FINANCE 001

REVIEWER • 1ST SEMESTER, 1ST GRADING

LESSON 1 ●​ Shetty et al (1995) viewed

Financial Management finance as the operational or
practical side of economics,
WHAT IS FINANCE? the practical science of the
production and distribution of
●​ Noun: Finance means
wealth.
company or organizations'
●​ According to Saldana (1997),
money or other liquid
finance is the efficient
resources of a government,
allocation of scarce resources.
business, group of business, or
So, we can say that finance is
individual.
the efficient acquisition,
●​ No organization and no
distribution/allocation, and
household can live or exist
utilization of scarce
without finance.
money/fund resources.
●​ An organization, whether
●​ Saldana (1997) added that
political, civic or business in
finance, as a discipline, is
nature, must be aware of its
concerned with identifying,
immediate and future
evaluating, and managing
requirements for funds, the
sources and use of cash in
possible resources thereof and
order to increase the value of
the benefits that many accrue
the business enterprise to its
to the organization itself and to
present owners.
the community arising from
●​ Medina (2007) defined finance
efficeint and effective
as the study of the acquisition
utilization of said funds.
and investment of cash for the
●​ The word "finance" is derived
purpose of enhancing value
from the Latin word finer,
and wealth.
meaning "to end" or "to pay."
When a person pays his/her FINANCE THEREFORE,
bill, the financial matter is IS THE FUNCTION OF:
ended. a.​ Allocating available funds
●​ Economic activities like -​ determining where to use
business transaction, personal funds currently available
investment, or even simple to the firm
borrowing have financial b.​ Acquiring needed funds
implications. -​ obtaining funds from the
right resources at the
right time
 c.​ Utilizing these funds to 2. Increase the Value of a Business
achieve set goals ●​ Growth and stability are the
-​ using the funds primary bases in measuring
the value of a business entity.
THE PRIMARY GOALS OF A BUSINESS Growth may be measured in
●​ Going into business means terms of increase in assets that
investing in activities that can appreciate in value, improved
make available goods and production capacity
services needed in a community, accompanied by increase in
realize profit from the investment, sales volume and increase in
increase the value of the business owners equity.
itself as an economic entity, and ●​ Owners equity is the difference
improve the quality of life in the between total asset and total
community. liabilities (E=A-L) of an entity so
that it is also called net asset
1. To earn profit
or net asset value (NAV).
●​ Funds are invested in a business
●​ Its primary source is the
to earn sufficient return to
owners' investment or capital
investment.
placed in the business to which
●​ Goods and services are made
profit or net income is added.
available to the public and are
●​ NAV is reduced by losses and
billed to customers, clients with
distribution of earnings (called
sufficient markup to cover
dividends in the case of
operating expenses, financing
corporations).
charges, income taxess and
●​ Example, a total amount of
desired net profit.
assets amount to P300,000 and
●​ Earning per share (EPS) refers to
liabilities are P180,000 owner's
how much net income is earned
equity ougth to be the
for every share of capital stock
difference of P210,000. The
outstanding.
assets may decline in value by
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 P120,000 and still the business
EPS=
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 would be in a position to pay its
●​ In general, the higher EPS, the debts.
higher the price a stock can ●​ Therefore, the higher is the
command in the market. price that its owners can
●​ In the case of PLDT, its EPS for demand for their share in
the year 2004 was P95.36 and equity should they decide to
with expected increase in dispose or sell the same.
profit. Market price (at that ●​ For corporations the owner's
time) is P1,700 per share. equity or stockholders' equity
is divided by the number of
 share of capital stock ●​ The acquisition of funds should
outstanding to arrive at the always be at least cost and
book value per share. such funds need to be
●​ This serve as one of the bases channeled to fund projects or
in determining management's investments that will maximize
performance and for investors, benefits, including profit to the
determining what price to pay organization.
for the shares of stock of a ●​ The utilization of funds
company. obtained should be able to
3. Social Responsibility of maximize:
1. Wealth
Businessmen
2. The value of the company
●​ The social responsibility of a
3. The value of stakeholders
businessman refers to his
●​ Financial management is
contribution to the
concerned with the
improvement of the quality of
maintenance and creation of
life in the community.
economic value or wealth
●​ He adheres to legal and moral
(Known et al 1998).
standards by adopting
●​ At the same time,
company objectives, policies
management has social
and practices consistent
responsibility to all parties
therewith.
interested and affected by
●​ The chain effects of business
organizational decisions.
activity affect not only the
Sometimes, this social
earning power of people
responsibility will take priority
directly involved with it (such
over profit.
as the employees, suppliers,
●​ The person incharge of the
and customers) but are also
finance function is called the
indirectly affected by its
director of finance/ VP for
economic activities.
finance/finance manager.
●​ All these bring about increased
He/she is responsible for the
demand for other products
allocation of the financial
and services.
resources of the compnay, the
WHAT IS FINANCIAL MANAGEMENT? acquisition of additional funds
●​ Financial Management, or needed, and the utilization of
called managerial finance, is these financial resources to
concerned with the attain organizational
management funds. objectives.
●​ It is the efficient and effective ●​ The finance manager or
allocation, acquisition, and controller supervises the chief
utilization of funds. accountant, the purchasing
 manager, the investment flows, payback period, rate of
manager, the budget and return investment, earnings per
planning manager, the share and similar ratios.
treasury department and the ●​ Analyzes the periodic results of
risk manager and insurance operations and financial
department. position for possible
improvement
WHAT IS A FINANCIAL MANAGER? 2. Managing the firm's assets
●​ Concerns on the left side of the
●​ Business finance is concerned
balance sheet, examples of
with the management of the
assests are cash, marketable
financial resources of a
securities, receivables,
company.
inventories, plant, property and
●​ Financial resources refers to
equipment
all the resources of a company
●​ Determines the mix and type of
that are measurable in terms
assets that a business must
of monetary unit. The primary
have and sees to it that they
activities of the financial
are duly accounted for
manager must concern the
●​ Here are some questions
different items included in the
he/she tries to answer:
balance sheet.
a.​ How much must be in
WHAT ARE THE PRIMARY ACTIVITIES plant, property, and
OF A FINANCIAL MANAGER? equipment?
b.​ What are the fixed assets
1. Financial planning and analysis to be acquired?
●​ Responsible for financial c.​ Which of the fixed assets
resources of the company already owned must be
●​ Takes part of the corporate modified or replaced?
strategic and operational d.​ Are assets duly
planning safeguarded? Who are
●​ Applies managerial economic accountable for them?
knowledge for the projections e.​ How effective is the
based on accumulated data internal control system in
and options for the the company?
management 3. Managing the firm's liabilities
●​ Projects and estimates the
and owner's equity
revenue, costs and expenses
●​ Concerns on the right-hand
for the capital layout, changes
side of the balance sheet
in the company assets,
●​ Determines the mix of
liabilities and owner's equity
short-term and long-term
and the resulting annual cash
financing, what particular
 source is best at a given point 1. CONTROLLER
in time A.​ Planning for control which
●​ Levels which debt/equity ratio includes budgeting
should be maintained B.​ Reporting and interpreting
●​ Checks all of these for the results of operations and
profitability and liquidity effect systems installation
in the enterprise C.​ Evaluation of objectives,
policies, and procedures and
WHAT ARE THE PRIMARY ACTIVITIES consulting with all segments of
OF A FINANCIAL MANAGER? management regarding the
●​ The title of the financial or same
finance manager depends on D.​ Tax administration and
the size and organizational set government reporting
up in a company. E.​ Protection of assests
●​ In small businesses, the F.​ Economic appraisal (forward
finance functions are planning)
discharged by the sole 2. TREASURER
proprietor, the accountant, or A.​ Determination of financial
by the manager. requirements and
●​ In organizational set up, the procerements of funds
finance functions delegated to B.​ Cash management, banking,
the controller and or the custody of funds, and foreign
treasurer. Or in some cases, exchange problems
there is a vice-president to C.​ Investor relatons
whom the controller and the D.​ Corporate investments
trreasurer report. E.​ Credit and conllections
●​ The controller takes care of the F.​ Insurance
internal finance functions while G.​ Employees benefits
the treasurer takes care of the
●​ In big organizations, both the
external finanaces.
controller and treasurer usually
●​ The finance functions are
cannot participate in financial
usually divided between the
management, and a third
controller and the treasurer as
financial officer is hired, the
follows:
vice-president for finance.
He/she serves as a buffer
between the controller and the
treasurer so this two are now
one position.
 ●​ The vice president for finance
THE FINANCIAL MARKETS
supervices and coordinates the
work of both the controller and ●​ Financial markets are
treasurer and participates in institutions and system that
financial planning and in facilitates transactions in all
formulate financial policies. types of financial claims.
●​ He/she performs functions ●​ They are the heart of the
related to the entire financial system, determining
organization as part of the top the volume of credit available,
management such as attracting savings, and setting
formulation of corporate interest rates and security
objectives and policies, prices.
organization development and
CLASSIFICATION OF THE
public relations.
FINANCIAL MARKETS
GOALS OF THE FINANCIAL MANAGER
1. As to term or maturity
●​ Sets direction and keeps those ●​ are distinguished as to the
concerned focused term or maturity of the
●​ Provides a reference to instruments they deal with.
measure performance and Short instruments are dealt
progress of the company with in the money market, while
●​ Target towards which long-term instruments are
members of the organization dealt with in the capital market.
need to move forward to a. Money market
●​ Members of the organization b. Capital market
need to hit their goals. 2. As to type of issue
●​ Financial goals should be ●​ a. Primary market
aligned with the overall goals -​ consists of underwriters,
of a firm issuers, and instruments.
●​ Among these goals are: -​ Transactions involves
a.​ acquisition of funds with the equity (stocks) or debt
least cost from the right securities (bonds)
sources at the right time ●​ b. Secondary market
b.​ effective cash management -​ are markets for currently
c.​ effective working capital outstanding securities.
management -​ Shares held by the public
d.​ effective inventory are termed outstanding
management shares or securities.
e.​ effective investment decisions
f.​ proper asset selection
g.​ proper risk management
 -​ The role of the ●​ If they buy securities, they are
secondary market is to investors or lenders
ensure that a holder can ●​ When they are the ones issuing
sell his security at any the securities they are
time. Commercial banks borrowers.
have trust departments ●​ The original issuers or
and treasury borrowers who borrow funds
departments that are issue what is termed as
major players in the primary securities
secondary market.
CLASSIFICATION OF
FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIARIES
OR INTERMEDIARIES ●​ Financial intermediaries are
●​ They are the firm that bridge varied but they all have one
the gap between the surplus characteristics in common. All
units (SUs) or investors lenders of them issue secondary
and the deficit units (DUs) or securities to be able to
borrowers, which issue their purchase securities issued by
own financial instruments deficit units.
called secondary instruments. 2. DEPOSITORY INSTITUTIONS
●​ They channel the funds from ●​ Refers to the financial
the lenders to the borrowers institution that accepts
●​ A financial institution is an deposits from surplus units.
organization that provides ●​ It issues checking current
financial products and services account, savings, and time
to customers. deposit and help depositor
●​ Financial institutions provide with money market placement.
products like checking and ●​ Depository institute include:
other accounts that help 1. Commercial banks
consumers manage money. A.​ Ordinary commercial
They provide services and banks
advice to help consumers B.​ Expanded commercial or
meet. universal banks
●​ They include the depository 2. Thrift banks
and non-depository institutions A.​ Savings and mortgage
and sometime a borrower banks
themselves. B.​ Private development
●​ When they underwrite banks
securities or acts as brokers or C.​ Savings and loan
dealers, they are associations
intermediaries.
 D.​ Microfinance thrift banks
E.​ Credit unions
2. NON-DEPOSITORY INSTITUTIONS
●​ Obtain funds by issuing
deposits issue contracts that
are not deposits
●​ Non depository institution such
as pension funds, life insurance
companies, mutual funds, and
finance companies.
●​ Pension funds and insurance
companies issue contracts for
future payments under certain
specified conditions.
●​ Non-depository institution
can be classified into the
following:
1. Insurance companies
A.​ Life insurance companies
B.​ Property/casualty
insurance companies
2. Fund managers
3. Investment
banks/houses/companies
4. Finance companies
5. Securities dealers and
Brokers
6. Pawnshop
7. Trust companies and
departments
8. Lending investors