CHAPTER ONE his contribution to the
It is concerned
FINANCE – from the latin
word FINER, meaning “end”
or “to pay.”
PRODUCTION – acquisition
DISTRIBUTION – utilization
FINANCE – is the efficient
acquisition,distribution/alloc
ation, and utilization of
scarce money/fund
resources.
FUNCTION OF FINANCE:
1. Allocation available funds
2. Acquiring needed funds
3. Utilizing these funds to
achieve set goals.
ALLOCATION -determining
where to use funds currently
available to the firm.
ACQUISITION – obtaining
funds from the right sources
at the right time.
UTILIZATION – using
funds.
PRIMARY GOALS OF A
BUSINESS
* To earn profit
* To increase its own value
as an economic entity
* To improve the quality of
life in the community.
EARNING PER SHARE –
refers how much net income
is earned for every share of
capital stock outstanding.
STABILITY OF A
COMPANY – ability to
weather the ups and downs
in the economy or its ability
to continue operations
despite anticipated risks in a
business.
OWNERS EQUITY – the
difference between total
asset and total liabilities of
an entity so that it is also
called net asset or net
value. Its primary source is
the owner investment or
capital placed in the
business.
SOCIAL RESPONSIBILITY
OF A BUSINESS MAN –
government.
improvement of the quality
of life in the community.
MULTIPLIER EFFECT OF
BUSINESS IN A
COMMUNITY – refers to
the chain of business
activities.
FUNCTION OF BUSINESS
FINANCE:
* allocation of financial
resources
* procurement of funds
* Efficient and effective
utilization of financial
resources
EFFICIENT UTILIZATION
OF FR – refers to their
economical use.
EFFECTIVE UTILIZATION
OF FR – refers to their use
towards the attainment of
predetermine objectives.
CLASSIFICATION OF
FINANCE
1. DIRECT FINANCE –
involve in direct borrowing.
The security acquired
(direct security) by the
surplus and lender (lender)
is the same security issued
by the deficit unit
(borrower).
2. INDIRECT FINANCE –
involves financial
intermediaries in the real
sense of the word.
The transaction that
happens when deficit units
borrow with the use of
financial intermediaries.
FINANCIAL
INTERMEDIARIES – act as
middlemen when they buy
securities for resale or
simply facilitate the sale.
INTERMEDIATION
MARKET – the market
where indirect finance
happens.
PUBLIC FINANCE – deals
with the revenue and
expenditure patterns of the
with government affairs.
PRIVATE FINANCE – an
individual borrowing money
from another.
DIVIDED PRIVATE
FINANCE:
A. PERSONAL FINANCE –
finance conducted by
individuals/consumer.
B. FINANCE OF NON-
PROFIT ORGANIZATION –
conducted by charitable,
civic, religious org.
C. BUSINESS FINANCE –
deals with financing for
business firms or for
commercial use, the goal of
which is to make profit.
BUSINESS – any lawful
economic activity that
involves rendering service,
buying and selling goods.
FINANCE CONSISTS OF
THREE INTERRELATED
AREAS:
1. Managerial finance
2. Investment
3. Money and capital
markets
FINANCIAL
MANAGEMENT
(MANAGERIAL FINANCE)
– concerned with the
management of funds. It is
the efficient and effective
allocation, acquisition, and
utilization of funds.
UTILIZATION OF FUNDS
OBTAINED SHOULD BE
ABLE TO MAXIMIZE:
1. Wealth
2. The value of the
company
3. The value of stakeholders
FINANCIAL MANAGER –
decides as to where to get
financial resources like
cash, inventories,
equipment, and other
assets needed by the firm in
its operation.
ALLOCATION OR
UTILIZATION OF FUNDS –
process of determining
where to use the funds.
FINANCIAL MANAGER
(HIS PRIMARY
ACTIVITIES)
A. FINANCIAL PLANNING
AND ANALYSIS – takes
part in corporate, strategic
and operation planning in
an enterprise.
B. MANAGING THE
ASSETS OF THE
COMPANY – concerns the
left side of the balance
sheet.
C. MANAGING THE
CMPANY’S LIABILITIES
AND OWNER’S EQUITY –
activity are on the right-
hand side of the balance
sheet.
VP FOR FINANCE –
formulation of corporate
objectives and policies,
organization development
and public relations.
GOALS OF THE
FINANCIAL MANAGERS:
1. Acquisition of funds with
the least cost from the right
sources at the right time
2. Effective cash
management
3. Effective working capital
management
4. Effective inventory
management
5. Effective investment
decisions
6. Proper asset selection
7. Proper risk management
RISK MANAGEMENT – is
the primary task for the
financial manager.
FINANCIAL MARKETS –
institution and systems that
facilitates transactions in all
types of financial claims.
FINANCIAL MARKETS
ARE DIVIDED INTO:
1. As to term or maturity
* money market
* capital market
2. As to type of issue
* primary market
* secondary market
CLASSIFICATION OF
FINANCIAL MARKETS:
1. MONEY MARKETS –
cover markets for short-term
debt instrument. They
consist of a network of
institutions and facilities for
trading debt securities with
a maturity of one year or
less.
2. CAPITAL MARKETS –
for long-term. Meant
maturity of more than one
year.
3. PRIMARY MARKET –
consist of underwriters,
issuers, and instrument.
They raise cash for issuing
company.
4. SECONDARY MARKET
– markets for currently
outstanding securities.
FINANCIAL
INSTITUTION/INTERMEDI
AREIS – firms that bridge
the gap between the surplus
units or investors lenders
and deficit units.
1 CLASSIFICATION OF
INTERMEDIARIES.
DEPOSITORY
INSTITUTIONS – refers to
the financial institution that
accepts deposits from
surplus units.
INCLUDE:
1. COMMERCIAL BANKS
– grant only short term
loans.
A. ordinary commercial
banks
B. expanded commercial or
universal banks.
MACRO – used by
regulatory agencies to
gauge credit standing.
M- management
A – asset quality
C- capital adequacy
R- risk management
O – operating results
2. THIRFT BANKS –
composed of savings and
mortgage banks, private
development banks, stock
savings and loan
association, and micro
finance thrift banks.
A. savings and mortgage
banks
B. private development
banks
C. savings and loan
associations
D. microfinance thrift banks
E. credit
3. RURAL BANKS
NON-DEPOSITORY
INSTITUTIONS CAN BE
CLASSIFIED INTO THE
FOLLOWING:
1. INSURANCE
COMPANIES – sell life
insurance policies.
*loan value – the amount
that can be borrowed
against the policy during the
term fof the policy.
* cash surrender value –
the amount that will be
given to the insured or
beneficiary if the insured or
the beneficiary decides to
surrender the policy.
*accident insurance –
insures against death or
disability caused by
accidents.
B. Property/casualty
insurance companies –
offer protection against pure
risk.
2. FUND MANAGERS – are
pension fund companies
and mutual fund companies.
3. INVESTMENT
BANKS/HOUSES/COMPA
NIES – financial
intermediaries that pool
relatively small amounts of
investor money to finance
large portfolios of
investment that justify the
cost of professional
management.
4. FINANCE COMPANIES
– profit-oriented financial
institutions that borrow and
lend funds to households
and businesses.
5. SECURITIES BROKERS
AND DEALERS –
compensated by means of
commission.
- buy securities and resell
them and make profit on the
difference between their
purchase price and their
selling price.
6. PAWNSHOPS – where
people and some small
business “pawn” their
assets in exchange of an
amount much smaller that
the value of the asset.
7. TRUST COMPANIES
AND DEPARTMENTS –
corporations organized for
the purpose of accepting
and executing trusts and
acting as trustee under
wills, as executor or as
guardian.
8. LENDING INVESTORS –
individual or companies who
loan funds to borrowers,
generally consumers or
households.
CHAPTER TWO
FINANCIAL STATEMENTS
– tools that managers use
to help them in their
decision-making
considering financial
implications.
They are the product of
financial accounting.
BASIC FINANCIAL
STATEMENTS:
1. INCOME STATEMENT
2. BALANCE SHEET
3. STATTEMENT OF
CHANGES IN OWNER’S
EQUITY
4. STATEMENT OF CASH
FLOW
INCOME STATEMENT
(STATEMENT OF
COMPREHENSIVE
INCOME) – Details the
revenues earned and the
expenses incurred by a
company. It shoes the result
of operation of a company.
If the income is greater that
the operating expenses, it
will result in an operating
profit. If the income is less
than the operating
expenses, the result is an
operating loss.
PRODUCT COSTS – Are
the costs of direct materials,
direct labor, and overhead,
also called manufacturing
cost.
DIRECT MATERIALS – Are
materials directly
incorporated into the
product like lumber for
furniture, leather for shoes
and bags, and cloth for
clothing.
DIRECT LABOR – Covers
the wages paid to all direct
workers.
PERIOD COSTS – refers to
costs incurred during a
particular time period and
reported either as selling or
marketing expenses.
BALANCE SHEET
(Statement of financial
condition) ( statement of
financial position) – shows
the asset, liabilities, and
owner’s equity of a
business. It shows the
financial condition or
financial position of the
business. Shows the
liquidity and solvency of the
firm.
LIQUIDITY – Refers to a
firm’s ability to meet its
maturing obligations in the
short-run.
SOLVENCY – Refers to the
firms ability to meet
maturing obligation on the
long run.
CURRENT ASSET – Are
the resources that will be
used for current operations
(short term) or within the
current operating cycle.
NON-CURRENT ASSET –
Refers to the resources of
the firm that are durable or
will last longer than a year.
CURRENT LIABILITIES –
Are obligations of the firm
that will mature or need
payment during the current
during the current
accounting period or
accounting year.
NON-CURRENT
LIABILITIES – Are the
obligations of the firm that
will mature or become due
within more than a year.
ACCOUNT FORM – A
balance sheet can be
reported using the account
form where assets are listed
on the left side and liabilities
and owner’s equity on the
right side.
REPORT FORM – list the
asset followed by the
liabilities and owner equity.
BOOK VALUE – the
amount shows in the
traditional financial
statements is the acquisition
cost less any allowance for
bad debts or accumulated
depreciation.
MARKET VALUE – Are the
current replacement
costs,ie, the values that
assets will command in the
open market.
STATEMENT OF
CHANGES IN OWNERS’
EQUITY – Details the
changes that occurred in
the owner(s) equity. It
shows the beginning
owner(s) equity with
additional investment for a
sole proprietorship or
partnership or, for a
corporation, additional
issuances of corporate
stock.
STATEMENT OF
RETAINED EARNINGS –
For a corporation, the
accumulated profits of the
company are reflected in
the earnings account.
RETAINED EARNING
APPROPRIATED –
appropriation of the
company’s accumulated
earnings for such purposes
as plant expansion, building
construction, land
acquisition, bond retirement.
BOND SINKING FUND – If
cash is appropriated for
bond retirement,
PLANT EXPANSION FUND
– If an appropriation of cash
for plant expansion is
needed.
APPROPRIATED
RETAINED EARNINGS
PORTION – It shows all
appropriation of retained
earnings at the beginning of
period, and to each
respective appropriations
are added additional
appropriations and
deducted all reversal of
appropriated retained
earnings back to the
unappropriated retained
earnings.
STATEMENT OF
CHANGES IN
STOCKHOLDERS’
EQUITY – It starts with the
capital stock of the
corporation.
TWO TYPE OF SHARE:
1. Preferred shares
2. common shares
CAPITAL STOCK –
composed of the total per
value of these shares.
CASH FLOW STATEMENT
(Funds flow statement)
(Statement of the sources
and assets (Statement of
sources and users of
funds) – It can be a simple
statement of cash receipt
and cash disbursement.
STATEMENT IS DIVIDED
INTO THREE:
1. Net cash flow from
operating activities
2. Net cash flow from
investing activities
3. Net cash flow from
financing activities
OPERATING ACTIVITIES –
all operated-related earning
activities of the company –
rendering services for a
service firm, selling goods
for a trading concern, and
manufacturing and selling
activities for manufacturing
company.
FINANCING ACTIVITIES –
Involve obtaining resources
from owners and paying
them dividends as their
share in the profit of the
company.
INVESTING ACITIVITIES –
involve all activities related
to non-current asset-
disposing of them or selling
them and buying them.
FINANCIAL ANALYSIS –
Refers to examination of
financial data of an entity to
determine its profitability,
growth, solvency, stability
and effectiveness of its
management.
FINANCING DECISION –
Refers to decision that
involves funding investment
and operations over the
long run.
STEPS IN ANALYZING
THE FINANCIAL
STATEMENT
1. Understanding the
information provided in the
financial statements
2. Drawing logical
conclusion based on the
data presented
3. Making the appropriate
decision on the course of
action to take
HORIZONTAL ANALYSIS
– Analysis of the financial
statements can be done
comparatively to show
performance and financial
condition in prior years as
compared to the current
year.
This reveals if the
profitability and the financial
conditions of the firm are
improving or not.
This comparison usually
reveals trend.
TREND ANALYSIS –
Involves analysis of
significant changes in
absolute amounts and
percentage, including an
analysis of changes in the
ratios uses in ratios
analysis.
COMPARATIVE
STATEMENTS – show the
increases or decreases in
account balances and their
corresponding percentage.
VERTICAL ANALYSIS – Is
the process of analysing the
entries on a financial
statement, in relation to the
industry standard.
RATIO ANALYSIS – Is
descriptive; it describes the
situation that exists.
ACCOUNTING RATIO –
Are also important to people
outside the firm. A vendor
should look at some form of
liquidity ratio before
extending payment terms.
FINANCIAL RATIO:
PRIMARY RATIO –
Consider profit or return
level of the business entity,
normally for the year, in
relation to the capital
employed or invested, or
net assets during the same
period.
SECONDARY RATIO –
These are ratios concern
with profitability – profit in
relation to sales; and the
other is with the activity -
sales in relation to capital
employed or net asset.
TERTIARY RATIOS –
evaluate profitability of the
business and analysis of
activity.
PROFITABILITY RATIO –
Can be assessed from the
point of view of gross profit
or contribution to sales as a
percentage.
ACTIVITY OR USE OF
ASSET RATIO – Is an
examination of activity by
comparing sales separately
with fixed assets and
working capital.
FINANCIAL STATUS
RATIOS – Are those help
analyse a business financial
standing in terms of its
ability to pay liabilities and
settle obligations.
LIQUIDITY RATIOS – The
relationship of current
assets to current liabilities.
SOLVENCY RATIOS –
Calculate the ability of the
business to meet the
interest due from the profits
available.
INVESTMENT RATIOS –
Intended to give investors
financial position of the
business and the invested
capital.
RETURN ON EQUITY –
Confines its view to the
profits belonging to the
shareholders – the profit
after tax and interest – and
its relationship to the
shareholders’ funds.
EARNINGS PER SHARE –
The central measurement of
profitability from an
investor’s point of view.
PRICE/EARNINGS RATIO
– Expresses the number of
the times the price of the
share exceeds the earnings
per share.
DIVIDEND YIELD –
Reveals rewards to
investors – the dividends
paid to them, with the
market price of their shares.
DIVIDEND COVER –
uncovers generosity of the
business, in terms of
determining the proportion
of the profits distributed to
investors.
COMMONLY
CALCULATED RATIOS:
LIQUIDITY RATIOS –
LIQUIDITY – Is the ability of
asset to be converted
quickly into cash.
CURRENT RATIO – Is the
ratio of current assets to
current liabilities.
QUICK RATIO – Is the ratio
of current assets, excluding
inventory, divided by current
liabilities.
If the quick ratio is less than
1.0, the firm must plan on
selling inventory in order to
cover current liabilities. If
quick ratio is larger than 1.0,
the firm must do something
for its slowdown in sales.
ACTIVITY RATIO – Are
related to operations and
operating efficiency
because they measure how
quickly the firm is converting
assets into cash.
INVENTORY TURNOVER –
measures how many times
per period (usually a year)
the firm sells through its
inventory.
ACCOUNTS RECEIVABLE
TURNOVER – Is the annual
credit sales of the firm
divided by the accounts
receivable.
AVERAGE COLLECTION
PERIOD – Is also called
“days of sales outstanding”
the average collection
period describes the
average time it takes to
collect accounts.
INVENTORY CONVERSE
CYCLE – Combines the
days of sales in inventory
and days of sales in
accounts receivable.
ASSET TURNOVER –
Concerned with the efficient
use of assets.
FIXED ASSET TURNOVER
– Looks at sales in
comparison to the long-term
assets of the firm, such as
land, equipment, plant.
TOTAL ASSET
TURNOVER – Combines
the effect of current asset
management, the
conversion of inventory and
accounts receivable into
cash; and fixed asset
management.
LEVERAGE RATIOS – It is
the responsibility of the
financial manager to
determine the level of debt
that is appropriate for a firm.
DEBT TO EQUITY RATIO
– Shows the relationship
between debt and equity.
The higher the debt of a firm
in relationship to its equity,
the more leverage it is, and
the more risk it has
assumed.
GROSS PROFIT MARGIN
PROFITABILITY – is the
broadest measures of the
firm’s profit level.
OPERATING PROFIT
MARGIN – Examines the
income of the company
before taking into account
the interest and taxes.
NET PROFIT MARGIN –
Demonstrate a better
assessment of a firm’s
profitability particularly for a
company who does owe
interest and taxes.
RETURN OF ASSET –
determines profitability in
relation to assets
management.
RETUN ON EQUITY –
evaluates whether the use
of company assets
contributes to the rate of
return for stockholders
investment.
MARKET VALUES – a
firm’s value is related to
what an investor will pay for
its stock.
BOOK VALUE – is the
basis for fairly determining
the worth of the assets in
relation to a holders’ share,
upon liquidation of the firm.
EARNINGS PER SHARE –
aims to identify the valid
earnings per share value,
by looking at trends
overtime or the earnings of
other companies in the
same industry.