AE 21:

FINANCIAL
MANAGEMENT
CHAPTER 1:

INTRODUCTION TO
FINANCIAL
MANAGEMENT
FINANCIAL MANAGEMENT
Preparing, directing and managing the money of
activities of the company such as buying,
selling, and using money for best results to
maximize wealth or to produce best value of
money.
KEY OBJECTIVES OF
FINANCIAL MANAGEMENT:
1. To create wealth for the business.
2. To generate cash
3. To provide an adequate return on investment.
 3 KEY ELEMENTS IN THE
PROCESS OF FINANCIAL
MANAGEMENT:
1. Financial Planning
2. Financial Control
3. Financial Decision Making
 SCOPE OF FINANCIAL
MANAGEMENT:
1. Anticipation
2. Acquisition
3. Allocation
4. Appropriation
5. Assessment
 CAREER OPPORTUNITIES IN
FINANCE:
1. Financial Services
 Banking
 Personal finance planning
 Investments
 Real estate
 Insurance

2. Managerial Finance
 Finance Analyst
 Capital Budgeting
 Cash Manager
PROFESSIONAL
CERTIFICATION IN FINANCE:
1. Chartered Financial Analyst (CFA)
2. Certified Treasury Professional (CTP)
3. Certified Financial Planner (CFP)
4. American Academy of Financial Management (AAFM)
5. Professional Certifications in Accounting
 Certified Public Accountant (CPA)
 Certified Management Accountant (CMA)
 Certified Internal Auditor (CIA)
LEGAL FORMS OF BUSINESS
ORGANIZATION:
1. Sole Proprietorship
2. Partnership
3. Corporation
 FINANCE, ECONOMICS AND
ACCOUNTING
 Economics – is the study of choice.
 It is a social science that deals with individual or collective economic activities such
as production, consumption, distribution, and transfer of money and wealth.
 Finance
 is the study of financial allocation that can provide insights on where to put one’s
money and why is it necessary.
 Accounting
 accountants generally use accrual method, while in finance, emphasis is on cash
flows.
 GOALS OF THE FIRM AND THE
ROLE OF THE FINANCE
MANAGER
Decision rule for managers:
“Only take action that are expected to increase the share price!”
1. Profitability (short-term goal)
2. Sustainability (long-term goal)

 maximize shareholders’ wealth.

Earnings per Share

Investment Year 1 Year 2 Year 3 TOTAL
A P 14 P 10 P4 P 28
B 6 10 14 30
 2 KEY ACTIVITIES OF A
FINANCIAL MANAGER IN THE
BALANCE SHEET:
1. Investment decisions
 Defines the most efficient level and the best structure of
assets.
2. Financing decisions
 Determines and maintains the proper combination of short-
term and long-term financing.
CURRENT ASSETS

Cash P 10,000,000

Trade and other receivables 6,000,000

Inventory 100,000

Other current asset 10,000

TOTAL CURRENT ASSETS P16,110,000

NON-CURRENT ASSETS

Property, plant and equipment P 5,000,000

Other noncurrent assets 100,000

TOTAL NONCURRENT ASSETS P 5,100,000

TOTAL ASSETS P 21,210,000

 CORPORATE GOVERNANCE,
ETHICS AND AGENCY ISSUES
 Corporate Governance
 is a system of organizational
control that defines and
establishes the responsibility
and accountability of the
major participants in an
organization.
TO REDUCE AGENCY ISSUES
AND AGENCY COST:
1. Properly constructed and implemented corporate
governance.
2. Structured expenditures thru compensation plans.
3. Market forces such as shareholders crusading from
large institutional investors.
4. Threat of hostile takeovers.
 SHORT QUIZ
1. Preparing, directing and managing the money of activities of the company for
best results to maximize wealth or to produce best value of money is called?
2-4 What are the key objectives of Financial Management?
5. This person is responsible for making investment, financial, and dividend policy-
making decision of a firm or business.
6. True or false. Corporate shareholders have unlimited liability.
7. What is the primary goal of a finance manager?
8. It is a system of organizational control that defines and establishes the
responsibility and accountability of the major participants in an organization.
9. Give at least one advantage of a sole proprietorship.
10. Give at least one major participant of Corporate Governance.
CHAPTER 2:

UNDERSTANDIN
G FINANCIAL
STATEMENT
FINANCIAL STATEMENTS
 Is a structured representation that shows and provide information about:
Financial Position/Financial Standing
Financial Performance
Cash Flows of the entity
… that is useful to wide range of users in making economic decisions.
 Is a statement that tells its users if the business is
Profitable
Sustainable
 It will show the result of the management stewardship of the resources
entrusted to it.
OBJECTIVES OF FINANCIAL
STATEMENTS
1. Provide the users of information for economic decisions.
Users of FS:
a. Internal users – owners, employees, managers
b. External users – suppliers, lenders, government, potential investors, customers, and general public

2. Providing information about the company’s financial position which pertains to:
 Amount of assets, its liabilities and capital
 Ability to generate funds
 Liquidity
 Solvency

3. Providing information about the company’s financial performance.

4. Providing information about the changes in financial position (increase/decrease of
equity/capital).
5. Provide information about the cash flows of the business (inflows/outflows).
COMPONENTS OF A
FINANCIALS STATEMENTS:
1. Statement of Financial Position (Balance Sheet)
2. Statement of Comprehensive Income (Income
Statement)
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes to the Financial Statements
STATEMENT OF FINANCIAL POSITION
STATEMENT OF
COMPREHENSIVE INCOME
STATEMENT OF CHANGES IN
EQUITY
STATEMENT OF CASH FLOWS
NOTES TO THE FINANCIAL
STATEMENTS
1. Statement of compliance with IFRS
2. Summary of significant accounting policies
Basis of preparation
The measurement basis
3. Risk management and other disclosures on capital management
4. Disclosures on individual line items of financial statements
FINANCIAL STATEMENT
ANALYSIS
 It is the process of extracting information from financial statements
to better understand the company’s:
1. Current and future performance
2. Financial condition (position)
 Forecasting the financial health of the company and the comparison
of actual financial conditions with expected financial conditions. It
can be represented by:
1. Predetermine standards
2. Past performance
3. Competitors performance or industry average.
FINANCIAL STATEMENT
ANALYSIS
Objective:
To determine the extent of a firm’s success in attaining its financial goals:
1. To earn maximum profit
2. To maintain solvency
3. To attain stability
FINANCIAL STATEMENT
ANALYSIS
Objectives for users:
 Financial managers, investors and lenders analyze financial statements to
identify an organization’s financial strength and weakness.
 Current shareholders and owners concern
- profitability, stability and sound capital structure necessary for continued
success operation.
 Potential investors’ concern
-interested in “sold” companies, one whose FS indicate stable earnings and
dividends with limited to moderate growth.
COMMON TOOLS AND
TECHNIQUES USED IN
FINANCIAL STATEMENT
ANALYSIS
1. Horizontal Analysis
 Comparative statements are comparing financial data of two years showing the increase and decrease
in the account balance with their corresponding percentages.
2. Vertical Analysis
 Uses a significant item in a financial statement as a base value, and all other financial items are
compared with it.
Classifications:
a. Liquidity ratio
b. Activity or Asset utilization ratio
c. Leverage ratio
d. Profitability ratio
e. Market value ratio
HORIZONTAL ANALYSIS
 Comparative statement
 Formula:

Later year – Base Year X 100% = percentage increase or decrease of an account

Base Year
 Changes
Increase (Decrease)

Year 2 Year 1 Peso Amount Percentage Ratio

ASSETS
Current Assets:
Cash 2400 2100 300 14% 1.14
Marketable Securities 1350 900 450 50% 1.50
Account Receivable, net 36000 33000 3000 9% 1.09
Inventory 60000 51000 9000 18% 1.18
Prepaid expenses 750 900 -150 -17% .83
Total Current Asset 100500 87900 12600 14% 1.14
VERTICAL ANALYSIS
Common-size statement
 Balance Sheet
 Total assets as base account which is 100%, while its components are % of total assets.
 Liabilities and equity
 Total liabilities and equity as base account which is 100%, while its components are % of
the total.
 Income Statement
 Net Sales as base account which is 100%, while its components are % of the net sales.
VERTICAL ANALYSIS
Financial ratios
 Indicate areas of strength and weakness.
 Shows that the value of particular ratio depends varies on the
perspective of the analysis and the firms competitive strategy.
2 types of comparison
1. Industry comparison
2. Trend analysis
LIQUIDITY RATIOS
 Show the relationship of firm’s cash and other current assets to its existing liabilities.
 Indicates whether the firm can pay its currently maturing obligations.

1. WORKING CAPITAL – use in day to day operations of the business.

Formula: Working Capital = Current Assets – Current Liabilities

2. CURRENT ASSET RATIO – assesses the ability of the firm to meet its current liabilities as
paid by its current assets.
Formula:
Current Assets
Current Ratio
Current Liabilities
LIQUIDITY RATIOS
3. QUICK RATIO (Acid Test Ratio)
 shows the firm’s ability to pay its short-term obligations.
 the higher the ratio, the more liquid the firms is.

Formula:
Cash + Marketable Securities + Account Receivable
Quick Ratio
Current Liabilities
ASSET MANAGEMENT RATIOS
 Known as “asset utilization ratio”
 Measures how a firm is effectively managing its assets to earn profits.

1. Account Receivable Turnover – measures the efficiency of collections. The higher the
turn-over, means the greater number of times receivable is reinvested for more profits.
Formula:
Credit Sales

Accounts Receivable Turn-over

Average A/R

*Average A/R = (Beg + End) / 2

ASSET MANAGEMENT RATIOS
2. Average Collection period – measures the number of days the firm invest in account
receivable.
Formula:

365 days
Average Collection Period
A/R Turn-over

Average A/R
Average Collection Period
Average Daily Sales
ASSET MANAGEMENT RATIOS
3. Inventory Turn-over – use to determine how fast the inventory are converted to sales
Formula:

Cost of Sales
Inventory Turn-over
Average Inventory

Beginning Inventory + Ending Inventory

*Average Inventory
2
ASSET MANAGEMENT RATIOS
4. Average Selling period – determine the number of days the inventory is held as stock before
it will be sold.
Formula:
365 days
Average Selling Period
Inventory Turn-over

Finished goods turn-over = cost of sales / Average finished goods inventory

Work in process turn-over = Cost of goods manufactured / Average work in process
Raw Materials turn-over = Raw materials used / Average materials inventory
ASSET MANAGEMENT RATIOS
5. Fixed Assets Turn-over or Fixed Assets Utilization Ratio
Formula:

Sales
Fixed Asset Turn-over
Net Fixed Asset
ASSET MANAGEMENT RATIOS
6. Total Assets Turn-over – determine the number of times investments in assets are reinvested
in sales.
Formula:
Sales
Total Asset Turn-over
Total Assets
DEBT MANAGEMENT RATIOS OR
FINANCIAL LEVERAGE
 By raising fund thru debt, the owners can maintain control of firm with limited investment.
 Creditors look at the equity, or owner-supplied funds, to provide a margin of safety.

1. Debt to Total Asset Ratio or Total Debt Ratio

Formula:

Total Debt
Debt to Total Asset Ratio
Total Assets

2. Debt to Equity Ratio – compares resources provided by creditors with resources provided
by owners.
Total Liabilities
Debt to Equity Ratio
Total Stockholders Equity
DEBT MANAGEMENT RATIOS OR
FINANCIAL LEVERAGE
3. Times-Interest-Earned Ratio or Interest Coverage Ratio – measures the ability of the
firm to meet its annual interest payments.

Earnings before Interest and Taxes (EBIT)

Times-Interest-Earned Ratio
Interest Charges
At the end of 2021, Bloc1 Company had total assets of P375,000 and
equity of P206,250. For 2022, its budget for capital investment
projects is P62,500. To finance a portion of the capital budget, the
company may borrow from a bank which set a condition that the
loan would be approved, provided that the 2022 debt-to-equity ratio
should be the same as the debt-to-equity ratio in 2021.
How much debt should be incurred to satisfy the bank’s condition?
PROFITABILITY RATIOS
• Show the net results of policies and decisions the management did in the current period.

1. Profit Margin
Net Income available to common stock
Profit Margin
Sales

2. Return on Sales
Net Income
Return on Sales
Net Sales

Net Income – after interest and taxes

PROFITABILITY RATIOS
3. Return on Total Assets (ROA)
Net Income available to common stock
Return on Total Assets
*Average Total Assets

OR
Net Income + Interest Expense, net of tax
Return on Total Assets
Average Total Assets

*Average Total Assets = (Total assets, beg + Total assets, end) / 2

10% bonds payable 4,000,000
Net income 5,000,000
Income tax rate 30%
Total Assets, Dec 31, 2021 25,000,000
Total Assets, Dec 31, 2022 30,000,000

Required: Compute ROA.

10% bonds payable 4,000,000
Net income 5,000,000
Income tax rate 25%
Total Assets, Dec 31, 2021 25,000,000
Total Assets, Dec 31, 2022 30,000,000

Required: Compute ROA.

 CASH FLOW ANALYSIS
 A detailed study of the net change in cash as a result of operating, investing, and
financing activities during the period.
 Include cash and cash equivalents
CLASSIFICATION OF CASH
FLOWS
1. Operating Activities
2. Investing Activities
3. Financing Activities
 OPERATING ACTIVITIES
 Cash effects of transactions that create revenues and expenses.
 Generally relates to change in current assets and current liabilities

CASH INFLOWS CASH OUTFLOWS

Sales of goods/services
Interest income received on loans
Dividend income received on equity
securities
Payment to suppliers
Salaries and wages
Taxes paid to the government
Interest expense paid to creditors
Payment of other expenses
 INVESTING ACTIVITIES
 Generally relates to change in non-current assets.

CASH INFLOWS CASH OUTFLOWS

Sale of PPE Purchase of PPE
Sale of debt or equity securities of other firm Purchase of debt or equity securities of other
Collection of principal on loans firm
Lending of money for other firms
 FINANCING ACTIVITIES
 Relates to changes in long-term liabilities and stockholders’ equity accounts.

CASH INFLOWS CASH OUTFLOWS

Sale of company’s own stocks Payment of dividends to stockholders

Issuance of bonds or notes Redemption of long-term debt
Reacquisition of capital stocks
 DECEMBER 31, 2022 DECEMBER 31, 2021
Cash 53, 760 10,400
Accounts Receivable 62,000 48,800
Inventories 66,720 69,360
Accounts Payable 41,680 40,080

From 2022 income statement:

Sales 526,640
Operating Expenses 464,000
Income before Tax 62,640
Income tax 28,240
Net Income 34,400

Other information:
• Included in the operating expenses are:
1. Loss of P1,920 resulting from the sale of an equipment for P21,600 cash.
2. Depreciation expense of P70,400.
• The company purchase machinery for P60,000 cash during the year.
• The income tax shown on the income statement was paid in full during the year.
• During the year, the company declared and paid dividend of P16,000.

Req: Prepare Statement of Cash Flows for Bloc1 Corporation for the year 2022.