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Business Finance: Week 1and 2 - Module 2
Business Finance: Week 1and 2 - Module 2
Business Finance
Week 1and 2 – Module 2
Business Finance
Grade 12 - Week 1 and 2 – Module 2
First Edition, 2020
Copyright © 2020
La Union Schools Division
Region I
All rights reserved. No part of this module may be reproduced in any form without
written permission from the copyright owners.
Management Team:
Flow of funds (FOF) are financial accounts that are used to track the net inflows
and outflows of money to and from various sectors of a national economy.
Macroeconomic data from flow of funds accounts are collected and analyzed by a
country's central bank.
In your previous Lesson, you have learned on the different types of Financial
Institution, Financial Instrument and Financial Market which plays an important
role in the Flow of funds.
After going through this Learning Materials, you are expected to:
1.Explain the flow of funds within an organization – through and from the
enterprise—and know the role of the financial manager (ABM_BF12-IIIa-5).
Before going on, check how much you know about this topic. Answer the pretest on
a separate sheet of paper.
Pretest
Directions: Read carefully each item. Use separate sheet of paper for your
answers. Write only the letter of the best answer for each test item.
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8. By definition, the money market involves the buying and selling of:
A. funds that mature in more than one year
B. stocks and bonds
C. short-term funds
D. flows of funds
9. Government usually:
A. maintains permanent deposits with financial institutions.
B. borrows funds directly from financial institutions.
C. is a net demander of funds.
D. is a net supplier of funds.
10. What is the 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. savings and loans C. savings bank
B. mutual fund D. credit union
Jumpstart
For you to understand the lesson well, do the following activities. Have fun and
good luck!
Activity: Read and explain the following case questions: Use separate sheet of
paper for your answers.
1. Suppose that you run a business and during your management of money, some
cash remain. What should you do with that cash?
2. If you’re going to save your money, where would you keep it?
3. Given the opportunity to manage a business, what would it be? Now, suppose
that the business that you’ve manage became profitable for some time. Then you
decided to expand your business but you don’t have enough cash to pay for the
expansion. Where can you get the additional funding?
Discover
Draw two boxes and label with names of learners A and B. Below [A], write “Saver”,
and below [B], write “users of funds”.
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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 Placements - the sale of a new security directly to an investor or group of
investors.
However, if these facts are unknown to them, A and B can go to a Financial Market
which 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 B have
met in the Financial Market, they can now agree to make a private placement.
If A and B do not want to make an effort to find a counterpart in the Financial
Markets, A and B may go to a Financial Institution. 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.
Moreover, Financial institutions actively participate in the financial markets as
both suppliers and users of funds.
Financial System:
Financial Institution
[Learner A] [Learner B]
Savers/Suppliers of Private Placement Users/Demanders
Funds of Funds
Financial Markets
*Note that on the diagram presented, the solid lines represent the flow of
cash/funds, while the colored lines represent the flow of financial instruments
which represent obligations to transfer cash or other assets in the future.
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Explore
Here are some enrichment activities for you to work on to master and strengthen
the basic concepts you have learned from this lesson.
Enrichment Activity: Read and answer the following questions. Use separate
sheet of paper for your answers.
1. How transactions between suppliers and users of funds take place. How
would you prove that there was a transaction so that the demander will be
able to repay the supplier on time and at the right amount?
2. 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, where does the transfers of funds from one party to another are
made?
Great job! You have understood the lesson. Are you now ready
to summarize?
Deepen
At this point, we will further discuss the composition of the Financial System and
that you will identify the types of Financial Markets, Financial Institutions and
Financial Instruments.
1. 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.
• Recall from ABM the following definitions:
- 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)
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• Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment
in Bonds
- 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
When companies are in need of 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.
- Debt Instruments generally have fixed returns due to fixed interest rates.
Examples of debt instruments are as follows:
•Treasury Bonds and Treasury Bills are issued by the Philippine government.
These bonds and bills have usually low interest rates and have very low risk of
default since the government assures that these will be paid.
•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.
•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, 2017)
• 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
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may decide to declare higher dividends, preferred stock will receive a fixed
dividend rate while common stockholders receive all the excess.
2. Financial Markets
• Recall the definition of financial markets from earlier discussion.
• Classify Financial Markets into comparative groups:
3. Financial Institutions
• Recall the definition of Financial institutions from the earlier discussion.
• Identify examples of financial institutions:
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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.
Zutter, 2012)
• The figure above illustrates how the key financial institutions serve as
intermediaries for suppliers and users of funds
Integration of Learning
• Question for reflection: How would you relate the role of financial managers, role
of financial markets and role of investors?
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Gauge
Directions: Read carefully each item. Use separate sheet of paper for your
answers. Write only the letter of the best answer for each test items.
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10. The major securities traded in the capital markets are:
A. treasury bills and certificates of deposit
B. commercial paper and Treasury bills
C. bonds and commercial paper
D. stocks and bonds
11. Which of the following actively participate in the financial markets as both
suppliers and users of funds?
A. private placements C. financial instruments
B. flow of funds D. financial institution
12. Long-term debt instruments used by both government and business are known
as:
A. equities C. stocks
B. bonds D. bills
13. Which of the following is NOT an example of financial institution?
A. Commercial banks C. Insurance companies
B. Corporate bonds D. Mutual funds
14. It is generally have fixed returns due to fixed interest rates.
A. debt instruments C. equity instruments
B. corporate bonds D. treasury bonds
15. Which of the following role that provide funds to be used by financial managers
to finance corporate growth?
A. Financial market C. Financial intermediaries
B. Investors D. Suppliers
Great job! You are almost done with this Learning Materials.
References
Printed Materials:
Cayanan, Arthur S and Borja, Daniel Vincent H. (2017). Business Finance. Manila,
Philippines: Rex Bookstore. pp. 4-7, 81-83.
Website:
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Answer Key:
Pre-test
1. C 2.D 3. D 4. A 5. D 6. C 7. A 8. B 9. D 10. C
Jumpstart: Activity
*Answers may vary
Deepen: Illustration:
*Answers may vary
Gauge: Assessment
1. D 2. C 3. B 4. D 5. A 6. A 7. D 8. C 9. D 10. B
11.B 12. D 13. C 14. D 15. B
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