CHAPTER 1: NATURE, PURPOSE AND SCOPE OF FINANCIAL 3.

3. Compliance with legal and regulatory provisions relating to ● Find the best and least expensive sources of funds and to
MANAGEMENT funds procurement, use and distribution as well as invest these funds into the best and most efficient mix of assets
coordination of finance function with the accounting function
Finance. As defined by Webster’s Dictionary, finance refers to the ● Respond effectively to changes in supply, demand and prices
system that includes the circulation of money, the granting of credit, FINANCIAL DECISIONS as well as no more general and overall economic factors.
the making of investments and the provision of banking facilities.
1. Investment Decision- determine how scarce or limited CHAPTER 2: RELATIONSHIP OF FINANCIAL OBJECTIVES TO
AREAS OF FINANCE resources in terms of funds of the business firms are ORGANIZATIONAL STRATEGY AND OTHER ORGANIZATIONAL
committed to projects. OBJECTIVES
1. Financial Management. also known as Corporate Finance,
Managerial Finance & Business Finance 2. Financing Decision- mix of debt and equity chosen to finance MAIN FINANCIAL GOAL: CREATING VALUE FOR INVESTORS
investments should maximize the value of investments made.
OBJECTIVES: INVESTORS' POV: To increase the value of their INVESTMENTS
3. Dividend Decision- determination of quantum of profits to be
- Maximize profits distributed to the owners, the frequency of such payments and HOW? By investing it to different investments securities
the amounts to be retained by the firm.
- Track liquidity and cash flow COMPANY'S POV: Create value for investors
SIGNIFICANCE OF FINANCIAL MANAGEMENT
- Develop financial forecasts SHORT TERM AND MEDIUM TERM OBJECTIVES:
1. Broad Applicability
- Maximize the current value per share of the existing stock or ● Maximization of return on investment
ownership in a business firm - Any organization whether motivated with earning profit or
not having cash flow requires to be viewed from the angle ● Growth of earnings per share and price/earnings ratio through
1. Capital Markets of financial discipline. The principles of finance are maximization of net income
applicable wherever there is cash flow.
● Stock Market. is a place where investors go to trade equity ● Minimization of finance charges
securities (e.g., shares) issued by corporations. 2. Reduction of Chances of Failure
LONG TERM OBJECTIVES:
Example: PSE (Philippine Stock Exchange), SM, AyalaLand, BPI, - A firm having the latest technology, sophisticated
BDO, Unibank, Meralco machinery, high caliber marketing and technical experts, ● Growth in the market value of the equity shares
and so forth may still fail unless its finances are managed
● Bond market is where investors go to buy and sell debt by sound principles of financial management. The strength ● Survival and sustained growth of the firm
securities issued by corporations or governments. of business lies in its financial discipline. Therefore, the
finance function is treated as primordial which enables the RESPONSIBILITIES TO ACHIEVE THE FINANCIAL OBJECTIVES
Example: PAG-IBIG MP2 other functions like production, marketing, purchase, and
personnel to be effective in the achievement of 1. INVESTING. Deals with managing the firm's assets
2. Investments. decisions concerning stocks and bonds and organizational goal and objectives.
include a number of activities: ASSERT MIX- amount of pesos invested in current and fixed assets.
3. Measurement of Return on Investment
● SECURITY ANALYSIS- finding the proper values of individual HURDLE RATE- aim at investments in assets only when they are
securities - Anybody who invests his money will expect to earn a expected to earn a return greater than a minimum acceptable return.
reasonable return on his investment. The owners of
● PORTFOLIO THEORY- best way to structure portfolios or businesses try to maximize their wealth. 2. FINANCING.
baskets of stocks and bonds
RELATIONSHIP BETWEEN FINANCIAL MANAGEMENT AND ● Ways in which firm obtains and manages the financing it needs
● MARKET ANALYSIS- issue whether stock and bond markets ACCOUNTING to support its investment
at any given time are "too high" "too low" or about right
Finance and accounting functions are intertwined and the ● Finance manager should keep in view how and where to raise
SCOPE OF FINANCIAL MANAGEMENT finance function is often considered as part of the functions of the money, determination of debt-equity mix, impact of interest and
accountant. inflation rates of the firm.
1. Procurement of short-term as well as long-term funds from
financial institutions Financial Managers can make better decisions if they apply these 3. OPERATING. Concerned with working capital management
basic economic principles.
2. Mobilization of funds through financial instruments WORKING CAPITAL- firm short term asset and short term liabilities
Finance Manager
 ● Ensuring that the firm has SUFFICIENT RESOURCES to institutions. This type of financing is generally required for the Finance is one of the major functional areas of a business. For
continue its operations and avoid costly interruptions. procurement of purchase cheaper Fixed Assets such as machinery, example, the functional areas of business operations for a typical
equipment, vehicles, etc. manufacturing firm are manufacturing, marketing, and finance:
ENVIRONMENTAL "GREEN" POLICIES AND THEIR
SHORT-TERM SOURCES - Trade credit, loans from Manufacturing deals with the design and production of a product.
IMPLICATIONS FOR THE MANAGEMENT OF THE ECONOMY commercial banks and commercial papers. This type of financing is
AND FIRM used to purchase raw materials, pay wages to production workers, Marketing involves the selling, promotion, and distribution of a
pay trade credit, taxes, interest on a bank loan, etc. product.
● Private property rights can promote prosperity and cooperation
and at the same time protect the environment, but do they CHIEF FINANCIAL OFFICER - A senior executive Manufacturing and marketing are critical for the survival of a firm
protect the environment sufficiently? In recent years, people responsible for managing the financial actions of their company because these areas determine what will be produced and how
have increasingly turned to the government to achieve these products will be sold. However, these other functional areas
additional environmental improvements. Sometimes, people CONTROLLER - Handles Cost & Financial Accounting, tax could not operate without funds. Since finance is concerned with
turned to the government because property rights failed to hold payments and management information systems all of the monetary aspects of a business, the financial manager
polluters accountable for the costs they were imposing on must interact with other managers to ascertain the goals that must
others. In these "external cost cases", the government may be TREASURER - Responsible in managing the firm's cash be met, when and how to meet them. Thus, finance is an integral
able to improve accountability and protect rights more efficiently and credit, its financial planning and its capital expenditures. part of total management and cuts across functional boundaries.
by regulation. In other instances, people with strong desires for
various environmental amenities (for example, green spaces, THE FINANCE ORGANIZATION CORPORATE GOVERNANCE
hiking trails and wilderness lands) want the government to force
others to help pay for them. The financial management function is usually associated with a top Corporate governance is the process of monitoring managers and
officer of the firm such as a Vice President of Finance or some other aligning their incentives with shareholders goals. In reality, because
CHAPTER 3: FUNCTIONS OF FINANCIAL MANAGEMENT Chief Financial Officer (CFO). Figure 3-2 is a simplified shareholders are usually inactive, the firm actually seems to belong
organizational chart that highlights the finance activity in a large firm. to management. Generally speaking, the investing public does not
ROLE OF FINANCIAL MANAGER As shown, the Vice President of finance coordinates the activities of know what goes on at the firm's operational level. Managers handle
the treasurer and the controller. The Controller's office handles cost day-to-day operations, and they know that their work is mostly
1. ANALYSIS & PLANNING and financial accounting, tax payments, and management unknown to investors. This lack of supervision demonstrates the
information systems. The Treasurer's office is responsible for need for monitors. Figure 3-3 shows the people and organizations
Financial Manager shall utilize both quantitative and managing the firm's cash and credit, its financial planning, and its that help monitor corporate activities.
qualitative analysis of all operational aspects of company and shall capital expenditures.
consider economics and business trends, review past company
performance and attempt to anticipate obstacles and potential
problems.

2. ACQUISITION OF FUNDS

Financial Manager should know whether these funds are

for short term, medium term or long term use.

3. ALLOCATION OF FUNDS

Financial Manager should know where to allocate funds

and obtain best mix of financing alternatives and to develop an
appropriate dividend policy. Financial Manager should know whether
these funds are for short term, medium term or long term use.
JOBS IN FINANCE
LONG-TERM SOURCES - shares and debentures, long-
term borrowings and loans from financial institutions. This type of ● Finance prepares students for jobs in banking, investments,
financing is generally required for the procurement of expensive insurance, corporations and government.
Fixed Assets such as land, buildings, assembly lines, etc. It can be
used in building a new factory, international expansion, or acquiring ● Accounting students need to know marketing management and
or taking over another business. human resources. They also need to know finance for it affects
decisions in all those areas.
MEDIUM-TERM SOURCES - borrowings from commercial RELATIONSHIP WITH OTHER KEY FUNCTIONAL MANAGERS
banks, public deposits, lease financing and loans from financial IN THE ORGANIZATION ETHICAL BEHAVIOR
 Ethics are of primary importance in any practice of ] 1. Unlimited liability 5. LIMITED LIABILITY PARTNERSHIP (LLP)- similar to LLC, and it
finance. Finance professionals commonly manage other people's is used for professional firms in the fields of accounting, law and
money. For instance, corporate managers control the stockholders' 2. Limitations in raising capital architecture.
firm, bank employees perform cash receipts and disbursements
functions and investment advisors manage people's investment 3. Lack of continuity LLCs and LLPs provide limited liability protection but they are taxed
portfolios. as partnerships, where general partner has full control of the
2. PARTNERSHIP- legal arrangement between TWO or more business while the investors have votes in proportion to their
FINANCIAL SCANDALS people who decide to do business together. ownership interest.

1.LEHMAN BROTHERS (REPURCHASE AGREEMENT) ADVANTAGES IMPORTANT BUSINESS TRENDS

Repurchase Agreement is a short term borrowing for 1. Ease of formation - Increased globalization of business
dealers in government securities. Lehman Brothers sold toxic assets
to Cayman Island banks, understanding that they would eventually 2. Additional sources of capital - Ever improving information technology (IT)
be bought back. The global financial services firm hid over $50
billion in loans disguised as sales. The scandal was exposed in 3. Management base - Corporate Governance
September 2008, when Lehman Brothers filed for bankruptcy.
4. Tax implication - Outsourcing
2. BERNIE MAD OFF (PONZI SCHEME)
DISADVANTAGES CHAPTER 5: UNDERSTANDING FINANCIAL STATEMENTS
Ponzi Schemes ultimately require an unsustainably large
pool of investors to keep the racket going The Bernie Madoff 1. Unlimited liability GENERAL OBJECTIVES OF FINANCIAL STATEMENTS
scandal came to light the very same year. Bernard L. Madoff
Investment Securities LLC was a Wall Street investment firm 2. Lack of continuity ● FOR ECONOMIC DECISIONS
founded by Madoff, who tricked investors out of $64.8 billion through
the largest Ponzi scheme in history. 3. Difficulty of transferring ownership - Determines the capacity of an enterprise to pay its
employees and suppliers, meet interest payments,
3. SATYAM (FALSIFYING RECORDS) 4. Limitations in raising capital repay loans and make distributions to its owners.

In 2009, Indian IT services and back-office accounting firm 3. CORPORATION- legal entity created by state, and it is separate ● FINANCIAL POSITION
Satytam admitted to falsifying revenues, margins and cash balances and distinct from its owners and managers.
to the tune of 50 billion rupees. Although founder and Chairman - Information about the economic resources
Ramalinga Raju and his brother were charged with breach of trust, ADVANTAGES controlled by the enterprise and its capacity in the
conspiracy, cheating and falsification of records, they were released past
after the Central Bureau of Investigation failed to file charges on 1. Limited liability
time. - Information about financial structure
2. Unlimited life
CHAPTER 4: BUSINESS ORGANIZATION AND TRENDS - Information in predicting how successful the
3. Ease in transferring ownership enterprise in further finance
FORMS IN BUSINESS ORGANIZATIONS
4. Ability to raise capital - Information about liquidity and solvency
1. PROPRIETORSHIP- unincorporated business owned by ONE
individual. DISADVANTAGES ● PERFORMANCE OF AN ENTERPRISE

ADVANTAGES 1. Time and cost formation - Information about the variability of performance is
important and useful in predicting the capacity of
1. Easy of entry and exit 2. Regulation an enterprise to generate cash flows from its
existing resource base.
2. Full ownership and control 3. Taxes
● CHANGES IN FINANCIAL POSITION
3. Tax savings 4. LIMITED LIABILITY COMPANY (LLC)- hybrid between
partnerships and a corporation - Provide information concerning changes in
4. Few government regulations. financial position of an enterprise which is useful
in order to assess its investing, financing and
DISADVANTAGES operating activities during the reporting period.
DEMAND FOR FINANCIAL ACCOUNTING INFORMATION

● Manager and employees

● Investor & Analyst

● Creditor & Supplier

● Shareholders & Directors

● Regulatory & Tax Agencies

● Customers & Potential Strategic Partners FINANCIAL STATEMENTS

● Other Decision Makers 1. Statement of Financial Position

Net Working Capital
SOURCES OF INFORMATION ABOUT BUSINESS ENTERPRISE - It reports the company's resources (assets) namely, what the
company owns and also the sources of asset financing. CURRENT ASSETS-CURRENT LIABILITIES
1. The audited annual report that includes four (4) financial
statements: Statement of Financial Position (Balance - Balance Sheet Net Operating Working Capital
Sheet), Statement of Comprehensive Income, Statement of
Stockholders Equity and Statement of Cash Flow ; with OWNER FINANCING- money from shareholders & any profit CURRENT ASSETS-NON INTEREST CURRENT LIABILITIES
explanatory notes and the management's discussion and retained by the company (Accounts payable. Accrued salaries and wages. Deferred income
analysis of financial results. taxes)
NON-OWNER FINANCING- raise money from banks or other
2. The unaudited quarterly or interim reports that include summary creditors and suppliers LIABILITIES
versions of the four financial statements and limited additional
disclosure. ● Both OWNERS and NON OWNERS hold claims on company Current Liabilities
ASSETS.
CONSTRAINTS ON RELEVANT AND RELIABLE INFORMATION ● Notes payable
● OWNERS claim the company's EQUITY.
1. TIMELINESS ● Sales taxes payable
● NON OWNERS claims on the company's LIABILITY.
- If there is undue delay in the reporting of information, it may ● Unearned revenues
lose its relevance.
● Current maturities of long- term debt
2. BENEFIT & COST
● Statement presentation and analysis
- The benefits derived from information should exceed the
NON-CURRENT LIABILITIES
cost of providing it.
● Bond basics
3. QUALITATIVE CHARACTERISTICS
● Accounting for bond issues
- The aim is to achieve an appropriate balance among the
characteristics in order to meet the objective of financial
● Accounting for bond retirements
statements.
INVESTING ACTIVITIES. Represented by the company's assets ● Accounting for long-term notes payable
4. FAIR PRESENTATION
and these assets are financed by a combination of non owner
financing (LIABILITIES) and owner financing (EQUITY) ● Statement presentation and analysis
- The applications of the principal qualitative characteristics
and of appropriate accounting standards, normally results
FINANCING ACTIVITIES. Funding is provided by a combination of 2. Statement of Comprehensive Income
in financial statements that convey what is generally
owner and non owner financing.
understood as a true and fair view of such information. - Reports on the company's performance over a period of time
WORKING CAPITAL. Also known as Current Assets, which is used and lists amounts for revenues, expenses and other
ARTICULATION - Linkage of the four financial Statement
and then replaced throughout the year. comprehensive income.
Net Income = Total Revenue - Total Expenses have competitive advantages? Can it protect itself from new ● Limitations of the performance measures or tools and
entrants? At what cost? How must it compete to survive? techniques used in the analysis. Quantitative measurements
OPERATING ACTIVITIES are not absolute measures but should be interpreted relative to
6. FINANCING. Must it seek financing from public markets? Is it the nature of the business and in the light of past, current and
● Use company resources to produce, promote and sell its going public? Is it seeking to use its stock to acquire another future operations.
products and services. company? Is it in danger of defaulting on debt covenants? Are
there incentives to tell an overly optimistic story to attract lower ● Analysts should be alert to the potential for management to
● These activities extend from INPUT MARKET involving cost of financing or to avoid default on debt? influence the outcome of financial statements in order to
SUPPLIERS of materials and labor to a company's OUTPUT appeal to creditors, investors and others.
MARKETS involving CUSTOMERS of products and services. 7. LABOR. Who are its managers? What are their backgrounds?
Can they be trusted? Are they competent? What is the state of FINANCIAL RATIO ANALYSIS
3. Statement of Stockholder’s Equity employee relations? Is labor unionized?
● It is a comparison in fraction, proportion , decimal or percentage
- Reports on changes in key types of equity over a period of time. 8. GOVERNANCE. How effective is its corporate governance? of two significant figures taken from financial statements.
Does it have a strong and independent board of directors? Does
CONTRIBUTED CAPITAL. Represents the cash that the company a strong audit committee of the board exist, and is it populated ● It expresses the direct relationship between two or more
received from the sale of stock to stockholders less any fund with outsiders? Does management have a large portion of its quantities in the statement of financial position and statement of
expended for the repurchase of stock wealth tied to the company's stock? comprehensive income of a business firm.

RETAINED EARNINGS. Cumulative total amount of income that the 9. RISK. Is it subject to lawsuits from competitors or shareholders? 1. LIQUIDITY RATIO. Firm's ability to pay off debts that are
company has earned and that has been retained in the business Is it under investigation by regulators? Has it changed auditors? maturing within a year or within the next operating cycle.
and not distributed to its shareholders. If so why? Are its auditors independent? Does it face Liquidity ratios are necessary if the firm is to continue operating.
environmental and/or political risks?
4. Statement of Cash Flow 2. ASSET MANAGEMENT RATIO. How efficiently the firm is
BASIC OF PROFITABILITY ANALYSIS using its assets. Good asset management ratios are necessary
- Change in a company's cash balance over a period of time and to keep its costs low and this, its net income high.
reports the inflows and outflows from operating, investing and The primary goal of financial management is to maximize
financing activities. shareholder's wealth, not accounting measures such as net income 3. DEBT MANAGEMENT RATIO. How the firm has financed its
or earnings per share (EPS). However, accounting data influence assets as well as the firm's ability to repay its long-term debt. It
ASSESSMENT OF THE FIRM’S OPERATING EFFICIENCY & stock prices and this data can be used to see why a company is indicate how risky the firm is and how much its operating
FINANCIAL POSITION THROUGH FINANCIAL STATEMENT performing the way it is and where it is heading. income must be paid to bondholders rather than stockholders
ANALYSIS
FINANCIAL ANALYSIS 4. PROFITABILITY RATIO. How profitability of the firm is
ANALYZING THE BROADER BUSINESS ENVIRONMENT operating and utilizing its assets. It combine the asset and debt
● Comparing the firm's performance to that of other firms in the management categories and show their effects on return on
1. LIFE CYCLE OF A BUSINESS. At what stage in its life is this same industry. equity.
company? Is it a startup, experiencing growing pains? Is it strong
and mature, reaping the benefits of competitive advantages? Is it ● Evaluating trends in the firm's financial position over time. 5. MARKET BOOK RATIO. Consider the stock price give us an
nearing the end of its life, trying to milk what it can from stagnant idea of what investors think about the firm and its future
product lines? prospects. It tell us what investors think about company and its
prospects.
2. OUTPUTS. What products does it sell? Are its products new, LIMITATION OF FINANCIAL STATEMENT ANALYSIS
established or dated? Do its products have substitutes? How
complicate are its products to produce? 1. Information derived by the analysis are not absolute measures
of performance in any and all of the areas of business
3. BUYERS. What products does it sell? Are its products new, operations. They are only indicators of degrees of
established or dated? Do its products have substitutes? How profitability and financial strength of the firm.
complicated are its products to produce?
● Limitations inherent in the accounting data the analyst
4. INPUTS. Who are its suppliers? Are there many supply sources? works with it. These are brought about by among others: (a)
Does the company depend on a few supply sources with variation and lack of consistency in the application of
potential for high input costs? accounting principles, policies and procedures, (b) too-
condensed presentation of data and (c) failure to reflect change
5. COMPETITION. In what kind of markets does it operate? Are in purchasing power.
markets open? Is the market competitive? Does the company