Ateneo de Naga University Senior High School-Grade 12

1Q- ABMS114 ATENEO de NAGA UNIVERSITY
Ateneo Avenue, Naga, 4400 Camarines Sur
SENIOR HIGH SCHOOL- GRADE 12

Academic Track- Accountancy and Business Management
INTRODUCTION TO FINANCIAL MANAGEMENT 4. How they raise additional funds they need
(PART 1) (Gitman)
Objectives
1. Define finance
2. Describe who are responsible for financial FORMS OF BUSINESS ORGANIZATION
management within an organization
3. Describe the primary activities of financial Sole Proprietorship
manager • a business owned by one person and
operated for his or her own profit.
WHAT IS FINANCE? Partnership
• Finance can be defined as the science and art • a business owned by two or more people and
of managing money. (Gitman & Zutter, 2012) operated for profit.
Corporation
Budgeting • an entity created by law owned by
• It is the act of estimating revenue (in the form shareholders.
of their allowance) and expenses over a
period of time (in this case, on a daily basis). HOW AND WHERE CAN YOU BUY STOCKS?
• Corporations
WHAT IS INVESTMENT? • Major share holders
• An investment is an asset or item acquired Prices of stocks
with the goal of generating income or • Earnings
appreciation. Appreciation refers to an • economics
increase in the value of an asset over time.
When an individual purchases a good as an WHO IS A SHAREHOLDER?
investment, the intent is not to consume the • A shareholder also referred to as a
good but rather to use it in the future to create stockholder, is a person, company, or
wealth. institution that owns at least one share of a
company's stock, known as equity.
Sources of Funds • Have an opportunity to manage the
a. Personal money corporation.
b. Love money Overall Objective:
c. Venture capital • “wealth maximization”
d. Angels
e. Business incubators HOW DO WE MEASURE SHAREHOLDERS
f. Government grants and subsidies WEALTH?
g. Bank loans • Shareholder’s wealth is measured based on
h. Stocks the current market price of the corporation’s
i. Loan stocks.
j. Lenders or investors
k. operations FACTORS THAT INFLUENCE MARKET PRICE
Finance is concerned with decisions about: Controllable by Management
1. How much of their earnings they spend • Profitability
2. How much they save or how much they need
• Having a good liquidity and reasonable
3. How they invest their savings
leverage postion.
• Dividends

• Competent management which affects the 7. Experienced or seasoned manager

company’s operating efficiency
• Coming up with corporate plans that improve “Corporate plans that improve the business
the business prospects of the company. prospects.”
Uncontrollable External Factors WHAT IS THE ROLE OF FINANCIAL

• Macroeconomic conditions MANAGEMENT?
• Political stability • Deals with decisions that are supposed to
• Prospects of the industry where the company maximize the value of shareholders’ wealth.
operates • These decisions will ultimately affect the
• General market sentiment markets perception of the company and
• Flow of foreign funds invested in the influence the share price.
Philippine stock market. • The goal of financial management is to
maximize the value of shares of stocks.
PROFITABILITY • Managers of a corporation are reasonable for
• Profit is a measure of the financial making the decisions for the company that
performance of a company for a period of would lead towards shareholders’ wealth
time. maximization.
• Although it is a major driver for increasing the
value of stock, an investor should not relay on
profits alone. As discussed earlier, it is
possible that the company has profits but its
cash flow is negative.
GOOD LIQUIDITY AND REASONABLE

LEVERAGE POSITION
• Liquidity and leverage refers to the
company’s management of the type and
amount of assets and liabilities that it will hold
in the course of its operations.
DIVIDENDS
• Holders of share receive dividends from a
corporation as returns on their investments in
form of cash or other properties. Companies
which have better dividend policies are
generally more attractive than company who
do not pay out dividends,
COMPETENT MANAGEMENT
1. Visionary
2. Decisive
3. People-oriented
4. Inspiring
5. Innovative
6. Respected

INTRODUCTION TO FINANCIAL MANAGEMENT REVIEW

(PART 2) Financial Asset- an asset that is a cash and equity
Objectives instrument of another equity
1. Illustrate how the financial system works. Financial Liability- ang liability that is a
2. Define financial markets, financial contractual obligation
institutions and financial instruments Equity Instrument- any contract that evidence a
residual interest in the asset of an entity deducting
PRIVATE PLACEMENT all liabilities
• Sale of a new security directly to an investors
or group of investors Supplier of Funds
Users of funds
FINANCIAL MARKETS
• Organized forums in which the suppliers and DEBT INSTRUMENTS
users of various types of funds can make • Generally, have fixed returns due to fixed
transactions directly. interest rates
• Interest rates is the profit
Treasury bonds and Corporate bonds
treasury bills
These bonds and bills These bonds usually
have usually low have higher interest
interest rates and have rates than Treasury
very low risk of default bonds. However, these
since the government bonds are not risk free
assures that these will
be paid
EQUITY INSTRUMENTS
• Generally have varied returns based on the
FINANCIAL INSTITUTIONS performance of the company
• Intermediaries that channel the savings of Preferred stock Common stock
individuals, businesses, and governments If a company were to be If the company’s growth
into loans or investments. liquidated and its assets is spurring the common
have to be distributed, stockholders will benefit
‘Verbal and Non-verbal Agreement’ no asset will be on the growth.
distributed to common
FINANCIAL INSTRUMENT stockholders unless all
• Is a real or virtual document representing a the claims of the
legal agreement involving some sort-of preferred have been
monetary value. These can de debt securities given.
like corporate bonds or equity like share of
stocks. FINANCIAL MARKET
• When it is issued it gives rise to the financial • Creates security product for investors or
asset on one hand and a financial liability or lenders and make these funds available for
equity instrument on the other. those who needs money.

PRIMARY VS. SECONDARY MARKETS • Financial institutions that receive payments

Private placement Secondary market from employees and invest the proceeds on
The sale of a new Financial market in their behalf
security directly to an which preowned E. Other Financial Institutions
investor or group of securities (those that • Include pension funds like Government
investors. are not new issues) are Service Insurance System (GSIS), and Social
traded. Security System (SSS), Unit investment trust,
investment banks, and credit unions, among
Initial Public Offering others,
Public Offering
MONEY MARKETS VS. CAPITAL MARKETS

Money market Capital market
A financial relationship A market that enables
created between suppliers and users of
suppliers and users of long-term funds to make
short-term funds. transactions.
FINANCIAL INSTITUTIONS
• A type of financial institution that acts as the
middleperson between two parties- the
investors and the borrowers. Financial Role of Financial Markets
intermediaries raise and accumulate money • Make financing decisions that require funding
from an investor and offer the accumulated from investors in the financial markets.
money to individuals or corporate entities in
need of financial assistance. Role of Financial Markets
• The financial markets provide a forum in
A. Commercial Banks which firms can issue securities to obtain the
• Individuals deposit funds at commercial funds that they need and in which investors
banks, which use the deposited funds to can purchase securities to invest their funds.
provide commercial loans to firms and
personal loans to individuals, and purchase Role of Investors
debt securities until the funds are needed to • Investor provide the funds that are to be used
pay off claims by policyholders by financial managers to finance corporate
B. Insurance Companies growth.
• The insurance companies pool these
payments and invest the proceeds in various
securities until the funds are needed to pay
off claims by policyholders.
C. Mutual Funds
• Mutual funds are owned by investment
companies which enable small investors to
enjoy the benefits of investing in a diversified
portfolio of securities purchased on their
behalf by professional investment managers.
D. Pension Funds

THE CORPORATE ORGANIZATION STRUCTURE Þ Appointing and removing members of the

Objectives top management including the president
• Understand the key positions in a corporate (CEO)
organization and identify the roles of each. Þ Determining top management’s
compensation.
Þ Approving the information and other
disclosures reported in the financial
statement (Cayanan, 2015)
PRESIDENT (CHIEF EXECUTIVE OFFICER)

• The role of a president may vary from one
company to another.
Responsibilities:
Þ Overseeing the operations of a company
and ensuring that the strategies approved by
the BODs are implemented as planned.
Þ Performing all areas of management:
This diagram emphasize that each line is planning, organizing, staffing, directing and
working for the interest of the person on the line controlling.
above them. For instance, the managers of the Þ Representing the company in professional,
company are making decisions for the interest of the social, and civic activities.
board of directors and the board of directors does the
same for the interest of the shareholders, it follows While the president performs all the function of
the goal of each individual in a corporate organization management it does not necessarily mean that
should have an objective of shareholders’ wealth he have to do it alone. To assist him are the vice
maximization. presidents of different functional areas: finance,
marketing, production and administration.
SHAREHOLDERS
• Responsible for electing board of directors VP FOR MARKETING
(BOD). Each share held is equal to one
• Formulating marketing strategies and plans.
voting right. Since BODs are elected by the
• directing and coordinating company sales.
shareholders, they are tasked to carry out
the objectives of the shareholders. • Performing market and competitor analysis.
• Analyzing and evaluating the effectiveness
BOARD OF DIRECTORS and cost marketing methods applied.
• Highest policy making body in a corporation. • Conducting or directing research that will
Its primary responsibility is to ensure that the allow the company to identify new marketing
corporation is operating to serve the best opportunities.
interest of the stockholders. • Promoting good relationships with customers
and distributors (Cayanan, 2015).
Responsibilities:
Þ Setting policies on investments, capital VP FOR PRODUCTION
structure and dividend policies. • Ensuring production meets customer
Þ Approving company’s strategies, goals and demands.
budgets.

• Identifying production technology or process structure for the company. Capital Structure
that minimizes production cost and make the refers to how much of your total asset is financed
company cost competitive. by dept and how much is financed by your equity.
• Creating a production plan that maximizes the
utilization of the company’s production Asset = Liabilities + Owner’s Equity
facilities.
• Identifying adequate and cheap raw material • To acquire assets, a company needs funds.
suppliers (Cayanan, 2015) • It is financed by equity if an asset was
bought using cash from our pockets.
VP FOR ADMINISTRATION • If the asset was bought using a borrowed
• Coordinating the functions of administration, money, it is financed by debt.
finance, and marketing departments. • In the figure it could be interpreted; the total
• Assisting other departments in hiring assets is financed by 60% debt and 40%
employees. equity. Accordingly, the capital structure is 60
• Providing assistance in payroll preparation, debt and 40% equity.
payment of vendors, and collection of • The mix of debt and equity differs from
receivables. organizations to organizations depending on
• Determining the location and the maximum the management’s strategies. With this, it is
amount of office space needed by the the responsibility of the Financial Manager to
company. discern which type of financing (debt or
• Identifying the means, processes, or systems equity) is best for the company.
that will minimize the operating costs of the
company (Cayanan, 2015). II. INVESTING
A. Short term investment decisions are
VP FOR FINANCE needed when the company is in an excess
(The role of the VP for Finance of the Financial cash position.
Manager) • To plan for this, the financial manager
should be able to make use of Financial
I. FINANCING Planning Tools such as budgeting and
Financial decision includes making decisions forecasting.
on how to fund long term investments (such as • Moreover, the company should choose
company expansions) and working capital which which type of investment it should invest
deals with the day to day operations of the that would provide a most optimal risk and
company (i.e., purchase of inventory, payment of return trade off.
operating expenses, etc.)
The role of VP for Finance of the financial B. Long term investments should be
manager is to determine the appropriate capital supported by a capital budgeting analysis
which is among the responsibilities of a
finance manager.
• Capital Budgeting Analysis is a tool to
assess whether the investment will be
profitable in the long run. This is a crucial
function of management especially if the
investment would be financed by debt.
• The lenders should have the confidence
that the investments that management

will push through with will be profitable or • Therefore, the choice between short
else they would not lend the company any and long-term sources depends on
money. the risk and return trade off that the
management is willing to take.
III. OPERATING
Deal with the daily operations of the IV. DIVIDEND POLICIES
company. The role of the VP for finance is
determining how to finance working capital It is the role of a financial manager to
accounts such as accounts receivable and determine when the company should declare
inventories. The company has a choice cash dividends. Some investors buy stocks
whether to finance working capital needs by because of the dividends they expect to receive
long-term or short-term sources. from the company; non-declaration of dividends
• Short-term sources are those that may disappoint these investors
will be payable in at most 12 months. Before the company may be able to declare
This includes short terms loans with dividends, two conditions must exist:
banks and suppliers’ credit. For short- 1. The company must have enough retained
term bank loans, the interest is earnings (accumulated profits) to support
generally lower as compared to that cash dividend declaration.
long-term loans. Hence, this would 2. The company must have cash.
lead to lower financing cost. However,
it pose a trade off between profitability Dividends come from the company’s cash and
and liquidity risk. Because this availability of unrestricted restrained earnings.
matures in a short period, there is a • Availability of finically viable long-term
possibility that the company may not investment.
be able to obtain enough cash to pay • Access to long term source of funds.
their obligation (i.e. liquidity risk). • Management’s Target Capital Structure.
• Supplier’s credit are the amounts
owed to the suppliers for the The functions of a finance manager are
inventories they delivered or services investing and its available cash may be used to invest
they provided. This is fee of interest in long term investments that would increase the
charges, but the obligations with them profitability of the company. Some small enterprises
have to be paid on time to maintain which are undergoing expansion may have limited
good supplier relationship. Such access to long term financing (both long-term debt
relationships should be nurtures to and equity). This results to these small companies
ensure time delivery of inventories. reinvesting their earnings into their business rather
• Long-term sources mature in longer than paying them out as dividends.
periods. Since this will be paid in a
much longer time, the lenders expect
more risk and place a higher interest Contrarily, a company which has access to
rate which make makes the cost of long-term sources of funds may be able to declare
long-term sources higher than the dividends even if they are faced with investment
short-term resources. However, since opportunities. However, these investment
it takes longer time to mature it gives opportunities are generally financed by both debt and
the company more time to gain cash equity.
to pay off the obligation in the future. Þ The management usually appropriates a
proportion of retained earnings for investment

undertakings and this may limit the amount of

retained earnings available for dividend
declaration.
Þ Creditors are not willing to finance entirely the
cos of a company’s long-term investment.
Thus, the need for equity financing (e.g.
internally generated funds or issuance of new
shares).
Þ Example of these companies are publicly
listed companies such as PLDT, Globe
Telecom, and Petron. PLDT and Globe have
generously distributed cash dividends for the
last five years (information as of 2014)
Þ For companies which have limited access to
capital and have target capital structure, they
may a residual dividend policy. This means
that when companies are faced with
investment opportunities, internally
generated funds will be used first to finance
these investments and dividends can only be
declared if there are excess funds.

REVIEW OF FINANCIAL STATEMENT payable (a liability account) so that the basic

PREPARATION, NALYSIS, INTERPRETATION accounting equation remains in balance.
PT.1 • In double-entry bookkeeping, there is the
concept of debit (dr) and credit (cr). Debit is
Accounting the left, and credit is the right.
• It is the systematic and comprehensive • There is also a concept of normal balances.
recording of financial transactions pertaining A normal balance, either a debit normal
to a business. balance or a credit normal balance, is the side
• Accounting is the process of recording where a specific account increases.
financial transactions pertaining to a • In the accounting equation, asset is on the left
business. The accounting process includes side, while liabilities and equity is on the right
summarizing, analyzing and reporting these side. Therefore, asset has a debit normal
transactions to oversight agencies, regulators balance, meaning that cash as an asset is
and tax collection entities. The financial debited to increase, while credited to
statements used in accounting are a concise decrease.
summary of financial transactions over an • On the other hand, liabilities and owners’
accounting period, summarizing a company's equity have a credit normal balance. This
operations, financial position and cash flows. means that a liability account is credited to
• Accounting is one of the key functions for increase, while debited to decrease. The
almost any business. It may be handled by a accounting equation provides the foundation
bookkeeper or an accountant at a small firm, for what eventually becomes the balance
or by sizable finance departments with sheet.
dozens of employees at larger companies.
The reports generated by various streams of II. T-Account Analysis
accounting, such as cost accounting and
managerial accounting, are invaluable in • In double-entry bookkeeping, the terms debit
helping management make informed and credit are used to identify which side of
business decisions. the ledger account an entry is to be made.
Debits are on the left side of the ledger and
I. Accounting Equation Credits are on the right side of the ledger. It
does not matter what type of account is
Asset = Liabilities + Owner’s Equity involved.
• This means that the whole assets of the
company come from the liability, or debt of the
company, and from the capital of the owner of
the business, and the income it generated
from the business operations. This reflects • The debit to cash increases the Cash Account
the double-entry bookkeeping, and shown in by PHP500 while the credit to Accounts
the balance sheet. Payable increases this liability account by the
• Double entry bookkeeping tells us that if we same PHP500.
add something from the one side, which is • In the above example, we analyzed the
asset, we must add the same amount to the accounting equation in terms of assets,
other side to keep them in balance. liabilities, and owners’ equity. These are
• For example, if we were to increase cash (an called Real or Permanent Accounts. These
asset) we might have to increase note accounts remain open and active for the life
of the enterprise.

• In contrast, there are accounts that reflect • On the other hand, a resource that has been
activities for a specific accounting period. used for the current period is called an
These are called Nominal or Temporary Expense. At the end of each accounting
Accounts. After the end of the specific period period, expenses are closed out to the
and the start of a new period, the balance of Retained Earnings Account which decreases
the nominal accounts are zero. the Owners’ Equity. Since expenses
• Using the accounting equation, we can now decrease the owners’ equity, those expense
expand the analysis that will include both real accounts carry a normal debit balance.
and nominal accounts. All nominal accounts
will be then closed to a Retained Earnings B. Revenue Accounts
account at the end of the period, which is an • Revenue Accounts reflect the accumulation
owner’s equity account. of potential additions to retained earnings
during the current accounting period.
Illustrative Example: • At the end of the accounting period
accumulation of revenues during the period
Calvo Delivery Service is owned and are closed to the Retained Earnings Account
operated by Noel Calvo. The following selected which increases Owners’ Equity.
transactions were completed by Calvo Delivery • Therefore revenue accounts carry a normal
Service during February: credit balance meaning the same balance as
the Retained Earnings Account.
A. Received cash from owner as additional
investment, P35,000. Illustrative Example:
B. Paid creditors on account, P1,800.
C. Billed customers for delivery services on account, J. F. Outz, M.D., has been a practicing
P11,250. cardiologist for three years. During April 2009, Outz
D. Received cash from customers on account, completed the following transactions in her practice
P6,740. of cardiology:
Mar 1 Provide medical services to clients for cash

P35,000.
Mar 2 Paid rent for the month, P3,000. Paid
advertising expense, P1,800.
Mar 6 Purchased office equipment on account,
P12,300.
Mar 15 Paid creditor on account, P1,200.
Mar 27 Paid cash for repairs to office equipment,
III. Nominal Accounts P500
Mar 30 Paid telephone bill for the month, P180.
There are two major categories of nominal Mar 31 Paid electricity bill for the month, P315.
accounts: Expense and Revenue accounts:
A. Expense Accounts
• A resource, when not yet used up for the
current period, is considered an Asset and will
provide benefits at a future time.


REVIEW OF FINANCIAL STATEMENT • The journal serves as a record. Of when

PREPERATION, ANALYSIS AND transactions occurred and were recorded.
INTERPRETATION PART 2,3, AND 4 • For repetitive or high-volume transactions
(e.g. none thousand sales transactions in one
Objectives day), special journals are made. These
1. The learners will be able to identify and special journals include sales journal,
explain the basic steps in accounting purchases journal, cash receipts journal, and
process. cash disbursements journal.
2. Determine the basic financial statements
3. Define liquidity and solve liquidity ratios 3. Post the transactions on a ledger
(current and quick). • A transaction is first recorded in a journal.
4. Define profitability and solve profitability Periodically, the journal entries are
ratios (return on equity, return on assets, transferred to the accounts in the ledger.
gross profit margin, operating • The process of transferring the debits and
5. profit margin, net profit margin). credits from the journal entries to the
accounting is called posting.
• Ledgers provide chronological details as to
ACCOUNTING CYCLE how transactions affect individual accounts.
• Accounting is all about getting data and There are two types of ledgers: general
putting them into the accounting equation, the ledger and subsidiary ledger.
end of products are financial statements such
as a balance sheet and income statements,
the process of accounting follows a cycle
called the accounting cycle.
• It starts with the identification of whether a
transaction is accountable or can be
quantified and ends with post-closing trial
balance
1. Analyze business transactions

• Carefully read the description of the
transaction to determine whether an asset, a
liability, an owner’s equity, a revenue, an
expense, or a drawing account is affected.
• For each account affected by the transaction,
determine whether the account increases or
decreases.
• Determine whether each increase or
decrease should be recorded as a debit or
4. Prepare an Unadjusted Trial Balance
credit, following the rules of credit and debit.
• List the name of the company, the title of the
trial balance is prepared.
2. Read this in the journal
• List the accounts from the ledger and enter
• Using the rules of debit credit, transactions
their debit of credit balance. In the debit or
are initially entered in a record called a journal
credit column of the trial balance.
and the entry made is called a journal entry.
• Total the debit and credit columns of the trial
balance.

• Verify that the total of the debit column equals • These are the statement of financial
the total of the credit column. position, statement of profit or loss, and
statement of cash flows.
5. Make adjustments. Journalize adjusting • Provides information and used to
entries estimate the liquidity and stuffs.
• Some expenses are not recorded daily. 8. Make closing entries
• Some revenues and expenses are earned as • If the revenues exceed expenses during an
time passes rather than as separate accounting period, retained earnings will
transactions. increase.
• Some revenues and expenses may be • The reverse is true which means that if the
unrecorded. expenses exceed revenues, the retained
a. Accruals earnings will decrease.
• These include unpaid salaries for the In closing temporary accounts:
accounting period, unpaid interest • Revenue account balances are transferred to
expense, or unpaid utility expenses. an account called Income Summary Account
b. Prepayments (sometimes profit or loss summary).
• If a company has prepaid expenses such • Expense account balances are also
as prepaid rent or prepaid insurance then transferred to the Income Summary Account.
the correct balances for these accounts • The balance of the Income Summary (net
have to be established at the end of each income or net loss) is transferred to the
accounting period to reflect their correct owner’s capital account.
balances. • The balance of the owner’s drawing account
c. Depreciation and amortization expenses is transferred to the owner’s capital account.
• Depreciation expenses are recognized at
the end of each accounting period 9. Make a post-closing trial balance
through adjusting entries. If there are • A post-closing trial balance shows the
intangible assets such as franchise, the accounts that are permanent or real. These
allocation of their costs which is called are the accounts that can be seen in your
amortization expense, is also recognized balance sheet. These are the accounts that
at the end of each accounting period can be seen in your balance sheet. The post
through adjusting entries. closing trial balance is prepared to test If the
d. Allowance for uncollectible accounts debit balances equal the credit balances after
• Bad debt expense from accounts closing entries are considered.
receivable is also recognized through
adjusting entries.
BASIC FINANCIAL STATEMENT
6. Prepare an Adjusted Trial Balance A financial statement is basically a summary of all
• An adjusted trial balance is prepared after transactions that are carefully recorded and
taking into consideration the effects of the transformed into meaningful information. It also
adjusting entries. Again, this is to ensure shows the company’s permanent and temporary
that the total debit balances equal the accounts.
credit balances after posting and
journalizing adjusting entries made. a. Income statement
• These are also known as the profit or loss
7. Prepare the financial statements statement, statement of comprehensive
income, or statement income.

• This a summary of the revenue and b. Quick Ratio

expenses of a business entity for a specific
period of time, such as a month or a year.
b. Statement of owner’s equity

• These are also known as the statement of
changes in equity.
• This reports the changes in the owner’s
equity over a period of time PROFITABILITY & PROFITABILITY RATIOS
• It is prepared after the income statement
because the net income or net loss for the Profitability
period is added or subtracted from the • It refers to the company’s ability to generate
owner’s equity. earnings. It is one of the most important goals
of businesses.
c. Balance Sheet • A measurement of efficiency and ultimately its
• This provides information regarding the success or failure. A further definition of
liquidity position and capital structure of a profitability is a business’s ability to produce a
company as of a given date. return on an investment based on its
• It must be noted that the information found in resources in comparison with an alternative
this report are only true as of a given date. investment.
• It shows a list of the assets, liabilities and
owner’s equity of a business entity as of a Profitability Ratios
specific date, usually at the close of the last • Assess a company’s ability to earn profits
day of a month or a year. from its sales or operations, balance
sheet assets, or shareholders’ equity.
d. Statement of cash flows Profitability ratios indicate how efficiently
• The statement of cash flows reports a a company generates profit and value for
company’s cash inflows and outflows for a shareholders.
period. • In discussing the formula of the ratios, its
• This is used by managers in evaluating past important that you know how the
operations and in0planning future investing components are computed or where they
and financing activities. are taken. For example, stockholder’s
• It is also used by external users such as equity should include all of its
investors and creditors to assess a components including retained earnings.
company’s profit potential and ability to pay.
PROFITABILITY RATIOS
LIQUIDITY AND LIQUIDITY RATIOS Return on equity
• Refers to the company’s ability to satisfy its (Measures the amount 𝐍𝐞𝐭 𝐢𝐧𝐜𝐨𝐦𝐞
short-term obligations as they come due. of net income earned in 1
relation to stockholders 𝐒𝐭𝐨𝐜𝐤𝐡𝐨𝐥𝐝𝐞𝐫𝐬 𝐞𝐪𝐮𝐢𝐭𝐲
a. Current ratio equity.)
Return on assets 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐈𝐧𝐜𝐨𝐦𝐞
(Measures the ability of
a company to generate 𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬

income out of its

resources or assets.) ROA = 0.10
Gross Profit Margin
(shows how many 3. Gross Profit Margin
pesos of gross profit is
earned for every peso of 700,000
sale. It provides 2,000,000
information regarding
the ability of a company 𝐆𝐫𝐨𝐬𝐬 𝐩𝐫𝐨𝐟𝐢𝐭 Gross Profit Margin = 0.35
to cover its 𝐒𝐚𝐥𝐞𝐬
manufacturing cost from 4. Operating Profit Margin
its sales. Remember
that gross profit is just 501,000
sales less cost of goods 2,000,000
or cost of services.)
Operating Profit Margin = 0.25
Operating profit 5. Net Profit Margin
margin
(shows how many 352,240
pesos of operating profit 2,000,000
is earned for every peso 𝐎𝐩𝐞𝐫𝐚𝐭𝐢𝐧𝐠 𝐢𝐧𝐜𝐨𝐦𝐞
of sale. It measures the 𝐒𝐚𝐥𝐞𝐬 Net Profit Margin = 0.18
amount of income
generated from the core
business of a
company.)
Net profit margin
(measures how much
net profit a company 𝐍𝐞𝐭 𝐢𝐧𝐜𝐨𝐦𝐞
generates for every
peso of sales or 𝐒𝐚𝐥𝐞𝐬
revenues that it
generates.)
PRACTICE:
1. Return on Equity
352,240
2,075,000
ROE = 0.17
2. Return on Assets
501,000
4,900,000

REVIEW OF FINANCIAL STATEMENT Accounts payable turnover

PREPERATION, ANALYSIS AND • Shows how many times a company pays off
INTERPRETATION PART 5 its accounts payable during a period.
EFFICIENCY RATIOS Purchases

• The credit period all boils down to the Accounts payable turnover =
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
capabilities of company to lend funds.
• Refers to a company’s ability to be efficient in
its operations. Specifically, it refers to the Average payment period
speed with which various current accounts • A solvency ratio that measures the average
are converted into sales, and ultimately, cash. number of days it takes a business to pay its
vendors for purchases made on credit.
EFFICIENCY RATIOS
Average payment period
Accounts receivable turnover 365
• Described as a ratio of average accounts =
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
receivable for a period divided by the net
credit sales for that same period.
sales
Accounts receivable trunover =
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 Operating cycle
Operating Cycle
Average collection period = Average collection period
• The amount of time that passes before a + Average age of inventory
company collects its accounts receivable.
Cash conversion cycle
Average collection period • Expresses how many days it takes a
365 company to convert cash into inventory, and
=
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 then back into cash via the sales process.
Inventory turnover Cash Conversion Cycle
• Indicates the rate at which a company sells = Average collection period
and replaces its stock of goods during a + Average Age if inventory
particular period. − Average age of payable
Cost of good sold
Inventory turnover =
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Average age of inventory or days'

Inventory
• The average number of days it takes for a firm
to sell off inventory. It is a metric that analysts
use to determine the efficiency of sales.
365
Average age of inventory =
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟

FINANCIAL LEVERAGE TYPES PF LEVERAGE RATIOS

1. Debt Ratio
WHAT IS FINANCIAL LEVERAGE? • This ratio measures the proportion of total
• It refers to the company’s use of debt. It assets finance by total liabilities or money
defines the company’s capital structure which provided by creditors (not by the business
indicates how much of the total assets are owners). The debt ratio is a financial ratio that
financed by debt and equity. measures the extent of a company's
• Leverage results from using borrowed capital leverage. The debt ratio is defined as the ratio
as a funding source when investing to expand of total debt to total assets, expressed as a
the firm's asset base and generate returns on decimal or percentage. It can be interpreted
risk capital. Leverage is an investment as the proportion of a company's assets that
strategy of using borrowed money— are financed by debt.
specifically, the use of various financial total liabilities
Debt ratio =
instruments or borrowed capital—to increase 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
the potential return of an investment.
• In deciding how to finance a business 2. Debt-to-Equity Ratio
venture, specifically what capital structure • A variation of debt ratio, shows the proportion
should be chosen. You have to know that with of debt to equity. More specifically, it reflects
increased debt comes greater risk as well as the ability of shareholder equity to cover all
higher potential return. For example: outstanding debts in the event of a business
Þ Pam has a small restaurant business with downturn.
current equity of PHP60,000. With the total liabilities
Debt to equity ratio =
increasing demand, she is planning to expand 𝑇𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦
her restaurant space. After much analysis she 3. Interest Coverage Ratio
determined that an initial investment of • This ratio shows the company’s ability to pay
PHP50,000 in fixed assets is necessary. its fixed interest charges in relation to its
These funds can be obtained in either of two operating income or earnings before interest
ways. The first is the no-debt plan, under and taxes. More specifically, it reflects the
which she would ask a relative to become an ability of shareholder equity to cover all
investor (owner) by investing the full outstanding debts in the event of a business
PHP50,000. The other alternative, the debt downturn. The interest coverage ratio is a
plan, involves borrowing PHP50,000 from the debt and profitability ratio used to determine
nearby rural bank at 10% annual interest. how easily a company can pay interest on its
Þ Pam expects PHP 30,000 in annual sales, outstanding debt
PHP18,000 in operating expenses, and a EBIT
30% tax rate. The no-debt plan results in Intrerest Coverage ratio =
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
after-tax profits of PHP8,400, which is an
8.4% return on equity (new equity of FACTORS INFLUENCE CAPITAL STUCTURE
PHP100,000)
• The debt plan results in PHP4,400 of after-tax 1. Nature of Business
profits or 8.8% return on equity (equity still at • If the business is risk then it has to be
PHP50,000). The debt plan provides Pam financed conservatively hence, lower debt
with a higher rate of return, but the risk of this ratio.
plan is also greater, because the annual • State of Business Development – A newly
PHP5,000 of interest must be paid whether formed business may have difficulty
Pam’s business is profitable or not. borrowing from banks. Banks usually look for

the historical financial performance of

borrowers.
2. Macroeconomic conditions
• If the overall economy is good then
management can be more aggressive on
taking in risk through increased debt
financing.
3. Prospects of the industry

• A growing industry makes business more
confident to take on more financial risk.
4. Taxes
• Interest expenses are tax deductible while
cash dividends are not. By having more debt
than equity, businesses save on taxes as
interest expense (multiplied by the tax rate)
decreases income tax due.
5. Management style
• Management and the board of directors can
be aggressive or conservative in terms of
taking on risk.

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1Q- ABMS114 ATENEO de NAGA UNIVERSITY

Ateneo Avenue, Naga, 4400 Camarines Sur

SENIOR HIGH SCHOOL- GRADE 12

SENIOR HIGH SCHOOL- GRADE 12

• Competent management which affects the 7. Experienced or seasoned manager

Uncontrollable External Factors WHAT IS THE ROLE OF FINANCIAL

GOOD LIQUIDITY AND REASONABLE

SENIOR HIGH SCHOOL- GRADE 12

INTRODUCTION TO FINANCIAL MANAGEMENT REVIEW

SENIOR HIGH SCHOOL- GRADE 12

PRIMARY VS. SECONDARY MARKETS • Financial institutions that receive payments

MONEY MARKETS VS. CAPITAL MARKETS

SENIOR HIGH SCHOOL- GRADE 12

THE CORPORATE ORGANIZATION STRUCTURE Þ Appointing and removing members of the

PRESIDENT (CHIEF EXECUTIVE OFFICER)

SENIOR HIGH SCHOOL- GRADE 12

SENIOR HIGH SCHOOL- GRADE 12

SENIOR HIGH SCHOOL- GRADE 12

undertakings and this may limit the amount of

SENIOR HIGH SCHOOL- GRADE 12

REVIEW OF FINANCIAL STATEMENT payable (a liability account) so that the basic

SENIOR HIGH SCHOOL- GRADE 12

Mar 1 Provide medical services to clients for cash

SENIOR HIGH SCHOOL- GRADE 12

SENIOR HIGH SCHOOL- GRADE 12

REVIEW OF FINANCIAL STATEMENT • The journal serves as a record. Of when

1. Analyze business transactions

SENIOR HIGH SCHOOL- GRADE 12

SENIOR HIGH SCHOOL- GRADE 12

• This a summary of the revenue and b. Quick Ratio

b. Statement of owner’s equity

SENIOR HIGH SCHOOL- GRADE 12

income out of its

SENIOR HIGH SCHOOL- GRADE 12

REVIEW OF FINANCIAL STATEMENT Accounts payable turnover

EFFICIENCY RATIOS Purchases

Average age of inventory or days'

SENIOR HIGH SCHOOL- GRADE 12

FINANCIAL LEVERAGE TYPES PF LEVERAGE RATIOS

SENIOR HIGH SCHOOL- GRADE 12

the historical financial performance of

3. Prospects of the industry

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