Financial Management Basics

Study Notes

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

Description

Understand the different types of business activities such as financing, operating, and investing activities, and learn about forms of business organizations including sole proprietorship, partnership, and corporation.