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MODULE 1 - Chapter 1
INTRODUCTION TO
FINANCIAL MANAGEMENT

Content Standards
The learners demonstrate an understanding of the definition of finance, the activities of
the financial manager, and the financial institutions and markets.

Performance Standards
The learners will be able to
1. define finance;
2. describe who are responsible for financial management within an organization;
3. describe the primary activities of the financial manager; and,
4. describe how the financial manager helps in achieving the goal of the organization

Learning Competency
The learners shall be able to
1. explain the major role of financial management and the different individuals involved;
2. distinguish a financial institution from financial instrument and financial market.

“Beware of little expenses. A small leak will sink a great ship”.

– Benjamin Franklin

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 TO-DO-LIST

1. On the first page of your columnar (8-column) notebook, create a title page:

(Header) TARLAC NATIONAL HIGH SCHOOL

Senior High School Department
Academic Track-Accountancy, Business and Management

(Center) My Portfolio in Business Finance

(Bottom) <Name>
<Section>

VIVIAN D. PARAZO
Subject Teacher

S.Y. 2020-2021

2. On the succeeding pages of your columnar notebook, do the following:

• Write a heading when you begin a chapter, example for Chapter 1:
(Align Left) Chapter 1: Introduction to Financial Management
• In every chapter, do all the activities as required.
• Label all activities you do. Example: ACTIVITY 1.1
• Require your parent/guardian to sign in every assignment/activity you
finished.

ACTIVITY 1.1
Motivation. Answer the following questions:
A. How much is your daily allowance? If not given daily, how much is your average allowance
per day?
B. Write down all the items you spend money on. List the description and peso amount spent.
C. Compute for the balance of your allowance by deducting the expenses you listed from your
daily allowance.
D. If the answer to Question C is positive, what do you do with the money left? If the answer
is negative, where do you get additional money?

ACTIVITY 1.2
A. Finance in Everyday Life
Present in writing a scenario in your everyday life (Try: the life of a high school student).
Narrate the scenario in your own style using the questions given in Activity 1.1.

B. Relevant Vocabulary
• Most of the activities you do involving decisions on where to use your allowance is a
finance decision.

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Define the following and explain it briefly using your answers in Activity 1.1.
1. Finance 3. Budgeting 5. Sources of Funds
2. Budget 4. Investments

• Finance is concerned with decisions about:

- How much of your earnings you spend
- How much you save or how much you need
- How you invest their savings
- How you raise additional funds you need (Gitman)

• Once you graduate from school, you will no longer receive your daily allowance. Either
you would be employed by a company, manage your family business, or start up your own
business.

C. Prerequisite of Knowledge

Answer the following questions:

1. Do you want to have your own business? Why?
2. What type of business organization is owned by one person who operates it for his or her
own profit?

• Continue to recall from ABM 1 the forms of business organizations:

- Sole Proprietorship - A business owned by one person and operated for his or her own
profit.
- Partnership - A business owned by two or more people and operated for profit.
- Corporation – An entity created by law owned by shareholders.

3. How can you be a shareholder of a corporation?

4. Give at least five (5) big listed companies/corporations in the Philippines.
5. How and where can shareholders buy stocks?

D. Knowing the Shareholder

Assume that you are the biggest shareholder in a corporation.
1. What objectives you want to achieve as owner of the corporation?
2. Do you think a profitable company is a successful company?
3. Can success be attributed to profitability only?
4. Is it possible that a company can have profits but still does not have enough cash to pay
its obligations (i.e. suppliers, lenders)?
5. What will happen if the company cannot pay its obligations?
6. What do you think of a company who has very large amount of cash? Give at least 5
advantages and disadvantages.

• From the perspective of a corporation, financial management deals with decisions that
are supposed to maximize the value of shareholders’ wealth. This means maximizing the
market value of the shares of stocks. Shares of stocks represent the form of ownership
in a corporation.
• The overall objective of a shareholder should be wealth maximization. What defines a
shareholders’ wealth?

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E. Measurement of a Shareholder’s Wealth
How do we measure shareholder’s wealth?
- Assume a learner bought 10 shares of Globe Telecom at PHP2,510 each on
September 9, 2010. This brings his investments to PHP25,100. What happens to the value of
his investment if the price goes up to PHP2,600 per share or it goes down to PHP2,300 per
share?

• Shareholders’ wealth is measured based on the current market price of the

corporation’s stocks. The market price changes across different periods. Hence, the value
of your investment changes in different points on time based on the market value at that
time.

F. Factors that Influence Market Price

Suppose the following Income Statements and Cash Flow Statements of companies A, B and
C were presented to you. Which do you think is a more attractive company?

G. Role of Financial Management

Given the factors that influence market price, how will the company ensure that such
objectives will be achieved?

• Financial management deals with decisions that are supposed to maximize the value of
shareholders’ wealth. (Cayanan)
- These decisions will ultimately affect the markets perception of the company and
influence the share price.
- The goal of financial management is to maximize the value of shares of stocks.
- Managers of a corporation are responsible for making the decisions for the company
that would lead towards shareholders’ wealth maximization.

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 DISCUSSION

THE ROLE OF BUSINESS FINANCE

Businesses are, in effect, investment agencies or intermediaries. This is to say that their
role is to raise money from members of the public, and from other investors, and to invest
it. Usually, money will be obtained from the owners of the business (the shareholders)
and from long-term lenders, with some short-term finance being provided by banks
(perhaps in the form of overdrafts), by other financial institutions and by other businesses
being prepared to supply goods or services on credit (trade payables (or trade creditors)).

Businesses typically invest in real assets such as land, buildings, plant and inventories (or
stock), though they may also invest in financial assets, including making loans to, and
buying shares in, other businesses. People are employed to manage the investments, that
is, to do all those things necessary to create and sell the goods and services in the
provision of which the business is engaged. Surpluses remaining after meeting the costs
of operating the business – wages, raw material costs, and so forth – accrue to the
investors. Of crucial importance to the business will be decisions about the types and
quantity of finance to raise, and the choice of investments to be made. Business finance
is the study of how these financing and investment decisions should be made in theory,
and how they are made in practice.

THE RELATIONSHIP BETWEEN BUSINESS FINANCE AND ACCOUNTING

Business finance and accounting are not the same thing. Accounting is concerned with
financial record keeping, the production of periodic reports, statements and analyses, and
the dissemination of information to managers and, to some extent, to investors and the
world outside the business. It is also much involved with the quality, relevance and
timeliness of its information output. Obviously, financial decision makers will rely heavily
on accounting reports and the accounting database generally. Knowledge of past events
may well be a good pointer to the future, so reliable information on the past is invaluable.
However, the role of the financial manager is not to provide financial information but to
make decisions involving finance.

In smaller businesses, with narrow portfolios of management skills, the accountant and
the financial manager may well be the same person. In a large business, the roles are likely
to be discharged by different people or groups of people. Not surprisingly, many financial
managers are accountants by training and background, but some are not. With the
increasing importance of business finance in the curricula of business schools and in
higher education generally, the tendency is probably towards more specialist financial
managers, with their own career structure.

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ACTIVITY 1.3
A. The Corporate Organization Structure

B. Four Functions of VP for Finance

- Financing - Operating
- Investing - Dividend Policies

Answer the following questions:

1. Discuss briefly the roles of each position identified in the Figure 1.
2. Identify what is the role of the Financial Manager or VP for Finance in each function.

ACTIVITY 1.4
A. Savings and Shortages
1. What will you do if you have excess amount of cash?
2. If you are going to save your money, where would you keep it?
3. Suppose that you have a business running and is profitable for some time. Then you decide
to expand your business but does not have enough cash to pay for the expansion. Where can
you get the additional funding?

B. The Financial System

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C. Relevant Vocabulary
Define the following:
1. Financial Markets 3. Private Placement
2. Financial Institutions 4. Financial Instruments

Answer the following questions:

1. How transactions between suppliers and users of funds take place?
2. How would they prove that there was a transaction so that the demander will be able to
repay the supplier on time and at the right amount?

• Due to the increased need for security for the performance of obligations arising from
these transactions and due to the growing size of the financial system, the transfers of
funds from one party to another are made through Financial Instruments.

The figure above illustrates how the key financial institutions serve as intermediaries for
suppliers and users of funds.

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 ENRICHMENT

How would you relate the role of financial managers, role of financial markets and role of
investors?

Role of Financial Managers Role of Financial Markets Role of Investors