BusFinance:

Prof. Norsel P. Arban

CHPTR1-UNDERSTANDING FINANCE
DIFFERENT AREAS OF FINANCE
Definition of Finance 2 Finance is broadly classified:
→ Management of money, banking, investments
1. Private finance
and credit. -is the management of financial resources
→ both a science and an art of correct of private individuals, non-government
application of the economic and accounting organizations, and private organizations in
concepts and principles that define the accordance with the prescribed financial
system, structure, and process of policy and priority of the business
management, allocation, and utilization of organizations.
financial resources, investments and
expenditures.
2. Public finance
-is the allocation of government income
generated from either taxation or
Economics Accounting
borrowings and the government
*study of how individuals, *art of recording,
classifying and
expenditure based on
government, business and
other organizations make summarizing in a the approved national and local
choices that effect the significant manner and in appropriation or budget. Public finance is
allocation and distribution terms of money, also termed as fiscal administration.
of scarce resources transaction and event 2 Private finance is subdivided into:
which are, in part at least, 1. Personal finance-is a term that covers
of financial character, managing your money as well as saving
and interpreting the and investing. It encompasses budgeting,
results thereof.
banking, insurance, mortgages,
investments, retirement planning, and tax
and estate planning.
Areas of Finance 2. Business finance - an area of finance that
focuses on the handling and management
of financial resources of a business
organization.
Three major division :
1. Financial Management
2. Capital Market
3.Financial Investment
3 Business finance is further subdivided into the
following areas:
1. Financial management
→ focuses on capital budgeting decision or
investment decision on the acquisition of
assets and its corresponding financial
scheme.
→ concerned with raising financial resources
and their effective utilization towards
achieving the organizational goal.
2. Capital market
→ is an areas of business finance that studies
the different financial institutions and their
functions that provide assistance to both
private and public borrowers of funds. It
also includes the study of cost borrowings
the funds such as interest and other
financing charges.
3. Financial investment
• includes business decision about the value
and price of stocks and bonds, portfolio
analysis, market analysis, security analysis,
and behaviour of the investors.
 → investment decision also include placing
the extra money or funds to stock and
bonds. Holding the money in excess of the
required funds of the ordinary business
activities does not provide much benefit to
the business. Sound finance management
dictates that excess and idle cash must be
properly invested on fruitful ventures like the
stock market.

3. Financing decisions
→ deal with raising or acquiring of funds from
outside sources and not form the ordinary
results of the business operation.
→ In other words, financing decisions are
made when the business needs to borrow
money.

→ A business can raise money from the following

Reasons for Studying Finance
activities or sources:
1. come up with financial plans as to how their funds
can be acquired, managed, and allocated;
1. operations
2. become better investors; and 2. investors or lenders
3. make informed financial and economic decisions. 3. owners

In making a financial decision, the following

question must be answered:
The Role of a Finance Officer
1. How much should be borrowed from
• He or she act the wary financial traffic officer to
almost all business transactions with monetary external sources?
considerations. 2. What is the allocation of the borrowed funds
• Expected to be the “shock absorber” of budgetary into the short term and long term?
requests and requirements of other functional units 3. Will the much needed funds be sourced from
of the business. creditors or company owners?
• The finance officer is heavily engaged in making 4. Is the borrowing short-term or long-term?
decisions for the business to attain its objectives at 5. What is the expected cost of borrowing the
the optimum level. funds?
• His or her decision-making function is broadly
classified into three:
1. Operating decision QUALIFICATION OF FINANCE OFFICER:
2. Investing decision 1.POSSESSES SOUND KNOWLEDGE OF ACCOUNTING AND
3. Financing decision ECONOMIC CONCEPTS AND PRINCIPLES.
2.Has profound understanding of operation science,
statistics and marketing research.
3.has gained technical experience in finance and
FUNCTIONS OF A FINANCE OFFICER
provided professional judgement
1. Operating decisions
4.has good communication skills in both oral and written forms
→ are financial decisions affecting the routine 5.has impressive relationship with banks and other
operating activities of a business.
financial institutions
→ It is directed towards providing immediate 6.has outstanding relationship within the business and
solution to the concerns of the functional among other functional areas
areas of the firm such as manufacturing, 7.is ethically and morally upright and socially responsible
marketing, purchasing, and the like.
2. Investment decisions
→ deal with choosing small and large projects
with several investment opportunities. The
different projects are critically evaluated in
terms of return of investment and expected
cash flows. However, investment decisions
are made only when investment
opportunities come.
 Review Chapter 1:
1.) What is Finance? Management of money, FINANCIAL SYSTEM
banking, investments and credit. → At the societal environment or regional level it is
2.) What are the areas of Finance? PUBLIC FINANCE & principally responsible for the flow of money or
PRIVATE FINANCE
funds from the lender to the borrower.
3.) What is Business finance? An area of finance that
focuses on the handling and management of → Controls, regulates, and facilitates the savings,
financial resources of a business organization. borrowing, lending, and investing activities
4.) What are the 3 Major Division of Business Finance? happening among the different players in the
1.Financial Management system.
2.Capital Market
3.Financial Investment
5.) Finance Resources - refer to the funds of a business
which are provided by the owner or by the creditors? → In the Philippine financial system, the
Financial expenditures~ government plays an active role in the flow of
6.) Operating expenditures – a period costs that money in the economy through Bangko Sentral
include business expenses such as salaries, electricity
and water, traveling expenses and the like.
ng Pilipinas (BSP). The BSP regulates the
Capital expenditures-involve the acquisition or operations of financial institutions and financial
construction of buildings, machinery, processing plant, intermediaries.
and land. → The basic elements of a financial system are as
7.) Financial Investment- resources that are expected
follows:
to provide income and achieve appreciation or
growth of the business. 1. Financial institutions
8.) Capital market- an area of business finance that 2. Financial markets
studies the different financial institutions and their 3. Financial instruments
functions that provide assistance to both private and 4. Lenders and borrowers
public borrowers of funds. (financial institutions-provide
money, gapa borrow money, dira ka gadalagan if
mashort ka sang money gaborrow ka sa ila)
9.) Financial Investment - includes business decisions Financial Institutions
about the value and price of stocks and bonds,
→ are institutions or organizations that provide
portfolio analysis, market analysis, security analysis, and
behavior of the investors. (business decision) financial services, among others, in the form of
10.) Economics – branch of social science, concerned loan, credit, fund administration, financing,
with the efficient utilization of scarce resources to depository, and safekeeping.
satisfy human need and wants. Classification of Financial Institutions
11.) Financial Investment – he/she acts as the wary
1. Depository Institutions
(feeling or showing caution about possible dangers or
2. Financial Intermediaries
problems) financial traffic officer to almost all business
3. Investment Institutions
transactions with monetary considerations.
-they are tasked to developing budgets, monitoring
transactions, and preparing financial reports. They 1. Depository Institutions:
possess strong accounting and analytical skills. → that accepts deposits ( savings, current and time deposits)
form individuals and corporate entities, extend loans to
borrowers, transfer funds and manage funds for
CHAPTER 2: FINANCIAL INSTITUTIONS, investment purposes.
INSTRUMENT AND MARKETS 4 Depository institutions include the following:
1. Banks
2. Savings and loan association
The Business Environment 3. Trust companies
In finance, the business environment is 4. Credit unions
divided into international, national, regional, and local 1. Banks
“ are institutions authorized to operate and regulated by the
levels.
BSP under the general banking law of 2000. They accept
One of the environmental layers of the deposits and bills payment, provide loans and facilitate the
macro environment is the societal environment. This transfer of funds domestically or abroad”
environment is made up of the following systems. Under BSP Circular No. 271, the major classification of banks
1. Political system operating in the Philippines are as follows:
2. Financial system 1. Universal bank
3. Economic system 2. Commercial bank
4. Socio-cultural system 3. Thrift bank
4. Rural bank
5. Technological system
5. Cooperative bank
6. Legal system 6. Islamic bank
 are also the member-borrowers of the
Classification of banks: association. The members are vested with the
1. Universal bank – considered as the biggest bank rights to direct the managerial and financial
in terms of assets, loan portfolio, and revenue. It goal of the association.
has the widest scope of banking activities
authorized by the BSP and usually has the most 3. Trust Companies
number of branches nationwide and abroad. The - a legal business entity, usually a major division of a
minimum capital requirement of the universal universal or commercial bank, that acts as a fiduciary
bank with more than 100 branches is set by the agent or trustee on behalf of an individual person or
BSP at P20 billion in compliance with BASEL III corporate entity for the purpose of management,
requirements. administration, and final transfer of property to the
2. Commercial bank - it is a type of bank that beneficiary.
provides commercial loans and and offers In other words, the trust company acts as the
investment products in addition to the custodian of the property for and on behalf of the
regular banking service of accepting beneficiary for a fee. It also performs the following
related custodial tasks:
deposits. Compared to a universal bank, it is
a. Asset management
more limited banking services.
b. Ownership registration for the beneficiary
List of Commercial Banks in Philippines:
c. Stock transfer
a. Asia United Bank Corp.
d. Custodial arrangement like in court
b. Bangkok Bank Public Co. Ltd.
proceedings.
c. Bank of America, N.A.
d. Bank of China Ltd. -Manila
4. Credit Union
e. Bank of Commerce
→ a financial depository institution that is mainly
f. Bank of Tokyo-Mitsubishi UFJ, Ltd.
controlled and operated by its members for the
3. Thrift bank – defined in Republic Act No. 7906,
following purposes:
include savings and mortgage banks, private
a. Extending credit to members
development banks, and stock savings, loan
b. Offering competitive interest rates
associations, and microfinance thrift banks that
c. Promoting the concept of thrift
are organized under existing laws for the following
d. Providing other types of financial services
purposes:
→ Credit union exist to help and extend financial
a. Accumulating and investing the savings of
assistance to members by pooling and
depositors
accumulating funds from all the members. The
b. Providing working capital to businesses
funds amassed from the membership fees shall be
engaged in agriculture, service, and housing
made available for borrowing by the members who
c. Providing diversified financial services to
are in need. Only those who have accounts with
individuals and small and medium enterprises
the credit union are considered members and
4. Rural bank and Cooperative bank - organized and
owners.
operating in rural areas. They are intended to promote
and expand the rural economy by providing the people
with basic financial services. The primary target markets
or rural and cooperative banks are farmers who need
financial help in the production and marketing of Financial Intermediaries
agricultural products. Rural and cooperative banks are - a type of financial institution that acts as the
also engaged in micro financing to assist small individual middleperson between two parties – the investors and
entrepreneurs. Rural banks and cooperative banks differ the borrowers. Financial intermediaries raise and
from each other by ownership. Rural banks are privately
accumulate money from investors and officer the
owned and managed while cooperative banks are
owned by cooperatives or a federation of cooperatives. accumulated money to individuals or corporate
5. Islamic bank – created and organized under R.A. No. entities in need of financial assistance.
6848, aims to promote and accelerate the socio- - the concept of financial intermediaries is very
economic development of the Autonomous Region of broad. It includes all types of financial institutions that
Muslim Mindanao by performing banking, financing, receive money from one party and offer it to another
and investment operations and to establish and as financial aid. They include banks, insurance
participate in agricultural, commercial, and industrial companies, brokerage and investment houses, broker-
ventures based on the Islamic concept of banking. dealer, mutual funds, and pension funds.
2. Savings and loan association
→ referred to as a financing and mortgage loan
3 Financial Intermediaries refer the following:
1. Mutual Fund
company.
-accumulate money by selling shares of stocks or bonds
→ a financial institution that is engaged in the
of publicly listed corporations to individual or corporate
business of accumulating the savings of its investors.
members and stockholders, and using such 2. Pension Fund
accumulations for loans or investments in -is set up by a business for the purpose of paying the
securities of productive enterprises. pension requirements of all private sector employees who
→ the unique feature of the financing and retire from the business organization upon reaching their
mortgage loan company is that the depositors retirement age.
 3. Insurance Companies investments in the forms dividends while those holds
- acts as a financial intermediary by pooling together the bonds earn income in the form of interest.
proceeds of insurance policies sold to the public and
investing the accumulated funds in high yield maturing 2. Money market - the financial market is classified as
securities from investment house.
money market when the financial securities being
Insurance Companies may offer the following products traded have a period of less than one year. This type of
to the public: financial security is called short-term security. Since
A. Life Insurance short-term securities are not intended to be held for
B. Health Insurance more than one year, they also referred to as trading
C. Car Insurance securities.
D. Fire Insurance
E. Crop Insurance 3. Primary market – is a financial market where a
F. Marine Insurance corporation can issue new shares of stock. The primary
G. Other Insurance Products market facilitates the raising of the required amount
when the investors directly buy the new shares from the
issuing corporation.
Investment Institutions
4. Secondary market – is a financial market where
- a company engaged in buying securities of
other companies which are listed in the stock financial securities are traded between or among
exchange for investment purpose only. Hence, the investors. In the secondary market, there is no issuance
buying and selling of financial securities are not the of new shares from the corporation. The secondary
primary business activities of an investment institution. market, therefore, exist after the corporation has issued
new shares to the investors in the primary market.
In other words, an investment
institution or company simply holds on to the securities
it acquired from other companies. Financial securities 5. Public market - is a market which the financial
are held up to the time of their maturity. This financial securities of publicly listed corporation are traded
institution earns income from holding the securities in following a standardized contract agreement and
the form of interest or dividends. procedures. A corporation is classified as publicly-listed
when its shares are available for sale to the public.

Financial Instruments
→ refer to contracts that give rise to the formation of
financial assets of one entity and at the same time
the creation of financial liability or an equity
instrument in another entity
→ In all financial instruments, two parties are involved.
One party has the contractual right to receive the
financial assets, and the other party has the
contractual obligations to pay or deliver the
financial assets.
The most common forms of financial instruments are as
follows:
▪ Cash – On the part of the holder, cash is a financial
asset. However, on the part of the
Market- refers to the place where the sellers and the
government such as the Banko Sentral ng
buyers of goods or services meet.
Pilipinas, cash is a financial liability.
→ The major business happening is the selling-buying activity.
▪ Check- it is a financial asset of the payee, but
Financial Market- refers to the place where the selling considered a financial liability of the drawer
and buying activity occurs to trade equity securities or issuer.
such as bonds and stocks, currencies, derivative ▪ Loan – it is a financial asset of the lender or creditor
securities, notes and mortgages. but considered a financial liability of the
borrower or the debtor.
→ The buying-selling transaction happening in the
▪ Bond – it is a financial asset of the holder or investor
financial market are called trading activity. but considered a financial liability of the
The typical financial market, among others include the issuing company.
following: ▪ Stocks – it is a financial asset of the investor or
shareholder but an equity of the issuing
1.Capital market - is a financial market where stocks
company.
and bonds are issued for medium-and long-term
periods. Stocks are treated as equity securities while
bonds are technically considered debt securities.
Investors who hold stocks receive return from their
Financial Instrument indenture. The second liability is the face value of
the bond. Default arises when either the interest or
Bond
the principal amount is not paid on the designed
→ is a financial instrument that represents a payment dates.
contractual debt of the party issuing the bond.
The bond is called collateral trust
Issuing party may either be a private business entity
bond when it is secured by the stocks or bonds of
or a government. This type of financial instrument is
other companies. There are also instances when
evidenced by a certificate called bond indenture.
the issuing company secures the bond by the
→ Usually, the issuer makes a promise under oath to stream of cask flows expected from the
pay the specified amount borrowed at a investment project.
determinable future time with periodic interest
payment at a stated rate until such time that the 4. Debenture Bond- when it is not supported by any
whole amount borrowed is fully settled. The holder collateral or security as assurance in times of non-
of the bonds, therefore, earns income through payment or default.
interest.
Companies with high credit ratings and the Philippine
government issue debenture bonds. Investors who buy
debenture bonds issued by private corporations have
6 The most common type of bonds are as follows: a strong belief on the financial capacity of issuing
1. Term Bond- that has a single maturity date. The company based on the past financial performance
bond can be a single lone bond or can be shown in its financial statements.
composed of several bonds with the same On the other hand, domestic and
maturity date. foreign investors who buy debenture bond issued by
the Philippine government in various stock exchanges
For example, a corporation has been authorized worldwide are working on the theory that no
to issue P10million term bond on March 1, 2018 government will ever go to a state of bankruptcy. For
which will mature on March 1, 2028. Investors who them, it is easy for the government to raise money in
acquire the bond on different dates after March the form of taxation and other charges.
1, 2018 will have the same payment date which is
march 1, 2028. 5. Convertible Bond- is a debt security, as such a
However, investors are not precluded bondholder is also referred to as creditor.
to cancel or surrender the term bond prior to its
maturity date. Hence, an investor who acquires a A convertible is a bond which can be converted
bond on September 1, 2019 can surrender the into a share of stock in a later date. The option to
bond anytime prior to March 1, 2028. convert must be vested in the bondholder and
not on the issuing company.
2. Serial Bond- is a kind of bond that has a series of
several maturity dates instead of single maturity The choice to convert the bond gives
date. preferential right to the bondholder to become a
shareholder of the company instead of being a
For example, a 10 year serial bond issued on creditor. Issuing a convertible bond gives the
March 1, 2018 have a series of maturity dates impression that there is some value inherent in the
every two years from the date of issuance. company.
When the bond is serial, a portion of
the total debt obligations is paid out or settles 6. Callable Bond- have maturity dates indicated on
every maturity date. The total bond obligation, the face of the indenture. The issuing company is
therefore, are reduced gradually as time passes expected to pay the bondholder on the maturity
by. date.
Companies usually issue serial bonds → The bond is callable when the issuing
when they feel that the cash raised from the sale company has the option to redeem the
of bonds is no longer necessary as the project is bond prior to its maturity date. In most
mowing towards it completion stage. By gradually instances, the company pays a higher
cancelling the debt obligation, the financing amount, or technically called at a
charges brought about by interest expense are premium, when the bond is redeemed prior
reduced to its maturity period.

3. Secured Bond- a type of bond that is secured by The issuing company redeems the bond prior to its
the issuing company. The security is issued in the maturity date under the following instances.
form of real property which serves as collateral in 1.The company has accumulated enough funds
the event of default on the part of the bond to continue the investment project.
issuer. 2.The investment project is finished ahead of
schedule or at lesser costs.
Two liabilities arise when a bond is issued. The first 3.There is substantial decrease in the interest
liability is the interest which is payable every rate.
interest payment date indicated in the bond
 Review Chapter 2
Stock 1. True – The operation of the business organization is
-is a financial security that signifies ownership of the affected by several forces outside the organization.
assets of the corporation. Only stock corporation are Factors: political, financial, economic, etc.
authorized by the Securities and Exchange Commission 2. False – The basic elements comprising the financial
(SEC) to issue stocks; hence, sole proprietorship and system are financial institutions and financial market.
partnership can never issue shares of stocks. 4 basic elements of financial elements:
1. Financial instruments
→ The holders of the shares of stocks as evidenced by 2. Financial institutions
the Stock Certificate are called shareholders or 3. Financial market
stockholders. The shareholders has claim on the net 4. Lenders and borrowers
assets of the business as owners of the corporation.
→ The number of shares issued determines the 3. False- The only financial institutions that has active
percentage of ownership of the corporation. If the participation in the financial system is the bank.
corporation has 10,000 authorized shares and 4 depository institution:
outstanding, a holder with 2,500 shares will have 1. Bank
25% ownership on the net assets of the corporation. 2. Savings and loan association
This indicates that the holder can control the 3. Trust companies
operation and decision-making of the corporation 4. Credit unions
by 25%. 4. True- Generally, a bank is operating just like a
financial intermediary
5. False – In a savings and loan association, anybody
The 2 major types of stocks are as follows: can make a deposit and avail him/herself of its loan
1. Common Stock or ordinary shares service. (Only members or owners)
→ is a financial instrument whose holders do not 6. True – Mutual and pension funds manifest clearly the
have preferences over each other. functions of financial intermediaries
7. True – Shares of the corporation issued for the first
→ The common stockholders have the same
time are traded in the primary market
rights and privileges in terms of dividend or
8. False – An insurance company acts like a financial
asset distribution with other stockholders
intermediary by pooling together the retirement
→ A common stock is a voting stock. contributions of the employees and offers the fund to
debtors. (proceeds of insurance policies sold to the
2. Preferred stocks or preference shares public and investing the accumulated funds in high
→ is a kind of stock that is preferred over yield …)
common stock. 9. True- Two parties are always involved in any financial
These preference are in terms of the following: instrument in all instances.
→ Distribution of earnings or dividend distribution 10. False – Common stocks has a fixed rate of return
→ Net assets at the time of liquidation and preferred share has a preference in the selection
of the board of directors. (Bonds has fixed rate while
common stock is preferred share; preferred share
*The preference on the distribution of profit means that doesn’t have voting rights while common stock has
preference stockholders are Paid First of the Dividends rights.)
accruing to them.
11. Stock – is a financial security that signifies ownership
of the assets of the corporation
12. Debenture bond – it is a bond which is not
supported by any collateral or security as assurance in
times of non-payment or default
13. Financial Instrument – refers to contract that give
rise to the formation of financial assets of one entity
and at the same time the creation of financial liability
or an equity instrument in another entity.
(Check- financial asset of payee & financial liability of
drawer or issuer ; loan- financial asset of the lender or
creditor & financial liability of the borrower or the
debtor)
14. Capital Market- it is a financial market where stocks
and bonds are issued for medium and long-term
periods. (short term- money market)
15. Universal bank – considered largest bank in terms
of assets, loans and portfolio and revenue,

A new name/title for balance sheet and what it shows