Lesson 1: where shares will be offered to many

Introduction to Finance Management investors.

Financial management Banks

- starts with a plan - provide mechanism where savers can put
- maximize the value of shareholders' wealth their excess funds through deposits.
- give the depositors interest on the money
Shareholder’s Wealth deposited to them.
- market value of the shares of stocks.
Insurance Companies
Shares of stocks - the insured pays premiums, that are used to
- represent the form of ownership in a fund claims, to the insurance companies.
corporation.
- takes into account the risk-return trade-off 1. Life insurance products protect the
of management decisions and the prospects insured from loss of life
of a company. 2. Non-life insurance products protect the
insured from the loss of or damage to
Profit Maximization properties.
- should not be the overriding objective of
company's management Stock Exchange
- exposes the company to bankruptcy risk - Philippine Stock Exchange(PSE) provides a
- consider inferior raw materials for system for the trading of equity securities of
production publicly listed companies.

Stakeholders Stock Brokerage Firms

- not limited to the stockholders of the - they’re the one who coursed the investing in
company the stock market
- include management, employees, suppliers, 1. Online brokers, one can trade in the Stock
customers, creditors, regulatory agencies, market through the internet. COL Financial
and the community where the company and BPI Trade are two of the online
operates Financial System brokers in the Philippines.
2. With live brokers, one need sa telephone
Financial System to call brokers and place orders.
- The financial system links the savers and the Confirmation receipts are forms of
users of funds. evidence regarding the executed buy or
sell transaction that a client placed with
Savings his broker
- can come from households. individuals.
companies, government agencies, or any Mutual Funds
other entity whose cash inflows are pater - include investments in the stock market,
than their cash outflows. bonds, treasury notes, and other money
market instruments like treasury bills.
Financial intermediaries - investments are pooled and the funds are
- provides a mechanism by which the savings invested by professional managers for a
can be channeled to users of funds. fee which is a small percentage of the funds
borrowers, and investors. invested.

Publicly Listed Company

- A company can become publicly listed
through an initial public offering (IPO)
Financial Instruments Shareholders
- elect the Board of Directors (BOD).
1. Equity securities
- include common stocks and preferred stocks Board of Directors
a. Preferred Stock - the highest policy-making body in a
- priority over a common stock in terms of corporation.
claims over the assets and cash dividend - primary responsibility is to ensure that the
declaration of a company corporation is operating to serve the best
b. Common Stockholders interest of the stockholders.
- real owners of the company - elected by the stockholders.
- growth potential of their investments is The following are among the responsibilities of
unlimited the board of directors:
- no cash dividend 1. Setting policies on investments, capital
- dividend per share for common stocks is not structure, and dividends
fixed 2. Approving company’s strategies, goals,
and budgets
2. Debt securities 3. Appointing and removing members of the
- The Treasury bonds and Treasury bills top management including the president
issued by the National Treasury are forms of 4. Determining top managements
indebtedness of the National Government. compensation
a. Treasury bills 5. Approving the information and other
- auctioned at the National Treasury every disclosures reported in the financial
Monday to accredited dealers. statements
- eventually farmed out to both institutional
and retail investors on Wednesdays. President
b. Treasury bonds - roles may vary from one company to
- Retail: also issued by National Treasury another
which are normally in multiples of P5 000 Among the responsibilities of a president are the
and the coupon interest is paid quarterly. following:
- Regular: coupon interest is paid semi- a. Overseeing the operations of a company
annually. b. Performing all areas of management:
planning, organizing, staffing directing,
c. Corporate bonds and controlling.
- tenors are usually 5 years, 7 years. and 10 c. Representing the company in professional,
years social, and civic activities.
- offer slightly higher interest rates than - cannot manage the company on his own
government securities VP for Sales and Marketing
- roles includes marketing
strategies/analysis/opportunities,
Organizational Chart and the Roles of the VP
sales/cost evaluation,
for Finance
- promotes good relationship with customers
and distributors
Shown in the Figure below is a typical
organizational chart.
VP for Production
- roles includes anything about production
- identifies adequate and competitively priced
raw material suppliers

VP for Administration
- roles includes coordination and assisting
different departments, payroll preparation
 - determines the location and the maximum I. Measurement
amount of office space needed by the - measured based on the current market price
company of the corporation’s stocks

II. Factors that Influence Market Price

VP for Finance A. Controllable by Management

a. Financing Decisions 1. Profitability
- include making decisions as to how to • Profit - a measure of the financial performance
finance long-term investments and working of a company for a period of time.
capital which deals with the day-to-day
operations of the company. 2. Good liquidity and reasonable leverage
- determining the appropriate capital position.
structure of the company, that is how much
of the total assets should be financed by debt • Liquidity and leverage
and equity. - refers to the company’s management of the type
and amount of assets and liabilities that it will
b. Investing Decisions hold in the course of its operations.
• Short term investment decisions are needed
when the company is in an excess cash position 3. Dividends
• Long term investments should be supported Holders of shares receive dividends from a
by a capital budgeting analysis which is among corporation as returns on their investments
the responsibilities of a finance manager. in form of cash or other properties.
Companies which have better dividend
- capital budgeting analysis
policies are generally more attractive than
 technique used to determine the
companies who do not pay out dividends.
financial viability of a long-term
investment..
4. Competent management
Competent managers may have any of
c. Operating Decisions
the following attributes: visionary, innovative,
- deal with the daily operations of the
decisive, respected, people-oriented,
company.
experienced/seasoned manager and inspiring
- using short-term loans can boost the
profitability of a company but it has a trade-
5. Corporate plans that improve the business
off since it expose the company to a liquidity
prospects.
problem.
- conservative management will opt to
B. External Factors
finance working capital accounts mostly
- factors that influence the general
through long-term sources.
reaction of investors in making an
investment
d. Dividend Policies
decision.
- encourage investor to invest
- condition to declare cash dividends
Its effect is not only to a specific company but on
i enough retained earnings
all companies or a group of companies under
ii must have cash.
similar circumstances. Such factors are a result of
- considerations: Availability of investment
the environment a company operates in rather
opportunities, Access to long-term sources
than the decisions of the company’s management.
of funds, and Capital structure
III. Roles of Financial Management
Wealth Maximization
• Financial management
 - deals with decisions that are supposed to IASB
2

maximize the value of shareholders’ wealth. - independent, private-sector body that

- affect the markets perception of the develops and approves International
company and influence the share price. Financial Reporting Standards (IFRS).
- The goal of financial management is to
maximize the value of shares of stocks. 3. Statement of Cash Flows
- Managers of a corporation are responsible - reports a company’s cash inflows and
for making the decisions for the company outflows for a period.
that would lead towards shareholders’ - used by external users such as investors and
wealth maximization. creditors to assess a company’s profit
potential and ability to pay its debt and pay
Lesson 2: dividends.
Financial Statement Preparation and Analysis - operating, investing, and financing activities
i Operating Activities
Basic Financial Statements - quality of earnings is seen
ii Investing Activities
1. Statement of Financial Position - provide information regarding the future
- new name that the international Accounting direction of the company.
Standards Board (IASB)2 iii Financing Activities
- provides information regarding the liquidity - to notice if there’s a potentially
position and capital structure of a company encounter liquidity problems in the
as of a given date. future
- information whether there is a proper
Liquidity refers to the ability of a company to pay matching of investing and financing
maturing obligations. activities.
Capital structure provides information regarding
the amount of assets financed by debt or 4. Statement of Changes in Stockholders’
liabilities and equity Equity
- provides information that explains the
2. Statement of Profit or Loss changes in the Stockholders' equity
- provides information regarding the account from one accounting period to
revenues or sales, expenses, and net income another.
of a company over a given accounting The changes may be due to the following:
period. 1. Profit or loss for the accounting period.
2. Cash dividend declaration
Core business refers to the main business of a 3. Issuance of new shares of stocks
company. 4. Other transactions that affect the
Stockholders' equity such as other
International Accounting Standards Board (lASB) comprehensive income, treasury stocks,
gives the preparers of financial statements two and revaluation of assets.3
options on how to present statements of profit or
loss.
i Present it as a separate financial Notes to Financial Statements
statement. - integral part of the financial statements.
ii Present it together with other - provides brief description of the company,
comprehensive income (0C1). summary of significant accounting policies,
breakdown of amounts found in the
0C1 represents transactions that are not reported financial statements.
in the profit or loss statement but affects the
stockholders' equity
 7. Preparing the financial statements

Review of the Financial Statement 8. Making the closing entries

Preparation
Income statement accounts such as revenues
This section is a review of the process taken in and expenses are closed to prepare the system
preparing financial statements. for the next accounting period.

1. Analyzing business transactions 9. Post-closing trial balance

- identify if a transaction needs to be recorded
in special journals The post-closing trial balance is prepared to
2. Recording in the journals test if the debit balances equal the credit
- For repetitive transactions, special journals balances after closing entries are considered.
are made
- invoices, receipts etc. must be present to
support the recording Financial Ratios
3. Posting to ledger accounts
Posting Liquidity Ratio
- process of transferring the debits and
credits from the journal entries to the
accounts
Ledgers
- chronological details as to how transactions
affect individual accounts.
General ledger
- summary of the different Subsidiary Ledgers
and can serve as a control account.
4. Preparing the Unadjusted trial balance
5. Making the adjusting entries
Adjustments
a. Accruals. These include unpaid salaries for
the accounting period, unpaid interest
expense, or unpaid utility expenses.

b. Prepayments. If a company has prepaid

expenses such as prepaid rent or prepaid
insurance.

c. Depreciation and amortization expenses Current Asset

 Cash, including foreign currency
d. Allowance for uncollectible accounts. Bad  Investments, except for investments that
debt expense from accounts receivable. cannot be easily liquidated
 Prepaid expenses
6. Preparing the adjusted trial balance  Accounts receivable
 Inventory
An adjusted trial balance is prepared after Noncurrent Asset
taking into consideration the effects of the  Investments (long-term)
adjusting entries.  Property, plant and equipment
 Intangible assets
High current ratio Efficiency
- not necessarily good. - refers to a company’s ability to be efficient
- mean that there is a higher probability that in its operations.
the company can meet its short-term - refers to the speed with which various
obligations, current accounts are converted into sales,
- its assets may not be earning as much and and ultimately, cash.
the company may have given up long-term
investment opportunities. Efficiency ratios
• Accounts receivable turnover= Sales ÷ AR
• Average collection period, otherwise known as
average age of AR, days’ receivable or days sales
outstanding = 365 ÷ AR Turnover
• Inventory turnover= COGS ÷ Inventory
Profitability Ratio • Average age of inventory or days’ inventory =
1. Return on equity 365 ÷ Inventory Turnover
- measures the amount of net income earned • Accounts payable turnover = Purchases ÷
in relation to stockholders’ equity. Inventory
• ROE (return on equity) = Net income ÷ • Average age of payables, average payment
Stockholders’ equity period, or days’ payable = 365 ÷ AP Turnover
• Total asset turnover = Sales ÷ Average Total
2. Return on assets Assets.
- measures the ability of a company to • Operating cycle = Average Collection Period+
generate income out of its resources/assets. Ave. Age of Inventory
• ROA (return on asset) = Operating income ÷ • Cash conversion cycle = Operating Cycle -
Total assets Average Age of Payables

3. Gross profit margin Financial leverage

- shows how many pesos of gross profit is - refers to the company’s use of debt.
earned for every peso of sale. - defines the company’s capital structure
- provides information regarding the ability of which indicates how much of the total assets
a company to cover its manufacturing cost are financed by debt and equity.
from its sales.
- remember that gross profit is just sales less Financial leverage Ratio
cost of goods or cost of services. • Debt ratio – This ratio measures the proportion
• Gross profit margin = Gross profit ÷ Sales of total assets finance by total liabilities or
money
4. Operating profit margin provided by creditors (not by the business
- shows how many pesos of operating profit is owners).
earned for every peso of sale. • Debt-to-equity ratio – A variation of debt ratio,
- measures the amount of income generated shows the proportion of debt to equity.
from the core business of a company. • Interest coverage ratio or Time Interest
• Operating profit margin =Operating income ÷ Earned – This ratio shows the company’s ability
Sales to pay its fixed interest charges in relation to its
operating income or earnings before interest and
5. Net profit margin taxes.
- measures how much net profit a company
generates for every peso of sales or
revenues that it generates.
• Net profit margin = Net income ÷ Sales
1. Analysis and Interpretations of Financial
Statements
Financial statement analysis tools can be used.
• These are financial ratios, common size financial
statements, and trend or horizontal analyses.
• For the purposes of this course, four major
categories of financial ratios will be covered:
liquidity ratios, efficiency or turnover ratios,
profitability ratios, and leverage ratios.
2. Vertical Analysis or common size analysis.
• evaluating the data of financial statements that
express each item within a financial statement in
terms of a percent of a base amount.
• For the Statement of Financial Position or
Balance Sheet, all accounts are presented as a
percentage of total assets.
• For the statement of Profit or Loss or Income
Statement, all accounts are presented as a
percentage of net sales.
• In using this type of analysis, attention must be
focused on items with significant changes from
one period to another.

3. Horizontal Analysis
• This allows to see the trend for the different
accounts in the Financial Statements.
• This is also known as trend analysis.
• To establish the trend, percentage changes of
accounts from one period to another have to be
made.
To compute:
Amount of change = Current year amount – Base
(earlier) year amount
Percent of change = Amount of change/Base
(earlier) year amount
Some of the more important accounts to monitor
when doing trend analysis are the following:
• Sales
• Operating profits
• Total assets
• Interest bearing liabilities
• Interest expense