BF & FABM REVIEWER (1) PDF - Business Finance Reviewer

BUSINESS FINANCE REVIEWER 5. Organizational Skills- they must stay organized to do their jobs respectively. 40 items in total, 30 items Multiple choice...

BUSINESS FINANCE REVIEWER 5. Organizational Skills- they must stay organized to do their jobs respectively. 40 items in total, 30 items Multiple choice Other Financial Managers questions and 10 items True or False. The entrepreneurs are the CEO; in Business 1. Introduction to Financial Management Management, they are called the Business 2. Types of Financial Managers managers; and in a company, there are the different managers: 3. Important Skills of Financial Managers 4. Types of Financial Instruments 1. Board of Directors- they set policies on investment, capital structure and dividends. They 5. Types of Financial Institutions also approve the company’s strategies, goals, and 6. Types of Financial Markets budget and appoint and remove members of the top management including president. 7. Financial Planning 2. President- they are responsible for overseeing the operations of the company and ensuring that Finance is a term for matters regarding the the strategies as approved by the board are management, creation and study of money and implemented as planned. Other Financial investments. Managers. Three categories: 3. VP for Sales and Marketing- they are responsible for formulating marketing strategies Public Finance- includes government expenditures and plan, and performing market and competitor and other government concerns. analysis. Corporate Finance- involves managing assets and 4. VP for Production- ensuring production meets liabilities for a business. demand and Identifying production. Personal Finance- defines all financial decisions of 5. VP for Administration- coordinating the an individual or household, including budgeting, functions of administration, finance, sales and insurance. marketing departments. 6. VP for Finance- has the four following main role Financial Managers- person involved in financing. Financing, Investing, operating and dividend policies. Two types of financial manager: Controllers- who direct the preparation of financial reports. Financial Instrument- is the written legal obligation under certain condition. It is a monetary contract Credit managers- who oversee the firm’s credit between parties. business. Examples: 1. Bank loans 4. Future Contracts Important Skills for Financial Manager 2. Bonds 5. Stocks 1. Analytical Skills- increasingly assist executives in making decisions that affect the organization 3. Mortgages 6. Insurance 2. Communication Skills- Excellent communication are needed to explain and justify complex financial Types of Financial Instruments transactions. When a financial instrument is issued, it gives rise 3. Attention in Detail- financial manager must pay to: attention to detail. a. Financial Asset - is any asset that is: 4. Math Skills- must be skilled in math including algebra. An understanding of international finance Cash and complex financial documents also is important. A contractual right to receive cash  A contractual right to exchange instruments with the company’s growth is spurring, the common another entity stockholders will benefit on the growth. Moreover, during a profitable period for which a company Examples: Notes Receivable, Loans Receivable, may decide to declare higher dividends, preferred Investment in Stocks, Investment in Bonds stock will receive a fixed dividend rate while b. Financial Liability - is any liability that is a common stockholders receive all the excess. contractual obligation: To deliver cash or other financial instrument to Financial Institution- is a company engaged in another entity. business of dealing with financial and monetary To exchange financial instruments with another transactions. Financial institution can vary by size, entity under conditions that are potentially scope, and geography. unfavorable. Examples: Examples: Notes Payable, Loans Payable, Bonds 1. Banks 3. Brokerage Firms Payable 2. Trust Companies 4. Investment Dealer c. Equity Instrument – is any contract that evidences a residual interest in the assets of an entity after deducting all liabilities. Types of Financial Institutions Examples: Ordinary Share Capital, Preference 1. Commercial Bank – is a type of financial Share Capital institution that accepts deposits, personal and When companies need funding, they either sell mortgage loans, and offer basic financial products debt securities (or bonds) or issue equity and saving account to individuals and small instruments. businesses. A commercial bank is where people do their banking, as opposed to an investment bank. d. Debt Instruments - generally have fixed returns (Example: BDO Unibank Inc., Metropolitan Bank, due to fixed interest rates. Land Bank of the Philippines) Examples of debt instruments are as follows: 2. Investment Banks – it specialized in providing a. Treasury Bonds - These bonds and bills have services designed to facilitate business operations usually low interest rates and have very low risk of such as capital expenditure financing and equity default since the government assures that these offerings including initial public offerings (IPOs). will be paid. (Examples: BDO Capital and Investment Corp, PNB Capital and Investment Corp) b. Corporate Bonds - are issued by publicly listed companies. These bonds usually have higher 3. Insurance Companies – it is the most familiar interest rates than Treasury bonds. However, these non-bank financial institutions. Providing insurance bonds are not risk free. whether for individuals or corporations. (Examples: SunLife, PruLife, AXA Philippines, etc) e. Equity Instruments - generally have varied returns based on the performance of the issuing 4. Brokerage Firms – investment companies and company. Returns from equity instruments come brokerages provide investment services that from either dividends or stock price appreciation. include wealth management and financial advisory services. (Examples: BPI Trade, BDO Nomura, First The following are types of Equity Instruments: Metro, PhilStocks etc.) a. Preferred Stock - has priority over a common stock in terms of claims over the assets of a company. If a company were to be liquidated and Financial Markets - offer liquidity to borrowers and its assets must be distributed. Preferred savers. Refer to any marketplace where the trading stockholders also have priority over common of securities occurs. stockholders in cash dividend declaration. Types of Financial Markets Dividends to preferred stockholders are usually in a fixed rate. 1. Over-the-counter Market – it doesn’t have a physical location and trading is conducted b. Common Stock- holders of these stocks on the electronically. other hand are the real owners of the company. If 2. Bond Market – it sells securities such as notes and bills. A bond is a security in which an investor Steps in Planning loans money for a defined period at a pre- established interest rate. (Long term payment) A. Set goals or objectives. 3. Money Market- trades in products with highly These can be seen in the company’s vision and liquid, short- term maturities and high degree of mission statements. The vision statement states safety and a relatively low return in interest. (Short where the company wants to be while the mission term payment) statement states the plans on how to achieve the vision. 4. Derivatives Market - trades in future and option contracts that derive their value from underlying B. Identify Resources. instruments. Resources include production capacity, human 5. Capital Market - (Long term payment) resources, who will man the operations and financial resources. The materials needed, Financial planning process- involves gathering your manpower, machine, etc. financial information, setting life goals, examining your current financial status and coming up with a C. Identify goal-related tasks. strategy or plan for how you can meet your goals. Preparation in the accomplishment of the task. In this step, management must figure out how to achieve an objective. Planning it provides roadmaps for guiding, coordinating, and controlling the firm’s actions to D. Establish responsibility centers for achieve its objectives (Gitman & Zutter, 2012) accountability and timeline. Assign or distribute tasks/role to the members. The management must establish a mechanism 1. Strategic Planning which will allow plans to be monitored. This can be Strategic planning lays out the long-term, broad done through quantified plans such as budgets and goals that a business or individual wants to projected financial statements. achieve. E. Establish the evaluation system for monitoring Your strategic plan provides the general idea of and controlling. how to reach a goal. The management must establish a mechanism Strategic planning typically occurs at the which will allow plans to be monitored. This can be beginning of a year, quarter, or month. Strategic done through quantified plans such as budgets and plans should be reviewed every quarter at least. projected financial statements. The management will then compare the actual results to the planned A strategic plan supports the organization's vision budgets and projected financial statements. Any and mission statements by outlining the high-level deviations from the budgets should be plan to achieve both. investigated. F. Determine contingency plans. 2. Tactical Planning In planning, contingencies (future event or Tactical planning outlines the short-term steps circumstance) must be considered as well. and actions that should be taken to achieve the Budgets and projected financial statements are goals described in the strategic plan. anchored on assumptions. If these assumptions do Tactical planning occurs after the strategic plan is not become reality, management must have outlined. alternative plans to minimize the adverse effects on. A tactical plan answers, "how do we achieve our strategic plan?" It outlines actions to achieve short-term goals, The following criteria may be used for effective generally within a year or less. They are much planning: narrower in focus and can be broken down into the departmental or unit level.  Specific – target a specific area for improvement. Measurable – quantify or at least suggest an indicator of progress. Assignable – specify who will do it. Realistic – state what results can realistically be achieved, given available resources. Time-related – specify when the result(s) can be achieved. FABM REVIEWER Cash basis of accounting- revenues and expenses may be accounted for on a cash received or cash paid basis. 40 items in total, 20 items Multiple choice questions, 10 items Classification of Accounts and 10 items True or False. Accrual basis of accounting- requires that 1. Classification of Financial Accounts revenue should be recognized when earned regardless of when collection is received; 2. Normal Balances of Accounts and expense should be recognized when 3. Classification of Assets and Liabilities incurred regardless of when payment is 4. Examples of Current and Non-current Assets made. 5. Examples of Current and Non-current Liabilities 6. Contra-asset account The accrual basis of accounting is the 7. Two formats in preparing Statement of Financial generally accepted method because it Position conforms with the “matching principle” Statement of Financial Position (SFP)- is a formal statement showing the three 1. Assets - Resources owned. elements comprising financial position, Assets can be classified into two. namely Assets, Liabilities and Capital. 1. Current Assets SFP is also called as Balance Sheet. - Cash or Cash Expense. - Trading (buy and sell) Assets- Resources owned - Realize within 12 months. (receivable) Liabilities – Obligations owned - Normal operating cycle is 12 months Capital/Equity - Net assets Revenue- Income Examples of Current Assets Expenses- Disbursements 1. Cash- is money owned by the company 2. Cash Equivalent- includes bank accounts. Normal Balances 3. Receivables- refers to the company’s right A L C R E D to collect or claim payment from unpaid sales or lending activities. Dr Cr Cr Cr Dr Dr Accounts Receivable are claims against customers arising from services and sale of Assets = Liabilities + Capital → ( Balance merchandise on account. Sheet/SFP) Notes Receivable are claims supported by a Revenue and Expenses → (Statement of promissory note. Comprehensive Income) 4. Inventory- merchandise goods on hand Note: Dr- Debit Cr- Credit and are available for sale. 5. Prepaid Expenses- refer to future expenses that the company had paid for in Accrual vs Cash Basis advance. (e.g. Prepaid Rent, Prepaid Insurance) 6. Accrued Income- income that has earned but not yet received. Contra-asset account 7. Advances to Employees- advance payment to an employee for services to be rendered. A Contra Asset account is an asset account where the account balance is a credit balance. – decreases the value of an asset. 2. Non-Current Assets- an entity shall classify all other assets not classified as Accumulated Depreciation- “total” current as non-current. depreciated cost of a depreciable asset. (except: Land) Allowance for Bad Debts- also known as Examples: Allowance for Doubtful Accounts. This Property, Plant and Equipment (e.g, land, relates to the company’s receivables which building, machinery, equipment, furniture), might not be collected. (AR uncollected) Intangible Assets (patent, franchise, copyright, trademark) Long-Term investment, Deferred Tax Assets. 2. Liabilities - Obligations owned Patent- legal right for inventions Franchise- right to use the Liabilities can be classified into two: process/production/trademark 1. Current Liabilities Copyright- right for musical/literary works - Settle with normal operating cycle Trademark- legal right to use a symbol, - Trading name, logo. - Within 12 months - No unconditional right Examples of Non-current Assets 1. Land- an asset that is not subject to Examples of Current Liabilities depreciation. 1. Accounts Payable- are amounts due to 2. Building- can be acquired by purchase or creditors for assets acquired on account. by means of construction. 2. Notes Payable- are amounts due to 3. Machinery and Equipment- includes creditors “within 12 months” and evidenced computers, air-conditioning units, electric by a written promise to pay. fans, freezers, refrigerators etc. 3. Accrued Expenses- expenses that are 4. Furniture and Fixtures- includes tables, already incurred but not yet paid. chairs, filing cabinets etc. 4. Unearned Income- is an income collected 5. Intangible Asset- non-monetary asset by the business in advance but not yet “without physical substance” but are earned. expected to provide future economic benefits. 5. Advances from Customers- amounts 2. Account form - As the title suggests, the collected by the business in advance from presentation follows that of an account, customers but not yet earned. meaning, the Assets are shown on the left side and the Liabilities and Equity on the right 6. Current portion of long-term debt- portion side of the Statement of Financial Position of mortgage, bonds, notes and other long- term indebtedness which are to be paid within 12 months from the Balance Sheet. 2. Non-current Liabilities- all liabilities not classified as current are classified as noncurrent. Examples of Non-Current Liabilities 1. Notes Payable- are amounts due to creditors for “more than 1 year” and evidenced by a written promise to pay. 2. Bonds Payable- a liability owed by a company to obtain a substantial sums of money from lenders to finance the acquisition of equipment and other needed assets. 3. Mortgage Payable- long-term debt of the business for which the business entity has pledged certain assets as security to the creditor. 3. Capital/Equity- used to record the “original and additional investments” of the owner of the business entity. Residual interest in the assets after deducting all its liabilities. Means net assets, or total assets minus liabilities. Statement of Financial Position Forms of Statement of Financial Position 1. Report form - This form sets forth the three major sections in a downward sequence of Assets, Liabilities and Equity.