (1) month refundable deposit and two (2) months advance

upon signing of contract of lease.

4. Tax shall be retained by the implementer.
5. Rent Expense shall be allocated to factory overhead at 80% and 20% shall be

charged to general and administrative expenses.

Permits and Licenses

1. All permits and licenses shall be paid in cash.

2. These shall be totally charged to general and administrative expenses.
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Advertising expense

1. Advertising expense shall increase by 3.78% annually.

2. There will no samples inventory of twenty-five (25) kilos at the ending inventory

of the first year for it shall be charged to advertising expense.

Employee Benefits

1. SSS, Philhealth, and Pag-ibig fund contributions that are withheld during the

month shall be paid on the subsequent month.

2. De minimis benefits, in the form of rice subsidy amounting Php1,500.00 per

month, shall be given to each of the two workers.

Repairs and Maintenance

1. Repairs and Maintenance amounting to Php 2,000.00 shall be allocated to

factory overhead at 20%, General and Administration Expense at 30% and 50%

to selling expense.
2. Repairs and maintenance shall increase by 5% every year.
Accounts Payable

1. Accounts Payable are to be paid every end of the credit period.

Value Added Tax

1. The company is a VAT-exempt entity since it engages in the agricultural

production business.
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Documentary Stamp Tax

1. Documentary stamp tax will be paid upon incurrence.

Income Tax

1. On the account that the company is a sole proprietorship, the implementer shall

be subject to income tax.

Withdrawals
1. There shall be withdrawals of 50% of net income starting at the third year.

Financing

1. The Php 84,600.00 of the business projected cost will be provided by the owner

from his own savings.

2. Php 197,400.00 shall be obtained through a loan in a bank. The loan is payable

in 5 equal annual installments with 6% annual interest expense based on the

remaining balance.