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Subject Code: BFINMAX

Subject Title: Financial Management
Subject Description: This course provides an introduction to financial management and finance;
cash flows and financial analysis. Topics also include cash flows
estimation; operating and financial leverage; financial planning and
forecasting; managing working capital, cash and marketable securities
management and accounts receivable and inventory management.
No. of Units: 3
Class Schedule: ACT103: Synchronous: Saturday 7:00 am – 10:00 am
Asynchronous: Saturday 10:00 am – 11:00 am
ACT101: Synchronous: Saturday 11:00 am – 2:00 pm
Asynchronous: Saturday 2:00 pm – 3:00 pm
ACT102: Synchronous: Saturday 3:00 pm – 6:00 pm
Asynchronous: Saturday 6:00 pm – 7:00 pm

Course Learning Outcomes:

At the end of this course, the student will be able to:
1. Gain substantial knowledge and information on financial management that will help students in
seeking a career in the field of finance.
2. Have a strong background on the management of working capital.
3. Apply effective and efficient financial management in a given business organization.
4. Integrate and assimilate financial management and accounting principles into meaningful
application through real-life case problem analysis
5. Identify and relate well with financial management and accounting principles, issues and
practices surrounding the finance profession.

About the Instructor:

PROF. MICHAEL ANGELO M. MANAYAO, CPA, MBA
• Master in Business Administration – Far Eastern University
• Graduated from Baliwag Polytechnic College (Cum Laude) – Batch 2018
• Member, PICPA Bulacan

SM Baliwag Complex, Dona Remedios Trinidad Highway, Brgy. Pagala, Baliwag, Bulacan
(+63) 927-533-0342 – (+63) 923-949-5265 [email protected]
MODULE 3 – UNDERSTANDING FINANCIAL STATEMENTS

I. Learning Outcomes
The learners are expected to be able to:
1. Understand how business activities are reported through the financial statements.
2. Appreciate the general objectives of financial statements.
3. Enumerate and identify the needs of various users that demand financial accounting information.
4. Enumerate the sources of information about a business enterprise.

II. Content

Introduction
To be able to analyze a company effectively or infer its value, it is important that one must understand
the company’s business activities. This can be accomplished through the financial statements. Financial
statements report on company’s performance and financial condition and reveal executive management’s
privileged information and insights.

Accounting information should be used in the business context in which the information is created. All
companies without exception, plan business activities, finance those activities, invest in those activities
and then, engage in operating activities. Business firms conduct all these activities while confronting
business forces, including market constraints and competitive pressures.

Financial statements also provide crucial input for strategic planning, as well as information about the
relative success of those plans which can be used to corrective action and make new operating, investing
and financing decisions.

General Objectives of Financial Statements

The important objectives of financial statements are:
1. Providing information for economic decisions
The economic decisions that are taken by the users if financial statements require an evaluation of
the ability of an enterprise to generate cash and cash equivalents, and the timing and certainty of
their generation. This ability ultimately determines the capacity of an enterprise to pay the employees
and suppliers, meet interest payments, repay loans and make distribution to its owners.

2. Providing information about financial position

The financial position of an enterprise is affected by the economic resources such as:
a. Information about the economic resources controlled by the enterprise and its capacity in the
past to modify these resources is useful in predicting the ability of the enterprise to generate cash
and cash equivalents in the future.

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 b. Information about financial structure is useful in predicting future borrowing needs and how
future profits and cash flows will be distributed among those with an interest in the enterprise.
c. Information is useful in predicting how successful the enterprise is likely to be in raising further
finance.
d. Information about liquidity and solvency is useful in predicting the ability of the enterprise to
meet the financial commitments as fall due. Liquidity refers to the availability of cash in the near
future after taking account of financial commitments and solvency refers to the availability of
cash over the longer term to meet financial commitments as they fall due.

3. Providing information about performance of an enterprise

Another important objective of the financial statements is that it provides information about the
performance and in particular its profitability, which is required in order to assess potential changes
in the economic resources that are likely to control the future. Information about variability of
performance is important and useful in predicting the capacity of the enterprise to generate cash
flows from its existing resource base, and in forming judgment about the effectiveness in which the
enterprise might employ additional resources.

4. Providing information about changes in financial position

The financial statements provide information concerning changes in the financial position of an
enterprise, which is useful in order to assess its investing, financing and operating activities during
the reporting period. This information is useful in providing the user with a basis to assess the ability
of the enterprise to generate cash and cash equivalents, and the needs of the enterprise to utilize those
cash flows.

Demand for Financial Accounting Information

Decision makers and other stakeholders demand information on the company’s past and prospective
returns and risks to facilitate efficient contracting and risk-sharing.

The broad classes of users that demand financial accounting information include the following:
1. Managers and Employees
For their own well-being and prospective earnings, potential managers and employees need
accounting information on the financial condition, profitability and prospects of their companies as
well as comparative information on competing companies and business opportunities. Management
uses financial statements to raise financing for the company, to meet disclosure requirement and to
serve as a basis for executive remuneration and bonuses, for wage negotiations and to meet
disclosure requirements.

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2. Investors and Analysts
Financial statements are used by these parties to decide whether to buy or sell equity shares.
Expectations about future profitability and the ability to generate cash influence the price of
securities and a company’s ability to borrow money at favorable terms. Other information
intermediaries such as financial press writers and investment analysts are interested in predicting
companies’ future performance.

3. Creditors and Suppliers

Banks and other lenders need financial accounting information to help determined loan terms, loan
amounts, interest rates and required collateral. Suppliers demand financial data to establish credit
terms and to determine their long-term commitment to supply-chain relations. Both creditors and
suppliers use information to monitor and adjust their contractual requirements and environment with
a business firm.

4. Shareholders and Directors

Financial accounting information are needed by owners and directors of the company to assess its
profitability and risks, to evaluate managerial performance and to help make leadership decisions.

5. Regulatory and Tax Agencies

The SEC, BIR, BSP and other legal institutions demand financial accounting information to monitor
the business firm’s compliance with laws, for public protection, price setting and for setting tax and
other regulatory policies.

6. Customers and Potential Strategic Partners

Customers both current and potential, need accounting information to evaluate a company’s ability
to provide products and services as agreed and to assess the company’s reliability and staying power.
Potential strategic partners would wish to estimate the firm’s profitability to assess the fairness of
returns on mutual transactions and strategic alliances.

7. Other Decision Makers

Financial accounting information are required for varied purposes by other parties from assessing
damages for environmental abuses to making policy decisions involving economic, social, taxation
and other initiatives.

Sources of Information about Business Enterprise

In general, the quantity and quality of accounting information that companies supply are determined by
manager’s assessment of the benefits and costs of disclosure. In the Philippines, publicly listed

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companies must file financial accounting information with the Securities and Exchange Commission
(SEC). These are:
1. The audited annual report that includes the four financial statements (Statement of Financial
Position, Statement of Comprehensive Income, Statement of Stockholders’ Equity, Statement of
Cash Flows) with explanatory notes and the management’s discussion and analysis of financial
results.
2. The unaudited quarterly or interim reports that include summary version of the four financial
statements and limited additional disclosure.

All other registered corporations and partnerships are likewise required to file annually audited financial
statements with accompanying explanatory notes with the SEC.

Benefits of Disclosure
The advantages of supplying accounting information extend to a company’s capital, labor, input and
output markets. Companies compete in these markets. For instance, debt and equity financing are sourced
from capital markets and the better a company’s prospects, the lower will be its cost of capital as reflected
in higher stock prices or lower interest rate. The same is true for a company’s recruitment efforts in labor
markets and its ability to establish and maintain superior suppliers-customer relations in the input and
output markets.

Costs of disclosure
The preparation and dissemination costs of supplying accounting information can be substantial, and the
possibility for the information to produce competitive disadvantages is high.

Companies are apprehensive that disclosures of their activities such as product or segment successes or
failures, strategic initiatives, technological or systems innovations could harm their competitive
advantages. Companies also face possible lawsuits when disclosures create expectations that eventually
are not met. Disclosure costs including political costs are high for highly visible companies such as large
telecommunication conglomerates (e.g., PLDT and Digitel), oil companies and software companies
because they are favorite targets of public scrutiny.

Constraints on relevant and reliable information

1. Timeliness
If there is undue delay in the reporting of information, it may lose its relevance. Management may
need to balance the relative merits of timely reporting and the provision of reliable information. To
provide information on a timely basis, it may often be necessary to report before all aspects of a
transaction or other event are known, thus impairing reliability.

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2. Balance between benefit and cost
The balance between benefit and cost is a perspective constraint rather than a qualitative
characteristic. The benefits derived from information should exceed the cost of providing it. The
evaluation of benefits and costs is, however, substantially a judgmental process.

3. Balance between qualitative characteristics

In practice, a balancing or trade-off between qualitative characteristics is often necessary. Generally,
the aim is to achieve an appropriate balance among the characteristics in order to meet the objective
of financial statements. The relative importance of the characteristics in different cases is a matter
of professional judgment.

4. True fair view or fair presentation

Financial statements are frequently described as showing a true and fair view of the financial
position, performance, and changes in financial position of an enterprise. Although, this framework
does not deal directly with such concepts, the applications of the principal qualitative characteristics
and of appropriate accounting standards, normally results in financial statements that convey what
is generally understood as a true and fair view of such information.

Financial Statements
Business activities are periodically reported by companies using four financial statements: the Statement
of Financial Position, Statement of Comprehensive Income, Statement of Stockholders’ Equity and the
Statement of Cash Flows.

A Statement of Financial Position reports on a company’s financial position at a point in time. The
Statement of Comprehensive Income, Statement of Stockholders’ Equity and the Statement of Cash
Flows report on performance over a period of time.

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Statement of Financial Position
A Statement of Financial Position reports a company’s financial position at a point in time, the
company’s resources (assets) namely, what the company owns and also the sources of asset financing.
There are two ways a company can finance its assets:

1. Owner financing. It can raise money from shareholders.

2. Nonowner financing. It can also raise money from banks or other creditors and suppliers.

This means that both owners ad nonowners hold claims on company assets. Owner claims on assets are
referred to as Equity, and nonowner claims are referred to as Liabilities (or debt). Since all financing
must be invested in something, we obtain the following basic relation: (investing = financing). This
equality is called the accounting equation which follows: (assets = liabilities + owners’ equity).

Investing Activities
Statement of financial position is organized like the accounting equation. Investing activities are
represented by the company’s assets. These assets are financed by a combination of nonowner financing
(liabilities) and owner financing (equity).

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Financing Activities
Assets must be paid for, and funding is provided by a combination of owner and nonowner financing.
Owner (or equity) financing includes resources contributed to the company by its owners along with
profit retained by the company. Nonowner (creditor or debt) financing is borrowed money. We
distinguish between these two financing sources for a reason: borrowed money entails a legal obligation
to repay amounts owed, and failure to do so can result in severe consequences for the borrower. Equity
financing entails no such obligations for repayment.

Working capital
Current assets are often called working capital because these assets “turn over”, that is, they are used and
then replaced throughout the year.

Net working capital is the difference between current assets minus current liabilities while net operating
working capital is the difference between current assets and noninterest-bearing current liabilities.

Statement of Comprehensive Income

The Statement of Comprehensive Income reports on a company’s performance over a period of time and
lists amounts for revenues (also called sales), expenses and other comprehensive income. Revenues less
expenses yield the bottom-line net income amount.

Operating Activities
Operating activities use company resources to produce, promote and sell its products and services. These
activities extend from input markets involving suppliers of materials and labor to a company’s output
markets involving customers of products and services. Input markets generate most expenses (or costs)
such as inventory, salaries, materials and logistics. Output markets generate revenues (or sales) to
customers. Output markets also generate some expenses such as marketing and distributing products and
services to customers. Net income arises when revenues exceed expenses. A loss occurs when expenses
exceed revenues.

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Difference exists in the relative profitability of companies across industries. Although effective
management can increase profitability of a company, business models play a large part in determining
company profitability.

Statement of Stockholders’ Equity

The Statement of Stockholders’ Equity reports on changes in key types of equity over a period of time.
For each type of equity, the statement reports the beginning balance, a summary of the activity in the
account during the year and the ending balance.

Blue Company
Statement of Stockholders' Equity
For the Year Ended December 31, 20x4
(pesos in millions)

Contributed Retained
Other Equity Total
Capital Earnings
December 31, 20x3 ₱53,060 ₱117,824 ₱50,478 ₱221,362
Stock issuance (repurchase) 860 860
Net income (loss) 26,426 26,426
Dividends (0) (0)
Other 56 (1,902) (1,846)
December 31, 20x4 ₱53,920 ₱144,306 ₱48,576 ₱246,802

Contributed capital represents the cash that the company received from the sale of stock to stockholders
(also called shareholders), less any funds expended for the repurchase of stock. Retained earnings (also
called earned capital or reinvested capital) represent the cumulative total amount of income that the
company has earned and that has been retained in the business and not distributed to the shareholders in
the form of dividends.

Statement of Cash Flows

The Statement of Cash Flows reports the change (either an increase or decrease) in a company’s cash
balance over a period of time. The statement reports on cash inflows and outflows from operating,
investing and financing activities over a period of time.

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 Blue Company
Statement of Cash Flows
For the Year Ended December 31, 20x4
(pesos in millions)

Operating cash flows ₱12,550

Investing cash flows (13,428)
Financing cash flows 1,464
Net increase in cash 586
Cash, December 31, 20x3 43,743
Cash, December 31, 20x4 ₱44,329

III. Activity – Supplementary

Problem A
Fill in the blank spaces with categories 1 through 7 below.
1. Statement of financial position (BS)
2. Income Statement (IS)
3. Current Assets (CA)
4. Fixed Assets (FA)
5. Current Liabilities (CL)
6. Long-term Liabilities (LL)
7. Stockholders’ Equity (SE)

Indicate whether Items is If on Statement of Items

on Statement of Financial Financial Position,
Position (BS) or Income designate which
Statement (IS) Category
Retained earnings
Income tax expense
Accounts receivable
Common stock
Capital in excess of par value
Bonds payable
Notes payable
Net income
Selling and administrative expenses
Inventories

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 Accrued expenses
Cash
Plant and equipment
Sales
Operating expenses
Marketable securities
Accounts payable
Interest expense
Income tax payable

Problem B
The assets of J&R Associates consist entirely of current assets and net plant and equipment. The firm
has total assets of ₱2.5 million and net plant and equipment of ₱2 million. It has notes payable of
₱150,000, long-term debt of ₱750,000, and total common equity of ₱1.5 million. The firm does have
accounts payable and accruals on its statement of financial position. The firm only finances with debt
and common equity, so it has no preferred stock on its statement of financial position.

Required:
a. What is the amount of total liabilities and equity that appears on the firm’s statement of financial
position?
b. What is the balance of current assets on the firm’s statement of financial position?
c. What is the balance of current liabilities on the firm’s statement of financial position?
d. What is the amount of accounts payable, and accruals on its statement of financial position?
e. What is the firm’s net working capital?
f. What is the firm’s net operating working capital?

Problem C
In its most recent financial statements, Newhouse Inc. reported ₱50 million of net income and ₱810
million of retained earnings. The previous retained earnings were ₱780 million.

Required: How much dividends were paid to shareholders during the year? Assume that all dividends
declared were actually paid.

IV. Activity/Assessment – Visit the MS Teams

V. References
Cabrera, M. and Cabrera, G. (2019) Financial Management, Manila: GIC Enterprises and Co.
Inc.

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