BusFin: CHPTR1-UNDERSTANDING

FINANCE
Prof.

CONCEPT AND DEFINITION OF FINANCE  Financial investments are resources that are expected to
FINANCE is defined as; provide income and achieve appreciation or growth of the
“both a science and an art of correct business.
application of the economic and accounting concepts and  The financial expenditures of a business may cover the
principles that define the system, structure, and process of operating expenditures and the capital expenditures.
management, allocation, and utilization of financial resources,
investments, and expenditures”
 Management of money, banking, investment and credit
Key Concepts of Finance: DIFFERENT AREAS OF FINANCE
1. both a science and an art 2 Finance is broadly classified:
2. application of the economic and accounting concepts 1. Private finance
and principles
2. Public finance
3. system, structure, and process
4. management, allocation, and utilization
5. financial resources, investments, and expenditures 2 Private finance is subdivided into:
1. Business finance
2. Personal finance

2 Application of Economic and Accounting Concepts and 3 Business finance is further subdivided into the
Principles: following areas:
1. Economics, as a social science, is concerned with the 1. Financial management
efficient utilization of scarce resources to satisfy 2. Capital market
human needs and wants. 3. Financial investment
2. Accounting is an art of recording business transactions
and deals with the preparation of financial statements.
Accounting is considered as the language of both
business and finance.
Areas of Finance:

System, Structure, and Process:

 The field of finance provides and clearly defines a systematic,
structured, and procedural mechanism on the various financial
activities affecting the business
 The term system connotes that the financial activities of the
business are properly coordinated with the whole structure.
 Every financial activity has a purpose.

Management, Allocation, and Utilization:

 The fundamental concern of finance is to ensure that the
limited financial resources are correctly managed, allocated,
and utilized in order to achieve the financial goal of a
business.
 Management implies the efficient handling of business
resources, particularly those that are financial in nature
 Allocation connotes the wise distribution of financial
resources to the different functional areas, the proper
assignment of funds between current and non-current assets,
and the correct sourcing of funds based on the concepts of risk
and return.
 Financial resources that are properly managed, allocated, and
utilized significantly influence the financial performance of
the business
DIFFERENT AREAS OF FINANCE:
Financial Resources, Investments, and Expenditures 2 Finance is broadly classified into two:
 Financial resources refer to the funds of a business which are 1. Private finance 2. Public finance
provided by the owner or by the creditors.  Private finance is the  Public finance is the
 management of financial
resources of private
individuals, non-
government
organizations, and private
organizations in
accordance with the
prescribed financial
policy and priority of the
business organizations.
allocation of government 1. Production and Operation division
income generated from 2. General administrative or Human resource
either taxation or division
borrowings and the 3. Finance division
government expenditure 4. Marketing division
based on the approved TWO MAJOR DIVISIONS:
national and local 1. OPERATING DIVISION –
appropriation or budget.
 Usually headed by the Chief Operating Officer (COO)
Public finance is also
 handles the following functions:
termed as fiscal
1. Marketing
administration.
2. Production and Operations; and
3. Human Resource

2. FINANCE DIVISION–
2 Private finance is subdivided into:  Usually headed by the Chief Finance Officer (CFO)
1.Business Finance  handles the following:
1. Accounting function
- is an area of finance that focuses on the handling and
2. Treasury function
management of financial resources of business organizations.
The three major divisions of business finance are financial
management, capital market, and financial investment.

2. Personal Finance FUNCTIONS OF A FINANCE OFFICER

- is a sub-category of private finance which is directed
towards the management of personal resources of an
individual. The income of an individual is sourced from
compensation, exercise of profession, or business income as a
sole proprietor.
Income is allocated based on the individual’s personal needs such
as household expenses, education, hospitalization, and acquisition
of personal and real properties.
 Acts as the wary financial traffic officer to almost all
business transactions with monetary considerations.
 The finance officer is also expected to be the “shock
absorber” of budgetary requests and requirements of other
functional units of the business.
 Is primarily responsible for managing the finances in the
organization.
 The professional judgment of the finance officer in routine
and occasional transactions is the product of his or her varied
expenses and strong educational background in accounting,
economics, and even operation science.

 The finance officer is heavily engaged in making decisions

3 Business finance is further subdivided into the following
for the business to attain its objectives at the optimum level.
areas:
His or her decision-making function is broadly classified
into three:
1. financial management
1. operating decisions
2. capital market
2. investing decisions
3. financial investment
3. financing decisions
1. Financial management
-focuses on capital budgeting decision or investment decision
on the acquisition of assets and its corresponding financing
scheme. This area of finance answers the following FUNCTIONS OF A FINANCE OFFICER
questions: 1. Operating decisions
 What kind of asset shall be acquired?  are financial decisions affecting the routine operating
 What type of financing scheme shall be used activities of a business.
in the acquisition of the asset?  It is directed towards providing immediate solution to
the concerns of the functional areas of the firm such as
2. Capital market manufacturing, marketing, purchasing, and the like.
is an area of business finance that studies the different financial 2. Investment decisions
institutions and their functions that provide assistance to both  deal with choosing small and large projects with
private and public borrowers of funds. several investment opportunities.
 It also includes the study of the cost of borrowing the  The different projects are critically evaluated in
funds such as interest and other financing charges. terms of return of investment and expected cash
3. Financial investment flows.
- includes business decisions about the value and price of stocks  However, investment decisions are made only when
and bonds, portfolio analysis, market analysis, security analysis, investment opportunities come.
and behavior of the investors. 3. Financing decisions
 deal with raising or acquiring of funds from outside
sources and not form the ordinary results of the
FINANCE IN A BUSINESS ORGANIZATION business operation.
4 FUNCTIONAL DIVISIONS OF A BUSINESS  In other words, financing decisions are made when
ORGANIZATION: the business needs to borrow money.

Reviewer by SADSAD & SOBREVEGA

  A business can raise money from the following
activities or sources:
1. operations
2. investors or lenders
3. owners

QUALIFICATION OF FINANCE OFFICER:

1.POSSESSES SOUND KNOWLEDGE OF ACCOUNTING AND
ECONOMIC CONCEPTS AND PRINCIPLES.
2.Has profound understanding of operation science, statistics and marketing
research.
3.has gained technical experience in finance and provided professional
judgement
4.has good communication skills in both oral and written forms
5.has impressive relationship with banks and other financial institutions
6.has outstanding relationship within the business and among other functional
areas
7.is ethically and morally upright and socially responsible

Review Chapter 1:
1.) What is Finance?
2.) What are the areas of Finance?
3.) What is Business finance?
4.) What are the 3 Major Division of Business Finance?
5.) Finance Resources - refer to the funds of a business which are
provided by the owner or by the creditors?

Financial expenditures~ CHAPTER 2: FINANCIAL

6.) Operating expenditures – a period costs that include business
expenses such as salaries, electricity and water, traveling expenses
INSTITUTIONS, INSTRUMENT
and the like. AND MARKETS
Capital expenditures-involve the acquisition or construction of
buildings, machinery, processing plant, and land.
7.) Financial Investment- resources that are expected to provide Financial Institution is defined as;
income and achieve appreciation or growth of the business.
8.) Capital market- an area of business finance that studies the “ are institutions or organizations that provide
different financial institutions and their functions that provide financial services, among others, in the form of loan, credit, fund
assistance to both private and public borrowers of funds. (financial administration, financing, depository and safekeeping”
institutions-provide money, gapa borrow money, dira ka gadalagan if
mashort ka sang money gaborrow ka sa ila) Classification of Financial Institutions
1. Depository Institutions
9.) Financial Investment - includes business decisions about the value
2. Financial Intermediaries
and price of stocks and bonds, portfolio analysis, market analysis, 3. Investment Institutions
security analysis, and behavior of the investors. (business decision)
10.) Economics – branch of social science, concerned with the
efficient utilization of scarce resources to satisfy human need and
wants.
11.) Financial Investment – he/she acts as the wary (feeling or 1. Depository Institutions:
showing caution about possible dangers or problems) financial traffic  that accepts deposits ( savings, current and time deposits) form
officer to almost all business transactions with monetary individuals and corporate entities, extend loans to borrowers, transfer
considerations. funds and manage funds for investment purposes.
-they are tasked to developing budgets, monitoring transactions, and 4 Depository institutions include the following:
1. Banks
preparing financial reports. They possess strong accounting and
2. Savings and loan association
analytical skills. 3. Trust companies
4. Credit unions
1. Banks
Reviewer by SADSAD & SOBREVEGA
 “ 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”
Classification of banks:
1. Universal bank - considered as the biggest bank in terms
of portfolio and revenue
2. Commercial bank - it is a type of bank that provides
commercial loans and and offers investment products
in addition to the regular banking service of accepting
deposits.
3. Thrift bank - include savings and mortgage banks, private
development banks and stocks savings, loan associations
and microfinance thrift banks.
4. Rural bank
5. Cooperative bank
6. Islamic bank - aims and promotes and accelerate the
socio-economic development of the autonomous region of
Muslim Mindanao by performing banking, financing and
investment operations.
2. Savings and loan association
-engaged in the business of accumulating the savings of its
members and stockholders
3. Trust Companies
-is a legal business entity usually major division of a universal or
commercial bank, that acts as fiduciary agent or trustee on behalf
of an individual person or corporate entity.
4. Credit Union
- is a financial depository institutions that is mainly controlled and
operated by its members.
Financial Intermediaries
 “ a type of financial institution that acts as a middleperson
between two parties . The investor and borrowers”.
3 Financial Intermediaries refer the following:
1. Mutual Fund
-accumulate money by selling shares of stocks or bonds of publicly
listed corporations to individual or corporate investors.
2. 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.
3. Insurance Companies
- 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 house.
Insurance Companies may offer the following products to the
public:
A. Life Insurance
B. Health Insurance
C. Car Insurance
D. Fire Insurance
E. Crop Insurance
F. Marine Insurance
G. Other Insurance Products
Market- refers to the place where the sellers and the buyers of
goods or services meet.
Financial Market- refers to the place where the selling and
buying activity occurs to trade equity securities such as bonds and
stocks, currencies, derivative securities, notes and mortgages.
The typical financial market, among others include the following:
1.Capital market - is a financial market where stocks and bonds
are issued for medium and long term periods.
2. Money market - when the financial securities being traded
have period of less than one year.
3. Primary market - is a financial market where a corporation
can issue new shares of stocks
4. Secondary market - is a financial market where financial
securities are traded between or among the investors.
5. Public market - is a market which the financial securities of
publicly listed corporation are traded following a standardized
contract agreement and procedures.
Financial Instruments
 refer to contracts that give rise to the formation of
financial assets of one entity and at the same time the
creation of financial liability or an equity instrument in
another entity
Bond – is a financial instrument that represents a
contractual debt of the party issuing the bond.
6 The most common type of bonds are as follows:
1. Term Bond- that has a single maturity date. The bond can be a
single lone bond or can be composed of several bonds with the same
maturity bond.
2. Serial Bond- is a kind of bond that has a series of several maturity
dates instead of single maturity date.
3. Secured Bond- a type of bond that is secured by the issuing
company. The security is issued in the form of real property which
serves as collateral in the event of default on the part of the bond
issuer.
4. Debenture Bond- when it is not supported by any collateral or
security as assurance in times of non-payment or default.
5. Convertible Bond- is a debt security, as such a bondholder is also
referred to as creditor.
6. Callable Bond- have maturity dates indicated on the face of the
indenture. The issuing company is expected to pay the bondholder
on the maturity date.
Stocks
-is a financial security that signifies ownership of the assets of the
corporation.
The holders of the shares of stocks as evidenced by the Stock
Certificate are called shareholders or stockholders.
The 2 major types of stocks are as follows:
1. Common Stock or ordinary shares
 is a financial instrument whose holders do not have
preferences over each other.
 The common stockholders have the same rights and
privileges in terms of dividend or asset distribution with
other stockholders
2. Preferred stocks or preference shares
 is a kind of stock that is preferred over common stock.
*The preference on the distribution of profit means that preference
stockholders are Paid First of the Dividends accruing to them.
Reviewer by SADSAD & SOBREVEGA
Reviewer by SADSAD & SOBREVEGA