Financial Management Basics

Financing Activities

• Result in changes in the size and composition of contributed equity
• Include activities related to equity and debt

Operating Activities

• Principal activities of the enterprise
• Include sales, production, and delivery of goods and services

Investing Activities

• Acquisition and disposal of long-term assets and other investments
• Include purchases and sales of property, plant, and equipment

Forms of Organizations

• Sole Proprietorship: owned by one individual
• Partnership: owned by two or more individuals
• Corporation: a separate legal entity

Purpose of Business Organization

• Service: performs services for a fee
• Merchandising: companies that purchase goods that are ready for sale
• Manufacturing: companies buy raw materials and convert them into products

Accounting Equation

• Assets = Liabilities + Owner’s Equity
• Owner’s Equity = Assets - Liabilities
• Liabilities = Assets - Owner’s Equity

Assets

• Economic resources by the business
• Examples: cash, inventory, property, plant, and equipment

Liabilities

• Amounts owed by the business
• Examples: accounts payable, loans, and debts

Capital/Owner’s Equity

• Owner’s interest in the business
• Equals assets minus liabilities

Income

• Increase in economic benefit during the accounting period
• Examples: sales, revenue, and gains

Expense

• Decreases in economic benefit during the accounting period
• Examples: costs, losses, and expenditures

Basic Financial Statements

• Statement of Financial Performance/Income Statement: shows how business operates or produces wealth
• Statement of Changes in Owner’s Equity: shows activities that caused the owner’s equity change
• Statement of Financial Position/Balance Sheet: shows the health of the enterprise
• Statement of Cash Flows: shows why the amount of cash changed over a period of time

Debits and Credits

• Debit: increases asset or expense accounts, decreases liability or equity accounts
• Credit: increases liability or equity accounts, decreases asset or expense accounts

Accounting Cycle

• Documentation: gathering source documents
• Journalizing: recording business transactions in the journal
• Posting: transferring entries from journal to general ledger
• Preliminary Trial Balance: preparing to check the accuracy of posting and prove equality of debits and credits
• Adjusting Entries: preparing to update the books at the end of the accounting period
• Worksheet or Working Paper: preparing to facilitate the preparation of financial statements
• Financial Statements: preparing the accounting report at the end of the accounting period
• Closing the Books: closing entries, closing income and expense accounts, and preparing post-closing trial balance

Partnership

• An individual who wants to do business with a partner for a reason, mostly to combine capital resources or managerial skills and expertise
• A legal entity guided by the rules and regulations put up by each country
• Governed by the Civil Code of the Philippines, Articles 1767 to 1867
• Features of Partnership:
  • Voluntary Association
  • Shared Ownership and Control
  • Unlimited Liability
  • Mutual Agency
  • Co-Ownership of Property
  • Shared Profits and Losses