Business Finance

3rd Quarter
Module 1
BUSINESS FINANCE – Grade 12
Alternative Delivery Mode
Quarter 1 – Module 1: Introduction to Business Finance
First Edition, 2020

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Published by the Department of Education

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

Management and Development Team

Schools Division Superintendent: Maria Magdalena M. Lim, CESO V

Chief Education Supervisor: Aida H. Rondilla
CID Education Program Supervisor: Remylinda T. Soriano
CID LR Supervisor: Lucky S. Carpio
CID LRMS PDO II: Albert James P. Macaraeg

Reviewers/Validators: Remylinda T. Soriano, EPS, Math

Angelita Z. Modesto, PSDS
George B. Borromeo, PSDS

Editors: Ellaine I. Dela Cruz, DBA

Isabel A. Gumaru, DBA

Writer: Edna B. Waje, DEM:

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Introductory Message

For the Facilitator:

Welcome to the BUSINESS FINANCE Alternative Delivery Mode

(ADM) Module on Introduction to Business Finance.

This module was collaboratively designed, developed and reviewed

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

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

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

Notes to the Teacher

This contains helpful tips or strategies
that will help you in guiding the learners.

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

use this module. You also need to keep track of the learners' progress
while allowing them to manage their own learning. Furthermore, you are
expected to encourage and assist the learners as they do the tasks
included in the module.
For the Learner:

Welcome to Business Finance Alternative Delivery Mode (ADM)

Module on Introduction to Business Finance.

The hands is one of the most symbolized part of the human body. It
is often used to depict skill, action and purpose. Through our hands we
may learn, create and accomplish. Hence, the hand in this learning
resource signifies that you as a learner is capable and empowered to
successfully achieve the relevant competencies and skills at your own
pace and time. Your academic success lies in your own hands!

This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and
time. You will be enabled to process the contents of the learning resource
while being an active learner.

This module has the following parts and corresponding icons:

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

What I Know This part includes an activity that aims to

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

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

the current lesson with the previous one.

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

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

What is It This section provides a brief discussion of

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

What’s More This comprises activities for independent

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

What I Have Learned This includes questions or blank

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

What I Can Do This section provides an activity which will

help you transfer your new knowledge or
skill into real life situations or concerns.
 Assessment This is a task which aims to evaluate your
level of mastery in achieving the learning
competency.

Additional Activities In this portion, another activity will be given

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

Answer Key This contains answers to all activities in the

module.

At the end of this module you will also find:

References This is a list of all sources used in

developing this module.

The following are some reminders in using this module:

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

If you encounter any difficulty in answering the tasks in this

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

We hope that through this material, you will experience meaningful

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

This module was carefully prepared and designed

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

By the end of this session, you will be able to determine the

concept of demand, quantity demanded, and the laws of demand and
supply, demand and a supply curves and solve problems equilibrium,
equilibrium price, and equilibrium quantity

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

1. define as the management of money and includes

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

II. TRUE or FALSE

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

1. To achieve the goal of profit maximization for each alternative being

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

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

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

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

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

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

4. The primary goal of the financial manager is .

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

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

3, and 4. Each asset costs $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
 MODULE 1 INTRODUCTION TO BUSINESS FINANCE

FINANCE IN EVERYDAY LIFE

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

How much allowance they are given to you and how often do you receive it
(daily, weekly, etc.)

What activities have you done in a day from getting to school, to attending
flag ceremony, classroom discussions, lunch breaks, end of classes,
occasional meriendas or going out with friends and playing computer
games, going back home and going back out to a nearby store to buy
autoload because you realized that you can’t end the day without texting
their crush?

Do you have savings out of the allowance you get from your parents?

Now, identify your expenses you incurred (i.e. jeepney/tricycle fare, lunch,
merienda, computer games) and recognize the amount or value you save
and possibly invest it at a young age.

The most of the activities you do involving decisions on where to use your
allowance is a finance decision.

What’s In

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

Be able to define or give the meaning of the term finance in your

own words. You may enumerate as many definition as you can.
 What’s New

LESSON 1: DEFINITION OF FINANCE

Finance is defined as the management of money and includes activities

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

From that expenses you wrote down and listing all these down on a piece
of paper with the respective peso amounts. Try to get as many answers as
possible. Your answer will serve as your average daily allowance.

Go back to your list of expenses and give for the total peso amount of the
listed items. If the peso amount exceeds the daily allowance, your items
should be dropped off from the list. Cross out the items dropped but do
not erase completely. Continue this until total items remaining in the list
can be covered by the daily allowance.

The activity you did is called budgeting. - Budgeting is the act of

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

Go back to the activity and focus your attention on the surplus resulting
from your budgeting. Is your answer resulted in savings or excess cash?
What will you do with the excess money? Maybe your answer will be:
• Return to parents
• Save. How and where? Coin savers, Hidden under their beds, Deposit in
banks, Invest in stocks (rare answer)
Excess money presents an opportunity for investments.
Investments come in many forms that will generate income or appreciate
in the future.
- Between hiding your cash under your bed and depositing it in the bank,
it would be better to keep your money in bank deposits because these
earn interest.
.
Go back to the activity that you have written in the paper. What other
problems you may face in making financial decisions. Let us assume that
all the expenses listed on your paper (including those that were previously
crossed out) are incurred during the day. Let us compute how much more
cash they would need to support all those expenses.
Have you encountered the same situation? If not, have you ever in a
situation where you are short of cash, what would you do? Where will you
get extra cash? What other sources of cash do you know? Your possible
answers will be:
•
Ask from parents • Pawnshops
• Borrow from a friend • 5/6
• Fund raising activities • Banks
All your possible answers are called sources of funds. When faced with
financial difficulties (in this case, the lack of funds to meet the current
expenses) we look for people or institutions that will give us the money we
need.
To summarize the discussion by pointing out that, for individuals,
Finance is concerned with decisions about:
- How much of their earnings they spend
- How much they save or how much they need
- How they invest their savings
- How they raise additional funds they need
 What Is It

As you encounter it, the easiest way to define finance is by providing examples of
the activities it includes. There are many different career paths and jobs that
perform a wide range of finance activities. Below is a list of the most common
examples:

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

certificates (GICs)

• Borrowing money from institutional investors by issuing bonds on behalf of

a public company

• Lending money to people by providing them a mortgage to buy a house

• Using Excel spreadsheets to build a budget and financial model

• Saving personal money in a high-interest savings account

• Developing a forecast for government spending and revenue collection

• Prepare financial statements, business activity reports, and forecasts

• Monitor financial details to ensure that legal requirements are met

• Supervise employees who do financial reporting and budgeting

• Review company financial reports and seek ways to reduce costs

• Analyze market trends to find opportunities for expansion or for acquiring

other companies

• Help management make financial decisions

In addition, finance is a term for matters regarding the management, creation, and
study of money and investments. There are many other specific categories, such
as behavioral finance, which seeks to identify the cognitive (e.g., emotional, social,
and psychological) reasons behind financial decisions.

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

What is a Financial Manager?

Financial managers are responsible for the financial health of an

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

Financial managers increasingly assist executives in making decisions that

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

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

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

LESSON 3: FINANCIAL INSTITUTIONS AND MARKETS

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

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

Let us recall the forms of business organizations:

 Sole Proprietorship - A business owned by one person and operated

for his or her own profit.
 Partnership - A business owned by two or more people and operated
for profit.
 Corporation – An entity created by law owned by shareholders.

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

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

Let us assume that you are the biggest shareholder in a corporation.

The objectives you want to achieve as owners of the corporation is: to be
profitable and have a lot of cash.

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

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

What do you think of a company who has very large amount of

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

Remember, that the overall objective of a shareholder should be

wealth maximization. What defines a shareholder’s wealth?

Measurement of the shareholder’s wealth:

• Instruction: read carefully and analyse this. How do we measure

shareholders wealth?

Let us have an example.

 Assume that you 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?

Therefore, the shareholders’ wealth is measured based on the

current market price of the corporation’s stocks. The market price
changes across different periods. Hence, the value of your investment
changes in different points on time based on the market value at that
time.

Now, at this point, let us start discussing the factors which can affect
prices.
Factors that Influence Market Price

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

Controllable by Management Uncontrollable External Factors

• profitability • macroeconomic conditions

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

Each factor influences market price.

 Profitability

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

of time. Although it is a major driver for increasing the value of stock, an
investor should not rely on profits alone. As discussed earlier, it is
possible that the company has profits but its cash flow is negative.
An examples is that: suppose the following Income Statements and Cash
Flow Statements of companies A, B and C were presented to you. Which
do you think is a more attractive company?

COMPANY A
Income Statement Cash Flows
Sales P 100,000 Collection from Customers P0
Less: Costs 50,000 Payment of Expenses 50,000
Profits P 50,000 Net Cash Flow (P
50,000)

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

COMPANY C
Income Statement Cash Flows
Sales P 100,000 Collection from Customers P
100,000
Less: Costs 70,000 Payment of Expenses
70,000
Profits P 30,000 Net Cash Flow P
30,000
 1. Company A is profitable but generated negative cash flows which
resulted from the uncollected accounts receivable of PHP100,000.
Without adequate cash inflows to meet its obligations, the company will
face liquidity problems, regardless of its level of profits.
• Company B on the other hand has a positive cash flow but is
unprofitable. This is a result of the company’s delay in payment of its
costs.
2. 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.

3. Company C is profitable and has a positive cash flow. Based on the

information provided, Company C seems to be the best.

 Good liquidity and reasonable leverage position.

Liquidity and leverage refers to the company’s management of the type
and amount of assets and liabilities that it will hold in the course of its
operations.

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

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

 Corporate plans that improve the business prospects.

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

On the other hand, Company B sells Buko Juice in Antipolo area (or
any other area different from Company A’s area) for 5 years. Company B is
consistently earning profits and has a positive cash flow. When asked how
Company B sees itself after 5 more years, Company B answered that it
has generated enough cash to expand its business to Cubao area (or any
other area) to take advantage of the growing demand of Buko Juice in
Cubao.
Between Company A and Company B, which would be a better
investment? The answer is Company B. Since it has more concrete future
prospects allowing investors to hope for better revenues and net income.

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

What do you think, given the factors that influence market price,
how will the company ensure that such objectives will be achieved? This is
achieved through financial management. Financial management deals
with decisions that are supposed to maximize the value of shareholders’
wealth. (Cayanan). These decisions will ultimately affect the markets
perception of the company and influence the share price.
The goal of financial management is to maximize the value of shares of
stocks.

What I have learned

Managers of a corporation are responsible for making the decisions

for the company that would lead towards shareholders’ wealth
maximization.

Competent managers may have any of the following attributes: 1)

visionary 2) decisive 3) people-oriented, 4) inspiring, 5) innovative, 6)
respected and 7) experienced or seasoned manager.

The shareholders’ wealth is measured based on the current market

price of the corporation’s stocks.

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

period of time.

What I Need to Reflect

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

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

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

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

Pat II: Answer the following questions for your enrichment:

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

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

Name of Student Grade/Section Date

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

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

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

2. is an estimate of your income and spending over

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

3. is an accounting report that shows your

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

4. is an accounting report that shows what you

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

5. is the category of business skills that involves

managing your company's money. The types of finance include investing,
borrowing, lending, budgeting, saving and forecasting.
 Answer Key

What I know
Test I

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

Test II

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

Test III

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

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

References
Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
City. Rex Bookstore.

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

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

Websites

https://www.investopedia.com/financial-term-dictionary-4769738
https://corporatefinanceinstitute.com/resources/knowledge/finance/
what-is-finance-definition/
https://www.careerexplorer.com/careers/financial-manager/
https://courses.lumenlearning.com/boundless-
business/chapter/introduction-to-financial-management/
https://www.investopedia.com/ask/answers/061615/what-are-
major-categories-financial-institutions-and-what-are-their-primary-
roles.asp
http://teachtogether.chedk12.com/teaching_guides/view/436#section
3