Module 1, Lesson 2-Agency Problems and Corporate Social Responsibility

What are agency relationships and agency costs? Who is the agent and who is
the principal in this relationship?
A principle and an agent are connected in an agency relationship when the principal,
who is often a shareholder or owner, assigns decision-making authority to the agent,
who is typically a management or executive. Conflicts of interest lead to agency costs
such as residual loss, bonding expenses, and monitoring. The executives are the
agency and the shareholders are the principal in corporate governance.

How can adherence to Corporate Social Responsibility (CSR) contribute to the

goal of shareholder wealth maximization?
Corporate Social Responsibility (CSR) can significantly boost shareholder wealth by
enhancing reputation, risk management, employee satisfaction, investment attraction,
and long-term sustainability. Engaging in CSR activities builds a positive brand loyalty,
attracting new customers. CSR initiatives help manage social and environmental risks,
avoiding scandals and regulatory penalties that could harm financial performance.
Companies committed to CSR tend to have higher employee morale and retention,
leading to increased productivity. Additionally, CSR promotes long-term sustainability,
resulting in stable financial performance for shareholders.

Case Problems: Identifying Agency Problems, Costs, and Resolutions

A. The front desk receptionist routinely takes an extra 20 minutes of lunch time to
run personal errands.
Due to her failure to perform her duties during assigned work hours, the front desk
receptionist is generating an agency problem by spending an additional 20 minutes
during lunch to complete personal errands. Decreased productivity, job delays, and a
drop in service quality might result from this. Furthermore, it could lower employee
morale since they believe they are being treated unfairly. The business might establish a
structured break policy with more flexibility in scheduling and clarity in expectations to
handle this issue without resorting to terminating anyone.

B. Division managers are padding cost estimates so as to show short-term

efficiency gains when the costs come in lower than the estimates.
Division managers that put their own professional achievements ahead of honest
reporting by inflating cost projections to demonstrate short-term efficiency benefits may
be the cause of an agency problem. This may result in a misallocation of resources and
a loss of credibility, which would make financial planning and decision-making difficult.
This problem might be solved by implementing a system of checks and balances or
performance-based incentives, which would guarantee reporting accuracy rather than
merely short-term profits.

C. The firm's chief executive officer has had secret talks with a competitor about
the possibility of a merger in which she would become the CEO of the combined
firms.
The CEO's covert discussions on a possible merger in which she would take over as
CEO with a rival company expose a serious agency issue. Risks to one's finances and
legal standing, a decline in shareholder trust, and possible sanctions might result from
this. The firm's strategic objectives may be obscured by an obsession with one's own
agenda. To guarantee that management choices are in line with shareholder interests, a
resolution can call for explicit procedures regarding conflicts of interest, openness in
communications, and frequent board meetings.

D. A branch manager lays-off experienced full-time employees and staff’s

customer service positions with part-time or temporary workers to lower
employment costs and raise this year's branch profit. The manager's bonus is
based on profitability
A branch manager is reducing experienced full-time staff to save costs and increase
revenues, despite potential knowledge loss and higher turnover costs. This decision
could negatively impact training costs and service quality. To address this, the bonus
structure should consider staff retention, training costs, and service quality, prioritizing
long-term goals over short-term financial gains. This approach will protect the
organization's reputation and employee wellbeing.

Analysis
What is Financial Management all about? Contrast the objective of maximization
of profit with that of wealth maximization. What are the three major functions of
the financial manager? How are they related?

Financial management focuses on acquiring, financing, and managing a firm's assets to

achieve specific goals, primarily aiming to maximize shareholder wealth. This differs
from profit maximization, which prioritizes short-term gains and may overlook long-term
sustainability and risk factors. Wealth maximization considers future cash flow timing
and risk, advocating for decisions that enhance the present value of expected returns to
shareholders. The three major functions of a financial manager are investment
decisions, financing decisions, and asset management, all aimed at optimizing the firm's
overall value and maximizing shareholder wealth.
 Module 2, Lesson 1 -What are Financial Statements?
Activity

Activity
Warm up Warm-up Exercise
Ans:
identify the five elements of Financial Statements. In each element, provide at least five
examples and define each based-on IAS and PAS Frameworks. Recite it during our
synchronous class. Write your answer in an A4 bond paper.
The five elements of financial statements according to the IAS and PAS frameworks are
crucial for assessing a company's financial status. Assets are resources expected to
provide future benefits, including cash, accounts receivable, inventory, property, plant,
and equipment, and investments. Liabilities represent obligations expected to result in
outflows, such as accounts payable, loans payable, accrued expenses, deferred
revenue, and bonds payable. Equity reflects the residual interest in assets after
liabilities are deducted, comprising common stock, retained earnings, additional paid-in
capital, Treasury stock, and other comprehensive income. Income refers to increases in
economic benefits, including sales revenue, service revenue, interest income, rental
income, and gains from asset sales. Expenses are decreases in economic benefits
incurred to generate income, such as the cost of goods sold, operating expenses,
depreciation expense, interest expense, and tax expense.

Analysis
While you may already know that financial reporting is important, you may not
understand yet its power and potential. To help you unlock it, here’s the following
burning questions that will guide you all the way;

1. What are the financial statements?

1. A company's balance sheet, income statement, and cash flow statement are the
main components of financial statements, which are official documents that give an
overview of the financial performance and condition of the business.
2. Do all the companies do it the same way?
2. Due to various criteria, including industry, size, and legal requirements, different
organizations produce their financial statements in different ways, which leads to the
adoption of different accounting standards.
3. What is the importance of preparing
3. The capacity of financial statements to educate stakeholders—including creditors,
investors, and management—about the organization's financial health and enable well-
informed decision-making is what makes them crucial.
4. What is the role of these kinds of financial reports to the real world?
4. These financial reports are essential to the real world because they encourage
accountability and openness, direct investment choices, and have an impact on
economic policy, ultimately contributing to the overall stability and growth of the
economy.
 Module 3, Lesson 1 - Business Environment

Activity

Warm-up Exercise Direction: Write it in a clean A4 bond paper. Jack and Jill have
been partners for several years. Their firm, J & J Tax Preparation, has been very
successful, as the pair agrees on most business-related questions. One
disagreement, however, concerns the legal form of their business. Jack has tried
for the past 2 years to get Jill to agree to incorporate. He believes that there is no
downside to incorporating and sees only benefits. Jill strongly disagrees; she
thinks that the business should remain a partnership forever. First, take Jack’s
side, and explain the positive side to incorporating the business. Next, take Jill’s
side, and state the advantages to remaining a partnership. Lastly, what
information would you want if you were asked to make the decision for Jack and
Jill?

Ans:
Jack's Perspective: Advantages of Incorporating
Limited liability is one of the most appealing benefits of incorporation. Limited liability,
improved access to money, more credibility, tax benefits, and permanent life are just a
few of the perks that come with being an incorporation. It guarantees financial stability in
the event of legal action or other financial difficulties by shielding private assets from the
obligations and liabilities of the company. Businesses may raise money by selling their
stock, which enables them to invest in marketing, recruiting new employees, and
expansion. Because they are seen as more stable and professional, incorporated firms
are preferred by customers and suppliers. Corporations can also benefit from lower tax
rates and a wider selection of retirement plan alternatives. Finally, incorporation
guarantees that the company may go on successfully even in the event of an owner's
departure or demise.

Jill's Perspective: Advantages of Remaining a Partnership

Because it is less complicated, less expensive, and easier to start and manage, Jill
supports business partnerships. By enabling pass-through taxes, partnerships lower
total tax obligations. Because adding a board of directors or shareholders may lessen
the partners' ability to make decisions, Jill prefers their direct control and flexibility.
Because of their adaptability, partnerships make it simple to change management
structures and profit sharing. Jill also highlights the interpersonal connections that are
strengthened through time and improve customer and corporate partnerships.
Module 3, Lesson 1 - Business Environment

Information Needed to Make the Decision

Jack and Jill need to consider the long-term business objectives, client preferences,
legal obligations, financial ramifications, and current market conditions before making a
choice. This will assist them in making a decision that is in line with their goals and
moral principles. It's also crucial to comprehend the hazards, legal requirements,
income growth, and prospective tax responsibilities of incorporating as opposed to
staying a partnership. Contextualizing how each choice can affect their competitive
advantage will come from analyzing the competitors and the state of the market.

Analysis
What are the four basic forms of business organizations? What are the
weaknesses and strengths of each form?

Sole Proprietorships
A sole proprietorship is a business owned by one person who operates it for his or her
own profit.

 Strengths: Sole proprietorships are a cost-effective and straightforward business

structure, offering complete control over decision-making and profits, pass-
through taxation, and minimal regulatory requirements, allowing for flexibility in
operations and minimal taxation at the owner's personal tax rate.

 Weaknesses: This business model's primary disadvantages are its infinite

liability, which puts the owner's personal assets at danger, and its difficulty in
obtaining capital, which might damage the company's credibility.

Partnership
A partnership consists of two or more owners doing business together for profit.
Partnerships are typically larger than sole proprietorships.
  Strengths: Through the exchange of resources and knowledge, partnerships
generate more money and a wider range of ideas. Like sole proprietorships, they
enjoy pass-through taxation, which helps them financially.

 Weaknesses: Partnerships are subject to unlimited liability, meaning that all

partners bear the obligations of the company. Conflicts resulting from partner
disagreements can impact company operations. Partnerships may also lack
continuity since they might end if one of the partners moves out or dies.

Corporation
A corporation is an entity created by law. A corporation has the legal powers of an
individual in that it can sue and be sued, make and be party to contracts, and acquire
property in its own name.

 Strengths: Limited liability protection is provided by corporations, shielding

stockholders from personal debt obligations. They can raise money by issuing
shares, continue to exist indefinitely, guaranteeing continuity even in the event of
ownership changes, and frequently bring in a sizable amount of money.

 Weaknesses: Due to rising regulatory requirements, expenditures associated

with establishing and operating a company, and the possibility of double taxation
—profits being taxed at both the corporate and shareholder levels—establishing
and operating a corporation can be challenging.

Cooperative
Under the Philippine Laws, Cooperative is one of the legal forms of business organized.
It is a firm owned, controlled, and operated by a group of members for their own
benefits.

 Strengths: Members own and run cooperatives for their own benefit, fostering a
sense of community and common interests. By effectively supplying products
and services, they hope to raise members' quality of life and promote democratic
decision-making.
 Weaknesses: Cooperatives' decision-making process may be slower due to
unanimous agreement among members, and their reliance on member
contributions over external investors may hinder their ability to raise funds,
potentially limiting their development.
 Module 3, Lesson 2 -Financial Markets and Financial System

Activity
Warm-up Exercise Direction: In a clean A4 bond paper, illustrate the flow of funds
in the economy and the mechanism that financial markets provide for channeling
savings to the ultimate investors in real assets

1. Households/Consumers:
 Savings (money saved from income).
2. Financial Institutions:
 Banks and other intermediaries that collect savings and provide loans.
 3. Financial Markets:
 Platforms where financial instruments are traded (e.g., stock and bond
markets).
4. Non-Financial Firms:
 Businesses that use funds for investments in capital goods, infrastructure,
etc.
5. Government:
 Entities that borrow funds for public spending and infrastructure projects.
6. Ultimate Investors:
 The end recipients of funds for real asset investments.

flow of Funds
 Savings → Financial Institutions: Households save money, which flows into
banks and financial institutions.
 Financial Institutions → Financial Markets: These institutions invest the
pooled savings into financial markets.
 Financial Markets → Non-Financial Firms and Government: Funds are
allocated to firms for investments in real assets and to the government for public
spending.
 Investment in Real Assets: Non-financial firms and government projects utilize
these funds to build infrastructure, expand operations, or purchase equipment.

Flow of Funds in the Economy

1. Households/Consumers: Individuals save money from their income.
2. Financial Institutions: Banks and other intermediaries collect these savings and
provide loans to those in need.
3. Financial Markets: These institutions invest the pooled savings into financial
markets, facilitating the buying and selling of financial instruments.
4. Non-Financial Firms: Businesses borrow funds from financial markets to invest
in real assets like equipment and infrastructure.
5. Government: Governments also borrow from financial markets to fund public
projects.
 6. Ultimate Investors: The funds flow to businesses and government projects,
supporting economic growth and development.

Analysis
What are the roles of financial markets, instruments and institutions in the
financial system? What is the purpose of stock market exchanges such as the
Philippine Stock Exchange? Why should a country have a central bank?

The financial system's structures, markets, and tools are essential for allowing money to
move across the economy. They make it easier to trade financial assets, letting supply
and demand dictate prices and giving investors access to liquidity. Efficient capital
raising and savings allocation are made possible by financial instruments such as bonds
and stocks. Financial organizations that provide services like loans and investment
advice operate as middlemen between savers and borrowers. Examples of these
organizations include banks and investment firms.

Exchanges for stocks, such as the Philippine Stock Exchange, are essential for capital
creation because they allow businesses to raise money through the issuance of shares.
They improve liquidity, offer a venue for simple share purchases and sales, and
advance market transparency, all of which support ethical business conduct and sound
economic principles. A nation's capacity to maintain economic stability depends on its
central bank, which also serves as a lender of last resort, controls inflation, manages
monetary policy, and controls the money supply and interest rates. It preserves the
public's faith in the financial system during times of crisis by managing payment
systems and ensuring an appropriate supply of money.
 Module 3, Lesson 3 “Financial Intermediation”

Activity
-Warm-up Exercise Using an internet, watch an interviewed responsible officer of
a financial intermediary OR interview personally a responsible officer of a
financial intermediary. Find out the roles the firm plays to help the country’s
economic development and the risks they face. Write your observation and
reflection in a clean A4 bond paper.

In reflecting on insights from my interview with Tracy, a responsible officer of a financial

intermediary, it is evident that these firms play a vital role in fostering economic
development while also facing significant challenges. Financial intermediaries contribute
to economic growth by facilitating mergers and acquisitions (M&A), which drive
business expansion and job creation. Tracy emphasized the importance of
understanding client feedback, stating that insights can help refine financial strategies.
For example, if client’s express confusion about M&A processes, intermediaries can
adjust their explanations to ensure clarity. Moreover, they act as risk managers, helping
businesses navigate financial uncertainties. By providing tailored solutions and
addressing specific client concerns, they enhance market stability, making it more
attractive for investments.
Despite their crucial role, financial intermediaries encounter various risks. Market
volatility affects investment outcomes, and Tracy noted the need for adaptability based
on client feedback. This is essential when clients struggle with financial concepts,
allowing intermediaries to effectively address gaps in understanding.
Additionally, regulatory risks pose a challenge. With evolving regulations, intermediaries
must remain compliant while ensuring their advice aligns with best practices. This
requires continuous learning and adjustment. In summary, financial intermediaries are
essential to economic development by facilitating investments and managing risks.
They must navigate challenges such as market fluctuations and regulatory changes
while actively seeking client feedback to improve services. This dynamic interaction
underscores the importance of adaptability in the financial sector, positioning
intermediaries as crucial players in promoting economic stability and growth.

•Analysis
-What is financial intermediation? What are financial intermediaries? What are
the roles financial intermediaries play in the socio-economic development of a
nation?
Financial intermediation is the process where financial institutions act as intermediaries
between savers and borrowers, facilitating the flow of funds within the economy. These
intermediaries, including depository institutions like commercial banks and credit unions,
accept deposits and provide loans, while non-depository institutions like insurance
companies and investment banks offer financial services without accepting deposits.
They play a crucial role in socio-economic development by mobilizing savings, providing
credit, managing financial risks, ensuring market stability, and promoting financial
inclusion, enabling broader access to financial products and economic participation
among underserved populations.