Business Finance

1st Quarter
Module 1
BUSINESS FINANCE – Grade 12
Alternative Delivery Mode
Quarter 1 – Module 1: Introduction to Business Finance First Edition,
2020

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Published by the Department of Education

Secretary: Leonor Magtolis Briones
Undersecretary: Diosdado M. San Antonio

Development Team of the Module

Writers: Ellaine I. Dela Cruz, DBA
Isabel A. Gumaru, DBA
Farida F. Tallud, DBM
Clarabelle V. Dalimit, DEM
Edna B. Waje, DEM
Manuel L. Hermosa, EdD
Ma. Cristina A. Labay, MM
Jupiter Q. Whiteside, MBA

Editors: Remylinda T. Soriano, EPS

Angelita Z. Modesto, PSDS
Teofilo R. Norombaba, PSDS
George B. Borromeo, PSDS

Illustrators: Writers

Layout Artist: Ellaine I. Dela Cruz

Management Team :
Malcolm S. Garma, Regional Director Name of Regional Director
Genia V. Santos, CLMD Chief Name of CLMD Chief
Dennis M. Mendoza, Regional EPS In Charge of LRMS
Maria Magdalena M. Lim, CESO V, Schools Division
Superintendent
Aida H. Rondilla, CID Chief
Lucky S. Carpio, EPS In Charge of LRMS
Division ADM Coordinator
Name of Division ADM Coordinator

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Office Address:

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Introductory Message

For the Facilitator:

Welcome to the BUSINESS FINANCE Alternative Delivery Mode

(ADM) Module on Introduction to Business Finance.

This module was collaboratively designed, developed and reviewed

by educators both from public and private institutions to assist you, the
teacher or facilitator in helping the learners meet the standards set by the
K to 12 Curriculum while overcoming their personal, social, and economic
constraints in schooling.

This learning resource hopes to engage the learners into guided and
independent learning activities at their own pace and time. Furthermore,
this also aims to help learners acquire the needed 21st century skills
while taking into consideration their needs and circumstances.

In addition to the material in the main text, you will also see this
box in the body of the module:

Notes to the Teacher

As a facilitator, you are expected to orient the learners on how to

use this module. You also need to keep track of the learners' progress
while allowing them to manage their own learning. Furthermore, you are
expected to encourage and assist the learners as they do the tasks
included in the module.
For the Learner:
Welcome to Business Finance Alternative Delivery Mode (ADM)
Module on Introduction to Business Finance.
The hands is one of the most symbolized part of the human body. It
is often used to depict skill, action and purpose. Through our hands we
may learn, create and accomplish. Hence, the hand in this learning
resource signifies that you as a learner is capable and empowered to
successfully achieve the relevant competencies and skills at your own
pace and time. Your academic success lies in your own hands!
This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and
time. You will be enabled to process the contents of the learning resource
while being an active learner.

This module has the following parts and corresponding icons:

What I Need to Know This will give you an idea of the skills or
competencies you are expected to learn in
the module.

What I Know This part includes an activity that aims to

check what you already know about the
lesson to take. If you get all the answers
correct (100%), you may decide to skip this
module.

What’s In This is a brief drill or review to help you link

the current lesson with the previous one.

What’s New In this portion, the new lesson will be

introduced to you in various ways such as a
story, a song, a poem, a problem opener, an
activity or a situation.

What is It This section provides a brief discussion of

the lesson. This aims to help you discover
and understand new concepts and skills.

What’s More This comprises activities for independent

practice to solidify your understanding and
skills of the topic. You may check the
answers to the exercises using the Answer
Key at the end of the module.

What I Have Learned This includes questions or blank

sentence/paragraph to be filled in to
process what you learned from the lesson.

What I Can Do This section provides an activity which will

help you transfer your new knowledge or
skill into real life situations or concerns

Assessment This is a task which aims to evaluate your

level of mastery in achieving the learning
competency.

Additional Activities In this portion, another activity will be given

to you to enrich your knowledge or skill of
the lesson learned. This also tends retention
of learned concepts.

Answer Key This contains answers to all activities in the

module.

At the end of this module you will also find:

References This is a list of all sources used in

developing this module.
The following are some reminders in using this module:

1. Use the module with care. Do not put unnecessary mark/s on any
part of the module. Use a separate sheet of paper in answering the
exercises.
2. Don’t forget to answer What I Know before moving on to the other
activities included in the module.
3. Read the instruction carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking your
answers.
5. Finish the task at hand before proceeding to the next.
6. Return this module to your teacher/facilitator once you are through
with it.

If you encounter any difficulty in answering the tasks in this

module, do not hesitate to consult your teacher or facilitator. Always
bear in mind that you are not alone.

We hope that through this material, you will experience meaningful

learning and gain deep understanding of the relevant competencies.
You can do it!
 What You Should Know

This module was carefully prepared and designed for you to perform at
your own pace. Useful activities on the concept of demand, quantity
demanded, and the laws of demand and supply, demand and a supply curves
including solving problems on equilibrium, equilibrium price, and equilibrium
quantity were provided for you to accomplish. These will help develop your
creativity and critical thinking skills to solve problems independently. It is also
expected that upon accomplishing these activities, you can communicate
confidently and collaborate with other people to solve problems, intelligently.
And most importantly, your character and initiative to handle situations which
you cannot control will be developed.

By the end of this session, you will be able to determine the concept of
demand, quantity demanded, and the laws of demand and supply, demand
and a supply curves and solve problems equilibrium, equilibrium price, and
equilibrium quantity

What I know
Instruction: I. Fill in the blanks and identify the following terms.

1. is defined as the management of money and includes

activities such as investing, borrowing, lending, budgeting, saving, and forecasting.
2. are responsible for the financial health of an organization.
They produce financial reports, direct investment activities, and develop strategies
and plans for the long-term financial goals of their organization.
3. are those institutions that operate in the financial market,
providing different services for a wide range of stakeholder. Usually with financial
institutions you are referring only to banks, but actually you can categorize them
in: Investment banks and Insurance companies.
4. defines all financial decisions and activities of an
individual or household, including budgeting, insurance, mortgage planning,
savings, and retirement planning.
5. is the act of estimating revenue (in the form of your
allowance) and expenses over a period of time.

II. TRUE or FALSE

Instruction: Before each statement, write TRUE if the statement is correct or
FALSE if the statement is incorrect.

1. To achieve the goal of profit maximization for each alternative being considered,
the financial manager would select the one that is expected to result in the highest
monetary return.
2. Dividend payments change directly with changes in earnings per share.
3. The wealth of corporate owners is measured by the share price of the stock.
4. Financial markets are intermediaries that channel the savings of individuals,
businesses, and government into loans or investments.
5. The money market involves trading of securities with maturities of one year or
less while the capital market involves the buying and selling of securities with
maturities of more than one year.
 III. MULTIPLE CHOICE

Instruction: Choose the letter corresponding to the correct answer for each of the
questions provided below.

1. The is created by a financial relationship between suppliers and users

of short-term funds.
A. financial market
B. money market
C. stock market
D. capital market

2. Firms that require funds from external sources can obtain them from .
A. financial markets.
B. private placement.
C. financial institutions.
D. All of the above.

3. The major securities traded in the capital markets are .

A. stocks and bonds.
B. bonds and commercial paper.
C. commercial paper and Treasury bills.
D. Treasury bills and certificates of deposit.

4. The primary goal of the financial manager is .

A. minimizing risk.
B. maximizing profit.
C. maximizing wealth.
D. minimizing return.

5. A financial manager must choose between four alternative Assets: 1, 2, 3, and

4. Each asset costs P35,000 and is expected to provide earnings over a three-
year period as described below.

Asset Year 1 Year 2 Year 3

1 P21,000 P15,000 P6,000
2 P9,000 P15,000 P21,000
3 P3,000 P20,000 P19,000
4 P6,000 P12,000 P12,000

Based on the profit maximization goal, the financial manager would choose .
A. Asset 1.
B. Asset 2.
C. Asset 3.
D. Asset 4
 MODULE 1 INTRODUCTION TO BUSINESS FINANCE

FINANCE IN EVERYDAY LIFE

As a high school student, you ask for your baon by asking money from someone,
like from your mother, father, sister, brother or guardian. Budgeting your own
baon indicates that you are practicing on how to manage your finances.

How much allowance is given to you and how often do you receive it (daily,
weekly, etc.) List them down and indicate the amount.

From the many activities you have done in a day like getting to school, to
attending flag ceremony, classroom discussions, lunch breaks, end of classes,
occasional meriendas or going out with friends and playing computer games,
going back home and going back out to a nearby store to buy autoload because
you realized that you can‗t end the day without texting your crush.

Can you identify the expenses you have incurred (i.e. jeepney/tricycle fare, lunch,
merienda, computer games)? List them down and indicate the amount.

At the end of the day, a week, or a month, do you still have savings left out of the
allowance you get from your parents?

Do you have any idea on what to do if you have savings left from your baon?
Enumerate them below.

Do you know that most of the activities you do involving decisions on where to use
your allowance is a finance decision?

What’s In

(Activity No. 1) Let us try this activity.

Define or give the meaning of the term ―finance‖ in your own

words. You may enumerate as many definitions as you can.
_
 What‗s New

LESSON 1: DEFINITION OF FINANCE

Finance is defined as the management of money and includes activities such as

investing, borrowing, lending, budgeting, saving, and forecasting. There are three
main types of finance: (1) personal, (2) corporate, and (3) public/government.

From the activities you have done above, recall that you were able to get the total
amount of your ―baon‖ in getting to school for the entire week or month. You then
subtracted the total amount of your expenses and you were also able to get the
remaining amount or ―savings‖ of your ―baon‖, if any.

The activity you did is called budgeting.

Budgeting is the act of estimating revenue (in the form of your allowance) and
expenses over a period of time (in this case, on a daily basis). Budgeting will be
further discussed in the next lesson.

Go back to the activity and focus your attention on the surplus resulting from your
budgeting.

Is your answer resulted in savings or excess cash?

What will you do with the excess money?

Maybe your answer will be:

• Carry over to the next day

• Buy something I want
• Return to parents
• Save it

If you are going to save it, how and where are you going to save it?

Maybe your answer will be:

 I will put it in Coin savers
 Hide it under my bed
 Deposit in banks,
 Invest in stocks (rare answer)

Excess money presents an opportunity for investments. (Will be discussed in another

lesson)

Investments come in many forms that will generate income or appreciate in the future.

Between hiding your cash under your bed and depositing it in the bank, it would be
better to keep your money in bank deposits because these will earn interest.

Suppose that in your previous activity the total amount of the expenses you have
listed exceeds the total amount of your ―baon‖, in this case you are in a situation
where you are short of cash, what would you do? Where will you get extra cash?
What other sources of cash do you know?

Your possible answers will be:

• Ask from parents • Pawnshops
• Borrow from a friend • 5/6
• Fund raising activities • Banks
 All your possible answers are called sources of funds. When faced with
financial difficulties (in this case, the lack of funds to meet the current expenses)
we look for people or institutions that will give us the money we need.

What Is It

As you encounter it, the easiest way to define finance is by providing

examples of the activities it includes. There are many different career paths and
jobs that perform a wide range of finance activities. Below is a list of the most
common examples:

• Investing personal money in stocks, bonds, or guaranteed investment

certificates (GICs)
• Borrowing money from institutional investors by issuing bonds on behalf of a
public company
• Lending money to people by providing them a mortgage to buy a house
• Using Excel spreadsheets to build a budget and financial model
• Saving personal money in a high-interest savings account
• Developing a forecast for government spending and revenue collection
• Prepare financial statements, business activity reports, and forecasts
• Monitor financial details to ensure that legal requirements are met
• Supervise employees who do financial reporting and budgeting
• Review company financial reports and seek ways to reduce costs
• Analyze market trends to find opportunities for expansion or for acquiring other
companies
• Help management make financial decisions

In addition, finance is a term for matters regarding the management,

creation, and study of money and investments. There are many other specific
categories, such as behavioral finance, which seeks to identify the cognitive (e.g.,
emotional, social, and psychological) reasons behind financial decisions.

What’s More
LESSON 2: ACTIVITIES OF THE FINANCIAL MANAGER

What is a Financial Manager?

Financial managers are responsible for the financial health of an

organization. They produce financial reports, direct investment activities, and
develop strategies and plans for the long-term financial goals of their organization.
Financial managers work in many places, including banks and insurance
companies.

Financial managers increasingly assist executives in making decisions that

affect the organization, a task for which they need analytical ability and excellent
communication skills.

Financial managers also do tasks that are specific to their organization or

industry. For example, government financial managers must be experts on
government appropriations and budgeting processes, and healthcare financial
managers must know about issues in healthcare finance.
Moreover, financial managers must be aware of special tax laws and regulations
that affect their industry.

LESSON 3: FINANCIAL INSTITUTIONS AND MARKETS

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

Who among you wants to own their own business? What type of business
organization you want to operate?

Let us recall 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.

If you want to become a shareholder of a corporation, by buying stocks you can do

so. At this point, maybe you are aware of big listed companies like PLDT, Globe,
JFC, BPI, Banco De Oro, San Miguel Corporation, among others.

Corporations may either be privately owned or publicly owned. Privately owned

corporations are often owned by family members whose stocks may not be offered
to outsiders unless consent by the family members is secured.

Companies which are publicly listed are owned by unrelated investors and are
traded in organized exchanges like the Philippine Stock Exchange (PSE).

While there are many stockholders, there is generally a group of investors or a

family which controls each listed company. For example, in the case of BPI, the
biggest stockholder is Ayala Corporation and in the case of Banco De Oro, it is SM
Investment Corporation. Prices of stocks of listed corporations are driven by several
factors such as the earnings of the companies, the prospects of the industry where
these companies operate, the general market sentiment, and the economic
prospects of the country, among others.
Knowing the Shareholder

Let us assume that you are the biggest shareholder in a corporation. The
objectives you want to achieve as owners of the corporation are: to be profitable
and have a lot of cash.

If you think a profitable company is a successful company, can success be

attributed to profitability only? Recall that the determination of profit is based on
the accrual method. Is it possible that a company can have profits but still does not
have enough cash to pay its obligations (i.e. suppliers, lenders)? What will happen
if the company cannot pay its obligation?

What do you think of a company who has very large amount of cash? You
may say that this is good because the company will always have enough cash to
pay its obligations. But even though having a lot of cash has its advantages, it also
signals unhealthy company practices. It may tell them that management has not
been putting the company‗s resources into good use. Also, keeping too much cash
in the books is like hiding your extra allowance under your bed. You will be missing
out on investment opportunities.

Remember, that the overall objective of a shareholder should be wealth

maximization. So, what defines a shareholder‗s wealth?

Measurement of the shareholder’s wealth:

Instruction: read carefully and analyze the situation

How do we measure shareholders wealth?

Let us have an example.

 Assume that you bought 10 shares of Globe Telecom at P2,510 each on

September 9, 2010. This brings your investments to PHP25,100. What
happens to the value of your investment if the price per share goes up to
P2,600 per share or if it goes down to P2,300 per share on September 30,
2010?

Computation:

September 30, 2010 – 10 shares x P2,600 per share = P26,000 (increased by P900)
September 30, 2010 – 10 shares x P2,300 per share = P23,000 (decreased by P2,100)

Therefore, the 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.

Now, at this point, let us start discussing the factors which can affect prices. What are the
factors that can change the market price?
 Factors that Influence Market Price

Let us group the factors into two: Factors that the Management can control and
external factors that cannot be controlled by management.

Controllable by Management Uncontrollable External Factors

 profitability  macroeconomic conditions

 having a good liquidity and reasonable
leverage position
 dividends
 competent management which
affects the company‗s operating
efficiency
 coming up with corporate plans that
improve the business prospects of the
company
 political stability
 prospects of the industry where the
company operates
 general market sentiment
 flow of foreign funds invested in the
Philippine stock market

Each factor influences market price.

 Profitability

Profit is a measure of the financial performance of a company for a period

of time. Although it is a major driver for increasing the value of stock, an
investor should not rely on profits alone. As discussed earlier, it is
possible that the company has profits but its cash flow is negative.

An example is that: 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?

COMPANY A
Income Statement Cash Flows
Sales P100,000 Collection from Customers P0
Less: Costs 50,000 Payment of Expenses 50,000
Profits P 50,000 Net Cash Flow (P 50,000)

COMPANY B
Income Statement Cash Flows
Sales P 100,000 Collection from Customers P100,000
Less: Costs 150,000 Payment of Expenses 50,000
Profits (P 50,000) Net Cash Flow P 50,000

COMPANY C
Income Statement Cash Flows
Sales P 100,000 Collection from Customers P 100,000
Less: Costs 70,000 Payment of Expenses 70,000
Profits P 30,000 Net Cash Flow P 30,000

Company A is profitable but generated negative cash flows which resulted from
the uncollected accounts receivable of PHP100,000. Without adequate cash
inflows to meet its obligations, the company will face liquidity problems, regardless
of its level of profits.

Company B on the other hand has a positive cash flow but is unprofitable. This is
a result of the company‗s delay in payment of its costs. Accordingly, the Company
will soon have to pay the remaining PHP100,000 liability and its cash will no longer
be sufficient. Again, without adequate cash inflows to meet its obligations, the
company will face liquidity problems.
 Company C is profitable and has a positive cash flow. Based on the information
provided, Company C seems to be the best.

 Good liquidity and reasonable leverage position

Liquidity and leverage refers to the company‗s management of the type and
amount of assets and liabilities that it will hold in the course of its operations. (will
be discussed on another lesson)

 Dividends
Holders of shares receive dividends from a corporation as returns on their
investments in form of cash or other properties. Companies which have better
dividend policies are generally more attractive than companies who do not pay out
dividends. Take note that there may be times that companies do not pay out
dividends because of future expansions. Same with the other factors affecting
share price, dividend policies should go hand in hand with other factors in
determining market price.

 Competent Management
Competent managers may have any of the following attributes: 1.) visionary 2.)
decisive 3.) people-oriented, 4.) inspiring, 5.) innovative, 6.) respected and 7.)
experienced or seasoned manager.

 Corporate plans that improve the business prospects

An example is: Company A which is in the business of selling Halo-halo in the
Quiapo area (or any other area) for 5 years. Company A is consistently earning
profits and has a positive cash flow. When asked how Company A sees itself after
5 more years, Company A answered that it would continue to sell Halo-halo in
Quiapo (or any other area).

On the other hand, Company B sells Buko Juice in Antipolo area (or any other
area different from Company A‗s area) for 5 years. Company B is consistently
earning profits and has a positive cash flow. When asked how Company B sees
itself after 5 more years, Company B answered that it has generated enough cash
to expand its business to Cubao area (or any other area) to take advantage of the
growing demand of Buko Juice in Cubao.

Between Company A and Company B, which would be a better investment? The

answer is Company B. Since it has more concrete future prospects allowing
investors to hope for better revenues and net income.

 External Factors
These factors influence the general reaction of investors in making an investment
decision. Its effect is not only to a specific company but on all companies or a
group of companies under similar circumstances. Such factors are a result of the
environment a company operates in rather than the decisions of the company‗s
management.

Role of Financial Management

Given the factors that influence market price, how will the company ensure that
such objectives will be achieved? This is achieved through financial management.
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.
 What I Have Learned

Managers of a corporation are responsible for making the decisions for the
company that would lead towards shareholders‘ wealth maximization. Competent
managers may have any of the following attributes: 1.) visionary 2.) decisive 3.)
people-oriented, 4.) inspiring, 5.) innovative, 6.) respected and 7.) experienced or
seasoned manager.

The shareholders‘ wealth is measured based on the current market price of the
corporation‘s stocks. Profit is a measure of the financial performance of a
company for a period of time.

Finance is concerned with decisions about:

- How much of their earnings they spend
- How much they save or how much they need
- How they invest their savings
- How they raise additional funds they need

The goal of financial management is to maximize the value of shares of stocks.

What I Need to Reflect

Knowing the importance of managing the money, you will be able to save more
for the future.

Did you find our topic enjoyable and interesting? Write something about it.
You may use the box below.
 What I Can Do

Part I: Instruction: Go to a business in your locality. Ask who is in charge of the

finances of the business. Interview the ―Chief Financial Officer (―CFO‖) or the Vice-
President for Finance‖ and ask them to report about their roles and functions
within the organization. You may also do the interview through phone calls.

Pat II: Answer the following questions for your enrichment:

1. Aside from the factors mentioned in the module, what other factors do you think can
influence the investor‘s perception on the company‘s performance which would
ultimately affect share price?

2. Why is the study of finance important to you?

 Assessment
Instruction: I. Fill in the blanks and identify the following terms.

1. is the money coming in and going out of your

business and how much of the money sitting in your bank account is yours to
spend. A healthy cash flow is having enough money to pay what you owe when it‗s
due.

2. is an estimate of your income and spending over a

period. It helps you think ahead and plan your spending to get to where you want
to go.

3. is an accounting report that shows your income

and expenses and whether you made a profit or loss — over the financial year. It
may also be known as the income statement.

4. is an accounting report that shows what you own

and what you owe at the time of the report. It‗s known as the ‗snapshot‗ of your
business‗s financial position.

5. is the category of business skills that involves

managing your company's money. The types of finance include investing,
borrowing, lending, budgeting, saving and forecasting.
References
Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
City. Rex Bookstore.

Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial

Finance (13th Ed), USA: Prentice-Hall

Websites

https://www.investopedia.com/financial-term-dictionary-4769738
https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-
finance-definition/
https://www.careerexplorer.com/careers/financial-manager/
https://courses.lumenlearning.com/boundless-
business/chapter/introduction-to-financial-management/
https://www.investopedia.com/ask/answers/061615/what-are-major-
categories-financial-institutions-and-what-are-their-primary-roles.asp
http://teachtogether.chedk12.com/teaching_guides/view/436#section3
 Answer Key

What I know
Test I

1. Finance
2. Financial Manager
3. Financial Institutions
4. Personal Finance
5. Budgeting

Test II

1. True
2. False
3. False
4. True
5. True

Test III

1. A
2. C
3. A
4. C
5. D

Assessment
1. Cash Flow
2. Budget
3. Profit and Loss Statement
4. Balance Sheet
5. Business Finance