Introduction to Finance

• Knowledge is studying to gain wisdom to uphold the truth.

Finance Definition

• Derived from the Latin word "finer," meaning "to end" or "to pay."
• Financial matters conclude when a person pays a bill.
• It's the operational or practical side of economics, involving wealth production and distribution.
• It involves efficient acquisition, distribution/allocation, and utilization of scarce money/fund resources.

Finance Tasks

• Allocating available funds involves determining where to use funds currently available to the firm.
• Acquiring needed funds means obtaining funds from the right sources at the right time.
• Utilizing acquired funds involves using the funds to achieve set goals.

Classification of Finance

• Finance can be classified based on the form of negotiation and user.

As to Form of Negotiation

• Direct Finance: direct borrowing with a direct relationship between borrower and lender.
• Indirect Finance: involves the use of financial intermediaries.

As to User

• Public Finance: revenue and expenditure patterns of the government.
• Private Finance: finance other than public finance.
• Personal Finance: conducted by consumers/individuals.
• Finance of non-profit organizations: conducted by non-profit organizations.
• Business Finance: conducted by businesses or enterprises for profit.

Finance in the Business World

• Business: any lawful economic activity that involves rendering service, trading, manufacturing, construction, mining, and financial entities, uses and performs finance functions.
• Efficiency: the relationship between input and output, getting something done at the least cost, time, and effort.
• Effectiveness: a measure of quality, producing the desired result.
• Productivity: Efficiency + Effectiveness

Types of Business Organizations

As to Nature or Purpose

• Service: rendering service (e.g., barber shops, dental/medical clinics, laundry shops).
• Trading/merchandising: buying and selling goods (e.g., sari-sari stores, hardware stores, department stores).
• Manufacturing: converts raw materials into finished products (e.g., Procter and Gamble, San Miguel Brewery, BFGoodrich, Sterling).
• Banking and Finance: using money as the main product of the business (e.g., BDO, PNB, credit card companies, credit unions, savings and loan associations, insurance companies).
• Mining/extractive industry: extracting natural resources like oil, gas, gold, copper, cement, etc. (e.g., Caltex (Philippines), Inc., Nido Petroleum Philippines Pty., Ltd., Japan Petroleum Exploration Co., Ltd, Vulcan Industrial and Mining Corporation)
• Construction companies: building houses, buildings, schools, roads, bridges, etc. (e.g., F.F. Cruz and Company, JAO Builders, V. V. Soliven, CM Builders, Inc., DM Consunji, Inc.)
• Genetic industries: production or multiplication and reproduction of certain species of plants and animals, either for sale or for production of bio-products like wool, leather, medicinal herbs, etc.

As to Ownership

• Sole or Single Proprietorship
• Partnership.
• Corporation
• Cooperative
• Business Entity Concept: irrespective of ownership, the business is separate and distinct from the owner(s).

Single/Sole Proprietorship

• A business unit owned/controlled by a single individual, referred to as a sole/single proprietor.
• Advantages are ease of formation, minimal capitalization needs, sole decision-making, and easy termination.
• Disadvantages are unlimited liability, limited access to capital, limited skills/talents, inability to attract/retain good employees, limited life, difficulty in measuring success, and personal problems hindering operation/success.

Partnership

• Association of two or more persons who have agreed to contribute money, property, or industry to a common fund with the intention of dividing profits.
• Two or more persons may form a partnership for the exercise of a profession which is called general professional partnerships.
• Owners of a partnership are called partners.
• The aggregate concept views the partnership is a collection of rights and responsibilities of partners.
• Each partner is an agent of the partnership, and any act of the partner within the scope of the business binds the partnership and the other partners.

Nature of a Partnership

• Easier to form than a corporation.
• Allows pooling of resources for some common purpose(s).
• Used not only for small operations but also for large-scale operations.
• May be composed of two partners only or dozens of partners.
• Contractual in nature and can be formed either by an oral or written contract.

Essential Requisites of a Partnership

• Partnership contract, oral or written, expressed or implied, subject to Art. 1771 to 1773 of the New Civil Code.
• Two or more persons who have the legal capacity to enter into a partnership contract.
• Valuable contribution to a common fund consisting of money, property, or industry.
• Intention to divide profits between or among the partners.
• Lawful purpose(s).

Characteristics of a Partnership

• Mutual agency: every partner is an agent of the partnership.
• Voluntary association: partners voluntarily join together; no one is forced to become a partner.
• Based on contract: the agreement, oral or written, is an essential requisite.
• Limited life: dissolution occurs upon a partner's death/insolvency, project termination, or admission of a new partner.
• Unlimited liability: liability extends to the personal assets of the general partner in any partnership.
• Division of profit: the basic reason for forming a partnership and should be written in the agreement.
• Co-ownership of contributed assets: any asset contributed by a partner becomes the property of the partnership and hence, the property of partners.

Advantages of a Partnership

• Ease of formation.
• Allows the pooling of financial resources.
• Allows the pooling of skills, expertise, and experience.
• Less government control, supervision, and intervention than corporations.

Disadvantages of a Partnership

• Limited life.
• Unlimited liability.
• Mutual agency.

Organizing a Partnership

• A partnership may be constituted in any form, except when the capital is three thousand pesos or more and should be recorded with the SEC; when immovable or real rights are contributed and should be registered with SEC and necessitation a limited partnership, which must be registered with SEC.

Registration with the SEC

• File the business name with the SEC.
• Submit Articles of Co-Partnership, verification slip for the business name, a written undertaking to change the business name if required, TIN of each partner and/or that of the partnership, registration data sheet for partnership in six copies and other documents that may be required
• Pay the registration/filing and miscellaneous fees.
• Forward documents to the SEC Commissioner for signature.

Contents of the Articles of Co-Partnership

• Name, nature, purpose, and location of the business
• Names of the partners, indicating if they are limited or general and their corresponding addresses and citizenship
• Amount of contributed cash, property descriptions, and agreed values by each partner, and any additional contribution
• Term or duration of the partnership; date the partnership should start or end
• Duties, rights, and powers of each partner
• Manner of dividing profits/losses among the partners
• Conditions under which partners may withdraw money or other assets for personal use
• Provisions as to salaries and/or interests on partners' capitals
• Manner of keeping the books of accounts, length of the accounting period, and the date it should commence or end
• Provisions pertinent to dissolution/liquidation.
• Other special provisions and stipulations

Types of Partnerships as to Liability of Partners

• General Partnership: all partners are general partners.
• Limited Partnership: at least one partner is a limited partner; there should be at least one general partner to assume unlimited liability.

Types of Partners

As to Liability

• General Partner: liability extends to personal assets.
• Limited Partner: liability extends only to the interest in the partnership.

As to Investment

• Capitalist Partner: invests money or property.
• Industrial Partner: invests skill, talent, or knowledge.
• Capitalist-Industrial Partner: invests money, property, skill, talent, or knowledge.

Corporation

• An artificial being, organized by law, with ownership divided into shares of stock.
• Created by operation of law, having succession rights and powers expressly authorized (Corporation Code of the Philippines).
• Required to be organized by five or more persons, called incorporators
• Shareholders or stockholders are the owners of a corporation, including the incorporators.

Characteristics of a Corporation

• Separate legal existence (artificial being).
• Created by operation of law.
• Transferable units of ownership.
• Limited liability of stockholders.
• Continuity of existence.
• Centralized management by the Board of Directors.

Advantages of a Corporation

• Legal capacity.
• Limited liability of shareholders.
• Transferability of shares or the right of succession.
• Continuity of life.
• Ability to acquire funding.
• Ability to acquire talents, skills, and expertise.

Parties to a Corporation

• Corporators: include the incorporators, stockholders, or members (for non-stock).
• Incorporators: founders (five, but not more than fifteen).
• Stockholders/shareholders: those who own shares of stocks.
• Members: corporators of a non-stock corporation.
• Promoters: find potential incorporators/stockholders; prepare the prospectus to invite investors; work to obtain the charter/Articles of Incorporation.
• Board of Directors are the governing the body (not less than five nor more than fifteen), electsthe Chairman of the Board and corporate officers and formulate the overall policies.
• Corporate Officers are officials of the corporation, including the President, Vice Presidents, Treasurer, Corporate Secretary, etc.

Incorporation and Organization of a Corporation

• Promotion: bringing together incorporators and persons interested in forming the corporation and procuring subscriptions or capital.
• Incorporation: formally organizing the corporation, which includes registration of the business name with the SEC, drafting and execution of the Articles of Incorporation, execution of sworn affidavits, and bank deposit certificates, the filing of the Articles of Incorporation with the SEC and issuance by the SEC of the Certificate of Incorporation
• Formal Organization and Commencement of Business Operations: includes adoption of By-laws, election of the Board of Directors and officers and commencement of business operations

The Articles of Incorporation

• Name of the Corporation
• Specific purpose(s) for which the corporation is formed
• Location or principal place of business (should be in the Philippines)
• Term for which the corporation is to exist (not exceeding fifty years)
• Names, nationalities, and residences of the incorporators
• Names, nationalities, and residences of the persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with the Code
• For stock corporations, information includes the amount of authorized capital stock, the number of shares, and the par value of each share.
• For stock corporations, the names, nationalities, and residences of the original subscribers and the amount subscribed and paid.
• For stock corporations with no-par value shares, the authorized capital stock amount and the number of shares.
• For non-stock corporations, the amount of its capital is listed along with the names/nationalities/residences of contributors and the amount contributed by each.
• Include other matters not inconsistent with the law.

The By-laws

• Refer to the rules of action adopted by the corporation for its internal government and the government of its officers, stockholders, and members.
• Includes such points as time, place, and manner of calling and conducting meetings of directors/trustees and stockholders/members; required quorum in meetings; form for proxies and the manner of voting them; qualifications, duties, and compensation of directors, trustees, officers, and employees; the time for holding the annual election of directors/trustees; manner of election or appointment and the term of office of all officers other than directors/trustee; penalties for violation of the by-laws; manner of issuing certificates, in case of stock corporation; may be necessary for the transaction of its corporate business and affairs

Classification of Corporations

• The Corporation Code of the Philippines classifies corporations depending on nature.
• Public Corporations (municipal/local governments): government of a portion of the state.
• Private Corporations: corporations other than public.

Classification of Private Corporations

As to Purpose

• For profit (civil).
• Non-profit
• Charitable which includes Ecclesiastical/Religious organisations and Eleemosynary/Public Charity
• Foundation: a non-profit that donates funds, supports other organizations, or provides funding for its charitable purposes.

As to How Membership is Represented

• Stock Corporations: ownership is divided into shares of stock.
• Open corporations stocks sold to the public.
• Closed corporations - stocks are sold to a selected few.
• Non-stock Corporations: have members instead of stockholders, created not basically for profit, but for public good and welfare.

As to the State of Incorporation

• Domestic Corporations: incorporated in the country where it is located.
• Foreign Corporations
• Resident Foreign Corporation: foreign corporation with offices and operates in the Philippines.
• Non-resident Foreign Corporation: foreign corporation deriving income from the Philippines but without an office or branch in the Philippines.
• Multinational Corporations: extend operations to other countries like Coca-Cola, McDonalds, and General Motors Corporation.

As to Number of Persons Composing the Corporation

• Corporation Sole: bishop or the diocese to which the bishop belongs; only applicable to the Church.
• Corporation Aggregate: common form of corporation with multiple stockholders.

As to Legal Right to Corporate Existence

• De jure Corporation: conforms with the law and is recognized by the government.
• De facto Corporation: exists in fact, but not in law.

As to Relation to Other Corporations

• Parent or Holding Corporation: original corporation from which another corporation emanates.
• Subsidiary or Sister Corporation: emanates from the parent company which stocks are owned by the parent in majority.

Other Private Corporations

• Quasi-public corporations: such as light, water, transportation, telephone, etc.
• Government-owned/-controlled: the majority stock of which is owned by the government.
• Wasting assets corporations: engaged in the extractive industry.

Corporate Capital

• Ownership in a corporation is represented by capital stock, which is divided into shares to facilitate the transfer of ownership and profit distribution.
• Shares may be classified as to value on the stock certificate or right to dividends.

Classes of Shares Kinds of Stock

Value on the Stock Certificate

• Par value shares: value of the shares are written on the certificates.
• No-par value shares: value of the shares is not written on the certificates.
• With stated value not is written on the stock certificates, but are stated in the Articles of Incorporation or in a Board Resolution.
• Without stated value not written on the stock certificates nor anywhere in the Corporation documents.

Rights to Dividends

• Common stock or ordinary shares: a corporation issues only one class of stock, and each share has equal rights.
  • In case when there is more than one class of stock, the common stock entitles the holder to an equal pro-rata division of profits without any preference.
• Common stocks have "residual" in the corporation because it receives its after preferred shareholders are given theirs.
• Preferred/preference shares: corporations may issue more than one class of stock, one with preferential rights over another class.
• Regarding assets (upon liquidation), there is preference over common shares in distributing the corporation's assets, if the corporation is liquidated.
• Regarding dividends, the owners are entitled to receive dividends before payment of any dividend is distributed to the common stock.
  • cumulative.
  • non-cumulative.
  • participating.
• non-participating.

Cooperatives

• Organizations that provide individuals with goods/services or produce/dispose of their labor's products
• Registered with the Cooperative Development Authority, which govern the promotion, organization, registration, and supervision of all types of cooperatives
• Members are the owners of cooperatives.
• Patronage refunds share the profits of the cooperative based to the amount of business they do with the cooperative.
• Credit union a cooperative that provides member with loans

Organization Expense

• Expenditures incurred in organizing a corporation, such as SEC fees, legal fees, taxes paid to the city or municipal government, attorney's fees for drafting the Articles of Incorporation and By-laws, related services, and promotional costs.
• These are no longer charged to an intangible asset account and amortized yearly, theoretically over 50 years or practically over five years allowed prior.
• Under PAS 38, pre-operating expenses/organization expenses do not fall under the definition of an intangible asset and should no longer be reported as a deferred asset subject to amortization.
• They are now immediately expensed as period costs but the BIR still views them as amortizable for tax purposes.