P1: INTRODUCTION TO FINANCIAL MANAGEMENT DIVIDEND DECISION

➔ Dividend is a part o f profits, that are availablE

FINANCE for distribution, to equity shareholders.
➔ Defined as the art and science of managing Payment of dividends should be analyzed in
money. Virtually, all individuals ang relation to the financial decision of a firm. In the
organizations earn or raise money and spend or area of dividend decision, a firm is faced with
invest money. It is concerned with the process, the problem of declaring dividend or
institutions, markets and instruments involved postponing dividend declaration, this is a
in the transfer of money among individuals, problem of internal financing.
business and governments.
➔ Is defined as the lifeblood of an organization. It GOALS/OBJECTIVES OF FM – PROFIT MAXIMIZATION
is a common thread, which binds all the VS. WEALTH MAXIMIZATION
organizational functions as each function when
carried out creates financial implications. Traditional Approach – PROFIT MAXIMIZATION
➔ This means that the finance manager has to

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FINANCIAL MANAGEMENT make decisions in a manner that the profit is
➔ Is indeed, the key to success in business maximized.
operations. It is concerned with the acquisition, ➔ A process by which a firm determines the price,
AY financing and management of assets with some
overall goals in mind.
FM CAN BE DIVIDED INTO THREE MAJOR DECISIONS:
1. Investing
2. Financing
input and output levels that will lead to the
highest possible profit

Modern Approach – WEALTH MAXIMIZATION

➔ Also known as Net Present Worth Maximization.
3. Dividend decision ➔ Means maximizing the shareholder’s wealth due
to an increase in share price, thereby increasing
INVESTING the company’s market capitalization. The share
➔ Refers to the allocation of financial resources, price increase directly affects how competitive
time, or other assets to pursue economic the company is, its positioning, growth strategy,
activities that have the potential to generate and profits.
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profits or fulfill long-term objectives.
➔ Involves the commitment of funds to acquire or STAKEHOLDERS
develop assets, expand operations, conduct ➔ Are groups such as employees, customers,
research and development, or invest in human suppliers, creditors, owners and others who
capital. It is defined as the money spent on have a direct economic link to the firm.
creating. ➔ A party that has an interest in a company and
can either affect or be affected by the business.
FINANCING
➔ Is the process of providing funds for business THE ROLE OF ETHICS
activities, making purchases, or investing. ➔ Ethics is standards of conduct or moral
Financial institutions, such as banks, are in the judgment. The business community in general &
business of providing capital to businesses, financial community in particular are developing
consumers, and investors to help them achieve and enforcing ethical standards, purpose being
their goals. to motivate business and market participants to
adhere to the spirit of laws & regulations
concerned with business & professional
 practice. An effective ethics program is believed from personal resources or by borrowing and is
to enhance corporate value. responsible for all business decisions.

PLACE OF FINANCE FUNCTION IN THE PARTNERSHIP

ORGANIZATIONAL STRUCTURE ➔ Is a business run by two or more persons for
➔ The financial function is almost the same as profit. Most partnerships are established by a
most enterprises. The details may differ but the written contract known as “Deed of
important features are universal in nature. The Partnership”.
finance function occupies such a major place
that it cannot be the sore responsibility of the CORPORATION
executives. The important aspects of the finance ➔ Is a legal entity, separated from the owners,
function have to be carried on by the top with perpetual succession. Just like an
management. individual, the company can sue and be sued.
Ex. Managing Director and the Board of The owners of the company are its
Directors. It is the Board of Directors, which shareholders. They get a return by receiving

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makes all the material final decisions involving dividends. Shareholders elect the Board of
finance. Directors through vote. The Board of Directors
has the ultimate authority in running the
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CHIEF FINANCIAL OFFICER (CFO)
➔ Is basically to assist the top management. He
has an important role to contribute to good
decision-making on issues that involve all the
functional areas of the business. He must clearly
organization including making general policy.

PRESIDENT OR CHIEF EXECUTIVE OFFICER (CEO)

➔ Is responsible for managing day-to-day
operations and carrying out the policies
bring out financial implications of all decisions established by the Board. The CEO is required to
and make them understood. report periodically to the firm’s board of
directors.
TREASURY FUNCTION
➔ (Headed by a financing manager) is commonly P2: RECORDING TRANSACTIONS OF A SERVICE
responsible for handling financial activities, such ENTERPRISE
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as financial planning and fundraising, making
capital expenditures. ACCOUNTING
➔ Is the art or recording, classifying, summarizing,
CONTROL FUNCTION systematically, in terms of money, transactions,
➔ (Headed by Chief Accountant/Financial and events, which are parts at least, of a
Controller) typically handles the accounting financial character and interpreting the results,
activities such as corporate accounting, tax thereof.
management, financial accounting and cost
accounting. RECORDING
➔ Involves the preparation of business
FORMS OF BUSINESS ORGANIZATION documents, and commits the transactions and
events into writing.
SOLE PROPRIETORSHIP
➔ Is a business owned by one person who runs for CLASSIFYING
his own profit. Typical sole proprietorship is a ➔ Is the sorting of the many transactions in an
small business. The proprietor raises capital orderly and systematic manner.
SUMMARIZING j. TRUCK
➔ Takes the form of accounting reports prepared k. BUILDING
by the accountant for the management and the l. LAND
owners of the business.
2. LIABILITIES – Are the equities of the creditors,
INTERPRETING or the debts of the business. It includes account
➔ Involves the analysis of the accounting that end mostly with the term “payable” such
statement such as percentages and ratios, to as:
determine how the business is performing a. ACCOUNTS PAYABLE – Are amounts due
compared to prior years and other similar to creditors arising from the purchase of
businesses. merchandise or services on account.
b. NOTES PAYABLE - Are amounts due to
CLASSIFICATION OF ACCOUNTS creditors evidenced by a written
promise to pay.
1. ASSETS – Are things of value owned by the c. SALARIES PAYABLE – Are unpaid salaries

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business. due to the employees.
a. CASH – Any medium of exchange that d. TAXES PAYABLE – Are unpaid taxes due
the bank will accept at face value. to the government.
AY Includes coins and currencies, checks,
money order, bank drafts, and bank
deposits.
b. ACCOUNTS RECEIVABLE – Are claims
against debtors or customers arising
e. INTEREST PAYABLE – Is interest on
money borrowed incurred but not yet
paid at the end of the period.
f. MORTGAGE PAYABLE – Are long-term
debts secured by collateral.
from the sale of merchandise or
services on account. 3. CAPITAL – Represents the equity of the owner,
c. NOTES RECEIVABLE – Are claims against or the right of the owner on the assets of the
debtors evidenced by a written promise business. The other terms used for capital are
to pay. owner’s equity, proprietorship or net worth.
d. MERCHANDISE INVENTORIES – Are
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goods held for sale. 4. REVENUE OR INCOME – Is the inflow of assets
e. SUPPLIES – Are goods used in the resulting from the sale of goods or rendering of
operations of the business. They are services to customers.
normally classified as office supplies
and store supplies. 5. EXPENSES – Are costs incurred to produce
f. PREPAID EXPENSES – Are expenses paid revenue.
in advance, like rent, insurance, and a. SALARIES OR WAGES EXPENSE –
taxes. Includes all payments made to
g. EQUIPMENT – Include typewriter, employees or workers for rendering
electric fan, air conditioner, telephone, services to the company.
switchboard, computers, and the like b. UTILITIES EXPENSE – Is an expense
h. FURNITURE AND FIXTURES – Are made related to the use of electricity, fuel,
mostly of wood like desks, chairs, water and telecommunication facilities.
conference tables, and build-in c. SUPPLIES EXPENSE – Covers office
cabinets. supplies used by the business in the
i. AUTOMOBILE conduct of its daily operations.
 d. INSURANCE EXPENSE – Is the expired the total amount of debits must equal the total
portion of premiums paid on insurance amount of credits.
coverage such as premiums paid for
health or life insurance, motor vehicles PENCIL FOOTING
or other properties. ➔ The procedure wherein we obtain the balance
e. DEPRECIATION EXPENSE – Is the annual of any T-account by totaling the debits and
portion of the cost of a tangible asset credits to the account, and subtracting the
such as buildings, machineries, and smaller sum from the larger. If the sub of the
equipment charged as expense for the debit exceeds the sum of the credits, the
year. account has a debit balance. If the sum of the
f. UNCOLLECTIBLE ACCOUNTS credit exceeds the sum of the debits, the
EXPENSE/DOUBTFUL ACCOUNTS account will have a credit balance.
EXPENSE/ BAD DEBTS EXPENSE
– Means the amount of receivables RULES OF DEBIT AND CREDIT SUMMARIZED
charged as expense for the period

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DEBITS CREDITS
because they are estimated to be
doubtful of collection. Increase in Assets Decrease in Assets
g. INTEREST EXPENSE – Is the amount of
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ACCOUNT
money charged to the borrower for the
use of borrowed funds.

➔ Is a form used for recording increases and

Decrease in Liabilities

Decrease in Capital

Increase in Drawing
Increase in Liabilities

Increase in Capital

Decrease in Drawing

Decrease in Revenue Increase in Revenue

decreases in each individual asset, liabilities,
capital, revenue and expense. Increase in Expenses Decrease in Expenses

T-ACCOUNT JOURNAL
➔ Derives its name from the fact that it looks as a ➔ A permanent chronological record of business
capital letter T. We write the title or name of an transactions.
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account, like Cash, on top of the T. We record
the increases on the item on one side, while we JOURNAL ENTRY
record the decreases on the opposite side. ➔ Shows all of the effects of a transaction as
expressed in terms of debit and credit and may
DEBITS AND CREDITS include an explanation of the transaction.
➔ A debit entry is an entry on the left side, while a
credit entry is an entry on the right side. The JOURNALIZING
accountant would say “debit” instead of saying ➔ Is the process of entering a transaction in the
“place an entry on the left side of the T journal.
account” and “credit” for “place an entry on the
right side of the T-account. LEDGER (GENERAL LEDGER)
➔ Is the complete collection of all the accounts of
DOUBLE-ENTRY BOOKKEEPING a company
➔ This procedure keeps the accounting equations
in balance. In recording business transactions,
CHART OF ACCOUNTS P3: Functions of Financial Management/
➔ A complete listing of the account titles and Financial Market
account numbers of all the accounts in the
ledger. Each account has an identification FINANCIAL MANAGER
number as well as title to help locate accounts ➔ Is a person who takes care of all the important
when recording data. Example, asset accounts financial functions of an organization. The
might have the number (1) as the first digit; the person in charge should maintain a far
liability accounts with number (2) the capital sightedness in order to ensure that the funds
accounts with number (3) the revenue account are utilized in the most efficient manner.
with number (4) and the expense account with ➔ His/Her actions directly affect the Profitability,
number (5). growth and goodwill of the firm.

POSTING MAIN FUNCTIONS OF A FINANCIAL MANAGER:

➔ Is recording in the ledger the information
contained in the journal. If an item appears as a 1. Raising of Funds - In order to meet the

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debit in the journal, the posting will be on the obligation of the business it is important to have
debit side of the account. If the item appears as enough cash and liquidity. A firm can raise funds
a credit in the journal, then posting will be on by the way of equity and debt. It is the
AY the credit side of the account.

CR0SS-INDEXING
➔ Is the placing of the account number of the
ledger account in the general journal and the
responsibility of a financial manager to decide
the ratio between debt and equity. It is
important to maintain a good balance between
equity and debt.
2. Allocation of Funds - The funds should be
general journal page number in the ledger allocated in such a manner that they are
account. Normally we do not place the optimally used. In order to allocate funds in the
cross-reference numbers in the posting best possible manner the following point must
reference column of the journal until after we be considered
post the entry. a. The size of the firm and its growth
capability
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SIMPLE JOURNAL ENTRY b. Status of assets whether they are
➔ An entry with one debit and one credit. long-term or short-term
c. Mode by which the funds are raised
COMPOUND JOURNAL ENTRY These financial decisions directly and indirectly
➔ The journal entry for this transaction will involve influence other managerial activities. Hence formation
more than one debit and/or credit. Ex. Jan 15, of a good asset mix and proper allocation of funds is one
Ms. Cortez paid cash for taxes of P1,750 and of the most important activity
miscellaneous expenses of 850. 3. Profit Planning - Refers to proper usage of the
profit generated by the firm. Profit arises due to
TRIAL BALANCE many factors such as pricing, industry
➔ A list of the accounts with debit or credit competition, state of the economy, mechanism
balance to determine that debit equals credits of demand and supply, cost and output.
in the recording process. 4. Understanding Capital Markets - Shares of a
company are traded on stock exchange and
there is a continuous sale and purchase of
securities. Hence a clear understanding of
 capital market is an important function of a process crucial information with clients, stakeholders
financial manager. When securities are traded and team members.
on stock market there involves a huge amount
of risk involved. Therefore a financial manger CONFLICT RESOLUTION - As functional
understands and calculates the risk involved in managers lead teams, it's essential they understand
this trading of shares and debentures. how to manage and resolve conflict. This involves
Its on the discretion of a financial manager as to how addressing issues to ensure the success of the team and
to distribute the profits. Many investors do not like the prevent future issues.
firm to distribute the profits amongst share holders as
dividend instead invest in the business itself to enhance CRITICAL THINKING - refers to the ability to
growth. evaluate situations and determine the ideal outcomes.
It's an important skill to ensure functional managers
ROLE OF FINANCE MANAGER determine the best right options to pursue.

➔ Coordinate the financial aspects of a company, FINANCE MANAGEMENT - Functional managers

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including managing budgets, cash flows and create and manage project budgets. It's important for
expenditures. them to understand how to execute projects using
➔ Provide input related to funding requests or cost-efficient strategies and how to allocate resources
AY strategic decisions about mergers and
acquisitions.
➔ Prepare financial reports such as profit
projections in layman’s terms by paying
attention to detail.
properly.

FUNCTIONAL MANAGER SKILLS

LEADERSHIP SKILLS - enable professionals to

➔ Develop and implement financial plans and unite and motivate a team in an effort to achieve a
strategies that help the organization achieve its common goal. It's crucial they're able to coordinate and
goals. lead a team to complete projects successfully.
➔ Manage the organization’s investments and
ensure that investment decisions are aligned PROBLEM-SOLVING SKILLS - help functional
with the organization’s goals and objectives. managers decide the best resolutions for a variety of
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concerns. For example, they may use these skills to
FUNCTIONAL MANAGER determine how to best use resources or a budget to
➔ Are responsible for managing, owning and complete a job.
providing the resources for projects. However, their
involvement with projects varies based on the TIME MANAGEMENT - Functional managers are
company's organizational structure. Functional responsible for creating project timelines and managing
managers balance planning and direction to ensure the schedules for their team. It's essential they're able
team members have the resources they need and are to balance work and ensure everyone meets their
able to complete their tasks on time. deadlines.

FUNCTIONAL MANAGER SKILLS ETHICAL BEHAVIOR

➔ Refers to financial behavior or activities that are
COMMUNICATION SKILLS - It's important for ethically right or wrong.
functional managers to have excellent verbal and ➔ It is an integral part of business ethics that is
written skills. This may help them share, receive and followed by financial institutions, financial
services or financial markets.
 ➔ Takes into account not only financial returns but financial market helps in the mobilization of the
also environmental, social and governance investors’ savings.
factors.
3 – Liquidity - This provides an opportunity for the
FINANCIAL MARKET investors to sell their financial instruments at their fair
➔ Is a market where buyers and sellers trade value prevailing in the market at any time during the
commodities, financial securities, foreign working hours of the market.
exchange and other items of value.
➔ They are places where businesses raise their 4 – Risk sharing - The financial market performs the
cash, companies reduce risks, and investors function of risk-sharing as the person who is
make profits. undertaking the investments is different from the
➔ Is a word that describes a marketplace where persons who are investing their fund in those
bonds, equity, securities, currencies are traded. investments. With the help of the financial market, the
risk is transferred from the person who undertakes the
7 Functions of Financial Markets investments to those who provide the funds for making

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1. Price Determination those investments.
2. Funds Mobilization
3. Liquidity 5 – Easy Access - The industries require the investors to
AY 4. Risk sharing
5. Easy Access
6. Reduction in transaction costs and provision of
the Information
7. Capital Formation
raise funds, and the investors require the industries to
invest their money and earn the returns from them. So
the financial market platform provides the potential
buyer and seller easily, which helps them save their time
and money in finding the potential buyer and seller.

1 – Price Determination - The financial market performs 6 – Reduction in Transaction Costs and Provision of the
the function of price discovery of the different financial Information - The trader requires various types of
instruments traded between the buyers and the sellers information while doing the transaction of buying and
on the financial market. The prices at which the selling the securities. For obtaining the same time and
financial instruments trade in the financial market are money is required. But the financial market helps
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determined by the market forces, i.e., demand provide every type of information to the traders without
and supply. the requirement of spending any money by them. In this
So the financial market provides the vehicle by which way, the financial market reduces the cost of the
the prices are set for both financial assets which are transactions.
issued newly and for the existing stock of the financial
assets. 7 – Capital Formation - Financial markets provide the
channel through which the new investors’ savings flow
2 – Funds Mobilization - The motivation for persons in the country, which aids in the country’s capital
seeking the funds is dependent on the required rate of formation.
return, which the investors demand. Because of this
function of the financial market only, it is signaled that TYPE OF FINANCIAL MARKETS
funds available from the lenders or the investors of the
funds will get allocated among the persons who need STOCK MARKET - allows buyers and sellers of
the funds or raise funds through the means of issuing securities to meet, interact, and transact. The markets
financial instruments in the financial market. So, the allow for price discovery for shares of corporations and
serve as a barometer for the overall economy. Buyers
and sellers are assured of a fair price, high degree of
liquidity, and transparency as market participants.

COMMODITY MARKET - is a marketplace for

buying, selling, and trading raw materials or primary
products. often split into two broad categories: hard and
soft commodities. Hard commodities include natural
resources that must be mined or extracted, such as
gold, rubber, and oil, whereas soft commodities are
agricultural products or livestock, such as corn, wheat,
coffee, sugar, soybeans, and pork.

DERIVATIVE MARKET - refers to a type of

financial contract whose value is dependent on an
underlying asset, group of assets, or benchmark. A

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derivative is set between two or more parties that can
trade on an exchange or over-the-counter (OTC).
AY FOREX MARKET - allows participants, such as
banks and individuals, to buy, sell or exchange
currencies for both hedging and speculative purposes.
The foreign exchange (forex) market is the largest
financial market in the world and is made up of banks,
commercial companies, central banks, and investment.
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