CAEL, IZZA M.

ABM12-DILIGENCE

BUSINESS FINANCE

Q3 W5 D1-4

1. How much is the permanent working capital? ₱ 150,000

2. How much is the maximum temporary working capital? (₱500,000 - ₱150,000) = ₱350,000

3. How much is the temporary working capital for the second quarter? (₱ 350,000-₱ 150,000) = ₱200,000

4. How much is the temporary working capital for the fourth quarter?

(₱450,000 - ₱150,000) = ₱300,000

E. EVALUATION: Use separate paper to write your answers.

1-4 Enumerate and briefly describe the internal controls for cash.

A. Separating cashiering function from the recording or accounting function. A basic internal control system should
not allow the assignment of custodial function and

recording function to one person unless you are the owner.

B. Issuing official receipts for collections and summarizing collections in a daily collection report. It is important to
know the collections from business every day as these collections reflect the health of the company.

C. Depositing collections. A good internal control over cash is by depositing all collections intact. The daily
collection reports are now compared with the deposit slips to find out if all collections are indeed deposited. Some
companies have 24-hour operations like hotels.

D. Adopting the check voucher system for payments. If all collections need to be deposited, then payments must
be made through a check voucher system. There must also be two signatories in the check to provide check and balance.
If the business is small, then the entrepreneur's signature may suffice.

5-7 Enumerate and discuss the internal controls for inventories. Cite examples.

a. Separating custodial functions from the recording functions. Just like cash, this internal control measure is also
true for inventories and for other types of assets.

For example, one person can place an order to buy an asset, but a different person must record the transaction in the
accounting records.

b. Aging of inventories. Aging of inventories allows management to identify the fast-moving items and the slow-
moving items. Management must decide what to do with slow-moving items before they further lose their values.

For example, a toothpaste company may bundle its toothpaste products with toothbrush or mouthwash which they also
produce and sell. Or have you seen the "buy one take one" promotions in department stores? These are just some of
the many ways by which management can dispose slow-moving inventories.

c. ABC Analysis. This approach classifies inventories into three categories: A, B, and C. Inventories which are
considered most important are classified as A; those at the middle are classified as B; and the least important are
classified as C. The main reason for classifying them is to provide the kind of security due to each category of
inventories.
8-10 Enumerate and differentiate the motives for holding cash.

1. Primary Reasons

a. Transactional. This is the cash used for paying expenses such as salaries, utilities, rent and taxes, among others.

b. Compensating balance. This is the cash held to meet bank requirements such as the minimum cash balance you
maintain for checking accounts and if you have existing loans, banks may also require a minimum amount of deposit
with them.

2. Secondary Reasons

a. Precautionary. This is the cash maintained for emergencies such as the additional cash you keep during political and
economic uncertainties.

b. Speculative. This refers to the cash held by the company to take advantage of opportunities (e.g., buying stocks during
major financial crisis)

11-15 What are the standards used in credit evaluation? Explain each.

1. Character –the willingness of the borrower to repay the loan.

2. Capacity – a customer’s ability to generate cash flows.

3. Collateral – security pledged for payment of the loan.

4. Capital – a customer’s financial resources

5. Condition – current economic or business conditions

DAY 3

E. EVALUATION

Decide whether long-term or short-term financing is needed.

Long-term 1. Acquisition of equipment

Long-term 2. Franchise of a fast-food outlet

Short-term 3. Purchase of inventory for a clothing shop

Long-term 4. Loan for agricultural needs (i.e. palay production, mango, etc.)

Long-term 5. Loan for purchase of a commercial space

Short-term 6. Development of a subdivision

Short-term 7. Auto-loan

Short-term 8. Loan for sari-sari store supplies

Short-term 10. Emergency loans (advances)

DAY 4

E. EVALUATION

What are the five keys of loan application? Briefly explain.

1. Character: Check Joe’s Restaurant’s payment history and experience in the business. The fruitfulness of the business
proves Mr. Salazar and the BOD’s ability to manage the business well.

2. Capacity: The positive income from the business and positive cash flows from operations proves the borrower’s
capacity. Current assets also show that the borrower has funds easily available for repayment if necessary. The term of
the loan should be adjusted to the cash flow of the borrower.

3. Collateral: The property pledged serves as collateral. Its value is usually greater than the loan to provide the bank
security for sudden changes in value of the collateral, as well as to compensate the bank for the collateral’s illiquid
nature.

4. Capital: The audit financial statements give a preview of the borrower’s resources.

5. Condition: The income statement shows that the business is earning and is even growing. The business has already
grown to 3 branches. This shows a preview of the growth in the food industry.