Business Finance: First Quarter Learning Packet

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BUSINESS FINANCE
First Quarter Learning Packet
What I Need to Know
This course deals with the fundamental principles, tools, and techniques of the financial
operation involved in the management of business enterprises. It covers the basic
framework and tools for financial analysis and financial planning and control, and
introduces basic concepts and principles needed in making investment and financing
decisions. Introduction to investments and personal finance are also covered in the course.
Using the dual-learning approach of theory and application, each chapter and module
engages the learners to explore all stages of the learning process from knowledge, analysis,
evaluation, and application to preparation and development of financial plans and
programs suited for a small business.
After going through this module, you are expected to:

1. have an appreciation of what the overall objective of management should be
2. describe the goals of the firm and explain why maximizing the value of the firm is an
appropriate goal for a business
3. identify factors that influence the change in market price
What I Know
Part I. True or False. Directions: Write T if the statement is correct and F if wrong.
Write your answer on the space provided before each number.
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.
6. High cash flow is generally associated with a higher share price whereas higher risk
tends to result in a lower share price.
7. When considering each financial decision alternative or possible action in terms of
its impact on the share price of the firm's stock, financial managers should accept
only those actions that are expected to increase the firm's profitability.
monetary return.
11. Risk and the magnitude and timing of cash flows are the key determinants of share
price, which represents the wealth of the owners in the firm.
12. When considering each financial decision alternative or possible action in terms of
its impact on the share price of the firm's stock, financial managers should accept
only those actions that are expected to maximize shareholder value.
13. An increase in firm risk tends to result in a higher share price since the stockholder
must be compensated for the greater risk.
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14. Stockholders expect to earn higher rates of return on investments of lower risk and
lower rates of return on investments of higher risk.
15. Primary and secondary markets are markets for short-term and long-term
securities, respectively.
16. Financial markets are intermediaries that channel the savings of individuals,
businesses, and government into loans or investments.
18. Holders of equity have claims on both income and assets that are secondary to the
claims of creditors.
19. Preferred stock is a special form of stock having a fixed periodic dividend that must
be paid prior to payment of any interest to outstanding bonds.
20. Commercial banks obtain most of their funds from borrowing in the capital markets.
21. Credit unions are the largest type of financial intermediary handling individual
savings.
22. A mutual fund is a type of financial intermediary that obtains funds through the
sale of shares and uses the proceeds to acquire bonds and stocks issued by various
business and governmental units.
23. IPO stands for Interest and Principal Obligation.
monetary return.
Part II. Multiple Choice. Directions: Choose the letter of the best answer. Write the chosen
letter on a separate sheet of paper.
__ 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 $35,000 and is expected to provide earnings over a three-year period
as described below. Based on the profit maximization goal, the financial manager would
choose _____.
A. Asset 1. B. Asset 2. C. Asset 3. D. Asset 4.
Asset $ Year 1 Year 2 Year 3

1 21,000 15,000 6,000
2 9,000 15,000 21,000
3 3,000 20,000 19,000
4 6,000 12,000 12,000
__ 6 Wealth maximization as the goal of the firm implies enhancing the wealth of
A. the Board of Directors. B. the firm's employees.
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C. the federal government. D. the firm's stockholders.
__ 7 Corporate owner is receiving realizable return through

A. earnings per share and cash dividends.
B. increase in share price and cash dividends.

C. increase in share price and earnings per share.
D. profit and earnings per share.
__ 8 The wealth of the owners of a corporation is represented by
A. profits. B. earnings per share. C. share value. D. cash flow.
__ 9 The goal of profit maximization would result in priority for
A. cash flows available to stockholders.
B. risk of the investment.
C. earnings per share.
D. timing of the returns.
__ 10 Profit maximization as a goal is not ideal because it does NOT directly consider
A. risk and cash flow. B. cash flow and stock price.
C. risk and EPS. D. EPS and stock price.
Lesson 1 Introduction to Financial Management
Financial management starts with a plan. This applies to both individuals and
companies. It is not enough to have cash and other resources today. Such resources, if not
managed properly, can be wiped out. Hence, financial management is a must.
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.
What’s In
ACTIVITY 1: YES, I CAN!
Do this activity on a sheet of paper.

Note: This activity is for the awareness of the student on the real-life situation of finances
of the family. Assistance of parents/guardians is needed.
A. How much is your household monthly income? (estimate)
B. Write down all the expenses. List the description and peso amount
C. Compute for the balance of your income by deducting the expenses you listed. How
much did you save or how much do you need?
D. If the answer to Question C is positive, what does your family do with the money
left? How can you invest your savings?
E. If the answer is negative, where do you get additional money? How do you raise the
additional funds you need?
F. What other problems you face in making financial decisions?
SAMPLE GUIDE:
HOUSEHOLD BUDGET
For the Month of November, 2020
INCOME BUDGET ACTUAL DIFFERENCE NOTES
Salary 1
Salary 2
Other Income
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Total Monthly Income
EXPENSES
Total Monthly Expenses
Net
1. The activity you did is called budgeting. Budgeting is the act of estimating revenue
(in the form of their allowance) and expenses over a period of time (in this case, on a
daily basis).
a. Surplus / Excess Cash
What will you do if you have excess cash?
You can save the excess money, hid under the bed,
deposit in banks, or invest. Excess money presents an
opportunity for investments. Investments come in
many forms that will generate income or appreciate in
the future. Between hiding cash under the bed and depositing it in the bank,
it would be better to keep the money in bank deposits because these earn
interest.
b. Short of Cash
What would you do if you are short of cash? Where will you get extra cash?
What other sources of cash do you know?
You can ask from parents, borrow from a friend, fund raising activities,
pawnshops, 5/6, banks. All these answers are 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.
2. Most of the activities you do involving decisions on where to use your income is a
ﬁnance decision.
3. Finance can be defined as the science and art of managing money. (Gitman & Zutter,
2012)
Once you graduate from school, you will no longer receive your daily allowance. Either you
would be employed by a company, manage family business, or start up your own business.
Do you still remember the different forms of business organizations?
4. 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. You can be
shareholder of a corporation through buying stocks. How and where can you buy
stocks?
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. 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.
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What’s New
ACTIVITY 2: I NEED YOUR INSIGHTS!

1. What do you think of a company that has large amount of cash?
2. Do you think a profitable company is a successful company? Can success be
attributed to profitability only? 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 obligations?
3. What should be the overall objective of shareholders? Elaborate your answer.
What is It
Financial management starts with a plan. This applies to both individuals
and companies. It is not enough to have cash and other resources today. Search resources,
if not managed properly, can be wiped out. Hands, financial management is a must.
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.
Subtopic 1: MEASUREMENT OF SHAREHOLDERS’ WEALTH
Maximizing shareholders wealth maximization of stock price should be the

overriding objective of management as it covers the different facets of operating a company
and it considers the different stakeholders in the organization. Stakeholders are not limited
to the stakeholders of the conflict period stakeholders also include management, suppliers,
customers, predators, regulatory agencies, and the community where the company
operates. For a longer and more sustainable operations, the interest of these different
stakeholders has to be borne in mind.
The stockholders have to be happy with their investments in the company so that
they will be encouraged to invest more. More investments mean more jobs can be created.
While profitability is a major driver for increasing the value of a stock, there are
other factors that influence share prices. There are many reasons why profit maximization
should not be the overriding objective of a company. One reason, as cited previously, is that
the company may need to borrow more just so it can increase sales or augment production
capacity. While borrowing is not necessarily bad, too much exposure the company in the
bankruptcy risk. also, too much focus on profits may force management to consider inferior
raw materials for production. While these may improve profits in the short run, this may
have adverse repercussions in the long run. Management may also defer important repairs
and maintenance just to show better profits in the current accounting period. Again,
deferring such repairs and maintenance may impair the efficiency of the production
facilities in the long run.
Maximizing shareholders wealth motivates members of top management to develop a

longer perspective for the company they manage. With this objective in mind, management
will try to make their customers happy by providing good products and services at
reasonable prices. To achieve this, management may have to innovate, invest in technology,
and be more efficient in their production and operation. Management may also need to
consider setting aside a 13 percentage of income to research and development to further
improve, and possibly expand the company's existing product and service offerings.
The interest of the employees must be considered in managing a company. Chances

are that happy employees mean more productive employees. Employees are happy in the
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workplace and they have a sense of belonging in the company, they will protect the
interests of the company. In Filipino culture, it is called malasakit. a close translation to
English will probably be solicitude or empathy. unhappy employees can damage the
reputation of the company, or they may do something that will taint the image of the
company.
Paying suppliers and creditors on time is a good business practice that will improve
relationships with these parties. It is important that management takes care of suppliers to
ensure good quality of materials at reasonable prices. Good relationships with creditors
enhance the probability of getting credit facilities especially during times of emergencies.
Compliance with the requirements of regulatory agencies also ensures more smooth
operations. Non-compliance may result in suspension of operations or unnecessary
penalties. Disruption in operations as a result of non-compliance with regulatory
requirements may also taint the image of the company which may have adverse effects not
just on the operations but also on the cost of financing as well.
Supporting the community where the company operates, in whatever capacity it can
, increases the company's chances of continuous operations in the area. Hiring employees
from the community promotes employees support for the company. The company can also
help in some civic oriented activities like planting trees in the area. Philex Mining
Corporation is an example of a company which has reforested more than 2500 hectares off
land across Itogon and Tuba, Benguet. For this, the company has won several awards,
some of which were given by the Philippine mine safety and environment Association
(PMSEA). in 2014, Felix also joined forces with the national power Corporation tour of forest
about 500 hectares of land around San Roque dam's critical watershed area. Philex has
also established adopt-a-school program where the company helps in the renovation of
schools in their host and neighboring communities. In its mining area, the company also
provides free private elementary education through Philex mines elementary school. It has
also awarded several scholarships to students in their host communities.
To illustrate, Globe Telecom Inc. (Globe) shares closed at P2,200 on April 25, 2016.
As of that date, globe's total shares outstanding was 132,742,402. The market value of the
shares as of that date was more done P292 billion. This amount represents the value of the
shareholders wealth. Ask the shares are actively traded in the Philippine Stock Exchange,
the price of the stock and the total market value of the shares may change every trading
day.
The changes in the price of a stock can be a confluence of many factors: profitable
operation, nature of the business, prospects of the business, projected earnings, and time
frame 4D realization of such projected earnings, ability to meet maturing obligations,
appropriate capital structure, dividend policies, investing decisions, management and
market sentiment.
While profits significantly affect the price of a stock, finance literature states that
profit maximization should not be the overriding objective of company’s management, but
shareholders wealth maximization. Profits can be maximized by taking more risks, for
example, borrowing more to finance expansion and generate more revenues. While more
borrowings can increase profitability, it can also expose the company to more risks and may
even result in operating losses if some external shocks occur and adversely affect the
company's operations. Investors factor that risk in valuing a stock.
Shareholders’ wealth maximization takes into account the risk-return tradeoff of

management decisions and the prospects of a company.
Shareholders’ Wealth
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Shareholders’ wealth is measured based on the current market price of the
corporation’s stocks. The market price changes across different periods. Hence, the
Example:
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?
Use the definition to analyze and solve the problem.
Solution:
An increase of the share price to PHP2,600 per share means that people are willing
to buy the shares for that amount. If the learners were to sell their shares at this
point, it will result to a profit of PHP90 per share or PHP900 on their whole
investment. Hence, the value of their investment increased from PHP25,100 to
PHP26,000. Therefore, there is an increase in shareholder’s wealth.
On the other hand, a decrease in the share price to PHP2,300 per share means that
people are only willing to buy shares for PHP2,300. If the learners were to sell their
investment at this point, they will receive PHP23,000 which would result to a loss of
PHP2,100. The decrease in value of their investment leads to a decrease in
shareholder’s wealth.
What’s More
ACTIVITY 3: MEASURING SHAREHOLDER’S WEALTH. Directions: Read carefully to solve

the problem. Write your answer on a separate sheet of paper.
Marikit and Diwata are identical twins. Name who is Marikit and who is Diwata on the
picture by answering the problem below based on the profit/loss on their investments.
Show your computation. Support your answer why A seems grateful while B is upset.
Problem:
Identical twins Marikit and Diwata both saved P30,000

from their allowance for the entire school year. As ABM
students and entrepreneurs by nature, they both intend
to double their savings in preparation for college. Due to
the current COVID situation, they know that the best
thing to do is to invest their money in stocks. Both
agreed they will choose companies to invest their money.
Marikit bought 20 shares of Jollibee Inc. at PHP1,000 each on March 30, 2020. This
brings her investments to PHP20,000. While Diwata, more risk-taker and aggressive,
invested all her savings on Globe Telecom with a value of P2,500 per share.
At the current situation, wherein all are hardly recovering globally, Jollibee goes down
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their per share value to P910. While Globe Telecom increased per share value to P7,000.
Compute their wealth based on the current share value.
What is It
Subtopic 2: FACTORS THAT INFLUENCE THE MARKET PRICE
There are factors that the Management can control and external factors that cannot
be controlled by management.
UNCONTROLLABLE EXTERNAL
CONTROLLABLE BY MANAGEMENT
FACTORS
 Profitability  Macroeconomic conditions

 Having a good liquidity and reasonable leverage  Prospects of the industry where the
position company operates
 Dividends  Political stability
 Competent management which affects the
 General market sentiment
company’s operating efficiency
 Coming up with corporate plans that improve the  Flow of foreign funds invested in the
business prospects of the company Philippine Stock Market
How these factors influence the market price?
A. Profitability
Profit is a measure of the financial performance of a company for a certain period.
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.
Illustration: 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 P 1,000 Collection from Customers: P 0
Less: Costs 50,000 Payment of Expenses 50,000
Profits P 50,000 Net Cash Flow (P 50,000)
Company B
Sales P 100,000 Collection from Customers:P 100,000
Profits (P 50,000) Net Cash Flow P 50,000
Company C
Sales P 100,000 Collection from Customers:P 100,000
Profits P 30,000 Net Cash Flow P 30,000 Explanation:
• 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.
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• 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.
B. Good liquidity and reasonable leverage position.

Liquidity and leverage refer to the company’s management of the type and amount of
assets and liabilities that it will hold during its operations.
C. 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.
• 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.
D. Competent management
Competent managers may have any of the following attributes:
1) visionary 2) decisive 3) people-oriented 4) inspiring
5) innovative 6) respected 7) experienced/seasoned manager.
E. Corporate plans that improve the business prospects.

Illustration:
• Company A which is in the business of selling Halo-halo in the Dapitan 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 Dapitan (or any other area).
• On the other hand, Company B sells Buko Juice in Katipunan 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.
Note. Between Company A and Company B, which would be a better investment? Company
B. Since it has more concrete prospects allowing investors to hope for better revenues and
net income.
F. 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.
What’s More
ACTIVITY 4: Factors that Influence the Market Price

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Directions: On a sheet of paper, identify if the following affecting the market price is
controllable by management or uncontrollable external factor.
- Dividends - Corporate plans

- Profitability - Competent management
- Macroeconomic Conditions - General market sentiment
- Political Stability - Liquidity and leverage
- Flow of foreign funds invested in the Philippine Market
- Prospects of the Industry where the company operates
What is It
Let us discuss 😊
Given the factors that influence market price, how will the company ensure that
such objectives will be achieved? It will be 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. 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.
Illustration of the Corporate Organization Structure:
SHAREHOLDERS
OWNERS
BOARD OF DIRECTORS
PRESIDENT (CEO) MANAGERS
VP for VP for VP for VP for

MARKETING FINANCE PRODUCTION MARKETING
Note: From the diagram presented, each line is working for the interest of the person on the
line above them. Since the managers of the company are making decisions for the interest
of the board of directors and the board of directors does the same for the interest of the
shareholders, it follows that the goal of each individual in a corporate organization should
have an objective of shareholders’ wealth maximization.
Top Management Roles:
• Shareholders The shareholders elect the Board of Directors (BOD). Each share held is
equal to one voting right. Since the BOD is elected by the shareholders, their responsibility
is to carry out the objectives of the shareholders otherwise, they would not have been
elected in that position. Ask the learners again what the objective of the shareholders is just
to refresh.
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• Board of Directors The board of directors is the highest policy making body in a
corporation. The board’s primary responsibility is to ensure that the corporation is
operating to serve the best interest of the stockholders.
The following are among the responsibilities of the board of directors:
- Setting policies on investments, capital structure and dividend policies.

- Approving company’s strategies, goals, and budgets.
- Appointing and removing members of the top management including the president.
- Determining top management’s compensation.
- Approving the information and other disclosures reported in the financial statements
(Cayanan, 2015)
• President (Chief Executive Ofﬁcer) The roles of a president in a corporation may vary
from one company to another. Among the responsibilities of a president are the following:
- Overseeing the operations of a company and ensuring that the strategies as approved by
the board are implemented as planned.
- Performing all areas of management: planning, organizing, staffing, directing, and
controlling.
- Representing the company in professional, social, and civic activities.
Note: Although the president carries out the decision making for all functions, it would be
difficult for him/her to do this alone. The president cannot manage the company on his
own, especially when the corporation has become too big. To assist him are the vice
presidents of different functional areas: finance, marketing, production, and administration.
Vice-Presidents of Different Functional Areas
• VP for Marketing
The following are among the responsibilities of VP for Marketing:
- Formulating marketing strategies and plans.

- Directing and coordinating company sales.
- Performing market and competitor analysis.
- Analyzing and evaluating the effectiveness and cost of marketing methods applied.
- Conducting or directing research that will allow the company to identify new marketing
opportunities, e.g. variants of the existing products/services already offered in the market.
- Promoting good relationships with customers and distributors. (Cayanan, 2015)
• VP for Production
The following are among the responsibilities of VP for Production:
- Ensuring production meets customer demands.

- Identifying production technology/process that minimizes production cost and make the
company cost competitive.
- Coming up with a production plan that maximizes the utilization of the company’s
production facilities.
- Identifying adequate and cheap raw material suppliers. (Cayanan, 2015)
• VP for Administration
The following are among the responsibilities of VP for Administration:
- Coordinating the functions of administration, finance, and marketing departments.

- Assisting other departments in hiring employees.
- Aiding in payroll preparation, payment of vendors, and collection of receivables.
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- Determining the location and the maximum amount of office space needed by the
company. Identifying means, processes, or systems that will minimize the operating costs of
the company. (Cayanan, 2015)
• VP FOR FINANCE
The four functions of a VP for finance (CFO) as follows:
1. Financing
2. Investing
3. Operating
4. Dividend Policies
1. Financing. There are situations when we are faced with lack of funds. Financing
decisions include making decisions on how to fund long term investments (such as
company expansions) and working capital which deals with the day to day
operations of the company (i.e., purchase of inventory, payment of operating
expenses, etc.).
The role of the VP for Finance of the Financial Manager is to determine the
appropriate capital structure of the company. Capital structure refers to how much
of your total assets is financed by debt and how much is financed by equity.
To illustrate, see the figure below:
Explanation:
Recall that Assets = Liabilities + Owner’s Equity.
- To be able to acquire assets, our funds must have

come somewhere. If it was bought using cash from
our pockets, it is financed by equity.
- On the other hand, if we used money from our
borrowings, the asset bought is financed by debt.
- In the figure above, the total assets are financed by
60% debt and 40% equity. Accordingly, the capital
structure is 60% debt and 40% equity.
Do you think there is an ideal mix of debt and equity across corporations?
Answer: No. The mix of debt and equity varies in different corporations depending on
management’s strategies. It is the responsibility of the Financial Manager to determine
which type of financing (debt or equity) is best for the company.
2. Investing. Investments may either be short term or long term.

- Short term investment decisions are needed when the company is in an excess cash
position. The company should choose which type of investment it should invest in that
would provide a most optimal risk and return trade off.
- Long term investments should be supported by a capital budgeting analysis which is

among the responsibilities of a finance manager. Capital budgeting analysis is a tool to
assess whether the investment will be profitable in the long run. This is a crucial function
of management especially if this investment would be financed by debt. The lenders should
have the confidence that the investments that management will push through with will be
profitable or else they would not lend the company any money.
3. Operating. Operating decisions deal with the daily operations of the company. The
role of the VP for finance is determining how to finance working capital accounts
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such as accounts receivable and inventories. The company has a choice on whether
to finance working capital needs by long term or short-term sources.
Why does a Financial Manager need to choose which source of financing a company should
use? What do they need to consider in making this decision?
- Short Term sources are those that will be payable in at most 12 months. This includes
short-term loans with banks and suppliers’ credit. For short-term bank loans, the interest
rate is generally lower as compared to that of long-term loans. Hence, this would lead to a
lower financing cost.
Suppliers’ credit are the amounts owed to suppliers for the inventories they
delivered or services they provided. While suppliers’ credit is generally free of interest
charges, the obligations with them must be paid on time to maintain good supplier
relationship. Such relationships should be nurtured to ensure timely delivery of inventories.
Short term sources pose a trade-off between profitability and liquidity risk. Because
this source matures in a short period, there is a possibility that the company may not be
able to obtain enough cash to pay their obligation (i.e. liquidity risk).
- Long term sources, on the other hand, mature in longer periods. Since this will be paid
much later, the lenders expect more risk and place a higher interest rate which makes the
cost of long-term sources higher than short term sources. However, since long term sources
have a longer time to mature, it gives the company more time to accumulate cash to pay off
the obligation in the future.
Hence, the choice between short- and long-term sources depends on the risk and
return trade off that management is willing to take.
4. Dividend Policies. Recall that cash dividends are paid by corporations to existing
shareholders based on their shareholdings in the company as a return on their
investment. Some investors buy stocks because of the dividends they expect to
receive from the company. Non-declaration of dividends may disappoint these
investors. Hence, it is the role of a financial manager to determine when the
company should declare cash dividends.
Before a company may be able to declare cash dividends, two conditions must exist:
1. The company must have enough retained earnings (accumulated profits) to support cash
dividend declaration.
2. The company must have cash.
What do you think will affect the decision of management in paying dividends?
Dividends come from the company’s cash and availability of unrestricted retained
earnings. It will be affected by the following:
• Availability of financially viable long-term investment
One of the functions of a finance manager is investing and its available cash may be
used to invest in long term investments that would increase the profitability of the
company. Some small enterprises which are undergoing expansion may have limited access
to long term financing (both long term debt and equity). This results to these small
companies reinvesting their earnings into their business rather than paying them out as
dividends.
• Access to long term sources of funds
Page 14
On the other hand, a company which has access to long term sources of funds may be able
to declare dividends even if they are faced with investment opportunities. However, these
investment opportunities are generally financed by both debt and equity.
- The management usually appropriates a portion of retained earnings for investment

undertakings and this may limit the amount of retained earnings available for dividend
declaration.
- Creditors are not willing to finance entirely the cost of a company’s long-term investment.
Hence, the need for equity financing (e.g. internally generated funds or issuance of new
shares).
Examples of these companies are publicly listed companies such as PLDT, Globe Telecom,
and Petron. PLDT and Globe are two of the Philippine listed companies which have
generously distributed cash dividends for the last five years (information as of 2014).
• Management’s Target Capital structure
For companies which have limited access to capital and have target capital structure, they
may end up with a residual dividend policy. This means that when companies are faced
with investment opportunities, internally generated funds will be used first to finance these
investments and dividends can only be declared if there are excess funds.
What’s More
ACITIVTY 5: ORGANIZATIONAL CHART and the ROLES OF THE VP for FINANCE
Directions: Match the responsibilities to corresponding positions. Write your answer on a

sheet of paper.
ACTIVITY 6: Directions: The statements below are related to the functions of VP of

Finance. Write F if the statement is related to financing, I for investing, O for operating and
D if the statement is related to dividend policies. Write your answer on the space provided
for.
______1. Plan for expected excess in cash using Financial Planning tools.
______2. Determine working capital.
Page 15
______3. Declare dividend to shareholders.
______4. Choose long-term investment.
______5. Purchase land for sale.
______6. Borrow additional fund to the bank.
______7. Declare 40% of income use to purchase inventories.
______8. Determine salaries of employees.
______9. Division of surplus to the shareholders of the firm.
______10. Purchase 1 million worth of equipment with return on investment or ROI in 5

years.
ACTIVITY 7: Directions: Summarize your learnings on each subtopic. Write your answer on
a sheet of paper.
A. Subtopic 1: _______________________________________________________________________
__________________________________________________________________________________________
B. Subtopic 2: _______________________________________________________________________
__________________________________________________________________________________________
C. Subtopic 3: _______________________________________________________________________
__________________________________________________________________________________________
What I Can Do
ACTIVITY 8: Subtopic 1: Measurement of Shareholders’ Wealth

Directions: Problem Solving. Analyze the problem below and answer the given questions.
Write your answer on a sheet of paper.
Assume Maria bought 15 shares of SMDC at PHP1,530 each on June 27, 2018. This brings
her investments to PHP22,950.
1. What happens to the value of her investment if the price goes down to PHP1,310 per
share on April 27, 2020?
2. What happens to the value of her investment if the price goes up to PHP3,790 per share
on August 26, 2020?
3. How much will be the profit/loss on April 27, 2020 if she were to sell the stocks?
4. How much will be the profit/loss on August 26, 2020 if she were to sell the stocks?
5. When is the best time to sell the stocks? What should you consider before investing your
money?
ACTIVITY 9: Subtopic 2: Factors that Affects the Market Price

Explain the importance of knowing the factors that affects the market price and its impact
to the business. Elaborate your answer. (10 points each)
Factors Controllable by Management Uncontrollable External Factors
ACTIVITY 10: Subtopic 3: ORGANIZATIONAL CHART and the ROLES of VP for

FINANCE
Directions: Answer the problem. Miss Maria Clara is a newly hired Administrative Assistant
in a private company. Her immediate superior asked her to do the summary of duties and
responsibilities of the Top Management positions. Help her identify whose roles are listed
below. Write your answers on a sheet of paper.
Page 16
_______ 1. Coordinating the functions of administration, finance, and marketing
departments.
_______ 2. Assisting other departments in hiring employees.
_______ 3. Formulating marketing strategies and plans.
_______ 4. Coming up with a production plan that maximizes the utilization of the
company’s production facilities.
_______ 5. Aiding in payroll preparation.
_______ 6. Overseeing the operations of a company and ensuring that the strategies as
approved by the board are implemented as planned.
_______ 7. Setting policies on investments, capital structure and dividend policies.
_______ 8. Directing and coordinating company sales.
_______ 9. Performing market and competitor analysis.
_______ 10. Analyzing and evaluating the effectiveness and cost of marketing methods
applied
_______ 11. Identifying adequate and cheap raw material suppliers.
_______ 12. Performing all areas of management: planning, organizing, staffing, directing,
and controlling.
_______ 13. Determining the location and the maximum amount of office space needed by
the company. Identifying means, processes, or systems that will minimize the
operating costs of the company.
_______ 14. Representing the company in professional, social, and civic activities
_______ 15. Identifying production technology/process that minimizes production cost and
make the company cost competitive.
_______ 16. Approving company’s strategies, goals, and budgets.
_______ 17. Appointing and removing members of the top management including the
president.
_______ 18. Conducting or directing research that will allow the company to identify new
marketing opportunities, e.g. variants of the existing products/services already
offered in the market.
_______ 19. Determining top management’s compensation.
_______ 20. Promoting good relationships with customers and distributors.
Rubrics for all the Activities:
4 3 2 1
NEATNESS Homework is in an Homework is in an Homework is in an Homework is
orderly packet and orderly packet and orderly packet disorderly with
is incredibly neat, is neat, with few with several tears many tears and
with no tears or tears or smudges and smudges smudges
smudges
COMPLETIO All the assigned Most of the Some of the Student did not
N work is complete assigned work is assigned work is do the assigned
complete complete work
TIMELINESS Homework was Homework was Homework was Homework was
received on the received received received
scheduled date 3 day late 7 days late 8 or more days
late
ACCURACY All the answers are Most of the Some of the Few to none of
correct answers are answers are the answers are
correct correct correct
WORK All steps for doing Most steps for Some steps for The student did
SHOWN the activities were doing the activities doing the not show any
meticulously shown were meticulously activities were work/activity
shown meticulously
shown
Assessment
Page 17
ACTIVITY 11: POST TEST.
Part 1. True or False. Directions. Write T if the statement is correct and F if incorrect. Write
your answer on a sheet of paper.
financial manager would select the one that is expected to result in the highest monetary
return.
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.
Part 2. Multiple Choice. Directions. Read the statements carefully. Choose the correct
answer then write it on a sheet of paper.
1. The primary goal of the financial manager is

A. minimizing risk. B. maximizing profit.
C. maximizing wealth. D. minimizing return.
2. Corporate owner is receiving realizable return through

A. earnings per share and cash dividends.
B. increase in share price and cash dividends.
C. increase in share price and earnings per share.
D. profit and earnings per share.
3. The wealth of the owners of a corporation is represented by

A. profits. B. earnings per share.
C. share value. D. cash flow.
4. Wealth maximization as the goal of the firm implies enhancing the wealth of
A. the Board of Directors. B. the firm's employees.
C. the federal government. D. the firm's stockholders.
5. The goal of profit maximization would result in priority for

A. cash flows available to stockholders. B. risk of the investment.
C. earnings per share. D. timing of the returns.
6. Profit maximization as a goal is not ideal because it does NOT directly consider
A. risk and cash flow. B. cash flow and stock price.
C. risk and EPS. D. EPS and stock price.
7. Profit maximization as the goal of the firm is not ideal because

A. profits are only accounting measures.
B. cash flows are more representative of financial strength.
C. profit maximization does not consider risk.
D. profits today are less desirable than profits earned in future years.
8. Profit maximization fails because it ignores all EXCEPT

A. the timing of returns. B. earnings per share.
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C. cash flows available to stockholders. D. risk.
9. The key variables in the owner wealth maximization process are

A. earnings per share and risk. B. cash flows and risk.
C. earnings per share and share price. D. profits and risk.
10.Cash flow and risk are the key determinants in share price. Increased cash flow results
in ________, other things remaining the same.
A. a lower share price B. a higher share price
C. an unchanged share price D. an undetermined share price
Additional Activities
ACTIVITY 12: To practice your skills in financial management, read and answer the
activities below. Write your answer on a sheet of paper.
Wealth Maximization
1. Your mother will soon start to receive her pension. She thought to invest a part of her
money in Philippine Stock Exchange. You as an ABM student with the knowledge about
investment, your mother asked your opinion which of the company listed below is best.
Assumingly the following companies are open to the public, which of them do you prefer?
Support your answer.
i Jollibee, P1500 per share

ii Shell, P1150 per share
iii Converge Internet Provider, P1100 per share
In 2023, assuming all the stocks will increase by 15% per share, how much will be
the total wealth of your mother if she will buy 15 shares of it? Compute for all the three
companies.
Factors affecting the Market Price
Considering the situation today, choose one among the controllable/uncontrollable

factors affecting the market price that you think will highly distress the company you chose
for your mother to invest from. Explain your answer.
Functions of Chief Financing Officer
Relate the four functions of CFO to the role of the person handling the finances of your
family. Elaborate your answer.
ACTIVITY 13: Directions: The different departments cannot stand alone; therefore, they
need the support of other departments to facilitate the maximization of shareholders’
wealth. Explain and discuss possible contribution of one department to the other
departments. Use the given diagrams for your answers.
Page 19
A. PRODUCTION FINANCE
MARKETING
ADMINISTRATION/OPERATION
B. MARKETING FINANCE
PRODUCTION
ADMINISTRATION/OPERATION
C. OPERATION FINANCE
MARKETING
PRODUCTION
WHAT I NEED TO KNOW
After going through this module, you are expected to:

1. distinguish a financial institution from financial instrument and financial market.
(ABM_BF12-IIIa-2)
2. enumerate the varied financial institutions and their corresponding services.
(ABM_BF12-IIIa-3)
3. compare the varied financial instruments. (ABM_BF12-IIIa-4)
4. explain the flow of funds within an organization – through and from the enterprise—
and the role of the financial manager. (ABM_BF12-IIIa-5)
WHAT I KNOW
LESSON FINANCIAL INSTITUTIONS, FINANCIAL INSTRUMENTS, AND

2 FINANCIAL MARKET
ABM_BF12-IIIa-2 ABM_BF12-IIIa-5
The lender and the borrower that are present at the right time and at the right place may
not happen all the time. In fact, it seldom happens. What happens if they did not meet? At
this point, we will discuss the financial institutions, financial instruments, financial
market, and the flow of funds for you to understand the financial system.
What’s In
ACTIVITY 14: YES I CAN!
Directions: Read each statement below carefully. Write X if the statement is TRUE and Y
if otherwise on the space provided for.
______ 1. Financial institution matches the supply and demand for funds.
______ 2. Financial system channels the funds from the savings unit to the deficit units.
______ 3. Financial instrument and securities are traded in the financial market.
Page 20
______ 4. Financial intermediaries provide channel through which the central bank can
influence the economy, in general and the financial system.
______ 5. Borrowers and savers fall under deficit units.
______ 6. Bank is an example of financial intermediary.
______ 7. Lender is otherwise known as savings unit.
______ 8. Financial institutions include banks, credit unions, asset management firms,
building societies, and stock brokerages, among others.
______ 9. Borrowers are also known as creditors.
_____ 10. Financial institutions can be divided in two major parts: Banking
Institution and Non-banking institution.
_____ 11. Financial intermediary links the savers and users of funds.
_____ 12. When the BSP produces a surplus in the currency of the country, inflation will
be uncontrollable.
_____ 13. Globalization permits foreign participants to be part of the financial system.
_____ 14. Exchange rates is one of the activities in a financial system.
_____ 15. Financial systems affect a country’s economy.
Let us take a quick tour on what you have learned in the previous year.
FINANCIAL INSTRUMENTS - When a financial instrument is issued, it gives rise to a

financial asset on one hand and a financial liability or equity instrument on the other.
A Financial Asset is any asset that is:
• Cash
• An equity instrument of another entity
• A contractual right to receive cash or another financial asset from another entity.
• A contractual right to exchange instruments with another entity under conditions that are
potentially favorable. (IAS 32.11)
• Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment in Bonds
• Who are the holders of Financial Assets? - Answer: Suppliers of Funds
A Financial Liability is any liability that is a contractual obligation:
• To deliver cash or other financial instrument to another entity.

• To exchange financial instruments with another entity under conditions that are
potentially unfavorable. (IAS 32)
• Examples: Notes Payable, Loans Payable, Bonds Payable
An Equity Instrument is any contract that evidences a residual interest in the assets of an
entity after deducting all liabilities. (IAS 32)
• Examples: Ordinary Share Capital, Preference Share Capital

• Who are the makers of Financial Liabilities and Equity instruments? Answer: Users of Funds
WHAT’S NEW
ACTIVITY 15: GROW YOUR MONEY!
Analyze the situation and answer the questions below. Write your answer on a sheet of
paper.
Page 21
Guide questions:
a. What can you say about the situation of students A and B?

b. Can they help one another with their goals?
c. How can they benefit from each other? Explain your answer.
WHAT IS IT
THE FINANCIAL SYSTEM
Financial Institutions
Saver/Suppliers Private Placement Users/Demanders

of Funds (A) of Funds (B)
Financial Markets
FLOW OF FUNDS FLOW OF SECURITIES/NOTES/BONDS/DEBT INSTRUMENTS
• Figure 1. The resulting diagram illustrates the Financial System.
• The black lines represent the flow of cash/funds, while the gray lines represent the flow of
financial instruments which represent obligations to transfer cash or other assets in the
future.
Illustration:
If A knows that B is in need of funds, or if B knows that A is willing to invest funds,

A and B may agree to make a Private Placement. Private Placement is the sale of a new
security directly to an investor or group of investors. (Link the box for Private Placement
between A and B as shown in Figure 1.)
However, if these facts are unknown to them, A and B can go to a Financial

Market, an organized forum in which the suppliers and users of various types of funds can
make transactions directly. It is an organized forum that lets A, along with other suppliers
of funds, and B, along with other users of funds, meet and make transactions. Once A and
Page 22
B have met in the Financial Market, they can now agree to make a private placement. (Link
the box for Financial Markets to A and B as shown in Figure 1.)
If A and B do not want to make an effort to find a counterparty in the Financial

Markets, A and B may go to a Financial Institution, an intermediary that channel the
savings of individuals, businesses, and governments into loans or investments. A Financial
Institution will receive A’s supply of funds and match it with B’s demand of funds. Unlike
the Financial Markets were A and B knows to whom the fund went and from whom the
funds came, Financial Institutions serve as an intermediary to the suppliers and users of
funds. (Link the box for Financial Institutions to A and B as shown in Figure 1.)
Moreover, Financial institutions actively participate in the financial markets as both

suppliers and users of funds. Public offering is the sale of either bonds or stocks to the
general public. (The link between Financial Institutions and Financial Markets as shown in
Figure 1.)
Question: How transactions between suppliers and users of funds take place? 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? Answers: Verbal agreement and Written
agreement
Savings can come from households, individuals, companies, government agencies,

or any other entity whose cash inflows are greater than their cash outflows. The financial
system through financial intermediaries provides a mechanism by which these savings can
be channeled to users of funds, borrowers, and investors.
1. FINANCIAL INSTRUMENTS
IAS 32 and 39 define a financial instrument as "any contract that gives rise to a

financial asset of one entity and a financial liability or equity instrument of another entity“.
Financial instruments are monetary contracts between parties. They can be created, traded,
modified, and settled. They can be cash (currency), evidence of an ownership interest in an
entity (share), or a contractual right to receive or deliver cash (bond).
Contract refers to agreement between two parties.
1 party – has the contractual right to receive the financial assets
2 party – has the contractual obligation to pay or deliver the financial assets
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, a real or a
Page 23
virtual document representing a legal agreement involving some sort-of monetary value
(Source: Investopedia - Sharper Insight. Smarter Investing. | Investopedia. (2016).
Investopedia. Retrieved 8 May 2016, from http://investopedia.com). These can be debt
securities like corporate bonds or equity like shares of stock.
When companies need funding, they either sell debt securities (or bonds) or issue equity
instruments. The proceeds from the sale of the debt securities and issuance of bonds will be
used to finance the company’s plans. On the other hand, investors buy debt securities of
equity instruments in hopes of receiving returns through interest, dividend income or
appreciation in the financial asset’s price.
Common examples of Debt and Equity Instruments:
A. Debt Instruments generally have fixed returns due to fixed interest rates. Examples
of debt instruments are as follows:
• Treasury Bonds and Treasury Bills

The Philippine Government issues two kinds of government securities (GS):
Treasury Bills and Treasury Bonds, so-called because it is the Bureau of Treasury
which originates their sale to the investing public through a network of licensed
dealers.
Government agencies, Local Governments, and government-owned or
controlled corporations may float securities, but these are not labeled as Treasuries.
Government Securities are no longer certificated, they are known as “SCRIPLESS”,
just like in USA, Canada, China, and Korea.
GS discount or coupons are subject to 20% final income tax which is
withheld upon floatation of Treasury Bills or upon payment of the coupon for
Treasury Bonds. NO OTHER TAX is imposed on the secondary market buyer.
Floatation is the process of offering a company’s shares for sale on the stock market
for the first time.
Treasury bonds and treasury bills are issued by the Philippine government.
These bonds and bills have typically low interest rates and have exceptionally low
risk of default since the government assures that these will be paid. Debt securities
treasury bills and bonds are both investment securities issued by the government to
raise funds for the running of the government and to pay off any outstanding
government loans. The major similarity between these securities is that they are
issued by the same party, and any individual who purchases these securities is
essentially lending money to their country’s government. Regardless of their
similarities, treasury bills and bonds are quite different to each other in terms of
their characteristics.
Treasury bill is a short term security, with maturity of usually less than one
year. The return to an investor of a treasury bill is not from interest paid like in
most bonds (interest on bonds are called coupon payments). Rather, the investment
return is through the appreciation of the price of the security. For example, the price
of a T-bill is set at 950. The investor pays the T-bill at 950 and waits for it to
mature. At maturity, the government pays the bill holder (investor) 1000. The return
that the investor would have made is the difference of 50. Treasury Bills have
maturities of a year or less. Treasury Notes are issued with maturities from 2,3,5
and10 years. Treasury Bonds are long-term investments that have maturities of 10-
30 years from their issue date.
Treasury Bills are government securities which mature in less than a year.
There are three tenors of Treasury Bills:
91-day Bills; 182-day Bills; 364-day Bills
The no of days are based on the universal practice around the world of
ensuring that the bills mature on a business day.
Page 24
Treasury Bills are quoted either by their yield rate, which is the discount, or
by their price based on 100 points per unit.
Treasury Bills which mature in less than 91-days are called Cash
Management Bills (e.g. 35-day, 42 day).
Treasury bonds are government securities which mature beyond one year.
At present there are five maturities of bonds:
2-year; 5-year; 7-year; 10-year; 20-year
These are sold at its face value on origination. The yield is represented by the
coupons, expressed as a percentage of the face value on per annum basis, payable
semi-annually.
The Treasury bonds and Treasury bills issued by the National Treasury are
forms of indebtedness of the National Government. The Treasury bills which are in
the tenors of 91 days, 182 days, and 360 days are auctioned at the National
Treasury every Monday to accredited dealers. These are eventually farmed out to
both institutional and retail investors on Wednesdays.
Occasionally, the National Treasury also issues retail Treasury bonds. A
small investor can participate in these retail Treasury bonds. These are normally in
multiples of P5000. Coupon interest on these retail Treasury bonds is paid
quarterly. For Treasury bonds, coupon interest is paid semiannually.
From publicly listed companies have also started issuing corporate bonds.
The tenors are usually 5 years, 7 years, and 10 years. GT Capital, the holding
company, which is the biggest stockholder of Metrobank, has just finalized the
interest rates on its corporate bond issue which covers those three tenors.
PLDT and Meralco are the other big publicly listed companies which issued
corporate bonds recently. Corporate bonds offer slightly higher interest rates than
government securities. Interest on investment in debt securities is subject to 20%
final tax. For bank deposits with tenors over at least five years, tax rate is 0%.
In terms of claims over the assets of a company. Bondholders have
preference over preferred stocks and common stocks. Also, interest due to them,
just like bank creditors, has to be paid first before dividends are given to preferred
and common stockholders.
• Corporate Bonds are issued by publicly listed companies. These bonds usually
have higher interest rates than Treasury bonds. However, these bonds are not risk
free. If the company which issued the bonds goes bankrupt, the holder of the bonds
will no longer receive any return from their investment and even their principal
investment can be wiped out.
B. Equity Instruments generally have varied returns based on the performance of the
issuing company. Returns from equity instruments come from either dividends or
stock price appreciation. The following are types of equity instruments:
• Preferred Stock has priority over a common stock in terms of claims over the
assets of a company. This means that if a company were to be liquidated and its
assets have to be distributed, no asset will be distributed to common stockholders
unless all the claims of the preferred stockholders have been given. Moreover,
preferred stockholders have also priority over common stockholders in cash dividend
declaration. Dividends to preferred stockholders are usually in a fixed rate. No cash
dividends will be given to common stockholders unless all the dividends due to
preferred stockholders are paid first. (Cayanan, 2015)
• Holders of Common Stock on the other hand are the real owners of the company.
If the company’s growth is spurring, the common stockholders will benefit on the
growth. Moreover, during a profitable period for which a company may decide to
declare higher dividends, preferred stock will receive a fixed dividend rate while
common stockholders receive all the excess.
Page 25
Most companies have only common stocks in their stockholders’ equity, but some
companies have both company common stocks and preferred stocks. PLDT and Globe have
both common stocks and preferred stocks in their stockholders’ equity.
Ask if name suggests a preferred stock has priority over a common stock in terms of claims
over the assets of a company. this means that if a company is to be liquidated and its
assets have to be distributed, no asset will be distributed to common stockholders unless
all the claims of the preferred stockholders have been given.
preferred stockholders also have priority over common stockholders in cash dividend
declaration. no cash dividends will be given to common stockholders unless all the
dividends due to preferred stockholders are paid first.
if the preferred stockholders have preference over common stockholders in terms of claims
over the assets of the company and in cash dividend declaration why would an investor be
willing to become a common stockholder?
there are benefits in being a common stockholder. common stockholders are the real
owners of the company. Being residual owners, the grass the growth potential of their
investments is unlimited. If an investor has identified uh a good common stock , its value
can multiply overtime. At the height of the global financial crisis in 2008 and 2009, many
fundamentally sound stocks went down. One of them was Universal Robina Corporation
(URC) which went down to around P5.00 after hitting a high of around P26.50 during that
period. As of August 26, 2014, URC closed at P163.50. If one had bought the stock in 2009
even at P10.00 the investment would have multiplied 16 times.
One could have bought Jollibee Foods Corporation (JFC) stock at P40.00 on January 2009.
As of August 16, 2014, the stock closed at P192.50. One could have bought PLDT at P2,100
in the first quarter of 2009. As of August 26, 2014, the stock closed at P3,390. The
appreciation in value is not as high as URC’s or JFC's but PLDT has distributed an annual
cash dividend of at least P150 per share since 2010. The dividend yield is higher than the
return of most fixed income like time deposits.
Unlike preferred stocks, the dividend per share for common stocks is not fixed. A common
stock investor can receive more cash dividends during period of unusual profitability. But
during periods of unprofitable operations, bought preferred stockholders and common
stockholders may not receive dividends. The company is not obligated to pay dividends if it
is not in a position to do so. for community preferred stockholders, however, and paid
dividends can accumulate, and no cash dividends will be paid to common stockholders
unless all the dividends in arrears for preferred stockholders are paid.
Being the residual owners of a company, common stockholders have voting rights, a
privilege generally not available to preferred stockholders. This means that if one has
enough common shares in a company, he can nominate a director in the board of directors.
If this happens, then he can influence the major decisions made by a company as such
major decisions are approved by the board.
CHARACTERISTI
COMMON STOCK PREFERRED STOCK
CS
Ownership Yes No
Voting Rights Yes No
Board Represented and in control Sometimes represented but seldom in control
Page 26
Representation
Company Paid back investment after debtors and Paid back investment after debtors but before
Liquidation Rights Preferred Stockholders Common Stockholders
Return on Capital Not Guaranteed and paid only when Guaranteed by a coupon rate that is similar to
(Dividends) company has excess profits. Never paid a bond interest payment paid before any
before Preferred Dividends distributions to Common Stockholders
Sale of Company Shares in return on sales Usually convertible to common stock upon this
type of event and shares in return on sale
Comparison Between Stocks and Bonds
BONDS STOCKS
Lower risk but lower yield. Higher risk but with possibility of higher returns
Can be appropriate for retirees (because of the Can be appropriate if the investment is for the
guaranteed fixed income) or for those who need long term (10 years or more). This can allow
the money soon (because they cannot afford to investors to wait for stock prices to increase if
take a chance at the stock market) ever they go low.
DIFFERENCES BETWEEN EQUITY INSTRUMENTS AND DEBT SECURITIES
EQUITY DEBT
Investor Status Stakeholder Creditor
Maturity Date Undetermined Fixed term
Returns Dividend Fixed Coupon Rate
Priority claim in case of bankruptcy Inferior to debt securities holder Superior to Stakeholder
AKA names Common share Bond, Debenture
2. FINANCIAL MARKET
FINANCIAL MARKET is a meeting place for people, corporations and institutions

that either need money or have money to lend or invest. Global network of individuals and
financial institutions that may be lenders, borrowers or owners of public companies
worldwide.
 PUBLIC FINANCIAL MARKETS: Financial market for national, state and local
government that are primarily borrowers of funds for highways, education,
welfare and other public activities
Page 27
 CORPORATE FINANCIAL MARKETS: Financial markets for corporations to raise
funds for short-term operations and for new plant and equipment.
Different financial markets serve different types of customers or different parts of the
country. Financial markets also vary depending on the maturity of the securities being
traded and the types of assets used to back the securities.
Classification of Financial Markets into comparative groups:
A. Primary vs. Secondary Markets

To raise money, users of funds will go to a primary market to issue new securities
(either debt or equity) through a public offering or a private placement. Primary market is
a financial market in which securities are initially issued; the only market in which the
issuer is directly involved in the transaction.
The sale of new securities to the general public is referred to as a public offering and
the first offering of stock is called an initial public offering. The sale of new securities to one
investor or a group of investors (institutional investors) is referred to as a private placement.
However, suppliers of funds or the holders of the securities may decide to sell the
securities that have previously been purchased. The sale of previously owned securities
takes place in secondary markets, a financial market in which preowned securities (those
that are not new issues) are traded.
The Philippine Stock Exchange (PSE) is both a primary and secondary market. PSE
is an organized secondary market where securities like shares, debentures of public
companies, government securities and bonds issued by municipalities, public corporations,
utility undertakings, port trusts and such other local authorities are purchased and sold.
To bring liquidity, the stocks are traded systematically in a stock exchange. An entity which
is in the business of bringing buyers and sellers of stocks and securities together. The
purpose of stock exchange is to facilitate the exchange of securities between buyers and
sellers, thus providing a marketplace, virtual or real. Known as the barometer of the
company’s economy. In a stock market the transaction (sending the order to the stock
exchange computer, confirmation of order, and execution) is communicated within a
fraction of a second.
B. Money Markets vs. Capital Markets

Money markets is financial relationship created between suppliers and users of
short-term funds. It is a venue wherein securities with short-term maturities (1 year or less)
are sold. They are created because some individuals, businesses, governments, and
financial institutions have temporarily idle funds that they wish to invest in a relatively
safe, interest-bearing asset. At the same time, other individuals, businesses, governments,
and financial institutions find themselves in need of seasonal or temporary financing.
On the other hand, securities with longer-term maturities are sold in Capital
markets, a market that enables suppliers and users of long-term funds to make
transactions. The key capital market securities are bonds (long-term debt) and both
common stock and preferred stock (equity, or ownership).
C. Physical Asset Markets vs. Financial Asset Market

PHYSICAL ASSET MARKET is also called tangible or real asset markets for
products such as wheat, autos, real estate, computers, and machinery. FINANCIAL ASSET
MARKET deals with stocks, bonds, notes, and mortgages. It also deals with derivative
securities.
Page 28
D. Spot Markets vs. Future Markets
Spot markets are markets in which assets are bought or sold for “on-the-spot”
delivery. Future markets are markets in which participants agree today to buy or sell an
asset at some future date.
E. Private Markets vs. Public Markets

Private markets are markets in which transactions are worked out directly between
two parties. Public markets are markets in which standardized contracts are traded on
organized exchanges.
3. FINANCIAL INSTITUTIONS
Financial institutions are intermediaries that channel the savings of individuals,

businesses, and governments into loans or investments. These are institutions or
organizations that provide financial services, among others, in the term of loan, credit, fund
administration, financing, depository, and safekeeping.
Financial institutions, based on the financial services provided, are generally classified as
follows:
1. Financial intermediaries
2. Investment institutions
An investment institution is a company engaged in buying securities of other

companies which are listed in the stock exchange for investment purposes only.
Hence, the buying and selling of financial securities are not the primary business
activities of an investment institutions.
An investment institution is usually composed of very wealthy investors. The

resources of these investors are pooled together in the institution for the purchase of
financial securities of high-grade companies. Mutual Funds and Insurance
Companies likewise pool their financial resources together to form an investment
company for investment purposes only.
3. Depository institutions
These are financial institutions that accept deposits (savings, current, and time
deposits) from individuals and corporate entities, extend loans to borrowers, transfer
funds, and manage funds for investment purposes.
Depository institutions include the following:
a) Banks
Banks are institutions authorized to operate and regulated by the BSP under
the general banking law of 2000. They accept deposits and bills payment,
provide loans, and facilitate the transfer of funds domestically or abroad.
Under Bangko Sentral ng Pilipinas Circular No. 271, the major classifications
of banks operating in the Philippines are as follows:
i Universal Bank
A Universal bank is considered the biggest bank in terms of assets,

loan portfolio, and revenue. It has the widest scope of banking
activities authorized by the BSP and usually has the greatest number
of branches nationwide and abroad. The minimum capital
requirement of a universal bank with more than 100 branches is by
Page 29
the BSP at P20 billion in compliance with BASEL III requirement.
Example: BDO.
ii Commercial Bank
Commercial bank is a type of bank that provides commercial loans

and offers investment products in addition to the regular banking
service of accepting deposits. Compared to a universal bank, it has
more limited banking services. Ex. Metrobank
Individuals deposit funds at commercial banks, which use the

deposited funds to provide commercial loans to firms and personal
loans to individuals, and purchase debt securities issued by firms or
government agencies.
iii Thrift Bank
Thrift banks as defined in Republic Act No. 7906, include savings

and mortgage banks, private development banks, and stock savings,
loan associations, and microfinance thrift banks that are organized
under existing laws for the ff. purposes:
a. Accumulating and investing the savings of depositors
b. Providing working capital to businesses engaged in

agriculture, service, and housing
c. Providing diversified financial services to individuals and small

and medium enterprises
A thrift bank, also known as a savings and loan association, is

a form of a financial institution that provides basic banking
services by offering a variety of savings options and mortgage
loan services and just like commercial banks these too qualify
as a depository institution and may even provide a range of
other products and services. Ref. https://www.wallstreetmojo.com/thrift-bank/
iv Rural Bank
Rural banks are organized and operating in rural areas. They are
intended to promote and expand the rural economy by providing the
people with basic financial services. Rural banks and cooperative
banks differ from each other by ownership. Rural banks are privately
owned and managed while cooperative banks are organized and
owned by cooperatives or a federation of cooperatives.
v Islamic Bank
The Islamic Bank, which has been created and organized under R.A.
No. 6848, aims to promote and accelerate the socio-economic
development of the Autonomous Region of Muslim Mindanao by
performing banking, financing, and investment operations and to
establish and participate in agricultural, commercial, and industrial
ventures based on the Islamic concept of banking.
b) Savings and loan association
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A savings and loan association, sometimes referred to as a financing
and mortgage loan company, is a financial institution that is engaged in the
business of accumulating the savings of its members and stockholders, and
using such accumulations for loans or investment in securities of productive
enterprises.
The unique feature of the financing and mortgage loan company is that
the depositors are also the member-borrowers of the association.
A financial institution similar to a bank that specializes in helping people

get residential mortgages. Savings and loan associations can be owned either by
their customers or by shareholders, but they were primarily meant to let the
average person pool his money so that members could purchase homes.
https://www.bankrate.com/glossary/s/savings-and-loan-association/
c.) Pension Fund
Financial institutions that receive payments from employees and invest the
proceeds on their behalf. A pension fund is set-up by a business for the purpose
of paying the pension requirements of all private-sector employees who retire
from the business organization upon reaching their retirement age.
d) Trust companies
A trust company is a legal entity that acts as a fiduciary, agent, or

trustee on behalf of a person or business for a trust.
A trust company is hired to act as a fiduciary, meaning they act on

your behalf and will not take advantage of you. As a result, a trust company
can make all of the investment decisions and act in the best interest of its
client. The investment management services offered by trust companies can
be helpful to those who are not experienced or knowledgeable about the
financial markets. A trust company is typically tasked with the
administration, management, and the eventual transfer of assets to
beneficiaries. A trust company acts as a custodian for trusts, estates,
custodial arrangements, asset management, stock transfer, and beneficial
ownership registration.
Trusts are managed for profit, which it may take out of the assets
annually or upon transfer to the beneficial third party. Also, clients who
don’t want or care to manage their day-to-day finances can also benefit from
using a trust company.
Trust companies are often good alternatives for preventing future

family squabbles when dealing with inheritances and estate planning. If
dividing up the assets of an estate will cause family turmoil, a trust company
can act as a neutral third party. Ref.
https://www.investopedia.com/terms/t/trustcompany.asp
e.) Insurance Company
Individuals purchase insurance (life, property and casualty, and

health) protection with insurance premiums. The insurance companies pool
these payments and invest the proceeds in various securities until the funds
are needed to pay off claims by policyholders. Because they often own large
blocks of a firm’s stocks or bonds, they frequently attempt to influence the
Page 31
management of the firm to improve the firm’s performance, and ultimately,
the performance of the securities they own.
An insurance company acts as a financial intermediary by pooling

together the proceeds of insurance policies sold to the public and investing
the accumulated funds in high-yield maturing securities from investment
houses. Most of the money accumulated by insurance companies from
insurance premium is lent in either medium- or long-term loan to companies
engaged in commercial real estate.
Insurance companies may offer the following products to the public:
1. Life Insurance 5. Crop Insurance

2. Health Insurance 6. Marine Insurance
3. Car Insurance 7. other insurance products
4. Fire Insurance
f) Mutual Funds
Owned by investment companies which enable small investors to enjoy

the benefits of investing in a diversified portfolio of securities purchased on their
behalf by professional investment managers. When mutual funds use money
from investors to invest in newly issued debt or equity securities, they finance
new investment by firms. Conversely, when they invest in debt or equity
securities already held by investors, they are transferring ownership of the
securities among investors.
g) Other Financial Institutions include unit investment trust fund (UITF),
investment banks, and credit unions, among others.
The figure below illustrates how the key financial institutions serve as
intermediaries for suppliers and users of funds.
The Flow of Funds and the Roles of Financial Manager
The term ‘Flow of Fund’ refers to the changes in working capital of the movement or
changes of funds. In other words, while a transaction is taking place, any increase or
decrease in funds or working capital is called Flow of Fund. If the funds or working capital
increases, it is treated as the inflow or sources of fund. On the other hand, if the funds or
working capital decreases, it is called the outflow of fund. (www.kullabs.com)
The flow of funds, therefore, denotes the earning and spending of cash or the growth
and reduction of working capital—i.e., fund inflows and outflows. Fund inflows include
activities designed to produce revenues, such as selling products, services, investments,
and other company assets, as well as issuing stocks and bonds. On the other hand, fund
outflows include paying wages, obtaining insurance, purchasing company assets and
materials, making long-term investments, and paying dividends and taxes. At one point,
companies gauged their flow of funds by using any definition of funds and included a
financial statement reporting these activities in their annual reports.
(www.referenceforbusiness.com/encyclopedia)
Page 32
The flow of funds does not occur when a transaction affects fixed assets and fixed
liabilities or current assets and current liabilities. This kind of transaction flow is called no
flow of fund and it occurs only between non-current accounts. Some examples of such
transactions which do not affect the flow of funds or which are not recorded in the fund’s
flow statement are: Collection from debtors or payment to creditors, purchase or sales on
inventory in cash or credit, purchase or sales of marketable securities, exchange of fixed
assets, purchase of fixed assets by issue of shares, conversion of debentures into shares,
etc. (www.kullabs.com)
In addition, when we have the comparison between cash flow and fund flow, cash
flow refers to the current format for reporting the inflows and outflows of cash, while funds
flow refers to an outmoded format for reporting a subset of the same information. Cash flow
is derived from the statement of cash flows. (https://www.accountingtools.com/)
Moreover, a cash flow statement shows the inflows and outflows of cash and cash
equivalents. Cash includes cash in hand and demand deposits with the banks while cash
equivalents are highly liquid investments, i.e. they can be
readily converted into cash like marketable securities,
commercial papers, and short-term government bonds. It
explains the changes in the cash in hand and cash at bank at
the beginning and the end of the accounting period.
Roles of Financial Managers, Financial Markets, and Investors:
Financial managers perform data analysis and advise senior managers on profit
maximizing ideas. 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.
The role of the financial manager, particularly in business is changing in response

to technological advances that have significantly reduced the amount of time it takes to
produce financial reports. Financial managers’ main responsibility used to be monitoring a
company’s finances, but they now do more data analysis and advise senior managers on
ideas to maximize profits. They often work on teams, acting as business advisors to top
executives.
As to skills, financial managers need to show evidence of commercial and business

awareness, high numeracy and sound technical skills, problem-solving skills and initiative,
negotiation skills and the ability to influence others and strong attention to detail and an
investigative nature. The roles of financial managers can vary enormously. In larger
companies for instance, the role is more concerned with strategic analysis, while in smaller
organizations, a financial manager may be responsible for the collection and preparation of
accounts. In general, tasks across roles may include:
In general, tasks across roles may include:
Page 33
Providing and interpreting financial information- Knowing how to work with the
numbers in a company's financial statements is an essential role for financial manager. The
meaningful interpretation and analysis of balance sheets, income statements, and cash flow
statements to discern a company's investment qualities is the basis for smart investment
choices.
Formulating strategic and long-term business plans- A strategic plan with key long-term
objectives serves as a framework for making decisions and provides a basis for planning.
Putting together a strategic plan can provide the insight needed to keep a company on track
by setting goals and measuring accomplishments. By analyzing the information in the long-
term plan, executives can make necessary changes and set the stage for further planning.
Developing financial management mechanisms that minimize financial risk - Business

establishments routinely face different types of risks in the course of their operations. Risk
stems from uncertainty of financial loss and can potentially cripple the business if not
managed in time. This demands that mechanisms to manage risk be created via a risk
management philosophy, with the objective of minimizing negative effects risks can have on
the financial health of the institution. In this way financial manager’s role involves
identifying potential risks in advance, analyzing them and taking steps to diminish or
eliminate them.
Managing financial accounting, monitoring; reporting systems and producing accurate

financial reports to specific deadlines; and liaising with auditors to ensure annual monitoring
is carried out - Accountability is a key feature of the financial systems. The budget is the
financial plan for the year, and it is essential for the financial manager to monitor actual
progress against this plan to ensure that the desired fiscal result will be achieved. The
monthly reports are the main tool of financial control enabling cost centers to monitor
income and expenditure against budget.
Keeping abreast of changes in financial regulations and legislation - New laws, regulations
and public expectations have pushed governance and compliance even higher up the
boardroom agenda. Financial managers everywhere recognize it’s essential to make sure
their companies have effective, robust and reliable governance and financial compliance
tools.
WHAT’S MORE
ACTIVITY 16: Directions: Read each situation carefully to solve each problem. Write your
answer on a separate sheet of paper. Read the following statements below and identify
whether:
A- Both statements are TRUE C- 1st statement is TRUE; 2nd statement is FALSE
B- Both statements are FALSE D- 1st statement is FALSE; 2nd statement is TRUE
Write the letter of your answer on the space provided before each number. Use CAPITAL
letters only.
_____1. Capital markets carry out the desirable socioeconomic function of directing capital
to productive uses. Capital markets can be in a national or an international setting.
_____2. Debt is defined as money that is borrowed and must be repaid. Equity is money that
is invested in return for a percentage of ownership.
_____3. All investments are risky. Basically, a higher rate of return means a higher risk.
_____4. When savers make investments, they convert risk-free assets into risky assets. Cash
or savings are risk-free assets.
_____5. Mutual funds are pools of money managed by an investment bank. This investment
bank is investing in stocks and bonds all over the world.
_____6. Financial intermediaries are important in the capital marketplace. Bank loan is a
financial intermediary.
_____7. In direct investments, the company invests in the capital market with its own effort.
While in the indirect investment, the company invests through a financial intermediary.
Page 34
_____8. Creditors, or debt holders, purchase debt securities and deduct future interest
income in return for their investment. When investors buy bonds, they are
lending the issuers of the bonds their money.
_____9. The most common example of a debt instrument is the bond. All types of
organizations can issue bonds.
____10. Stocks are the type of equity security with which most people are familiar. When
investors buy stock, they owe a share of a company’s assets and earnings
ACTIVITY 17: Directions: Visit the BSP website (http://www.bsp.gov.ph/) and let’s find
out how well you internalize the information from the website by answering this activity.
Choose the letter that corresponds to your answer. Write your answer on the space
provided for.
______ 1. Which of the following actions will be appropriate if there is an inflationary
pressure due to excessive demand?
a. BSP to slow down inflation by implementing incrementing monetary policy.
b. BSP to slow down inflation by implementing contractionary monetary policy.
c. BSP check the availability and cost of money in circulation and identify if it matches the
demand.
d. Only B and C
______ 2. What might be the possible reason explaining ‘why BSP adopts inflation
targeting?’ a. Increases accountability of the financial system and helps build credibility
b. Enables comprehensive approach to monetary policy
c. Allows mere focus on price stability
d. All of the above
______ 3. What might happen if The BSP increases policy interest rate?
a. It increases accountability of the financial system and helps build credibility.
b. Banks’ interest rates will follow the increase.
c. There will be lower cost of borrowing.
d. There will be an excessive demand for currency.
______ 4. The first pillar of the BSP focuses on ‘Price Stability,’ what does it imply?
a. All banks should help BSP make the price of goods and services stable.
b. They focus on preserving of purchasing power.
c. The BSP tries to lower cost of borrowing.
d. The citizens have the ability to buy goods and services in a reasonable price.
______ 5. Financial stability serves as the 2nd Pillar of the BSP. How can BSP sustain its
2nd mandate?
a. The BSP should sustain it through inflation targeting and monitoring.
b. The BSP should sustain it through banking supervision and regulation.
c. The BSP should sustain it through close monitoring of banks and other financial
institutions.
d. The BSP should sustain it through financial literacy campaign to government,
households, and firms.
______ 6. One of the supervising and regulating duties of the BSP is the surveillance to
financial institutions. For banks, one thing they check is the implementation of the so
called, AML Act, which stands for?
a. Anti-Money Laundering Act b. Anti-Money Loandering Act
c. Anti-Mobile Loandering Act d. Anti-Mobile Laundering Act
______ 7. What will happen when the BSP accomplishes its supervising and regulating
duties of financial institutions?
a. The country will have a stable and manageable inflation.
b. The BSP will have complied with Consumer Protection Laws and Safety and Soundness
of Financial Institutions.
c. The BSP will have good implementation of the AML Act since there is a close monitoring
of financial institutions.
d. The BSP will conduct a consistent and reliable financial literacy campaign to government,
households, and firms.
______ 8. What should the BSP do to ensure safe and efficient payments and settlements
of financial transactions?
a. It must comply with the Consumer Protection Laws and Safety and Soundness of
Financial Institutions.
Page 35
b. It must efficiently operate the PhilPaSS for transacting parties that directly benefit the
financial system.
c. It must implement the AML Act and conducts a close surveillance of financial
institutions. d. It must strengthen its efforts to financial literacy campaign for the
government, households and firms.
______ 9. Which of the following fall under the other functions of the BSP?
a. They maintain price stability.
b. They serve as custodian of official reserves.
c. They implement the AML Act and conduct a close surveillance of financial institutions.
d. They support financial education literacy campaign.
______ 10. In order to have efficient payments and settlement system, the BSP owns
the PhilPaSS. What does PhilPaSS stand for?
a. Philippine Pricing and Settlements System
b. Philippine Pricing and Settling System
c. Philippine Payments and Settling System
d. Philippine Payments and Settlements System
______ 11. BSP grants licenses and special authorities to the following ______________
a. pawnshops, mutual fund companies and schools.
b. banking institutions, other financial institutions, NBFI w/o quasi banking functions.
c. commercial banks, universal banks, thrift banks, cooperative banks, rural banks.
d. banking Institutions, other financial institutions, SEC, CDA, IC.
______ 12. This happens when the financial system is able to effectively distribute and
manage FUNDS between surplus (savers) and deficit units (spenders) and RISKS attendant
to the movement of funds and provision of services.
a. financial surplus b. financial stability c. efficient financial system d. price stability
______13. If the BSP maintains its credibility, then inflation expectations will ___________
a. allow greater focus on price stability. b. remain well-anchored.
c. promote transparency in monetary policy. d. become forward-looking.
______14. If the investment and consumer growth will be slower then, aggregate demand
growth will ___________ .
a. remain well-anchored. b. be slower too.
c. be manageable and ideal. d. become forward-looking.
______ 15. This refers to the action taken to manage the availability and cost of money and
credit to attain stable prices.
a. Inflation targeting b. Monetary Policy
c. Rediscounting d. Redress and Literacy
WHAT I HAVE LEARNED
ACTIVITY 18: Directions. Self-guide questions. Answer the following.
1. Explain why the same company can be a saver and user of funds.
2. What is the role of financial intermediaries in the financial system?
3. Explain the role of the banks in the financial system.
4. Explain the differences among common stocks, preferred stocks, and debt
securities.
WHAT I CAN DO
ACITIVITY 19: Directions. Answer the following:

A. Go to the Philippine Stock Exchange website (www.pse.com.ph) and look for the
historical prices of the following stocks for the last 30 trading days:
Based on the data that you have gathered, study
Philippine Stock Exchange the price movements of each stock. Which of
the five stocks is more volatile in terms of price
a. PLDT (stock code is TEL)
movements?
b. Globe Telecom (GLO)
c. Jollibee Foods Corporation
Page 36 (JFC)
d. San Miguel Corporation (SMC)
e. Aboitiz Power (AP)
B. Given that you have excess funds, where will you invest the funds? Why? Your
choices are time deposits, corporate bonds, and stocks. Consider risk-return trade-
off in your investment decision.
Rubrics for the Task:
4 3 2 1
NEATNESS Homework is in an Homework is in an Homework is in an Homework is

orderly packet and is orderly packet and is orderly packet with disorderly with many
incredibly neat, with no neat, with few tears or several tears and tears and smudges
tears or smudges smudges smudges
COMPLETI All the assigned work is Most of the assigned Some of the assigned Student did not do
ON complete work is complete work is complete the assigned work
TIMELINES Homework was received Homework was received Homework was Homework was
S on the scheduled date 3 day late received 7 days late received 8 or more
days late
ACCURACY All the answers are Most of the answers are Some of the answers Few to none of the
correct correct are correct answers are correct
WORK All steps for doing the Most steps for doing the Some steps for doing The student did not
SHOWN activities were activities were the activities were show any
meticulously shown meticulously shown meticulously shown work/activity
ACITIVITY 22: POST TEST. LESSON 1 AND 2.
A. True/False. Directions. Write True if the statement is correct and False if wrong. Write
your answer on a separate sheet of paper.
1. Primary and secondary markets are markets for short-term and long-term securities,
respectively.
2. Financial markets are intermediaries that channel the savings of individuals, businesses,
and government into loans or investments.
3. 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.
4. Holders of equity have claims on both income and assets that are secondary to the
claims of creditors.
5. Preferred stock is a special form of stock having a fixed periodic dividend that must be
paid prior to payment of any interest to outstanding bonds.
6. Commercial banks obtain most of their funds from borrowing in the capital markets.
7. Credit unions are the largest type of financial intermediary handling individual savings.
8. A mutual fund is a type of financial intermediary that obtains funds through the sale of
shares and uses the proceeds to acquire bonds and stocks issued by various business and
governmental units.
9. IPO stands for Interest and Principal Obligation.
B. Multiple Choice. Directions. Choose the letter of the best answer. Write the chosen
letter on a separate sheet of paper.
1. A ______ is one financial intermediary handling individual savings. It receives premium
payments that are placed in loans or investments to accumulate funds to cover future
benefits.
A. life insurance company B. commercial bank
C. savings bank D. credit union
2. The key participants in financial transactions are individuals, businesses, and
governments. Individuals are net ______ of funds, and businesses are net ______ of funds.
A. suppliers; users B. purchasers; sellers
Page 37
C. users; suppliers D. users; providers
3. Which of the following is not a financial institution?
A. A pension fund B. A newspaper publisher
C. A commercial bank D. An insurance company
4. A ______ is set up so that employees of corporations or governments can receive income
after retirement.
A. life insurance company B. pension fund
5. A ______ is a type of financial intermediary that pools savings of individuals and makes
them available to business and government users. Funds are obtained through the sale of
shares.
A. mutual fund B. savings and loans
6. Most businesses raise money by selling their securities in a.
A. a direct placement. B. a stock exchange.
C. a public offering. D. a private placement.
7. Which of the following is not a service provided by financial institutions?
A. Buying the businesses of customers
B. Investing customers’ savings in stocks and bonds
C. Paying savers’ interest on deposited funds
D. Lending money to customers
8. Government usually
A. borrows funds directly from financial institutions. C. is a net supplier of funds.
B. maintains permanent deposits with financial institutions. D. is a net demander of funds.
9. By definition, the money market involves the buying and selling of
A. funds that mature in more than one year. C. stocks and bonds.
B. flows of funds. D. short-term funds.
10.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
11.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.
References:
Business Finance, DepEd TG
Business Finance, Arthur S. Cayanan Daniel Vincent H. Borja
Business Finance, Second Edition, Roberto G. Medina
file:///D: BF%202020/Module/Other%20Resources/Business%20Finance.pdf
https://talentedge.com/articles/role-financial-management-organization/
https://www.investopedia.com/terms/c/capitalbudgeting.asp https://www.managementstudyguide.com/financial-planning.htm
https://www.investopedia.com/terms/w/workingcapitalmanagement.asp
ABEMAILA L. DELA CRUZ Cordova National High School
What I Know
ACTIVITY 23. LESSON 3. PRE-TEST.
Directions. Part 1. TRUE OR FALSE. Write T if the statement is correct and F if the
statement is incorrect.
________1. Financial Planning applies only to the area of business finance.
________2. Financial Planning is solely undertaken by the finance unit of an organization.
________3. Financial Planning is making a forecast on the financial operation of the
business.
________4. The vision and mission of the business are given importance in the formulation
of the strategic financial plan.
________5. The production schedule is prepared ahead of the sales forecast.
________6. Sales projection based on previous sales are considered final in making the
financial plan.
Page 38
________7. To determine the expected increase in current assets, the ratio of current assets
to sales is computed and then multiplied by the amount of change in sales.
________8. To analyze and interpret the projected financial statements, the business may
use the financial mix ratio.
________9. The first step in preparing a financial plan is to determine the expected cost and
expenses.
________10. The long-term financial plan need not be congruent to the vision of a business.
Part II. Directions. Analyze and solve the problem.
The January 31, 20x2 Statement of Financial Position of Shelpat Corporation follows:
Cash Php 8,000
Accounts Receivable (net of allowance for uncollectible accounts of Php 2,000) 38,000
Inventory 16,000
Property, Plant and equipment (net of allowance for accoumulated depreciation of 40,,000
Php 60,000)
Php 102,000
Accounts Payable Php 82,500
Owner(s) Equity 19,500
Php 102,000
Additional information: Sales are budgeted as follows:
February Php 110,000 March Php 120,000
Collections are expected to be 60% in the month of sale, 38% the next month, and 2%
uncollectible.
The gross margin is 25% of sales. Purchases each month are 75% of the next month’s
projected sales. The purchases are paid in full the following month.
Other expenses for each month, paid in cash, are expected to be Php 16,500. Depreciation
each month is Php 5,000
11. What are the budgeted cash collections for February 20x2?
a. Php 63,800 c. Php 101,800
b. Php 66,000 d. Php 104,000
12. What is the pro-forma income(loss) before income taxes for February 20x2?
a. Php (3,700) c. Php 3,800
b. Php (1,500) d. Php 6,000
13. What is the projected balance in accounts payable on February 20x2?
a. Php 82,500 c. Php 90,000
b. Php 86,250 d. Php 106,500
LESSON 3 FINANCIAL INSTITUTIONS, FINANCIAL

INSTRUMENTS, AND FINANCIAL MARKET
Page 39 What’s New

One of the most important concepts in the various areas of finance is financial
planning. Financial Plan is a document containing a person's current money situation and
long-term monetary goals, as well as strategies to achieve those goals.
STEPS IN PLANNING
The following steps can be followed in planning.
1. Set goals or objectives. The goals of a company can be divided into short-term,
medium-term, and long-term goals.
2. Identify Resources. Resources include production capacity, human resources who will
man the operations and financial resources.
As you begin your planning, you should know what is available to you. A
Resource Plan identifies the physical resources required to complete a project. It
lists each of the resource types (such as labor, equipment, and materials) and
how many of each you need. If you would like to define a comprehensive Resource
Plan for your project, take the following three steps.
First, identify the different types of resources needed to complete the project.
You then need to quantify the amount of each type of resource required. And
finally, you need to schedule the consumption of each resource within the project.
Let us describe each step in a little more detail.
Step 1: List the resource required
You should start by listing the resources required to complete the project.
● Labor. Identify all the roles involved in performing the project,

including all full-time, part-time and contracting roles.
● Equipment. Identify all of the equipment involved in performing the
project. For instance, this may include office equipment (e.g. PCs,
photocopiers, and mobile phones), telecommunications equipment (e.g.
cabling, switches) and machinery (e.g. heavy and light machinery).
● Materials. Identify all of the non-consumable materials to complete
project activities such as materials required to build physical
deliverables (e.g. wood, steel and concrete).
● Hardware/software. Identify if applicable.
Step 2: Estimate the number of resources required
The next step is to estimate the number of each resource.
● Labor, estimate how many hours you need per role

● Equipment, estimate how many pieces of equipment needed
● Materials, estimate how much material, in terms such as square

meters, kilograms, number of units, etc.
As much as possible, also indicate the date the resources are needed
and the consumption rate per day, week or month.
Step 3: Construct a resource schedule
You have now collated all the information required to build a detailed
Resource Schedule. Create a resource schedule which specifies the:
● Resources required to complete the project

● Timeframes for the consumption of each resource
Page 40
● Quantity of each resource required per week/month
● Total quantity of resource consumed per week/month
● Assumptions and constraints identified
3. Identify goal-related tasks. In this step, management must figure out how to achieve
an objective.
For example, if the target for this year is to increase sales by 15%, tasks should be
considered to achieve this goal. One task is to hire more sales agents if the management
believes that number of sales agents it has is not enough to support this 15% increase in
sales. It is also possible that the number of sales agents is has is already enough but many
of them must improve their selling skills. So, the task that needs to be done is to provide
training that will improve the skills of the sales agents.
4. Establish responsibility centers for accountability and timeline. If tasks are

already identified to achieve goals, the next important step to do is identify which
departments should be held accountable for this task. For example, if the goal is to achieve
a 15% increase in sales, you may immediately jump into the conclusion that this should be
the responsibility of the head of the sales and marketing department. While the sales
figures may have to be delivered by the sales and marketing department, there should be
other departments who should take responsibility in achieving this goal. The production
department must ensure that there are enough units to sell and are of good quality.
Otherwise, if the products are defective, the sales and marketing department will have a
more difficult time selling the products. Also, the credit committee which approves credit
terms to customers must be efficient in evaluating customers’ applications so that sales
transactions can be processes immediately.
There must also be a timeline for the activities, especially for those activities which are not
normally done on a daily basis such as providing training to sales agents or hiring
additional agents if that is one of the tasks that needs to be performed.
DEFINITION OF RESPONSIBILITY CENTER
A responsibility center is a part or subunit of a company in which the manager has

some degree of authority and responsibility. The company's detailed organization chart is a
logical source for identifying responsibility centers. The most common responsibility centers
are the numerous departments within a company.1
There must also be a timeline for the activities, especially for those activities which
are not normally done on a daily basis such as providing training to sales agents or hiring
additional agents if that is one of the tasks that needs to be performed.
Example of timeline:
"What is a responsibility center? | AccountingCoach." https://www.accountingcoach.com/blog/what-is-a-

responsibility-center. Accessed 23 Jul. 2020.
Page 41
5. Establish an evaluation system for monitoring and controlling. The management
must establish a mechanism which will allow plans to be monitored. This can be done
through quantified plans such as budgets and projected financial statements.
In a business or other organization, the monitoring and evaluation system

determines whether the organization is using its resources efficiently and effectively. The
system collects information, evaluates project performance and compares it to goals and
plans for the company and its departments. The better your monitoring and evaluation
system, the more effective and competitive your organization can become. Having a good
monitoring and evaluation system starts with developing the system that's most appropriate
for your organization.
The Control Plan is a document that describes the actions (measurements,

inspections, quality checks or monitoring of process parameters) required at each phase of
a process to assure the process outputs will conform to pre-determined requirements. In
simpler terms, the Control Plan provides the operator or inspector with the information
required to properly control the process and produce quality parts or assemblies. It should
also include instructions regarding actions taken if a non-conformance is detected. The
Control Plan does not replace detailed operator instructions. In some cases the Control Plan
is used in conjunction with an inspection sheet or checklist. The Control Plan helps assure
quality is maintained in a process in the event of employee turnover by establishing a
standard for quality inspection and process monitoring. Control Plans are living documents
that should be periodically updated as the measurement methods and controls are
improved throughout the life cycle of the product.
Control Plan Template
6. Determine contingency plans. In planning, contingencies must be considered as well.

Budgets and projected financial statements are anchored on assumptions. If these
assumptions do not become realities, management must have alternative plans to minimize
the adverse effects on the company.
A business contingency plan is a course of action that your organization would take if an
unexpected event or situation occurs. Sometimes a contingency can be
positive—such as a surprise influx of money—but most often the term refers
to a negative event that affects an organization’s reputation, financial health
or ability to stay in business. These include a fire, flood, data breach, major
network failure and more.
What is It
ACTIVITY 24: Self-Test Questions
1. Why is planning important in the success of an organization?

2. How is controlling related to planning?
3. Enumerate the different steps in planning and discuss each briefly?
4. What is the importance of quantifying a plan?
Page 42
What’s New
Budget Preparation
For this chapter, the following budgets will be prepared:
1. Sales Budget
2. Production Budget
3. Operating Budget
4. Cash Budget
In addition, projected financial statements will be made.
1. SALES BUDGET
The sales budget contains an itemization of a company's sales expectations for the
budget period, in both units and dollars.
The most important financial statement account in forecasting is sales because

almost all other accounts in the financial statements are affected by sales. If you analyze
the statement of profit or loss, the accounts such as cost of sales, gross profit, and variable
operating expenses are based on the sales figure. To a large extent, depreciation expense
and income tax expense are also based on sales. The decision of management to expand
production capacity is based on projected increase in sales. With the expansion in capacity
comes higher depreciation expense. Higher income tax expense is expected with higher
sales, if most of the operating expenses and cost of sales will remain unchanged as a
percentage of sales.
Looking at the accounts in the statement of financial position, almost all of them are
also correlated with sales. The amount of cash that a company maintains, its accounts
receivable and inventories, property, plant and equipment, and trade payables are affected
by sales.
Given the importance of sales forecast, attention must be given to it and must be
supported by reasonable assumptions. To have a set of reasonable assumptions on sales
there must be a good understanding of the industry where the company operates, enough
historical financial data to establish trend, and knowledge about corporate plans such as
expansion of product offerings or expansion into other geographical areas.
In preparing sales budget, external and internal factors must be considered. The following
external factors should be investigated in setting sales forecast assumptions: gross
domestic product (GDP) growth rate, interest rate, foreign exchange rate, income tax rates,
inflation, competition, economic crisis, regulatory environment, and political crisis. The
degree of importance that will be assigned to each factor depends on the nature of the
business. Some of these factors are more important for some companies as compared to
others. For example, a depreciating local currency is not welcomed by a company which
relies heavily on imported materials for its production.
For internal factors, the following factors are considered: pricing promotion
activities, distribution area/outlet coverage, production capacity, human resources,
management style of managers, reputation, and network of the controlling stockholders,
and financial resources of the company.
Example of Sales Budget:
Page 43
2. PRODUCTION BUDGET
Production budget is a schedule which provides information regarding the number
of units that should be produced over a given accounting period based on the expected
sales and targeted level of ending inventories.
Required Production in Units = Expected Sales + Target Ending Inventories -

Beginning Inventories
DCD Company Quarter

Production Budget (In Units)
For the Year Ending December 31, 2015 1 2 3 4 Year
Projected Sales 20,000 22,000 25,000 30,000 97,000
Target Level of Ending Inventories 3,000 3,500 5,000 3,500 3,500
Total 23,000 25,500 30,000 33,500 100,500
Less: Beginning Inventories 2,500 3,000 3,500 5,000 2,500
Required Production 20,500 22,500 26,500 28,500 98,000
Following the illustrative example, the required production in the first quarter is
20 ,500 units. Note that the ending inventory level of the present quarter will be the
beginning inventory level of the next quarter. Note also that the target level of ending
inventories of the fourth quarter is the same as that for the year while the beginning
inventory of the first quarter is the same as the beginning for the year.
From the number of units that is expected to be produced, the cost of production
can be estimated especially if the company has developed standard production cost per
unit. This information can also be used then in preparing projected financial statements
and cash budgets.
3. OPERATING BUDGET
Operations budget refers to the variable and fixed costs needed to run the operations of the
company but are not directly attributable to the generation of sales.
Examples of this are the following: • Rent payments • Wages and Salaries of selling and
administrative personnel • Administrative Costs • Travel and representation expenses •
Professional fees • Interest Payments • Tax Payments
4. CASH BUDGET
The cash budget, or cash forecast, is a statement of the firm’s planned inflows and
outflows of cash. It is used by the firm to estimate its short-term cash requirements, with
Page 44
particular attention being paid to planning for surplus cash and for cash shortages (Gitman
& Zutter, 2012).
To find out if the company will be in need of cash in the coming accounting period
and to have an estimate of how much is needed and at what particular period that need will
arise, a cash budget must be prepared. A cash budget shows the expected cash receipts
and disbursements for an accounting period. It can be prepared on a monthly or quarterly
basis for a year.
The cash budget has the following parts:
1. Cash receipts. This includes collections from receivables, proceeds from loans, or
issuance of new shares of stocks and advances from stockholders.
2. Cash Disbursements. This section includes payments to suppliers and other service
providers, payments for loans, and cash dividends.
3. Net cash flow for the period. This is computed by deducting cash disbursements
from the collections for the period.
4. Target cash balance. No business can operate without cash. This target cash
balance is the amount of cash that management wants to maintain at all times given
its present level of operations, stability of cash flows, and the macroeconomic and
political conditions.
5. Cumulative excess cash or funding requirements. This is the most important part of
the cash budget where the possible funding requirements are shown on a
cumulative basis.
To prepare a cash budget, assumptions must be made. These assumptions must be based
on the historical performance of the company and plans of the management.
Illustrative example:
Projected Financial Statements
1. Projected financial statements take into account past financial trends, market conditions,
possible changes and management expectations to arrive at a future financial picture. For
the purpose of this chapter, the financial statement method will be used in projecting
financial statement. Based on this approach, the following steps will be followed:
2. Forecast sales. In making financial projection, always start with the statement of
profit or loss and the most important account to forecast first is sales.
3. Forecast cost of sales and operating expenses. For the cost of sales, the average cost
of sales over the historical data analyzed can be used. If there are plans to improve
cost efficiency, then such improved cost efficiency can also be considered.
4. For the operating expenses, try to figure out which are variable and fixed. Variable
operating expenses include depreciation of office building, salaries, and some
maintenance expenses.
Page 45
5. Forecast net income and retained earnings. To forecast net income, there should be
information on income taxes and how much financing cost a company has and the
payment terms for these loans. There should also be assumptions on the interest
rates for the projection period.
6. Determine balance sheet items that will vary with sales or whose balances will be
highly correlated with sales. Balance sheet items that may vary with sales or will be
highly correlated with sales are cash, accounts receivable, inventories, accounts
payable, and accrued expenses payable.
7. Determine payment schedule for loans. The payment schedule for loans can be based
on the disclosures provided in the notes to financial statements or the plans of
management on how to pay the loans if no details about payment terms are
provided in the notes to financial statements.
8. Determine External Fund Needed (EFN). This amount is more of a balancing figure or
a squeeze figure. The balance sheet has to balance. Therefore, after assumptions are
made to project different balance sheet accounts, the projected statement of
financial position has to balance.
The formula for the EFN is shown below:
EFN = Change in Total Assets - (Change in Total Liabilities + Total Change in

Stockholders’ Equity)
If the EFN is put on the liabilities and stockholders’ equity and the amount is
positive, this means that there will be additional financing. However, if the amount is
negative, this means that there will be excess cash. Both negative and positive balances can
be disposed later by management.
9. Determine how external funds needed will be financed. Once EFN is computed, the
management decides how to finance it. It can all be through debt or equity or a
combination of debt and equity.
ILLUSTRATIVE EXAMPLE:
Before the end of 2014, the president of JSC Foods Corporation had instructed the Vice
President for Finance to prepare the 2015 projected financial statements based on their
most recent planning workshop. Based on the results of the planning workshop, the
following assumptions were prepared for the 2015 projected financial statements.
a. Sales are expected to increase by 10% in 2015 from the 2014 sales level. This growth
assumption is based on the assessment of the external and internal factors related to
JSC Foods Corporation and the historical growth of the company. The company’s
sales grew by 10.4% annually from 2010 to 2014.
b. The following financial statement accounts are expected to vary with sales based
on the 2014 financial statements:
i. Cost of sales
ii. Cash
iii. Trade accounts receivable
iv. Inventories
v. Other current assets
vi. Trade accounts payable
Variable operating expense is 7.5% of sales. Depreciation expense is 10% of
the gross beginning balance of property, plant and equipment. As of December 31,
2014, the gross balance of PPE is Php 26,000,000. For January 2015, Php
5,000,000 new PPE will be acquired. It is the policy of the company that PPE
acquired in the first half of the year will be depreciated for one full year.
c. As of December 31, 2014, there are two long-term loans. Both have annual
interest rate of 8%.
Page 46
i. The first loan will mature on June 30, 2015 and the remaining principal
balance to be paid on June 30, 2015 is Php 1,250,000.
ii. The second loan amounting to Php 3,000,000 which was incurred on
December 31, 2014 is paid at the rate of Php 500,000 principal balance
every June 30 and December 31.
New loans of Php 3,500,000 will be incurred on December 31, 2015

payable at the rate of Php500,000 every June 30 and December 31. Annual
interest rate is expected at 8%.
d. Other noncurrent assets and other current liabilities will remain unchanged.
e. Income tax rate is 30% of the income before taxes. Seventy-five percent of the
income tax expense will be paid in 2015 while the balance will be paid in 2016.
f. Cash dividends of Php2,000,000 will be paid for 2015.
Found in the Tables are the projected financial statements of JSC Foods Corporation in
2015.
JSC Foods Corporation Operating Expenses 7,431,340

Projected Statement of Profit or Loss
Operating Income 4,170,875
For the Year Ending December 31,
2015
Interest Expense 270,000
Net Sales 57,751,194

Income before Taxes 3,900,875
Cost of Sales 46,148,979

Taxes 1,170,262
Gross Profit 11,602,215

Net Income 2,730,613
This is how the cost of sales was computed:

Cost of Sales Percentage in 2014 = (41,954,730 / 52,501,085) x 100%
Cost of Sales Percentage in 2014 = 79.91%
Projected Cost of Sales in 2015 = 79.91% x 57,751,194
Projected Cost of Sales in 2015 = 46,148,979
The operating expenses were computed as follows:

Variable (7.5% x Sales of 57,751,194 4,331,340
Fixed (Depreciation Expense) 3,100,000
Total Operating Expenses 7,431,340
Depreciation expense is 10% of the beginning balance of gross PPE of Php 26 million and
the new acquisition of PPE worth Php 5 million.
The interest expense for 2015 was computed as follows:
First Loan: Interest from January 1 to June 30, 2015 50,000

1,250,000 x 8% x (6months/12months)
Second Loan: Interest from January 1 to June 30, 2015 120,000
Page 47
(1,000,000 / 2,000,000) x 8% x (6months / 12 months)
Interest from July 1 to December 31, 2015

(500,000 / 2,000,000) x 8% x (6months / 12 months) 100,000
Total Interest Expense for 2015 270,000

Note that the current portion of long-term debt of Php 1 million is added to long-
term portion of Php 2 million for the second loan to determine the interest expense for the
first six months of 2015. The year has to be divided into two because there is a principal
payment of Php 500,000 on June 30, 2015 which will reduce the principal balance starting
July 1, 2015. The interest expense will also go down for the second half of 2015 because the
principal balance has gone down. The next table shows the projected statement of financial
position for 2015.
JSC Foods Corporation Current Liabilities

Projected Statement of Financial Position
December 31, 2015 Notes Payable (EFN) 479,998
Assets
Trade Payables 5,555,665
Current Assets
Income Taxes Payable 292,566
Cash 1,166,574
Current Portion of Long-Term Debt 2,000,000
Receivables 2,529,502
Other Current Liabilities 85,600
Inventories 5,336,210
8,413,828
Other Current Assets 1,155,024
Noncurrent Liabilities
Total Current Assets 10,187,311
Long-term Debt, Net of Current3,500,000
Noncurrent Assets Portion
Property, Plany, and Equipment, Net 14,100,000 Total Liabilities 11,913,828
Other Noncurrent Assets 835,689 Stockholders’ Equity
Total Noncurrent Assets 14,935,689 Capital Stock 8,000,000
Total Assets 25,123,000 Retained Earnings 5,209,171
Total Stockholders’ Equity 13,209,171
Liabilities and Equity Total Liabilities and Stockholders’ 25,123,000

Equity
This is how the following balance sheet accounts were computed:
Cash
Cash as a Percentage of Sales in 2014 = (1,062,527/52,501,085)x100%
Cash as a Percentage of Sales in 2014 = 2.02%
Projected Cash in 2015 = 2.02% x 57,751,194
Projected Cash in 2015 = 1,166,574
Accounts Receivable
Accounts Receivable as a % of Sales in 2014 = (2,300,500 / 52,501,085) x 100%
Accounts Receivable as a % of Sales in 2014 = 4.38%
Projected Accounts Receivable in 2015 = 4.38% x 57,751,194
Projected Accounts Receivable in 2015 = 2,529,502
Inventories
Page 48
Inventories as a % of Sales in 2014 = (4,849,403 / 52,501,085) x 100%
Inventories as a % of Sales in 2014 = 9.24%
Projected Inventories in 2015 = 9.24% x 57,751,194
Projected Inventories in 2015 = 5,336,210
Other Current Assets

Other Current Assets as a % of Sales in 2014 = (1,050,000 / 52,501,085) x 100%
Other Current Assets as a % of Sales in 2014 = 2%
Projected Other Current Assets in 2015 = 2% x 57,751,194
Projected Other Current Assets in 2015 = 1,155,024
Accounts Payable
Accounts Payable as a % of Sales in 2014 = (5,050,810 / 52,501,085) x 100%
Accounts Payable as a % of Sales in 2014 = 9.62%
Projected Accounts Payable in 2015 = 9.62% x 57,751,194
Projected Accounts Payable in 2015 = 5,555,665
Current portion of Long-term Debt and Long-term Portion of Long-Term Debt.
For the 2015 projected statement of financial position, this will be the breakdown of the
remaining balances of long-term loans as to current portion and long-term portion as of
December 31, 2015.
Loan Current Long-term Total

Portion Portion
Loan of Php 3 million incurred on December 31, 1,000,000 1,000,000 2,000,000

2014
Loan of Php 3.5 million to be incurred on 1,000,000 2,500,000 3,500,000

December 31, 2015
Total 2,000,000 3,500,000 5,500,000
1. External funds needed (EFN) is just a balancing figure. Below is the formula for
computing EFN.
EFN = Change in Total Assets - (Change in Total Liabilities + Total Change in
Stockholders’ Equity) EFN = 2,824,980 - (1,614,369 + 730,612)
EFN = 479,998
Refer to the table below for the details of the computation of EFN in 2015.
2015 Balances 2014 Change

w/o EFN Balances
Total Assets 25,123,000 22,298,020 2,824,980
Total Liabilities 11,433,830 9,819,461 1,614,369
Total Stockholders’ Equity 13,209,171 12,478,559 730,612
Page 49
EFN 479,998
JSC Foods Corporation

Projected Statement of Cash Flows
For the Year Ending December 31, 2015
Cash Flows from Operating Payment of Cash Dividends (2,000,000)

Activities
Short-term Notes Payable (EFN) -
Income before Taxes 3,900,875
Loans, Net of Payments 1,250,000
Adjustments:
Cash Flows from Financing (750,000)
Depreciation 3,100,000 Activities
Changes in the following Net Change in Cash (375,951)

accounts:
Cash, Beginning 1,062,527
Decrease (increase) in Accounts (229,002)
Receivable Cash, Ending 686,576
Decrease (increase) in (486,906)

Inventories
Decrease (increase) in Other (105,024)

Current Assets
Increase (decrease) in Accounts 504,855

Payable
Increase (decrease) in Other -

Current Liabilities
Income Taxes paid (1,310,748)
Cash Flows from Operating 5,374,049

Activities
Cash Flows from Investing

Activities
Acquisition of PPE (5,000,000)
Acquisition of Other Noncurrent -

Assets
Cash Flows from Investing (5,000,000)

Activities
Cash Flows from Financing

Activities
Page 50
WORKING CAPITAL MANAGEMENT
Working Capital
Working capital, also known as net working capital (NWC), is the difference between
a company’s current assets, such as cash, accounts receivable (customers’ unpaid bills) and
inventories of raw materials and finished goods, and its current liabilities, such as accounts
payable. Net operating working capital is a measure of a company's liquidity and refers to
the difference between operating current assets and operating current liabilities. In many
cases these calculations are the same and are derived from company cash plus accounts
receivable plus inventories, less accounts payable and less accrued expenses.2
The management of these accounts, both the current assets and current liabilities,
is important because these accounts deal with the day-to-day operations of the business. If
the company fails in the management of these accounts, there will be no expansion to talk
about or this can lead to the closure of the company.
Good management of working capital accounts allows the company to pay maturing
obligations on time. This helps in developing good business relationships with suppliers
and other vendors such as utility companies. Good management of working capital
accounts also relieves managers of unnecessary stress and gives them more executive time
to improve the business operations.
Efficient management of working capital accounts can improve the earnings of the
company. This improvement in earnings can come from savings in financing costs and
minimizing possible impairment losses from inventories.
Working Capital Financing Policies
There are three types of working capital financing policies management can choose
from. These are:
1. Maturity-matching working capital financing policy

2. Aggressive working capital financing policy
3. Conservative working capital financing policy
Working capital financing policy basically deals with the sources and the amount of
working capital that a company should maintain.
A firm is not only concerned about the amount of current assets but also about the
proportions of short-term and long-term sources for financing the current assets. There are
several working capital investment policies a firm may adopt after taking into account the
variability of its cash inflows and outflows and the level of risk. 3
"Working Capital (NWC) Definition - Investopedia." 28 Apr. 2020,

https://www.investopedia.com/terms/w/workingcapital.asp. Accessed 28 Jul. 2020.
"Working Capital Investment Policies (Explained With Diagram)."

https://www.yourarticlelibrary.com/financial-management/working-capital/working-capital-investment-
policies-explained-with-diagram/44102. Accessed 1 Aug. 2020.
Page 51
Working capital requirements change with the volume of
business operations. As the sales increase, working capital
requirements also increase. To put in more simple terms, a company
needs Php 10 million in working capital to support an Annual Sales of
Php 50 million. If the sales increase to Php 100 million, will the Php 10
Million working capital be enough? Most likely no, because with Php
100-million sales, there will be more cash needed for the operations,
more accounts receivable; and if the company is a trading or a manufacturing company,
more inventories.
During the year, sales are not the same every month. This is why companies have
slack season and peak season. If a company has annual sales of Php 50-million, chances
are these sales are not generated uniformly throughout the year. Given this situation, the
net working capital requirements during the slack season are lower than those during the
peak season. The net working capital needed to support an operation during the slack
season represents the permanent working capital requirements while the additional net
working capital needed during the peak season represents the temporary capital
requirements.
All of these working capital financing policies have something to do with financing
permanent working capital and temporary working capital requirements.
Maturity-Matching Working Capital Financing Policy
As per this approach, fixed and permanent current assets are

financed through long-term sources and fluctuating current assets are
financed through short-term sources.
This policy is a medium risk proposition and requires a good

amount of attention. For example, if a bank loan is due to be paid
after six months, the company will ensure that sufficient amount of
cash will be available to repay the loan on the date of maturity even
though it may or may not currently have sufficient cash.
Aggressive Working Capital Financing Policy
The aggressive approach is a high-risk strategy of working

capital financing wherein short-term finances are utilized not only to
finance the temporary working capital but also a reasonable part of
the permanent working capital. In this approach of financing, the
levels of inventory, accounts receivables and bank balances are just
sufficient with no cushion for uncertainty. There is a reasonable
dependence on the trade credit.4
Why do managers of some companies adopt this policy? It is because long-term

sources of funds have higher cost as compared to short-term sources of financing. By
financing some of the permanent working capital requirements with short-term sources of
financing, financing cost is minimized which in turn, improves net income. By having this
financing policy, the company is increasing the probability that it will not be able to meet
maturing obligations. In finance, we call this default risk. Embracing this policy increases
default risk.
Conservative Working Capital Financing Policy
"Aggressive Approach to Working Capital Financing ...." 25 Mar. 2019,

https://efinancemanagement.com/working-capital-financing/aggressive-approach-to-working-capital-
financing. Accessed 1 Aug. 2020.
Page 52
Conservative approach is a risk-free strategy of working capital financing. A
company adopting this strategy maintains a higher level of current assets and therefore
higher working capital also. The major part of the working capital is financed by the long-
term sources of funds such as equity, debentures, term loans etc. So, the risk associated
with short-term financing is abolished to a great extent.
In the conservative approach, fixed assets, permanent working capital and a part of
temporary working capital is financed by long-term financing sources and the remaining
part only is financed by short-term financing sources. Thus, the primary objective of
working capital management is ensured.5
Why do managers of some companies adopt this working capital financing policy?
There are many possible reasons, but it can also be management style. Top management
does not probably want to be stressed too much so that they can concentrate their efforts
on other important concerns that will benefit the company. Maybe, the management would
also like to preserve their financial flexibility. This means that if the company is
conservatively financed and good investment opportunities come along, it will be easier for
the company to raise additional funds, be it in the form of debt financing or equity
financing.
Management of Working Capital Accounts
Cash is the most liquid asset of a company, but it is also the asset most vulnerable to theft.
Because of this, there must be proper internal controls over cash that need to be observed
to safeguard the asset.
The following internal controls over cash are suggested.
1. Separating cashiering function from the recording or accounting function.

2. Issuing official receipts for collections and summarizing collections in a daily
collection report.
3. Depositing collections.
4. Adopting the check voucher system for payments.
Primary and secondary Reasons for Holding Cash
The primary reasons for holding cash are for transaction and compensating balance
purposes. A company needs cash to pay for the following transactions: purchase of
inventories, salaries, utility services, loans, dividends, and other transactions that affect the
business. Compensating balances have something to do with having deposit accounts and
loans with banks. The minimum balance that a bank requires to keep the deposit accounts
and loans with banks. The minimum balance that a bank requires to keep the deposit
accounts with them is an example of compensating balance. If a company incurs a loan, the
bank will also require a minimum amount of deposit that has to be maintained with that
bank. This is another example of a compensating balance.
The secondary reasons for holding cash are for precautionary and speculative
purposes. If there is an economic crisis, management may want to maintain a higher level
of cash for emergencies and to serve as buffer for any possible slowdown in business
activities. A company can also maintain cash for speculative purposes. When there are
economic and political crises, a lot of things can be put on sale. Valuation of real estate
properties and stocks traded in the stock exchanges can go down to unreasonable levels
5
"Conservative Approach to Working Capital Financing." 23 Mar. 2019,

https://efinancemanagement.com/working-capital-financing/conservative-approach-to-working-capital-
financing. Accessed 1 Aug. 2020.
Page 53
because owners just want to get rid of them. For people with cash, these periods are perfect
opportunities to buy and invest.
Accounts Receivable
Management of accounts receivable is important. Imagine a situation where your

company cannot collect its accounts receivable. If this situation always happens, start
looking for another job. If your company cannot collect its accounts receivable, eventually it
will have to shut down its operations.
How can management minimize the potential loss from uncollected accounts
receivable? Minimizing loss from exposure to accounts receivable starts with its origination.
This means the customer who is given credit terms must be credit worthy. In any case, the
following 5Cs of credit can be used in the credit evaluation.
1. Character. This refers to the integrity and reputation of the customer.

2. Capacity. This refers to the capacity to pay.
3. Capital. This refers to the amount of capital invested by the owner or in this case,
the customer, into his company.
4. Collateral. This can be guarantees or collateral provided by the customer to support
his exposure with the company.
5. Condition. This one describes the environment where the company operates which
may affect the ability of a customer to pay.
Management of accounts receivable should also include having a good billing and collection
system. A good system should lead to the sending of Statements of Account to customers
on time. Follow-ups through phone calls or any form of gentle reminders should be made if
customers fail to pay on time.
Another control measure

that management can consider
is aging of accounts receivable.
An accounts receivable aging
report is a record that shows the
unpaid invoice balances along
with the duration for which
they’ve been outstanding.6 First,
management must compute
days’ receivable or average
collection period. Analysis
should be made if the average
collection period is getting
longer.
Inventories
Inventory is the term for the goods available for sale and raw materials used to
produce goods available for sale. Inventory represents one of the most important assets of a
business because the turnover of inventory represents one of the primary sources of
revenue generation and subsequent earnings for the company's shareholders.7
"What Is Accounts Receivable Aging Report and How to Use It."

https://www.freshbooks.com/hub/reports/accounts-receivable-aging-report. Accessed 1 Aug. 2020.
Page 54
Not managing inventories properly can lead to substantial amount of impairment
losses especially for the companies which deal with highly perishable products such as
those dealing with fruit and vegetables or fish and meat products.
The following are the internal controls that should be considered by management to
safeguard inventories:
1. Separating custodial functions from the recording functions. Just like cash, this
internal control measure is also true for inventories and for other types of assets.
2. Aging of inventories. Aging of inventories allows management to identify the fast-
moving items and the slow -moving items.
3. ABC Analysis. This approach classifiies inventories into three categories: A,B,and C.
Inventories which are considered most important are classifies as A; those at the
middle are classified as B; and the least important are classified as C. The main
reason for classifying them is to provide the kind of security due to each category of
inventories.
Trade Accounts Payable
Accounts payable (AP) is an account within the general ledger that represents a
company's obligation to pay off a short-term debt to its creditors or suppliers. 8
Dealing properly with suppliers is a good success variable in doing business. While
it is true that increasing days’ payable will lead to a lower cash conversion cycle and more
operating cash flows for the company, as a customer, it is not proper to simply delay
payments. Try to follow the credit terms and if the management wants to have longer
payment terms, this has to be discussed and agreed upon between two parties. If the
supplier is happy with a customer, chances are, requests of this nature can be
accommodated.
ABSTRACT
This module covered two major topics: planning and working capital management.
The first section discussed the importance of planning to the success of an organization,
how planning is done, and why plans should be quantified. Detailed discussions followed
on how sales budget, production budget, and projected financial statements are prepared.
The significance of sales is emphasized in all these forecasting activities. This is the reason
why sales forecast has to be supported by reasonable assumptions which cover both
external and internal variables.
The second section of the chapter discussed working capital management: its
composition and its relevance to the day-to-day operations of a company. The three working
capital financing policies describe how permanent and temporary working capital financing
policies describe how permanent and temporary working capital requirements should be
funded. The implications of the choice of working capital financing policy on profits and
default risks were likewise covered. The last part of this section described the management
of cash, accounts receivable, inventories and payables. In the discussion of these accounts,
the separation of custodial and recording functions was emphasized to safeguard the
assets.
"Inventory Definition - Investopedia." 5 Jul. 2020, https://www.investopedia.com/terms/i/inventory.asp.

Accessed 1 Aug. 2020.
"Accounts Payable (AP) Definition - Investopedia." 26 May. 2020,

https://www.investopedia.com/terms/a/accountspayable.asp. Accessed 1 Aug. 2020.
Page 55
What is It
ACTIVITY 25: Multiple Choice. Directions: Encircle the correct answer in each of the questions below.
1. In what sequence would the following budgets be prepared? 1. sales budget 2. inventory
budget 3. Production budget 4. purchases budget 5. cash budget
a. 4,5,1,2,3 b. 2,3,4,5,1 c. 1,2,3,4,5 d. 3,4,5,1,2
2. The main computation made in this budget is: Sales Target set by management divided
by sales per unit.
a. purchase budget b. production budget
c. sales budget d. inventory budget
3. The production department is preparing their budget for the year. Currently they are
identifying how much raw materials are needed for this year, what budget is the
production department preparing?
a. purchase budget b. production budget
c. sales budget d. inventory budget
4. What budget is this computation referring to?
Budgeted Sales(units) 10,000
20% set stock reserve 2,000
15% inventory last period 1,500
Budgeted inventory 10,500
a. purchases Budget b. Sales Budget c. Inventory Budget d. Production
Budget
5. The production department is preparing their budget for the year. Currently they are
identifying how many productions runs they need to do this year. What budget is the
production department preparing?
a. Production Budget b. Inventory Budget c. Sales Budget d. Purchase Budget
ACTIVITY 26. Directions: Compute the projected collection, sales budget, production
budget and cash budget and answer the questions below the given data.
1. Mel & James Inc. is doing their annual budgeting. They have the following information:
Given this data:

Average sale past 5 years $ 1,000,000
Sales target this year 10% increase from 5 yr. average sales
Sales price/unit $ 10.00
Safe Stock % 20% of total inventory
Raw Material/ unit 3 pcs Cost per raw material $1.50
a. How much is the budgeted sales for this year?

b. How many units does Mel and James need to sell?
c. How many units does Mel and James need to produce?
d. How many raw material units does Mel and James need?
e. How much is the projected cost of raw materials?
2. Rhylinchai Corp has the following information:
Projecteed Monthly Sales $ 300,000

Cash Collection % in 1st Month 40 %
Cash Collection % in 2nd Month 35%
Cash Collection % in 3rd Month 25%
a. How much cash will Rhylinchai Corp collect in the 1st Month?
b. How much cash will Rhylinchai Corp collect in the 3rd Month?
Page 56
3. Enjean Corp has the following information:
Projected Monthly Sales $ 500,000

Projected Monthly Cost of Goods Sold $ 250,000
Projected Selling and Admin Expenses $ 50, 000
a. How much will HowtJean Corp have as their projected income statement?
b. How much is HowtJean Corp profit margin based on its projected income statement?
4. Directions: Fill in the missing value of the following tables

ABC RESTAURANT & RESORT
Projected Statement Profit and Loss
For the year Ending December 31, 2017 - 2019
ACTIVITY 27. Directions: Write T if the statement is correct and F if it is incorrect.
________1. The process of planning future business actions and expressing those plans in a
formal manner, usually in monetary terms, is called budgeting.
________2. The budgeting process can be used to promote a positive effect on employees'
attitudes, but it can also yield a negative one.
_______3. The task of preparing the budget normally is the responsibility of one department,
the controller's department, or a department of one of the high-level managers.
_______4. Most successful businesses generally prepare their budgets from 'the top down'.
These budgets are tightly controlled by upper management.
_______5. Since the budget period normally coincides with the accounting period, budgets of
less than one year or greater than one year are not normally prepared.
_______6. When a company adds one increment of time to its budget period as one
increment of time expires, it is practicing continuous budgeting.
_______7. The cash budget is a financial budget.
_______8. The operating budgets provide all the information necessary for the preparation of
the budgeted income statement.
_______9. Normally, the cash budget is the first sub budget prepared in the process of
developing the master budget.
_______10. A quantity of merchandise or materials that is held as inventory to compensate
for unexpected demand or delays in receipts from suppliers is called the just-in-time
inventory stock.
ACTIVITY 28. Directions. Self-Test Questions

1. Why is management of working capital important?
2. Enumerate the three working capital financing policies and describe each briefly.
3. Identify four internal control measures for cash
4. Differentiate primary reasons from the secondary reasons for holding cash. Provide
an example for each.
5. What are the 5Cs of credit?
6. Why is aging of accounts receivable important?
7. Why aging of inventories important?
8. What is ABC analysis in inventory management?
9. Why is it important to keep good relationship with suppliers?
Page 57
ACTIVITY 29. Directions. Given the following information, estimate the quarterly
production in 2016.
a. Inventories, December 31, 2015 2,500 units

b. Projected Quarterly Sales and Target Level of Ending Inventories in 2016:
Quarter Projected Sales Target Level of Ending Inventories
Quarter 8,000 1,500

1
Quarter 6,000 3,000

2
Quarter 8,500 5,000

3
Quarter 12,500 3,000

4
c. Prepare a production budget schedule for 2016 showing the quarterly data.
ACTIVITY 29. Problem Solving. Directions. Answer the problem.
It was November 2015 and the president of BG Corporation wanted to find out if the
company had enough cash to pay the principal balance of the company’s loan worth Php 4
million by the end of 2016. He asked the chief accountant to prepare cash budget for 2016.
The following assumptions which will be used for the preparation of the cash budget
for 2016 are as follows:
Projected quarterly sales for 2016 are as follows:

First quarter Php 3 million
Second quarter Php 4.5 million
Third quarter Php 6 million
Fourth quarter Php 8 million
Expected fourth quarter sales in 2015 was Php 5 million.
Sales are collected 90% in the quarter the sales are made. The remaining
10% is collected the following quarter.
a. Cost of Sales is 70% of sales. Merchandise inventories are purchased in the quarter
these are sold. All merchandise purchased in the quarter are paid in the same
quarter.
b. Variable operating expenses which are paid in cash are 15% of sales.
On top of these variable cash operating expenses, fixed operating expenses paid in
cash are about Php 100,000 per quarter. Quarterly depreciation charged to
operations is Php 50,000.
c. Interest expense paid every quarter is Php 100,000.

d. Income tax rate is 30%. The income taxes to be paid every quarter will be as follows:
First quarter Php 230,000
Second quarter Php 60,000
Third quarter Php 127,500
Fourth quarter Php 195,000
e. Expected cash balance at the end of 2015 is about Php 400,000. For 2016, target
cash balance is raised to Php 500,000 because of expected increase in sales.
Page 58
Prepare the 2016 cash budget and find out if the company can pay the Php 4million
principal at the end of 2016.
ACTIVITY 30. POST-TEST
Part 1. Multiple Choice. Directions. Choose the correct answer.
1. What is the most important financial statement account in forecasting?

a. Inventories b. Account Receivables
c. Cash d. Sales
2. Schedule which provides information regarding the number of units that should be
produced over a given accounting period.
a. Operating Budget b. Sales Budget
c. Production Budget d. Cash Budget
3. An amount that is more of a balancing figure or a squeeze figure.
a. Temporary Working Capital b. External Fund Needed
c. Permanent Working Capital d. Retained Earnings
4. What refers to the current assets used in the operations of the business?
a. Working Capital b. Current Ratio
c. Liquidity d. Short-term Financing
5. A financing policy states that some of the permanent working capital requirements
are financed by short-term sources of financing?
a. Aggressive b. Conservative
c. Maturity-Matching d. None of the above
6. What is the most liquid asset of a company?
a. Sales b. Cash
c. Account Receivables d. Inventories
7. Section of the cash budget includes collections from receivables, proceeds from
loans, or issuance of new shares of stocks and advances from stockholders.
a. Net cash flow for the period b. Cash Disbursement
c. Cash Receipts d. Target Cash Balance
8. If all collections need to be deposited, then payments must be made through a
_______.
a. Banking System b. Voucher System
c. Check System d. Check Voucher System
9. It refers to the integrity and reputation of the customer.
a. Capacity b. Collateral
c. Condition d. Character
10. Allows management to identify the fast-moving items and the slow-moving items.
a. Aging of Accounts Receivables b. ABC Analysis
c. Aging of Inventories d. Custodial Function
Part II. True or False. Write T if the statement is correct and F if it is wrong.
11. For a business enterprise, having the right amount of cash is important since cash
is used to make payments for purchases, for operational expenses, to creditors, and for
other transactions.
12. The least important account in the forecasting of financial statement is sales since
most of the expenses are correlated with sales.
13. If the EFN is put on the liabilities and stockholders’ equity section and the amount
is positive, this means that there will be additional financing.
14. In short-term planning, the main focus of the top-level management is everyday
functioning of the company.
15. The primary reasons for holding cash are for precautionary and speculative
purposes.
16. In ABC Analysis, category C inventories are not important.
17. The net working capital needed to support an operation during the slack season
represents the permanent working capital requirements while the additional net working
Page 59
capital needed during the peak season represents the temporary working capital
requirements.
18. The three working capital financing policies describe how permanent and temporary
working capital requirements should be funded.
19. One way of managing our cash is to minimize our expense, like making the cashier
as the recorder of the data.
20. Cash Budget is being done to find out if the company will be in need of cash in the
coming accounting period and to have an estimate of how much is needed and what
particular period that need will arise.
Part III. Problem Solving. Directions. Analyze and solve the problem.
An analyst wants to project the financial statements of a company in 2016. He has gathered
the following information for 2015:
Current Assets 70,000,000
Property, Plant, and 110,000,000

Equipment
Current Liabilities 50,000,000
Bank Debt 30,000,000
Common Stock, Php 1 par 60,000,000
Retained Earning 40,000,000
Sales 200,000,000
Net Income 10,000,000

● Current assets and current liabilities are expected to vary with sales.
● The net profit margin in 2015 is expected to hold in 2016.
● Projected sales in 2016 is Php 210 million.
● The company plans to pay Php 0.05 cash dividends per share in 2016.
Compute the following for 2016:
21. Net Income

22. Current assets
23. Current Liabilities
24. Cash dividends
25. Retained earnings
REFERENCES
Business Finance. Arthur S. Cayanan et.al.printed by Rex Printing Company, Inc. QuexBook
Arthur S. Cayanan, Daniel Vincent H. Borja. Business Finance Kto12 First Edition. Rex Book Store, Inc. pp 49 -
77. ISBN 978-971-23-8008-2
https://tools.mheducation.ca/college/larson10/student/olc/10fal_tf_26.html
https://tools.mheducation.ca/college/larson10/graphics/larson10fal_student/slideshow2/chap26_f
iles/v3_document.htm
https://tools.mheducation.ca/college/larson10/student/olc/10fal_chapreview_26.html
http://accounting-financial-tax.com/2010/08/how-to-make-budgets-complete-steps-wit
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12

After going through this module, you are expected to:

Asset $ Year 1 Year 2 Year 3

__ 7 Corporate owner is receiving realizable return through

B. increase in share price and cash dividends.

Lesson 1 Introduction to Financial Management

From the perspective of a Corporation, financial management deals with decisions

Do this activity on a sheet of paper.

Corporations may either be privately owned or publicly owned.

ACTIVITY 2: I NEED YOUR INSIGHTS!

From the perspective of a Corporation, financial management deals with decisions

Subtopic 1: MEASUREMENT OF SHAREHOLDERS’ WEALTH

Maximizing shareholders wealth maximization of stock price should be the

Maximizing shareholders wealth motivates members of top management to develop a

The interest of the employees must be considered in managing a company. Chances

Shareholders’ wealth maximization takes into account the risk-return tradeoff of

Assume a learner bought 10 shares of Globe Telecom at PHP2,510 each on September 9,

Use the definition to analyze and solve the problem.

ACTIVITY 3: MEASURING SHAREHOLDER’S WEALTH. Directions: Read carefully to solve

Identical twins Marikit and Diwata both saved P30,000

 Profitability  Macroeconomic conditions

B. Good liquidity and reasonable leverage position.

E. Corporate plans that improve the business prospects.

ACTIVITY 4: Factors that Influence the Market Price

- Dividends - Corporate plans

Illustration of the Corporate Organization Structure:

PRESIDENT (CEO) MANAGERS

VP for VP for VP for VP for

Top Management Roles:

The following are among the responsibilities of the board of directors:

- Setting policies on investments, capital structure and dividend policies.

Vice-Presidents of Different Functional Areas

The following are among the responsibilities of VP for Marketing:

- Formulating marketing strategies and plans.

The following are among the responsibilities of VP for Production:

- Ensuring production meets customer demands.

The following are among the responsibilities of VP for Administration:

- Coordinating the functions of administration, finance, and marketing departments.

The four functions of a VP for finance (CFO) as follows:

Recall that Assets = Liabilities + Owner’s Equity.

- To be able to acquire assets, our funds must have

2. Investing. Investments may either be short term or long term.

- Long term investments should be supported by a capital budgeting analysis which is

2. The company must have cash.

• Availability of financially viable long-term investment

• Access to long term sources of funds

- The management usually appropriates a portion of retained earnings for investment

• Management’s Target Capital structure

ACITIVTY 5: ORGANIZATIONAL CHART and the ROLES OF THE VP for FINANCE

Directions: Match the responsibilities to corresponding positions. Write your answer on a

ACTIVITY 6: Directions: The statements below are related to the functions of VP of

______2. Determine working capital.

______4. Choose long-term investment.

______5. Purchase land for sale.

______6. Borrow additional fund to the bank.

______7. Declare 40% of income use to purchase inventories.

______8. Determine salaries of employees.

______9. Division of surplus to the shareholders of the firm.

______10. Purchase 1 million worth of equipment with return on investment or ROI in 5

ACTIVITY 8: Subtopic 1: Measurement of Shareholders’ Wealth

ACTIVITY 9: Subtopic 2: Factors that Affects the Market Price

Factors Controllable by Management Uncontrollable External Factors