INTRODUCTION TO FINANCE

CHAPTER 2
INTENDED LEARNING OUTCOMES
At the end of the chapter the students should be able to:

1. define finance and rationalize the importance of finance in the business world
2. differentiate direct finance from indirect finance; public finance from private finance;
discuss how they apply and work in the business world
3. discuss the different types of business according to nature, purpose, and ownership
4. illustrate how to organize the different types of business according to ownership
5. elaborate on the advantages and disadvantages of the different types of business
according to ownership
6. discuss the different types of partnership and different types of partner
7. discuss the different types of corporation
8. explain the difference between the different classes of stock
 INTRODUCTION TO FINANCE

According to Webster, finance may be defined as a noun and as a verb: As a noun,

finance means management of money, the monetary support for an enterprise, or the
money resources of a government, company, or person. As a verb, finance means to
provide capital for a person or enterprise.
Finance plays a very important part in people's and business enterprises' lives. No
organization and no household can live or exist without finance. People need funds.
Organizations need funds. This chapter will introduce finance and how important it is in
business. The different types of finance, business organizations, and their formation will
be discussed as well. A basic understanding of the corporation as a form of business
organization will be tackled including • the different classes of stock a corporation may
issue
FINANCE: DEFINITION
FINANCE: DEFINITION
 derived from the Latin word finer meaning "to end" or "to pay."
When a person pays his bill, the financial matter is ended
 the operational or practical side of economics, the practical science
of the production, and distribution of wealth (Shetty et al. 1995)
 the efficient acquisition, distribution/ allocation, and utilization of
scarce money/ fund resources
TASKS

1. Allocating available funds — determining where to use

funds currently available to the firm.
2. Acquiring needed funds - obtaining funds from the right
sources at the right time.
3. Utilizing acquired funds - using the funds to achieve set
goals.
CLASSIFICATION OF FINANCE

A. As to Form of Negotiation
1. Direct Finance - involved in direct borrowing with direct relationship between borrower
and lender.
2. Indirect Finance - involves the use of financial intermediaries.

B. As to User
3. Public Finance - revenue and expenditure patterns of the government.
4. Private Finance - finance other than public finance.
a. Personal finance - conducted by consumers/ individuals.
b. Finance of non-profit organizations - conducted by nonprofit organizations.
c. Business finance — conducted by businesses or enterprises for profit.
FINANCE IN THE BUSINESS WORLD
 Business — any lawful economic activity that involves rendering
service, trading, manufacturing, construction, mining, and financial
entities; uses and performs finance functions.
 Efficiency — the relationship between input and output; getting
something done at the least cost, time, and effort.
 Effectiveness - a measure of quality; producing the desired result

Efficiency + Effectiveness = Productivity

TYPES OF BUSINESS ORGANIZATION
 TYPES OF BUSINESS ORGANIZATION

A. As to Nature of Purpose
1. Service
2. Trading/ merchandising
3. Manufacturing
4. Banking and finance
5. Mining/ extractive industry
6. Construction
7. Genetic industry (agriculture, forestry, and fishing/ fish culture)
A. As to Nature of Purpose
1. Service - rendering service (e.g., barber shops, dental/ medical clinics, laundry shops).
2. Trading - buying and selling goods (e.g., sari-sari stores, hardware stores, department stores).
3. Manufacturing — buying raw materials and converting them into finished products (e.g., Procter
and Gamble, San Miguel Brewery, BFGoodrich, Sterling).
4. Banking and Finance — using money as the main object (product) of the business (e.g., BDO, PNB,
credit card companies, credit unions, savings and loan associations, insurance companies).
5. Mining or extractive industries — extracting natural resources like oil, gas, gold, copper, cement,
etc. (e.g., Caltex (Philippines), Inc., Nido Petroleum Philippines Pty., Ltd., Japan Petroleum
Exploration Co., Ltd, Vulcan Industrial and Mining Corporation)
6. Construction companies - building houses, buildings, schools, roads, bridges, etc. (e.g., F.F. Cruz
and Company, JAO Builders, V. V. Soliven, CM Builders, Inc., DM Consunji, Inc.)
7. Genetic industries - production or multiplication and reproduction of certain species of plants and
animals, either for sale or for production of bio-products like wool, leather, medicinal herbs, etc.
TYPES OF BUSINESS ORGANIZATION
B. As to Ownership
1. Sole or Single Proprietorship
2. Partnership
3. Corporation
4. Cooperative

Business Entity Concept — irrespective of ownership, the business is separate and distinct
from the owner(s).
 Single/Sole
Proprietorship
 a business unit owned and
controlled by a single individual
referred to as a sole/ single
proprietor
Advantages Single/Sole
Proprietorship
 ease of formation
 needs only minimum capitalization
 sole decision maker
 easy to terminate
DisadvantagesSingle/Sole
Proprietorship
 unlimited liability
 limited access to capital
 limited skills, talents, and capabilities
 inability to attract or retain good employees
 limited term of existence (short life)
 difficulty in measuring success
 personal problems may hinder operation/ success
 Partnership
 An association of fico or more persons who have
agreed to contribute money, property, or industry
to a common fund with the intention of dividing
the profits among themselves.
 Two or more persons may form a partnership for
the exercise of a profession. Such partnerships
are called general professional partnerships.
 The owners of a partnership are called partners.
 Each partner is an agent of the partnership. This
means that any act of the partner within the
scope of the business of the partnership binds the
partnership and the other partners.
 NATURE OF A PARTNERSHIP

 easier to form than a corporation

 allows the pooling of resources for some common purpose(s)
 employed not only for small operations, but also for large-scale operations
 may be composed of two partners only or dozens of partners
 contractual of nature; can be formed either by an oral contract or by a
written contract
 ESSENTIAL REQUISITES OF A PARTNERSHIP

1. A contract of partnership which may be oral or written, expressed or

implied, subject to the rules contained in Art. 1771 to 1773 of the New
Civil Code.
2. Two or more persons who have the legal capacity to enter into the contract
of partnership.
3. Valuable contribution to a common fund which may consist of money,
property, or industry.
4. An intention to divide the profits between or among the partners.
5. Lawful purpose(s)
 CHARACTERISTICS OF A PARTNERSHIP

1. Mutual agency - every partner is an agent of the partnership.

2. Voluntary association - partners voluntarily join together to form the partnership; no one is forced to become a
partner.
3. Based on contract — the agreement of the partner, be it oral or written, is the essential requisite for partnership
formation.
4. Limited life - a partnership is dissolved upon the death of a partner, the insolvency of a partner, the termination
of the project or purpose or the time for which the partnership was formed, and the admission of a partner.
5. Unlimited liability - since there is always a general partner in any partnership, the liability of the partnership
extends to the personal assets of the general partner.
6. Division of profit - basic reason for forming a partnership and should be contained in the agreement; otherwise,
it would be based on their capital contribution.
7. Co-ownership of contributed assets - any asset invested or contributed by a partner to the partnership becomes
the property of the partnership; hence, the common property of all the partners.
 Advantages of a Partnership Disadvantages of a Partnership

 ease of formation  limited life

 allows pooling of financial resources  unlimited liability
 allows pooling of skills, expertise, and  mutual agency
experience
 less government control, supervision, and
intervention than corporations
 ORGANIZING A PARTNERSHIP

A partnership may be constituted in any form, except:

 where the capital of the partnership is three thousand pesos or more, in

which case the contract of partnership shall appear in a public instrument
which must be recorded in the Office of the Securities and Exchange
Commission (SEC);
 where immovable or real rights are contributed into the partnership, in which
case a public instrument shall be necessary; and

a limited partnership, which must be registered with SEC

 Registration with the SEC

1. Filing of business name with the SEC.

2. Submission of the following to the SEC:
a. Articles of Co-Partnership;
b. Verification slip for the business name;
c. Written undertaking to change business name, if required;
d. TIN of each partner and/or that of the partnership;
e. Registration data sheet for partnership in six copies; and
f. Other documents that may be required.
3. Pay the registration/ filing and miscellaneous fees.
4. Forward documents to the SEC Commissioner for signature.
 CONTENTS OF THE ARTICLES CO-PARTNERSHIP

1. Name, nature, purpose, and location of business

2. Names of the partners, indicating whether they are limited or general and their corresponding
addresses and citizenship
3. Amount of cash, a description and agreed value of any other property to be originally contributed by
each partner, and any additional contribution that may be made by the partners
4. Term or duration of the partnership; date the partnership should commence or end
5. Duties, rights, and powers of each partner
6. Manner of dividing profits/ losses among the partners
7. Conditions under which the partners may withdraw money or other assets for personal use
8. Provisions as to whether salaries and/or interests on partners' capitals shall be allowed or not
9. Manner of keeping the books of accounts, length of the accounting period, and the date it should
commence or end
10.Provisions pertinent to dissolution
11. VI11. Provisions pertinent to liquidation
12.Other special provisions and stipulations
TYPES OF PARTNERSHIPS AS TO LIABILITY
OF PARTNERS

1. General Partnership (as to liability) - all of the partners are general

partners, that is, no partners are limited partners.
2. Limited Partnership - at least one (but not all) is a limited partner.
There should be at least one general partner to assume unlimited
liability.
 TYPES OF PARTNERS

A. As to Liability
1. General Partner - his liability extends up to his personal assets.
2. Limited Partner — his liability extends up to his interest in the partnership only

B. As to Investment
1. Capitalist Partner — invests money or property.
2. Industrial Partner — invests skill, talent, or knowledge.
3. Capitalist-Industrial Partner — invests money or property, and skill, talent, or
knowledge.
 CORPORATION

 an artificial being, organized in accordance

with the provision of law in which ownership is
divided into shares of stocks
 an artificial being created by operation of law,
having the right of succession and the powers,
attributes, and properties expressly authorized
by law or incident to its existence (Corporation
Code of the Philippines)
 required to be organized by five or more
persons, called incorporators
 shareholders or stockholders are the owners of
a corporation which include the incorporators
CHARACTERISTICS OF A CORPORATION

1. Separate legal existence (artificial being)

2. Created by operation of law
3. Transferable units of ownership
4. Limited liability of stockholders
5. Continuity of existence
6. Centralized management by the Board of Directors
ADVANTAGES OF A CORPORATION

 legal capacity
 limited liability of shareholders
 transferability of shares or right of succession
 continuity of life of the corporation
 greater ability to acquire funding
 greater ability to acquire talents, skills, and expertise
 PARTIES TO A CORPORATION

1. Corporators — include the incorporators, the other stockholders, or members (for Non-stock
Corporation).
2. Incorporators - founders (five, but not more than fifteen).
3. Stockholders/shareholders - those who own shares of stocks.
4. Members - corporators of a non-stock corporation.
5. Promoters - find potential incorporators or stockholders for the corporation being formed;
prepare the prospectus to invite investors and sometimes work to obtain the charter or approval
of the Articles of Incorporation.
6. Board of Directors (not less than five nor more than fifteen) governing body of the
corporation; elects the Chairman of the Board and the corporate officers; formulates the overall
policies of the corporation.
7. Corporate Officers - officials of the corporation including the President, the Vice Presidents,
the Treasurer, the Corporate Secretary, etc.
 INCORPORATION AND ORGANIZATION OF A
CORPORATION

1. Promotion - bringing together of the incorporators and persons interested in forming the corporation and
procuring subscriptions or capital for the corporation.
2. Incorporation - process of formally organizing the corporation, which includes:

a. registration of business name with the SEC

b. drafting and execution of the Articles of Incorporation
c. execution of sworn affidavits and bank deposit certificate
d. filing of the Articles of Incorporation with the SEC
e. issuance by the SEC of the Certificate of Incorporation
3. Formal Organization and Commencement of Business Operations includes the following:

f. adoption of By-laws
g. election of the Board of Directors
h. election of officers
i. commencement of business operations
 THE ARTICLES OF INCORPORATION

1. Name of the Corporation

2. Specific purpose(s) for which the corporation is formed
3. Location or principal place of business (should be in the Philippines)
4. Term for which the corporation is to exist (not exceeding fifty years)
5. Names, nationalities, and residences Of the incorporators
6. Names, nationalities, and residences of the persons who shall act as directors or trustees until the first
regular directors or trustees are duly elected and qualified in accordance with the Cod
7. In case of stock corporations, the amount of authorized capital stock, the number of shares into which it is
divided, and the par value of each share (in case of par value shares)
8. In case of stock corporations, the names, nationalities, and residences of the original subscribers and the
amount subscribed and paid by each on his subscription
9. In case of stock corporations whose shares are no-par value shares, the authorized capital stock amount
and the number of shares into which share capital is divided
10. In case of non-stock corporations, the amount of its capital, the names, nationalities, and residences of the
contributors and the amount contributed by each
11. Such other matters not inconsistent with law and which the incorporators may deem necessary and
convenient
 THE BY-LAWS
1. refers to the rules of action adopted by the corporation for its internal government and the government of its
officers, stockholders, and members
2. these include:
 time, place, and manner of calling and conducting regular or special meetings of directors or trustees
 time and manner of calling and conducting regular or special meetings of stockholders or members
 required quorum in meetings of stockholders/ members and the manner of voting thereto
 form for proxies of stockholders/ members and the manner of voting them
 qualifications, duties, and compensation of directors, trustees, officers, and employees
 time for holding the annual election of directors or trustees and the more or manner of giving notice
thereof
 manner of election or appointment and the term of office of all officers other than directors or trustee
penalties for violation of the by-laws in case of stock corporation, the manner of issuing certificates
 such other matters as may be necessary for the proper or convenient transaction of its corporate
business and affairs
 CLASSIFICATION OF CORPORATIONS

The Corporation Code of the Philippines classifies corporations according to

nature:

1. Public Corporations (also called municipal corporations or local

governments) - government of a portion of the state.
2. Private Corporations - all other corporations other than public
corporations.
 CLASSIFICATION OF PRIVATE CORPORATIONS
A. As to Purpose
1. For profit (civil)
2. Non-profit
3. Charitable
a. Ecclesiastical/ Religious
b. Eleemosynary/ Public Charity
4. Foundation - a non-profit organization that donates funds and gives support to other organizations or provides the
source of funding for its own charitable purposes.

B. As to How Membership is Represented

5. Stock Corporations — ownership is divided into shares of stock.

a. Open corporations - stocks are sold to the public.
b. Closed corporations — stocks are sold to a selected few.

2. Non-stock Corporations- corporations other than stock corporations; have members instead of stockholders;
created not basically for profit, but for public good and welfare.
 CLASSIFICATION OF PRIVATE CORPORATIONS

C. As to the State of Incorporation

1. Domestic Corporations - incorporated in the country where it is located.

2. Foreign Corporations
a. Resident Foreign Corporation - foreign corporation with offices, and operates in the Philippines.
b. Non-resident Foreign Corporation - foreign corporation deriving income from the Philippines, but
without an office or branch in the Philippines.
3. Multinational Corporations - extend their operations to other countries like Coca-Cola, McDonalds, and
General Motors Corporation.
D. As to Number of Persons Composing the Corporation
4. Corporation Sole - bishop or the diocese to which the bishop belongs to; only applicable to the Church.
5. Corporation Aggregate - common form of corporation with multiple stockholders
 CLASSIFICATION OF PRIVATE CORPORATIONS
E. As to Legal Right to Corporate Existence

1. De jure Corporation - corporation existing in conformity with the law and recognized by the government.
2. Defacto Corporation — corporation in fact, but not in law.

F. As to Relation to Other Corporations

3. Parent or Holding Corporation — original corporation from which another corporation emanates.
4. Subsidiary or Sister Corporation — corporation emanating from the parent company which stocks are owned by the
parent in majority.

G. Other Private Corporations

5. Quasi-public corporations — rendering public service such as light, water, transportation, telephone, etc.
6. Government-owned or controlled — majority stock of which is owned by the government.
7. Wasting assets corporations — engaged in the extractive industry.
 CORPORATE CAPITAL

1. ownership in a corporation is represented by capital stock which is divided into

units called shares of stock, to facilitate the transfer of ownership and distribution
of profits/ dividends
2. shares of stock may be classified as to:

 value on the stock certificate

 right to dividends
 CLASSES OF SHARES KIND OF STOCK

1. Value on the Stock Certificate

a. Par value shares - value of the shares are written on the stock certificates.
b. No-par value shares - value of the shares not written on the stock certificates.

i. with stated value - not written on the stock certificates, but are stated in
the Articles of Incorporation or in a Board Resolution.
ii. without stated value - not written on the stock certificates nor anywhere
in the Corporation documents.
 CLASSES OF SHARES KIND OF STOCK
2. Rights to Dividends
a. Common stock or ordinary shares — a corporation issues only one class of stock, and each share has equal rights.

 In case when there is more than one class of stock, the common stock entitles the holder to an equal pro-rata
division of profits without any preference or advantage over any other stockholder or class of stockholders.
 Common stocks have "residual" interest in the corporation because it receives its interest after preferred
shareholders are given theirs
b. Preferred/preference shares - corporations may issue more than one class of stock, one with preferential rights over
another class.
a. as to assets (upon liquidation) - given preference over common shares in the distribution of the assets of the
corporation in case of liquidation.
b. as to dividends - shares with preferential rights; owners of which are entitled to receive dividends before payment
of any dividend is made to the common stock.
 cumulative
 non-cumulative
 participating
 non-participating
 CLASSES OF SHARES KIND OF STOCK

3. Cooperatives

a. organizations established by individuals to provide themselves with goods and services, or to

produce and dispose of the products of their labor
b. registered with the Cooperative Development Authority, which promulgates the rules and
regulations to govern the promotion, organization, registration, and supervision of all types of
cooperatives

 members - owners of cooperatives.

 patronage refunds - share of the members in the profits of the cooperative in proportion to
the amount of business they do with the cooperative.
 credit union - a form of cooperative that provides members with loans for various purposes.
 ORGANIZATION EXPENSE

a. These are expenditures incurred in organizing a corporation, such as SEC

fees, legal fees, taxes and fees paid to the city or municipal government,
attorney's fees for drafting the Articles of Incorporation and By-laws, and
other related services, and promotional costs.
b. These are no longer charged to an intangible asset account and amortized
yearly, theoretically over a period of 50 years or in practice, over a period of
5 years as allowed before.
Under the PAS 38, pre-operating expenses/ organization expenses/costs do not fall
under the definition of an intangible asset and should no longer be reported as a
deferred asset subject to amortization. Theoretically, they are now immediately
expensed
SUGGESTED READINGS
Bernstein, L.A. 1993. Financial Statement Analysis Theory, Application, and Interpretation (5th ed.). Burr Ridge,
Illinois: Richard D. Irwin, Inc.
Helfert, E.A. 1994. Techniques of Financial Analysis (8th ed.). Burr Ridge, Illinois: Richard D. Irwin, Inc.
Keown, A.J. et al. 1998. Basic Financial Management (7th ed.). Singapore: Prentice Hall Simon and Schuster Pte. Ltd.
Laman, R.M.B. & V.P.B. Laman. 2007. Money, Credit & Banking: The Basics (5th ed.). Manila: GIC Enterprises & Co.,
Inc.
Meigs, R.F., W.B. Meigs, & M.A. Meigs. 1995. Financial Accounting (8th ed.). New York: McGraw-Hill, Inc.
Weston, J.F. & E.F. Brigham. 1993. Essentials of Managerial Finance (10th ed.). New York: The Dryden Press.

RESOURCE AND ADDITIONAL RESOURCES

http://www•businessdictionary.com/definition/legal-tender.html. Retrieved on April 16, 2014.
http://www•pbs•org/wgbb/nova/ancient/history-money.html. Retrieved on April 8, 2014.
http://www.bbc.co.uk/ahistoryoftheworld/objects/7cEz771FSeOLptGIE1aquA. Retrieved on April 15, 2014
http://www.bsp.gov.ph/banking/bspsup.asp, retrieved on April 23, 2013.
http://thismatter.com/money/banking/depository-institutions-types.htm. Retrieved on April 23, 2013.
http://www.bsp.gov.ph/banking/bspsup.asp, retrieved on April 23, 2013.
http://www.icba.coop/co-operative-bank/what-is-a-co-operative-bank.html. Retrieved on May
THANK YOU
GODBLESS…
GRACE P. GIRON, MBA, LPT
Basic Finance