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FINANCIAL
MANAGEMENT
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Objectives

 To provide the student with an understanding of the current

theories in finance and of their relevance to the unique business
conditions in the Philippines.

 Through an adequate presentation of the essential concepts in

finance, it hopes to enable the students to obtain a
comprehensive understanding of financial management.
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Objective

 To equip the student with the ability to apply the latest analytical
techniques to a variety of problems in financial management.

 Intends to help establish a link between finance theory and the

practice of finance, including some applications of peculiar
Philippine business conditions on the financial policies and
decisions in business enterprise. (examples: problem-solving,
case studies, etc.).
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Objective

 To motivate the student to set up basis to provide in-depth

applications of the theories in actual business settings.

 To understand the mathematical foundations of concepts and for

computer-assisted applications of certain analytical techniques.

 To provide/understand an intensive and comprehensive study of

financial evaluation and forecasting, and

 To develop/acquire knowledge in managerial skills using theory

and illustrative problem presentations.
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History of Money

 Money is so much a part of our daily lives that we seldom give a

thought to its origins. In fact, the human race was several
thousand years old before people began to recognize how
useful money could be and it came into general use.

 The essence of money will be greatly appreciated if we look

back on its origin. It started in barter.

 Barter is the exchange of goods and services for other goods

and services without the use of money.
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Stone Age

 In the stone age, people lived in small, rigidly structured

communities subsisting on hunting, fishing and gathering. Without
surpluses, there was no exchange of produce.

 It was only when hunters and gatherers turned into herdsmen and
agriculturalists that early forms of commerce began to develop.

 In the advanced civilizations of Egypt and ancient China, primary

products were assigned standard values and used as a forerunner
to money. Rice, tea, almonds, pepper and grain were all used in
this way. 
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Stone Age

 Later on, flints (very hard rock that produces sparks) and other
hard stones suitable for weapons or tools were exchanged for
other commodities. Minerals that could be fashioned into
utensils or jewelry were highly prized and often found their way
to far-off destinations.
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Age of Metal

 When the age of metals arrived, people traveled long distances

to barter for these substances, because they could be made into
tools and weapons far superior to any produced before. Gold
and copper in their pure state were considered to be the first
metals discovered and used by man. Other kinds were also
discovered such as silver, bronze, tin, and iron which were used
as ornaments. Gold was traded in the form of rings, tablets, and
ingots (mass of metal cast into a bar or other convenient
shapes).
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Age of Metals

 The metals has apparently become very vital commodities that

eventually turned out to be a popular medium of exchange—
thus, becoming known as metallic money during the early period
of time.

 Later on, they realized that barter as a form of exchange is

inadequate, crude and cumbersome. For these reasons, man
introduced the use of a very important commodity purposely to
eliminate the shortcomings characterize by barter transaction
like the need for a double coincidence of demand and equality
of value. That commodity is money.
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Coinage

 Before coins could become the basis of money systems,

sophisticated techniques for mining and metalworking evolved in
small steps over many centuries. The first metals to be worked
successfully were copper, bronze and iron. Standard-sized
metal rings, bracelets, arrowheads and small mythological
figures were cast and used for payment.
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Coinage

 When metals were used as money, it was observed the

cumbersome practice on the part of merchants weighing the
metals before they are able to consummate their exchange
transactions. A pair of scales was an essential tool to them in
their trade.

 It was not until 680 BC that the Greeks minted the first round,
flat coins, defining the physical shape of money for many
centuries to come.
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Coinage

 Then the coinage became the absolute monopoly of the sovereign

state. This to ensure uniformity in weight as well as fineness of coins,
thereby insuring the presence of stability in the country’s monetary
system. It did not only eliminate confusion and thus help facilitate
exchange but, moreover, insured confidence on the part of the people
with respect to the coins that were given circulation, within the country
which they accept and use as medium of exchange.

  Imagine if coinage remains to this day as a private preserve of

citizens, unquestionably, there will continue to exist in circulation an
endless number and kinds of money materials that will make their
recognition difficult.
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Definition of Money

 The English word money is believed to come from the Italian

word moneta. Another name for the Roman goddess, Juno.
Today the word means coin, but in ancient Rome, and perhaps
even earlier in Greece, the word meant advisor, one who warns,
or one who makes people remember.

 There are many definitions of money expressed by authorities in

finance. They expressed their definitions on the functions of the
money instead of what it is made of, or its appearance, value;
etc.
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Definition of Money

Money is generally described as “anything which is used as a

medium of exchange and which is widely acceptable for the
payment of goods and services without reference to the general
standing of the person who offers it”.

From that definition, it is quite clear that the basic function of money
is to facilitate exchange transaction of goods and services.
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Incidental Functions of Money

 Money as medium of exchange. Money eliminates the problem

of “double coincidence of demand” experienced during the
barter period. It is readily acceptable thing that is available as a
medium of exchange that will bring about a smooth and effective
transfer of goods from one hand to another. In short, it is an
intermediary in the process of exchange. People sell goods or
services for money which then use the money to buy needed
goods and services.
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Incidental Functions of Money

 Money as a store of value. The use of money as medium of

exchange for present and future transactions gives rise to its
use as a store of value knowing that it represents command
over a variety of goods, people may decide to hold money, or
save it, thereby “store value” thus enabling them to obtain goods
or services they may want and need anytime in the future.
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Incidental Functions of Money

Money as a means of deferred payment. Money serves as a

standard of deferred payment in all debts, which are contracts
expressed in terms of money. All debts which are specify the
repayment of a definite sum in the future are using money as a
standard of deferred payment.
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Characteristics of Good Money

For money to be able to perform the four major functions previously

discussed, it is necessary that the materials used to represent such
money must possess a number of essential attributes.

 General acceptability

 A good money commands general acceptability among the people

aside from their real and intrinsic value. The general acceptability of
a commodity used as money is likewise influenced by its stability of
value, that is, its purchasing power is not widely susceptible to wide
and violent fluctuations. Otherwise, such kind of money will fail in
the discharge of its role as standard means of deferred payment.
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Characteristics of Good Money

 Portability
 It should not only easy to carry but should, moreover, command
great values contained in small bulk. Imagine if money is very bulky
as well as very heavy. Such circumstance will slow down if not
actually hinder exchange transactions. Thus, in addition to metallic
money, there is in circulation paper money of various
denominations for such purpose.
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Characteristics of Good Money

 Cognizability

 The standard money must be capable of easy recognition. This will

help minimize counterfeiting and eliminate confusion. This will help
minimize counterfeiting and eliminate confusion. This is the purpose
behind the minting of coins into desired sizes and weights with marks
of sovereignty of the imposing country duly stamped on them. In the
Philippines, the minting of coins and printing of paper notes is
protected by our laws. Without government regulation, bogus coins
and bills will float and can definitely result in the loss of confidence on
the part of the public and thus usher their loss of general acceptability.
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Characteristics of Good Money

 Durability
 Originally, in the history of coinage, coins were made of pure
metals, like that of gold and silver. However, because these metals
are soft in their pure form, in order to give such coins the quality of
hardness, governments have added alloy to them in their minting.
In the case of paper money, when they become mutilated or
destroyed, the government has to replace them with new ones.
Also with coins.
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Characteristics of Good Money

 Malleability

It should be capable of being stamped with a proper design and

sufficiently durable to maintain its form and quality for a definite
period of time.
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Characteristics of Good Money

Elastic

This means that the volume of money in circulation could be easily

increased or reduced in accordance with the needs as well as
dictates of the economy. During periods of inflation which is
characterized by the presence of an oversupply of money in
circulation against the background of lower production, the
government endeavors to reduce the supply of money to help
stabilize prices. And during the periods of deflation, when the
economy is suffering from a lack of money supply, the government
removes all restrictions that would inhibit their rapid movement.
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Characteristics of Good Money

 Convertibility
 A good money should be exchangeable or easily convertible in
other forms of money known as foreign exchange as to make them
useful instruments in financing international transactions.
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Types of Modern Money

 Metallic Money
 special type of commodity money in which some metal, as for
instance, gold or silver is used

 Paper Money

 used in the form of bills and notes may or may not back up by a
particular commodity
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Kinds of Money

 Commodity Money

Under a modern monetary system, commodity money appears

in metallic form, the face value of which approximates that of the
value of the metal itself. Unlike other forms of money, commodity
money possesses intrinsic value. It means that it could be used
either as commodity (bullion) or as a medium of exchange (money)
without any loss in value.
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Kinds of Money

 Credit Money
 The use of credit money presupposes the existence of another
form of money in which it may be exchanged or redeemed. That
money is usually referred to as the money of final redemption or
standard money. The value of the credit money therefore
essentially equal to the value of standard money. Credit money
includes not only paper money but also subsidiary coins whose
token or nominal value at the time of their issuance is greater
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Kinds of Money

 than their bullion value and checking deposits. Paper money

which are issued by the governments are sometimes termed as
circulating promissory notes because they generally
represent the governments’ promise to pay in other types of
money on demand by holders thereof.
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Kinds of Money

 Fiat Money

Fiat money is money issued by command. Comes from the

Latin word “fiat”, which means “let it be done”. Such kind of money
may consist of coins or paper bills whose value is fixed by
government edict or decree and at a level that bears no relation to
the value of the material used to represent such kind of money.
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Kinds of Money

 For example if the government take a piece of paper whose

value is much lower than twenty pesos and print on it the words:
“This is P20.00 Philippine Currency” without any promise of
redemption in other kinds of money and then issue it in
circulation, that twenty-peso bill is considered a good example
of fiat money
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Kinds of Money

 Unlike credit money in the form of representative paper money,

fiat money is not convertible in other forms of money. It is
“inconvertible paper money”. In this case, no commodity backing
is necessary.
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FINANCIAL
MANAGEMENT