Cover designed by: Mr.

Medel Valencia

MODULE

Financial Management 1

AE 191

ACADEMIC YEAR 2020-2021

Prepared by:
Venus S. Palmenco, CPA
Instructor
 GUIDE ON HOW TO USE THE MODULE

A. For Faculty

The best way to use this module is to read the four lessons in sequence as you try to develop a
teaching strategy.
You may want to redesign the way the lectures are presented, as long as it is consistent with the
lesson objectives.
For timed activities(synchronous), inform the class ahead of time and allot ample time for them
to finish the activity
Provide reading suggestions (ebook, website) that will complement the main topics in this
module.
Since Accounting is a challenging subject, application of concepts are not presented in the
module, but rather to be presented during the synchronous sessions of the class in order to
encourage collaborative discussion.
In discussing the lesson, you may rearrange the sequence of the topics according to your
preference.

B. For Learners

Read the suggested readings before reading the Lecture

Do the activities specified honestly and religiously to make sure you understand the lesson.
Make your own notes or summary per lesson.
List down questions that come into your mind while studying and ask your instructor on his/her
consultation time or during your class hours.
Be proactive. Do extra problems to practice what you have learned. Your goal must be to finish
all the exercises in your book.
I suggest that you read the module from the first lesson to the last. As you read along, make sure
you understand the past topics because it helps you in connecting the concepts to enable you to
achieve an optimal level of comprehension.
Always do your activity in advance, and submit it before the due dates. Remember that it is not
the others but you who will be short-changed for not doing your work on time.
 FOREWORD

The course, Financial Management 1, covers topics regarding basic finance concepts.
The purpose of the course is to offer the students relevant, systematic, efficient and actual knowledge of
financial management that can be applied in practice with making financial decisions and resolving
financial problems. This learning module is developed with the aim to aid understanding of the students
through the lectures and activities that they can also apply with their personal lives.
Instructors want nothing but the best for their students that even in these trying times, they still
find ways on how to effectively convey the lessons now that face-to-face class is not possible.
Credits: 3 units
Pre-requisite: AE 15

I. Lesson Title: Managerial Finance Function

II. Lesson Objectives:

1. Describe how the managerial finance function is related to economics and accounting.
2. Identify the primary activities of the financial manager

III. Lecture
References: Principles of Managerial Finance, Gitman and Zutter, 2015, Chapter 1

The whole company’s objective is to maximize the firm’s wealth, including its owners and all
areas in the business organization should interact with each other in order to achieve their goals.

Source: https://www.gograph.com/vector-clip-art/manufacturing.html

Financial managers administer the financial affairs of all types of business and it’s one of the major
functional areas of a business. In our sample pictures above, in a typical manufacturing company, these
are the functional areas of business operation: manufacturing, marketing and finance. Manufacturing or
production management is the operational part of the business concern, which helps to multiple money
into profit. Profit depends upon the production performance. It needs finance because production
department requires raw material, machinery, wages, operating expenses etc. these expenditures are
decided and estimated by the financial department and the financial manager allocates the appropriate
finance to production. On the other hand, once the products have been manufactured, it’s now ready to go
into the market. Manufactured goods are sold in the market with innovative and modern approaches such
as using different platforms in the social media. For this, marketing department needs finance to meet their
requirements. The financial manager or finance department is responsible to allocate the adequate finance
to the marketing department. Manufacturing and marketing are important for the survival of a firm because
these areas determine what will be produced and how these products will be sold. However, these two
areas still need the support of finance to decide on its monetary aspects.
Organization of the Finance Function

Business organization generally includes these different functions depending on the size of the
firm. Recall that board of directors are elected by the stockholders who are the owners of the company
and the board reports to its stockholders through issuance of the annual report including the firm’s financial
statement. Then, the board has the responsibility to hire its president or CEO. Beyond this are the
respective managers in other functional areas of a business. One of those is the Chief Financial Officer or
the VP for Finance. The treasurer and the controller report to the CFO, who is the senior executive
responsible for managing the financial actions of a company. Then, the CFO reports directly to the CEO.
Controllers usually concentrate on what has already happened inside a company. They prepare financial
statements and other reports based on past activity. Treasurers focus outward and interact with the
bankers, shareholders and potential investors who provide capital and invest funds when available. In
some small businesses, the owner, a controller and an outside accountant might share the financial
duties.

Controller
Financial Reports
Tax Planning and Reporting
Performance Reports
Internal Auditing
Capital Budgeting

Treasurer
Collection of Cash
Monitoring of Cash Payments
Monitors Cash Availability
Short-Term Investments
Short-Term and Long-Term Borrowing
Issuing of Capital Stocks

Relationship to Economics
Financial managers can make better decisions if they apply the basic economic principles.
Economics is the study of how societies use scarce resources to produce valuable commodities and
distribute them among different people. Behind this definition are two key ideas in economics: that
goods are scarce and that society must use its resources efficiently. Finance mainly involves saving and
lending money, keeping in mind the time available, cash at hand, and the risk involved. To this end,
financial managers are given the responsibility to find the best and least expensive sources of funds
(financing decisions) and to invest these funds into the best and most efficient mix of assets (investing
decisions). In doing so, they try to find the mix of available resources that will achieve the highest return
at the least risk within the confines of an expected change in the economic climate.
 In addition to that is the marginal(added) cost-benefit analysis. Under this principle, in every
financial decision the entity makes, the incremental benefits shall always exceed the incremental costs
in order to meet the desired objectives. Like the example on the book, where Jamie Teng decides whether
to change their computer servers. First, Jamie should identify the incremental benefits they can obtain
from purchasing the new computer server and ascertain whether it would exceed the amount they need
to pay. The proceeds from the disposal of the old computer can be utilized in acquiring the new one,
which of course isn’t enough to finance it all. The additional cost that will be incurred is the one relevant
in Jamie’s decision. Therefore, in managerial finance, it’s only changes that matter.

Relationship to Accounting
Two basic differences of finance and accounting:
(1) Emphasis on Cash Flow. Finance is concerned with all of the monetary aspects of a business.
Financial manager has the responsibility on the maintenance of the firm’s solvency. Solvency is
the firm’s ability to meet its long-term debts and financial obligations. It can be an important
measure of the firm’s financial health. A solvent business is one that has positive net worth – the
total assets are more than the total liabilities. He or she should only allocate the funds to necessary
things like payment of the firm’s obligations and acquisition of assets needed to achieve the
firm’s goals. For example, by acquiring shares, bonds and other short-term investments, the
company can earn a return like dividends and interests. It’s the manager’s responsibility to find
the best firm to put their money. For them it doesn’t matter whether the firm’s income statement
shows a favorable result or not, what matters to them is the availability of cash, which will be
used to pay the firm’s obligations.

(2) Decision Making. The primary focus of finance is on the management of the firm’s cash and
making financial decisions for the company whereas accounting is on the collection and
presentation of firm’s financial data. The financial manager in a small business is a key decision
maker, often the second most important decision maker in the organization besides the owner.
He makes daily decisions that affect the company’s cash position and its overall financial health
including the company’s ability to grow and expand.

Primary Activities of the Financial Manager

Financial managers have complex and challenging job. They analyze financial data prepared by
accountants, monitor the firm’s financial status, and prepare and implement financial plans. The key
activities of the financial manager are:
Financial Planning: Preparing the financial plan, which projects revenues, expenditures, and
financing needs over a given period.
Investment (spending money): Investing the firm’s funds in projects and securities that provide
high returns in relation to their risks.
Financing (raising money): Obtaining funding for the firm’s operations and investments and
seeking the best balance between debt (borrowed funds) and equity (funds raised through the
sale of ownership in the business). Deciding whether it’s best to obtain funds from borrowing
money from financial institutions or from issuing the firm’s shares or both.

To make wise financial plan, investment and financing, the financial manager has to consider the
impact of the firm’s actions on the value of the firm.

IV. Academic Activities:

1. Please read Principles of Financial Management by Gitman and Zutter, pages 16-19

2. Thomas Book Sales, Inc., supplies textbooks to college and university bookstores. The books are
shipped with a proviso that they must be paid for within 30 days but can be returned for a full
refund credit within 90 days. In 2009, Thomas shipped and billed book titles totaling $760,000.
Collections, net of return credits, during the year totaled $690,000. The company spent $300,000
acquiring the books that it shipped.
a. Using accrual accounting and the preceding values, show the firm’s net profit for the past year.
b. Using cash accounting and the preceding values, show the firm’s net cash flow for the past
year.
 c. Which of these statements is more useful to the financial manager? Why?

V. Life Activity:

Personal Finance: It is typical for Jane to plan, monitor, and assess her financial position using
cash flows over a given period, typically a month. Jane has a savings account, and her bank loans
money at 6% per year while it offers short-term investment rates of 5%. Jane’s cash flows during
August were as follows:
Amount
Item Inflow Outflow
Clothes $1,000
Interest received $450
Dining out 500
Groceries 800
Salary 4,500
Auto payment 355
Utilities 280
Mortgage 1,200
Gas 222
a. Determine Jane’s total cash inflows and cash outflows.
b. Determine the net cash flow for the month of August.
c. If there is a shortage, what are a few options open to Jane?
d. If there is a surplus, what would be a prudent strategy for her to follow?