Business Finance:

Life-Insurance Company - It is a financial intermediary handling individual savings. It receives premium payments placed in loans or
investments to accumulate funds to cover future benefits.

Pension Fund - is a set up so that employees of corporations or governments can receive income after retirement.

Mutual Funds

- a type of financial intermediary that pools savings of individuals and makes them available to business and government
users.
- Funds obtained through the sale of shares.

Money Market

- It creates financial relationship between suppliers and users of short-term funds.

- involves the buying and selling of funds that mature in more than one year.

Finance - The science and art of managing money.

Risk - is nothing but an uncertain event that might damage your assets

Most businesses raise money by selling their securities in a STOCK EXCHANGE

From the diagram presented, emphasized that each

line is working for the interest of the person on the
line above them. Since the managers of the company
are making decisions for the interest of the board of
directors and the board of directors do the same for the
interest of the shareholders, it follows the goal of each
individual in a corporate organization should have an
objective of shareholders wealth maximization.

Shareholders - a person or institution that has invested money in a corporation in exchange for a “share” of the ownership. They
elect the Board of Directors (BOD).

Board of Directors - highest policy making body in a corporation. The board’s primary responsibility is to ensure that the corporation
is operating to serve the best interest of the stockholders

President (Chief Executive Officer) - The roles of a president in a corporation may vary from one company to another.

 Approving the information and other disclosures reported in the financial statements.
 Performing all areas of management.
 Representing the company in professional, social, and civic activities.

VP for Marketing VP for Production VP for Administration

 Formulating marketing  Ensuring production meets  Coordinating the functions of
strategies and plans. customer demands. administration, finance, and marketing
 Performing market and  Identifying production departments.
competitor analysis. technology/process that  Assisting other departments in hiring
 Analyzing and evaluating the minimizes production cost and employees.
effectiveness and cost of make the company cost  Providing assistance in payroll preparation,
marketing methods applied. competitive. payment of vendors, and collection of
 Coming up with a production receivables.
 Conducting or directing
plan that maximizes the  Determining the location and the maximum
research
utilization of the company’s amount of office space needed by the
 Promoting good relationships production facilities. company. Identifying means, processes, or
with customers and  Identifying adequate and systems that will minimize the operating
distributors. cheap raw material suppliers. costs of the company.

CAPITAL STRUCTURE

- refers to how much of your total assets financed by debt and how much is financed by equity.
- To be able to acquire assets, our funds must have come somewhere. If it has bought using cash from our pockets, it has
financed by equity. On the other hand, if we used money from our borrowings, the asset bought has financed by debt.

Functions of Financial Managers:

Role of Financial Managers:
1. Financing Decision - long-term investments, day to day operation
2. Investing Decisions - probability of failure - make financing decisions that
3. Operating Decisions - receivable and inventories. require funding from investors in
4. Dividend Policies - part of profits that are available for distribution the financial markets.
Overview of Financial System:

Financial institutions - are companies in the financial sector that provide a broad range of business and services including banking,
insurance, and investment management.

a. Commercial Banks
b. Insurance Companies
c. Mutual Funds - money market funds, bond funds, stock funds, and target date funds.
d. Pension Funds

Financial Instruments - a real or a virtual document representing a legal agreement involving some sort of monetary value. . These
can be debt securities like corporate bonds or equity like shares of stock. When a financial instrument issued, it gives rise to a
financial asset on one hand and a financial liability or equity instrument on the other.

Financial Asset is any asset that is:

• Cash
• An equity instrument of another entity
• (Equity measures the amount of money that would be returned to shareholders if the business liquidated its assets and
paid off its liabilities)
• A contractual right to receive cash or another financial asset from another entity.
• A contractual right to exchange instruments with another entity under conditions that are potentially favorable.
• Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment in Bonds
Financial Liability is any liability that is a contractual obligation:
• To deliver cash or other financial instrument to another entity.
• To exchange financial instruments with another entity under conditions that are potentially unfavorable.
• Examples: Notes Payable, Loans Payable, Bonds Payable
Equity Instrument
- contract that evidences a residual interest generally, have varied returns based on the performance of
in the assets of an entity after deducting all liabilities. the issuing company. Returns from equity instrument come
- Ex: Ordinary Share Capital, Preference Share Capital from either dividends or stock price appreciation.

Types of equity instruments:

Debt Instrument = Preferred & Common Stocks
- Generally, have fixed returns due to fixed interest rates.
- Examples of debt instruments are as follows:
- Treasury Bonds and Treasury Bills
- Corporate Bonds

Financial Market - refers to a marketplace, where creation and trading of financial assets, such as shares, debentures, bonds,
derivatives, currencies, etc. take place.

Money Markets vs. Capital Markets

Money markets are a venue wherein securities with short-term maturities (1 year or less) are sold. They have created because some
individuals, businesses, governments, and financial institutions have temporarily idle funds that they wish to invest in a relatively
safe, interest-bearing asset. At the same time, other individuals, businesses, governments, and financial institutions find themselves
in need of seasonal or temporary financing.

On the other hand, securities with longer-term maturities sold in Capital markets. The key capital market securities are bonds (long-
term debt) and both common stock and preferred stock (equity, or ownership).
HOW DO WE MEASURE WEALTH MAXIMIZATION?

Assume that Mr. Y bought 10 shares of Globe Telecom at PHP 2, 510 each on September 9, 2010. This brings his investments to PHP
25, 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?

Mr. Y’s investments to P 25, 100

If price goes up to P26,00 If price goes down to P23,000

2600-2510 = 90 per shares x 10 shares = 900 2300-2510 = - 210 per shares x 10 shares = - 2,100

P 25, 100 + 900 P 25, 100 -2100

= P26,000 = P23,000

1. ABC Company bought 10 shares of Jollibee Corporation at PHP2, 000 each on January 9, 2012. This brings his investments to
PHP20, 000. What happens to the value of his investment if the price goes up to PHP 2, 520 per share or it goes down to PHP 1,
500 per share?

ABC Company’s investment = P20,000 ( P2,000 / share )

If price goes up to P2,520 / share If price goes down to P1,500 / share

2,520 – 2,000 = 520 per share X 10 shares = 5,200 1,500 – 2,000 = - 500 per share X 10 shares = - 5,000
P 20,000 + P 5,200 P 20,000 – 1,500
then investment will also go up = P 25,200 Then investment will also go down = P 15,000
4 Essential / external users Balance Sheets

- Creditors
- Investors
- Suppliers
- Customers

Income Statements

Vertical and Horizontal Analysis

Financial Ratios

- are relationships establishing from a company’s financial statements and are used as comparison and decision-making purposes.
- Provides valuable information that measures progress against predetermined internal targets and comparison with certain competitors or
with overall industries.

Vertical Analysis

• Common size
• Comparing amounts in the financial statements within the same accounting period

Formula:

Income statement % = Amount / net sales (100%)

Balance sheet % = Amount / Total liabilities & capital of the year

Horizontal Analysis

- Trend analysis
- Comparing amounts in the financial statements of two or more consecutive periods.

Formula: For both Income statement & Balance sheet that has
3 a missing % with a given : change in amount

Change in amount / previous year amount = %

Financial Ratios

1. Liquidity - ability of a business to pay its currently maturing liabilities

2. Solvency- ability of a business to pay its long-term liabilities
3. Profitability- basic goal of any business which is to earn the highest possible profit/income on its investment

LIQUIDY:
1. Current Ratio - working capital ratio

CR = Current Assets / Current Liabilities

EX:

2014 CR = 3,047,420 / 1,224,936 = 2.48: 1 or 2.5: 1

2013 CR = 2,421,678 / 1,766108 = 1.37: 1 or 1.4: 1

2. Acid Test Ratio

- Quick ratio = (cash + marketable securities + receivable)

QR = Quick asset / Current Liabilities

EX:

2014 QR = ( 91,626 + 939,469 ) / 1,224,936 = 0.84: 1 or 0.8: 1

2013 QR = ( 7,792 + 676,411 ) / 1,766,108 = 0.39: 1 or 0.4:1

3. Receivable Turnover

RT = net credit sales / accounts receivables

Age of receivable = 365 / Receivable turnover

Note:
[(beginning balance + ending receivables) 2 = accounts receivables

2014 RT = 7457736 / 939460 = 7.94 or 8 2014 AOR = 365 / 8 = 46 days

2013 RT = 6396040 / 676411 = 9.4 or 9 2013 AOR = 365 / 9 = 41 days

4. Inventory Turnover

IT = = Cost of Goods / Inventory average Note: [(beginning inventory+ ending inventory) /2] = inventory average

Age of Inventory = 365 / IT

2014 IT = 6228552 / 1836634 = 3.39 or 3 2014 AOI = 365 / 3 = 122 days

2013 IT = 5859680 / 1377475 = 4.25 or 4 2013 AOI = 365 / 4 = 91 days
SOLVENCY AND STABILITY RATIOS:
1. Time interest Earned (TIE)

TIE = operating income/ interest expense

Ex:

2014 TIE = 343008 / 74208 = 4.6 times

2013 TIE = - 25614 / 144173 = 0.18 times

2. Debt ratio (DR) in %

DR % = Total Liabilities / Total Assets

Note: Total Liabilities includes current liabilities + long term debts

Ex:

3. Equity Ratio (ER) in %

ER= Total Equity or Owner’s Capital / Total Assets

Ex:

PROFITABILITY RATIOS

1. Gross Profit Margin in %

GPM = Gross Profit/ Net Sales

2. Operating Profit Margin

OPM = Operating Profit / Net Sales

3. Net Profit Margin Or Return on Sales

NPM = Net Income/ Net Sales

Analyzing Financial Statements

Financial Statements - contain historical information about its performance and financial condition. When analyzed together, financial statements
give the overall picture of the firm using certain ratios.

■ Liquidity is the ability of the business to pay its currently maturing liabilities as they fall on its due date.

■ Solvency is the ability to pay long-term liabilities.

■ Financial Stability measures how a business can survive in the long run. It depends on how the business is being funded.

■ NOTE: Solvency and stability are assessed using the capital structure that is composed of the business debts and equity.

■ Profitability addresses a very basic goal of any business: to earn the highest possible profit or return on its investment.

■ Asset utilization refers to how well the company is using its assets to generate sales and/or profit.

Forms of Business Organization

= The presentation of financial statements may differ depending on the form of business organization. There are different legal forms of business
organizations, but they fall into the following three major categories:

A. Sole or single proprietorship

■ is a business owned by one person. This is the simplest form of business organization in terms of getting started, operating and managing. The
owner keeps all the profit, but has unlimited liability for business debts. It means that the creditor can run after the owner’s personal assets for
payment of those debts. Other features of sole proprietorship include the following:

1. The life of the business is limited to life of the owner

2. The business income taxed as personal income
3. The capital is limited to the wealth of the owner
B. A partnership
 is a business organized by two or more owners called partners. The most common types of partnerships are (1) General partnership and (2)
limited partnerships.
 General partnership profit and losses are shared by all partners, and everyone has unlimited liability for all business debts.
 Limited partnership there should be at least one general partner. The other partners are called limited partners who will not actively
participate in the management of the business. Therefore, the liability and debts of a limited partner is limited only to his capital contribution
to the partnership.
C. A corporation

is the most complicated form of business organization. It is a juridical or legal person separate and distinct from its owners (stockholders). It
has rights, duties, and privileges of an actual person. It is the most difficult set up among the three major business categories.

Managers are the one who run the corporate affairs for the interest of the stockholders.

In a corporation, compared to sole and partnership, ownership is represented by shares of stock, and can be transferred. Therefore, the life of
the corporation is not limited. In addition, since a corporation has its own person, it can borrow money. As a result, the owners (stockholders)
have limited liability for business debts. Lastly, as a legal person, a corporation must pay income taxes.

There are several steps in order to find the missing term/s in a number sequence.

1. Look for the pattern.

2. Test the pattern.
3. Determine and write the missing term/s.

TYPES OF BUSINESS ACTIVITIES

Another factor that makes a difference in the presentation of financial statements is the type of activity a firm is doing.=

service type - products with no physical form like skills, field of expertise, and consultancy
merchandising type – buy and sell
manufacturing type - buys products known as raw materials, with an intention of transforming them into new products. With combination of
labor and factory costs, the raw materials go through a production process, and then the finished goods are sold to customers. Examples are
car manufacturers and food manufacturing companies.

Basic Financial Statement

■ An Income statement - shows the performance of the business for a given period of time. The performance known as results of operation s
primarily measured in terms of the income earned through the effective and efficient use of resources

■ Balance Sheet - shows the financial positions of the business as of a particular date. It presents three elements – (1) assets, (2) liabilities and
(3) equity.

Qualitative Factors in Financial Statement Analysis: Customers, Competitors, Market Share, Industry Growth, & Suppliers
 LIQUIDITY

SOLVENCY and STABILITY RATIOS

- Solvency refers to the company’s capacity to pay their long term liabilities.
- liquidity ratio intends to measure the company’s ability to pay debts that are coming due (short term debt).

Profitability Ratios - measure the ability of the company to generate income from the use of its assets and invested capital as well as
control its cost.
Financial Statements Analysis and Interpretation

Financial statement analysis helps users make better decisions.

Information for analysis

Income Statement
Balance Sheet
Statement of Changes in Stockholders’ Equity
Statement of Cash Flows

Standards for Comparison

 Intracompany
 Competitor
 Industry
 Guidelines

Horizontal Analysis - Comparing a company’s financial condition and performance across time
- Dollar Change = Analysis Period Amount - Base Period Amount
- Percent Change = Dollar Change / Base Period Amount × 100%

Vertical Analysis - Comparing a company’s financial condition and performance to a base amount
Common-size Percent = Analysis Amount / Base Amount = × 100%

Radio analysis - Using key relations among financial statement items

Trend Analysis - used to reveal patterns in data covering successive periods

- Trend Percent = Analysis Period Amount / Base Period Amount = × 100%

Working capital represents current assets financed from long-term capital sources that do not require near-term repayment.

LIQUIDY:

Days’ Sales Uncollected = Accounts Receivable / Net Sales X 365

- This ratio measures the liquidity of receivables.

Days’ Sales in Inventory = Ending Inventory Cost of Goods Sold ´ 365

- This ratio measures the liquidity of inventory.

Total Asset Turnover = Net Sales / Average Total Assets (add all assets divided by 2)

- this ratio measures the efficiency of assets in producing sales.

SOLVENCY:

Pledged Assets to Secured Liabilities = Book Value of Pledged Assets / Book Value of Secured Liabilities

- This ratio measures the protection to secured creditors.

PROFITABILITY:

Return on Total Assets = Net Income / Average Total Assets (add all assets divided by 2)

- ratio is generally considered the best overall measure of a company’s profitability.

Return on Common Stockholders’ Equity = Net Income - Preferred Dividends / Average Common Stockholders’ Equity

- measure indicates how well the company employed the owners’ investments to earn income

Book Value per Common Share = Shareholders’ Equity Applicable to Common Shares / Number of Common Shares Outstanding

- ratio measures liquidation at reported amounts.

Basic Earnings per Share = Net Income - Preferred Dividends / Weighted-Average Common Shares Outstanding

- measure indicates how much income was earned for each share of common stock outstanding.

Market:

Price-Earnings Ratio = Market Price Per Share / Earnings Per Share

Dividend Yield = Annual Dividends Per Share / Market Price Per Share