Lesson 1

Finance as a field of specialization, deals with and is strictly governed by financial facts and
truths which in turn are based on accepted industry and professional standards.

Finance is also considered an art. The different financial services continue to change and
develop as the operations of business organization become more complicated.

Financial management starts with a plan...

This plan applies to both individuals and companies...
It is not enough to have cash and other resources today...

Such resources, if not managed properly, can be wiped out. Hench, financial management is a
MUST!
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From a Corporation’s perspective
Financial management deals with decisions that are supposed to maximize the value of
shareholder’s wealth. Maximizing the market value of the shares of stocks.
Shares of stocks represents the form of ownership in a corporation...

To Illustrate:
AC Company’s share price closed at P2,150 on July 31,2019.
As of that date, the total shares outstanding was 120,000,000
Compute the market capitalization or market value of the
shares as of the date indicated.

Solution:
120,000,000 (P 2,150) = P 258,000,000,000 (shareholder’s wealth)

Assume that on August 1,2019, the share price of AC Company went down to P 2000. Assume
that there was no change in the total numbers of shares. As of August 1, 2019, the market
capitalization of AC Company was reduced to P 240 billion computed as follows:

Solution:
120,000,000 (P 2000)= P 240,000,000,000(shareholder’s wealth)
Factors that affect the changes in the price of stocks
➢ Profitable operation
➢ Nature of the business
➢ Prospect of the business
➢ Time frame for the realization of
a certain projected earnings
➢ Ability to meet maturity
obligations
➢ Appropriate capital structure
➢ Dividend policies
➢ Investing decisions
➢ Market sentiments

Profits can be maximized by taking more risks

Profits (more risks)

\/

Borrowing to finance
expansions, generate more
revenues

\/

Borrowing can increase risks

resulting to operating losses if
external shocks occur and
adversely affect its operation

Shareholder’s Wealth Maximization

Shareholder wealth maximization means that a company's primary goal is raising its stock price.
Shareholder wealth maximization can be a good thing because it gives a firm's managers a
clear objective that builds value.
Stakeholders include:
✓ Managers
✓ Employees
✓ Customers
✓ Creditors
✓ Regulatory agencies
✓ Community where the company operates

Effects of Maximizing Shareholder’s Wealth

✓ Motivates the board of directors and the top management to develop a longer perspective for
a company they manage.

✓ Management may also need to consider setting aside to research and development to
improve further and possibly expand a company’s existing products and service offering.

✓ Employee interest has to be considered in managing the company.

FINANCIAL INSTRUMENTS
Financial instrument is any physical or electronic document that has intrinsic monetary value or
transfer value.

This instrument gives rise to an asset or liability depending upon which entity you are taking.
This gives rise to an asset on the side of the holder or investor, and or liability or equity on the
side of the issuer.

SECURITIES- are primarily issued by corporation to generate cash or to acquire an asset. It

could either take in the form of debt security or an equity security.
Debt security- refers to corporate bonds (or liability security)
Equity security- refers to corporation shares.
Share represents as ownership interest in a corporation.

FINANCIAL ENVIRONMENT
The financial environment is characterized by its 3 interacting areas:

Financial institution & Market- are organizations or intermediaries that help the financial
system efficiently and transfer funds from depositors and investors to individuals, businesses
and governments that seek to spend or invest the funds in tangible assets.
Ex: banks, insurance companies and lending institution.

INVESTMENTS- this area focuses on the decision made by business and individuals as they
close securities for their investment portfolio. This involves the sale or marketing of securities,
analysis of securities and the management of investment risks through portfolio diversification.
FINANCIAL MANAGEMENT - involves financial planning, asset management and
decision to increase the value of the stakeholders. Also attributed to business finance because it
deals with decisions concerning cash flows.

Various Financial Institutions or Intermediaries

Banks:
Universal or commercial
banks
Thrift banks
Savings bank
Rural and cooperative
Banks.

Insurance Companies
Lending Institutions
Stock Exchange
Stock Brokerage Firms
Mutual Funds

Other Financial Institutions

This includes pension funds like:

Government Service Insurance System (GSIS)

Social Security System (SSS)
Unit investment trust fund (UITF)
Investment Banks
Credit Unions, among others
Lesson 2
Basic Financial Statement
• Statement of Financial Statement
• Statement of Profit or Loss
• Statement of Cash Flow
• Statement of Changes in Owner’s Equity

Statement of Financial Position

● The new name given by International Accounting Standards Board (IASB)
● Provides information regarding the liquidity position and capital structure of a Company

Liquidity- refers to the ability of a company to pay maturing obligations.

Current Assets- assets that are expected to be converted into cash within one year (accounts
receivable, and inventories)
Current Liabilities- that are expected to be settled or paid within one year.
Capital Structure- refers to the combination of debt and equity used by a company in financing
its assets.
Capital Structure- refers to the combination of debt and equity used by a company in financing
its assets.
Ex:
If a Company has 1 million assets and a liabilities of P400K.
The capital structure is 40% liabilities, and 60% Equity.

Statement of Profit and Loss

Provides information regarding the revenues or sales,
expense, and net income of a company over a given
accounting period. Accounting period may be for a
month, a quarter, or a year.
Statement of Cash Flow Statement
Cash Flow Statement explains
the change in the cash
balance from one accounting
period to another.

Three main categories:

Operating
Investing
Financing

Two techniques of financial statement analysis

Vertical Analysis- shows the different accounts in the statement of financial position and
operating performance. Shows the different accounts in the statement of profit or loss
are presented as percentage of net sales.

Horizontal Analysis- is useful in establishing trends.

FINANCIAL RATIOS
Profitability Ratios - Profitability ratios measures the returns to investors and the performance
of a company during a given accounting period.

Ratios:
● Return on Equity (ROE)
● Return on Assets (ROA)
● Gross Profit Margin
● Operating Profit Margin
● Net Profit Margin
Return on Equity (ROE)
ROE measures the amount of net income earned in relation to equity.

ROE= (Net Income/Equity )x 100%

( P 2,659,087/12,478,559) x 100%
= 21.31%
The ROE of 21.31% means that for every P 1.00 of owner’s
equity, P .2131 centavos was earned.

Return on Assets (ROA)

ROA measures the ability of a company to generate income out of its resources.

ROA= (Net Income/ Total Assets)x100%

= (P 4,048,696/ 22298,020) x 100%
= 18.16%
The 18.16% ROA means that it generated 18.16 centavos
operating income for every P1.00 of the asset in the company.

Gross Profit Margin

Provides information regarding the ability of a company to cover its cost of goods sold from its
sales.

Gross profit margin= (gross profit/ net sales) x100%

= (10,546,355/52,501,085) x100%
= 20.09%
The ratio means that for every P 1.00 sales that the company
generates, it earns 20.09 centavos in gross profit.

Operating Profit Margin

Operating profit margin measures the amount of income generated from the core business of a
company.

Operating profit margin = (Operating income/Net Sales)x100%

(P 4,048,696/52,501,085)x100%
= 7.71%
The 7.71% operating profit margin means that out of P1.00
net sales, the company earned 7.71 centavos after deducting
the cost of sales and operating income.
Net Profit Margin
Measures how much net profit a company generates for every peso of net sales or revenue that
it generates.

Net profit margin= (Net Income/ Net Sales)x100%

= (P2,659,087/ 52,501,085)x100%
= 5.06%
The company earned 5.06 centavos for every P1.00 of net
sales generated.

Efficiency Ratios or Turnover Ratios

Also known as Activity Ratios

Measures a company’s efficiency in utilizing its assets.

These ratios are critical in understanding the operations of a company, especially in managing
working capital accounts, including accounts receivables and inventories.

Ratios:
● Accounts Receivable turnover ratio
● Inventory turnover ratio
● Accounts payable turnover ratio
● Operating Cycle
● Cash conversion cycle

Total Asset Turnover Ratio

The total asset turnover measures the company’s ability to generate revenues for every peso of
asset invested. An indicator how productive the company in utilizing its resources.

TAT= Net Sales/ Total Assets

= P 52,501,085/ 22,298,020
= P 2.35
(for every P 1.00 use of Assets generates P 2.35 net sales

Fixed Asset Turnover Ratio

PPE (property, plant, and equipment) or fixed assets

FATR= Net Sales/PPE

= P52,501,085/ 12,200,000
= P4.30
(For every P1.00 of PPE can generate a net sales of P 4.30)
Accounts Receivable Turnover Ratio
Measures the efficiency by which accounts receivable are managed. A high accounts receivable
turnover ratio means efficient management of receivables.

ARTR= Net sales/ Gross trade accounts receivable

= P 52,501,085/ 2,300,000
= 22.82
Average collection period = 360 days/ 22.82
= 15.77 or 16 days

Inventory Turnover Ratio

Measures a company’s efficiency in managing its inventories. Trading and manufacturing
companies dealing with highly perishable products, and those prone to technological
obsolescence must pay close attention to this ratio to minimize losses.

Formula: Inventory turnover ratio= Cost of sales/Inventories

ITR= P41,954,730/4,849,304
ITR= 8.65

Inventory Turnover Ratio

Day’s inventories = 360/ Inventory turnover ratio
= 360/8.65
= 41.62 or 42 days
42 days in average to sell its inventories from the time it they
were bought.

Accounts Payable turnover ratio

Accounts Payable turnover ratio provides information regarding the rate by which trade
payables are paid.

APTR= Cost of sales/ Trade accounts payable

= P 41, 954,730/ 5,050,810
= 8.31
Day’s payable = 360/ APTR
= 43.32 0r 43 days
The average payment period of the company for its trade accounts
payable was 43 days.
Operating Cycle and Cash Conversion Cycle
By adding the average collection period and day’s inventories, the operating cycle can be
computed. This cycle covers the period from time the merchandise is bought to the time the
proceeds from the sale are collected. A low or short operating cycle is an indication of efficient
management of trade accounts receivable and inventories.

Operating Cycle and Cash Conversion Cycle

Operating cycle= day’s inventories + day’s receivable
= 42 days + 16 days
= 58 days
Cash conversion cycle = operating cycle-days payable
= 58 days- 43 days
= 15 days

Liquidity Ratios measure the ability of a company to pay maturing obligations, either to
suppliers, creditors, or its other vendors.

Current Ratio
Formula:
Current ratio= Current assets/ Current liabilities

Current assets include obligations that are expected to be converted into cash within 12months,
such as accounts receivables and inventories. Also includes prepayments, such as prepaid rent,
and prepaid insurance.

Current liabilities include obligations that are expected to be settled or paid within 12 months.
These include account payable, accrued expenses payable such as accrued salaries, and the
current portion of a long- term loan expected to be paid within the next 12 months from the
balance sheet date.

Current Ratio
Current ratio = Current assets/ Current liabilities
= P 9,262,331/ 7,819,461
= 1.18
The current ratio of 1.18 means that for every P 1.00 of
current liabilities that a Company has, it has P 1.18 current
assets.

Acid Test or Quick Ratio

Formula:
Quick ratio = (Cash + Current accounts receivables + short-term marketable securities)/ Current
liabilities
Quick ratio = (Current assets – inventories)/ Current liabilities
Quick ratio is a strict measure of a company’s liquidity measure.
QR= (P 1,062,527 + 2, 300,500)/ P 7,819,461
= 0.43 ( for every P 1.00 current liability the company has, it
has 43 centavos in quick assets.)

Stability or Leverage Ratios measure how much of the total assets of a company are financed
by liabilities and equity, otherwise known as capital structure.

Factors affecting the Company’s Capital Structure

• Nature business
• Stage of business development
• Macroeconomics conditions
• Prospects of the industry and expected growth rates
• Bond and stock markets
• Financial flexibility
• Regulatory environment
• Taxes
• Management style

Debit Ratio
Debit ratio measures how much of the total assets are financed by liabilities.

Debit ratio = Total liabilities/ Total assets

= P 9,819,461/ P 22,298,020
= 0.44
The debt ratio of less than 0.50 means that the company has
less liabilities than its stockholders’ equity. If the debt ratio is
0.50, this means that the amount of total liabilities is exactly
equal to stockholder’s equity.

Debit to Equity Ratio

The debt to equity ratio is a variation of the debt ratio. Debt to equity ratio of more than one
means that a company has more liabilities than stockholder’s equity.

Formula:
Debt to equity ratio = total liabilities / Equity
= P 9,819,461 / 12, 478,559
= 0.79
Interest

Interest Coverage Ratio

Provides information if a Company has enough operating income to cover interest expense.
ICR = Operating income / Interest expense
= P 4,048, 696 / 250,000
= 16.19
(this means the Company has more than enough operating
income to cover its interest expense. It has an operating
income that is a little more than 16 times its interest
expense.)

Lesson 3
Journal Entry
• Chart of Accounts –is a systematic listing of all accounts used by an entity.
• Journal – is a book where all transactions are initially recorded.
• Journal entry –is the logging of business transaction and their monetary value into the
T-accounts of the accounting journal as either debit or credit.
• Journalize transaction – is the process of recording a business
transaction in a journal.

DEBIT ACCOUNTS
• Debit (dr) - means the value received. It also means an entry to the left hand side of the
account. Assets are initially recorded on the debit side of the equation. To debit an asset is to
increase an asset. To credit an asset is to decrease it.

• Entry on the left side of Double Entry

Bookkeeping system that represents the addition
of an Asset or Expense or the reduction to a
Liability or Revenue.
CREDIT ACCOUNTS
• Credit (cr) - means the value parted with. Liabilities and capital are initially recorded on the
credit side. To credit a liability and /or capital is to increase them. To debit liability and/or capital
means to decrease them.

• An entry to the right side of an account. Entry on the right side of a Double- Entry Bookkeeping
system that represents the reduction of Assets or Expense or to the addition to a Liability or
Revenues.