BUSINESS FINANCE REVIEWER

FINANCE
- arrangement of money
- Life blood of Business
- Defined as the science and art of managing money.
BUSINESS FINANCE
- business activity which is concerned with the acquisition and conversation of capital
funds in meeting financial needs

FORMS OF ORGANIZATION

SOLE PROPRIETORSHIP
- A business owned by one person and operated for his/her own profit.
- Evidently is the easiest form of business to organize
PARTNERSHIP
- A business owned by two or more people and operated for profit.
- Kind of business organized by doctors and dentists who share clinic space.
CORPORATION
- An entity created by law owned by shareholders.

TYPES OF BUSINESSES

TRADING OR MERCHANDISING
- Buying of goods and selling the same without change in form.
RETAILING
- When goods are sold in small quantities
WHOLESALING
- When goods are sold in big quantities or in volume
SERVICE BUSINESS
- Is doing work for others
MNUFACTURING
- Is the process of converting raw materials into finished products.
RAW MATERIALS
- Are what you see in the completed products.
DIRECT LABOR
- Is the work on the raw materials as it is converted into finished product.
FACTORY OVERHEAD
- Is the resource needed or costs that us needed to be paid for making products other
than raw materials and direct labor.
CLASSIFICATION OF PARTNERSHIP

GENERAL PARTNERSHIP
- One wherein all the partners are general partners who are liable for partnership debts
LIMITED PARTNERSHIP
- One formed by two or more persons under the provisions on limited partnership
CLASSES OF PARTNERS
As to their liability for partnership debts:
General Partner – is one who is liable for partnership debts to the extent of his personal
property after the partnership assets are exhausted.
Limited Partner - is one whose liability for partnership debts is limited to his capital
contribution.
General-limited Partner – is one who has all the rights, powers, and subject to all
restrictions of a general partner but whose liability is limited to his capital contribution.
As to contributions:
Capital Partner – is one who contributes money or property to the capital of the partnership.
Industrial Partner – is one who contributes his work, labor or industry to the partnership.
Capitalist-industrial Partner – is one who contributes money or property as well as his
work or industry to the capital of the partnership.

stockholder’s pre-emptive right is his right to subscribe to new shares of stocks in

proportion to his existing shareholdings, before the new shares are issued to the general
public.

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.
Publicly owned corporations are owned by unrelated investors and are traded in organized
exchanges like the Philippine Stock Exchange.

The overall objective of a shareholder should be wealth maximization.

COMPETENT MANAGEMENT

VISIONARY - someone with a strong vision of the future.

DECISIVE- having a power or quality of deciding
PEOPLE-ORIENTED - be concerned with building relationships and keeping people happy.
INSPIRING - someone that is inspiring, exciting and makes you feel strongly interested and
enthusiastic.
INNOVATIVE - the development of new ideas or the improvement of existing ideas.
RESPECTED - admired and considered important by many people
SEASONED - a person who has a lot of experience of something
ROLE OF FINANCIAL MANAGEMENT

Financial management - deals with decisions that are supposed to maximize the value of
shareholders’ wealth.

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

ROLES OF EACH POSITION in an ORGANIZATION

Shareholders - The shareholders elect the Board of Directors (BOD). Each share held is
equal to one voting right.
Board of Directors - The board of directors is the highest policy making body in a
corporation.
President (Chief Executive Officer) - The roles of a president in a corporation may vary from
one company to another.
Vice President for Marketing - Formulating marketing strategies and plans. Directing and
coordinating company sales.
Vice President for Production- Ensuring production meets customer demands. Identifying
production technology/process that minimizes production cost and makes the company cost
competitive.
Vice President for Administration- Coordinating the functions of administration, finance, and
marketing departments.
Vice President (VP) Finance & Chief Financial Officer (CFO) - Oversee all financial related
matters where depth and scope is relative to the size of the company.
Financial Manager is part of a management team whose ultimate goal is to maximize
shareholders wealth.

Functions of a Financial Manager

1. Financing – Financing decisions determine how the firm raises money to pay for
the assets in which it invests.
2. Investing – Investing decisions determine what types of assets the firm holds.
Investing is where to put your excess cash to make it more profitable.
Short term investment decisions are needed when the company is in an excess cash
position.
Long term investments should be supported by a capital budgeting analysis which is
among the responsibilities of a finance manager.
3. Operating – Operating decisions deal with the daily operations of the company.
4. Dividend policies - the role of a financial manager to determine when the company
should declare cash dividends.
Financial Instruments
Financial Instruments is a real or a virtual document representing a legal agreement
involving some sort-of monetary value.
Supplier of funds is the holders of financial assets while Users of funds are the makers of
financial liabilities and equity instruments.

Definition of Terms:
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)
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)
An equity instrument is any contract that evidences a residual interest in the
assets of an entity after deducting all liabilities. (IAS 32)

Common examples of Debt and Equity Instruments

1. 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.
2. 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 is a special form of ownership having a fixed periodic dividend
that must be paid prior to payment of any dividends to common stockholders.
Common Stock is the purest and most basic form of corporate ownership.
Financial Markets
Financial Markets are organized forums in which the suppliers and users of various
types of funds can make transactions directly.
Primary vs. Secondary Markets
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.
Secondary market is a financial market in which pre-owned securities (those that are not
new issues) are traded.

Money Markets vs. Capital Markets

1. Money market is created by a financial relationship between suppliers and
demanders of short- term funds (funds with maturities of one year or less).
2. Capital market is a market that enables suppliers and demanders of long-term
funds to make transactions.
Public offering is the sale of either bonds or stocks to the general public.
Private placement is the sale of a new security directly to an investor or group of investors.

Financial Institutions
Financial Institutions are intermediaries that channel the savings of individuals,
businesses, and governments into loans or investments.
Examples of Financial Institutions
Commercial Banks - Individuals deposit funds at commercial banks, which use the
deposited funds to provide commercial loans to firms.
Insurance Companies - Individuals purchase insurance (life, property and casualty, and
health) protection with insurance premiums.
Mutual Funds - Mutual funds are 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.
Pension Funds - Financial institutions that receive payments from employees and invest
the proceeds on their behalf.
Other financial institutions - include pension funds like Government Service Insurance
System (GSIS) and Social Security System (SSS), unit investment trust fund (UITF),
investment banks, and credit unions, among others.