BF-Reviewer-prelims.pdf

Lesson 1 3. Corporation - an entity created by shareholders. Introduction to Financial Management Corporation Partnerships 1....

Lesson 1 3. Corporation - an entity created by shareholders. Introduction to Financial Management Corporation Partnerships 1. Privately Need - are often owned Finance - can be defined as the science by family members whose stocks and art of managing money. (Gitman & may not be offered to outsiders Zutter, 2012) unless consent by the family - the management of large members is secured. amounts of money - 2. Publicly Need - are owned by especially by the the unrelated investors and are government or large traded in organized exchanges companies. like the Philippine Stock - the giving of monetary Exchange. support for an enterprise. - the monetary resources Lesson 2 and affairs of a government, organization Shareholder’s Wealth Maximization or person. > the determination of profit is based on accrual method Allowance Cap - the Accrual Method records accounts receivables and Budgeting - is the act of estimating payables and, as a result, can revenue (in the form of allowance) and provide a more accurate picture expenses over a period of time (in this of a the profitability of a company, case, on a daily basis) particularly in the long term. Sources of Funds - when faced with financial difficulties, we look for people Unhealthy Company Practices or institutions that will give us the money The management has not been we need. putting the company’s resources into good use. Forms of Business Organization They will be missing out on 1. Sole Proprietorship - a investment opportunities. business owned by one person and operated for his or her own Measurement of Shareholder’s profit. wealth 2. Partnership - a business owned - Is measured based on the current by two or more people and market price of the corporation’s operated for profit. stocks. The market price changes across different periods. Factors that influence Market Place Shareholders - elect the Board of Directors (BOD). each share held is Profitability - is a measure of the equal to one voting right. financial performance of a company for Board of Directors - the highest policy a period of time. making body in a corporation. The - Although it is a major board’s primary responsibility is to driver for increasing the ensure that the corporation is operating value of stock, an investor to serve the best interest of the should not rely on profits stockholders. alone. It has possible but if its cash flow is negative. * owning the majority the shares means Dividend - are the distribution of a having the right to elect a majority of the company’s earnings to its shareholders. directors on the board. Lesson 3 Board of Directors - Set policies on investments, capital Role of Financial Management structure and dividend policies. - Approve company’s strategies, Understanding the role of Financial goals and budgets. Management - Appoint and remove members of the top management including Managers - are responsible for making the president. the decisions for the company that lead - Determine top management’s towards shareholders’ wealth compensation. maximation. - Approve the information and other disclosures reported in the Lesson 4 financial statements (Cayanan, 2015). Organizational chart and the roles of President (CEO) - Oversee the VP for Finance operations of a company and ensuring that the strategies as approved Shareholders > elects Board of by the board are implemented as Directors > appoints President (CEO) planned. - VP for Marketing - Perform all areas of - VP for Production management: planning, - VP for Administration organizing, staffing, directing and - VP for Finance controlling. - Represent the company in professional, social, and civic activities. * THE PRESIDENT CANNOT MANAGE maximizes the utilization of the THE COMPANY ON HIS OWN, company’s production facilities. ESPECIALLY WHEN - Identify adequate and cheap raw THE CORPORATION HAS BECOME material suppliers. (Cayanan, TOO BIG. 2015) * TO ASSIST THE PRESIDENT ARE VP for Administration - Coordinate the THE VICE PRESIDENTS OF functions of administration, finance, and DIFFERENT FUNCTIONAL marketing departments. AREAS: FINANCE, MARKETING, - Assist other departments in hiring PRODUCTION AND employees. ADMINISTRATION. - Provide assistance in payroll preparation, payment of vendors, VP for Marketing - Formulate and collection of receivables. marketing strategies and plans. - Determine the location and the - Direct and coordinate company maximum amount of office space sales. needed by the company. - Perform market and competitor - Identifying means, processes, or analysis. systems that will minimize the - Analyze and evaluate the operating costs of the company. effectiveness and cost of (Cayanan, 2015) marketing methods applied. - Conduct or direct research that Functions of VP for Finance will allow the company identify - Financing new marketing opportunities (e.g. - Investing variants of the existing - Operating Policies products/services already offered - Setting Dividend Policies in the market.) - Promote good relationships with VP for Finance - Help the board in customers and distributors. setting financing policies and making (Cayanan, 2015). financial decisions. VP for Production - Ensure production - Provide assistance to the board meets customer of directors in setting investment demands. policies and making investment - Identify production decisions. technology/process that - Set operating policies that have minimizes production cost and financial implications, such as make the company cost working capital financing policies, competitive. credit terms given to customers, - Come up with a production plan and whether to avail of trade that discounts offered by suppliers  - Provide assistance to the board ON THE OTHER HAND, IF WE of directors in setting dividend USED MONEY FROM OUR policies for corporations, or BORROWINGS, THE ASSET providing advice regarding the BOUGHT IS FINANCED BY distribution of profits, in the case DEBT. of partnerships or sole - Short term investment decisions proprietorships. are needed when the company is in an excess cash position. Financing Activities VP for Finance Investment Policies and Decisions - the financial manager should: Financing Policies and 1. Plan for expected excess in cash Decisions - include making using Financial Planning tools decisions on how to fund long such as budgeting and term investments (such as forecasting. company expansions) and 2. Choose which type of investment working capital which deals with should it invest in that would the day to day operations of the secure the best profits. company (i.e. purchase of 3. To minimize the probability of inventory, payment of operating failure, long term investments expenses, etc.). have to be supported by a capital - The role of the VP for Finance of budgeting analysis. the Financial Manager is to 4. This is a crucial function of determine the appropriate capital management especially if this structure of the company. investment would be financed by - The role of the VP for Finance of debt. the Financial Manager is to 5. The lenders should have the determine the appropriate capital confidence that the investments structure of the company. that management will push Capital structure - refers to how through with will profitable or else much of your total assets is they would not lend the company financed by debt and how much any money. is financed by equity. Capital Budgeting Analysis - is TO BE ABLE TO ACQUIRE a tool to access whether the ASSETS, OUR FUNDS MUST investment will be profitable in HAVE COME SOMEWHERE. IF the long run. IT WAS BOUGHT USING CASH FROM OUR POCKETS, IT IS FINANCED BY EQUITY.  Operating Policies and Decisions - Financial Market - are organized the company has a choice on whether to forums in which the suppliers and users finance working capital needs by of various types of funds can make long-term or short-term sources. transactions directly. Financial Institution - are Providing Assistance in Setting intermediaries that channel the savings Dividend Policies and Distributions of individuals, businesses and of Profits - the role of a financial governments into loans or investments. manager is to determine when the Financial Instrument - are real or company should declare cash virtual documents representing a legal dividends. agreement involving some sort-of - Cash dividends are paid by monetary value. corporations to existing - Are contracts for monetary assets shareholders based on their that can be purchased, traded, shareholdings in the company as created, modified, or settle for. a return on their investments. - When a Financial Instrument is - Some investors buy stocks issued, it gives to a Financial because of the dividends they Asset on one hand and a expect to receive from the Financial Liability or Equity company. Non-declaration of Instrument on the other hand. dividends may disappoint these investors. A Financial Asset in any Asset that Before a company may be able to is: declare cash dividends, two Cash conditions must exist: An equity instrument of another entity The company must have enough A contractual right to receive retained earnings (accumulated profits) cash or another financial asset to support cash dividend declaration. from another entity A contractual right to exchange Lesson 5 instruments with another entity under conditions that are Concept of Saving and Investing potentially favorable Examples: notes receivable, Private Placement - the sale of new loans receivable, investment in security to an investor or group of bonds investors. A Financial Liability is any Liability that is a contractual obligation:  To deliver cash or other financial 2. Corporate Bonds are issued by instrument to another entity publicly listed companies. These bonds To exchange financial usually have higher interest rates than instruments with another entity Treasury bonds. However, these bonds under conditions that are are not risk-free. If the company which potentially unfavorable issued the bonds goes bankrupt, the Examples: notes payable, loans holder of the bonds will no longer payable, bonds payable receive any return from their An Equity Instrument: investment and even their principal Is any contract that evidences a investment can be wiped out. residual interest in the assets of an entity after deducing all Equity Instruments - generally have liabilities varied returns based on the Examples: ordinary share capital, performance of the issuing preference share capital company. Returns from equity instruments come from either dividends * Who are the holders of the financial or stock price appreciation. assets? - This means that if a company - Suppliers of funds were to be liquidated and its * Who are the makers of the financial assets have to be distributed, no liabilities and equity instruments? asset will be distributed to - Users of funds common stockholders unless all the claims of the preferred Debt Securities - generally have fixed stockholders have been given returns due to fixed interests rates. - Moreover, preferred stockholders Examples: have also priority over common 1. Treasury Bonds and Treasury Bills stockholders in cash dividend are issued by the Philippine declaration. Dividends to government. These bonds and bills preferred stockholders are have usually low interest rates and have usually in a fixed rate. No cash very low risk of default since the dividends will be given to government assures that these will be common stockholders unless all paid. the dividends due to preferred stockholders are paid first. (Cayanan, 2015)  - Moreover, during a profitable - However, suppliers of funds or period for which a company may the holders of the securities may decide to declare higher decide to sell the securities that dividends, preferred stock will have previously been purchased. receive a fixed dividend rate The sale of previously owned while common stockholders securities takes place in receive all the excess. secondary markets. Types: ONEY VS. CAPITAL MARKETS 1. Preferred Stock has priority over a - Money markets are a venue common stock in terms of claims over wherein securities with short-term the assets of a company. maturities (1 year or less) are 2. Holders of Common Stock on the sold. other hand are the real owners of the Money market - a financial relationship company. If the company’s growth is created between suppliers and users of spurring, the common stockholders will short-term funds. benefit on the growth. - They are created because some individuals, businesses, governments, and financial PRIMARY VS. SECONDARY institutions have temporarily idle MARKETS funds that they wish to invest in a - To raise money, users of funds relatively safe, interest-bearing will go to a primary market to asset. At the same time, other issue new securities (either debt individuals, businesses, or equity) through a public governments, and financial offering or a private placement. institutions find themselves in - The sale of new securities to the need of seasonal or temporary general public is referred to as a financing. public offering and the first - On the other hand, offering of stock is called an securities with longer term initial public offering. The sale maturities are sold in of new securities to one investor Capital markets. The key or a group of investors capital market securities (institutional investors) is referred are bonds (long-term debt) to as a private placement. and both common stock and preferred stock (equity, or ownership). Capital market - a market that enables suppliers and users of long-term funds to make transactions. COMMERCIAL BANKS - When mutual funds use money - Individuals deposit funds at from investors to invest in newly commercial banks, which use the issued debt or equity securities, deposited funds to provide they finance new investment by commercial loans to firms and firms. Conversely, when they personal loans to individuals, and invest in debt or equity securities purchase debt securities issued already held by investors, they by firms or government agencies. are transferring ownership of the INSURANCE COMPANIES securities among investors. - Individuals purchase insurance PENSION FUNDS (life, property and casualty, and - Financial institutions that receive health) protection with insurance payments from employees and premiums. The insurance invest the proceeds on their companies pool these payments behalf. and invest the proceeds in OTHER INSTITUTIONS various securities until the funds - include pension funds like are needed to pay off claims by Government Service Insurance policyholders. System (GSIS) and Social - Because they often own large Security System (SSS), unit blocks of a firm’s stocks or bonds, investment trust fund (UITF), they frequently attempt to investment banks, and credit influence the management of the unions, among others. firm to improve the firm’s performance, and ultimately, the Lesson 6 performance of the securities they own. Basic Financial Statements MUTUAL FUNDS 1. Analyzing Business - Mutual funds are owned by Transactions - a transaction is investment companies which analyzed to find out if it affects enable small investors to enjoy the company and if it needs to be the benefits of investing in a recorded. Personal transactions diversified portfolio of securities of the owners and managers that purchased on their behalf by do not affect the company should professional investment not be recorded. managers. - a decision may have to be made to identify if a transaction needs to be recorded in special journals such as a sales or purchases journal.  - For example, N. Juna resigned from Company X. (This does not affect any asset, liability, or the owner’s equity account.) 2. Recording in the Journals - Using the rules of debit and Subsidiary Ledger credit, transactions are initially entered in a record called a Journal and the entry made is called a Journal Entry. The journal serves as a record of when transactions occurred and were recorded. - The Source Document is the file or document (i.e. official receipt, purchase order, contract) that will provide a basis or reason for a journal entry. 3. Posting to Ledger Accounts - - for example, M. Jaya resigned Posting in the subsidiary ledgers can be from Company X. (No journal done anytime and the balances are entry) summarized at the end of an accounting 3. Posting to Ledger Accounts - period. Posting in the general ledger is After transactions have been done at the end of an accounting period. recorded in the journals, the next 4. PREPARING THE UNADJUSTED step is posting the transactions to TRIAL BALANCE the ledger.The process of - Errors may occur in posting transferring the debits and credits debits and credits from the from the journal entries to the journal to the ledger. One way to accounts is called Posting. detect such errors is by preparing - Ledgers provide chronological a trial balance. details as to how transactions Trial Balance - a bookkeeping affect individual accounts. There worksheet in which the balances of all are two types of ledgers: the ledgers are compiled into debit and General Ledger and Subsidiary credit account column totals that are Ledger. The general ledger is a equal. summary of the different Double-entry accounting - requires Subsidiary Ledgers and can that debits must always be equal to serve as a control account. credits. The trial balance verifies this Example: equality. General Ledger PREPARING THE UNADJUSTED 2. Prepayments - If a company has TRIAL BALANCE prepaid expenses such as prepaid rent The steps in preparing a trial balance or prepaid insurance then the correct are as follows: balances for these accounts have to be 1. List the name of the company, the title established at the end of each of the trial balance, and the date the trial 3. Depreciation and Amortization balance is prepared. expenses - Depreciation expenses are 2. List the accounts from the ledger and recognized at the end of each enter their debit or credit balance in the accounting period through adjusting Debit or Credit column of the trial entries. If there are intangible assets balance. such as franchise, the allocation of their 3. Total the Debit and Credit columns of costs which is called amortization the trial balance. expense, is also recognized at the end 4. Verify that the total of the Debit of each accounting period through column equals the total of the Credit adjusting entries accounting period to column. reflect their correct balances. 4. Allowance for Uncollectible At the end of the accounting period, Accounts - Bad debt expense from many of the account balances in the accounts receivable is also recognized ledger can be reported in the financial through adjusting entries. statements without change. Preparing the Adjusted Trial Balance Making the Adjusting Entries - An adjusted trial balance is The analysis and updating of accounts prepared after taking into at the end of the period before the consideration the effects of the financial statements are prepared is adjusting entries. Again, this is to called the Adjusting Process. ensure that the total debit balances equal the credit The journal entries that bring the balances after posting and accounts up to date at the end of the journalizing adjusting entries accounting period are called Adjusting made. Entries. Preparing the Financial Statements - From the adjusted trial balance, The following are normally adjusted the financial statements can then at the end of a period: be prepared. These are the (Making the Adjusted Entries) statement of financial position, 1. Accruals - these include unpaid statement of profit or loss, and salaries for the accounting period, the statement of cash flows. unpaid interest expense, or unpaid utility expenses. Making the Closing Entries The balance of the owner’s drawing - Income statement accounts such account is transferred to the owner’s as revenues and expenses are capital account. closed to prepare the system for the next accounting period. 9. Post-Closing Trial Balance Upon closing: - shows the accounts that are If the revenues exceed expenses during permanent or real. These are the an accounting period, retained earnings accounts that can be seen in your will increase. balance sheet. The post-closing trial balance is prepared to test if The reverse is true which means that if the debit balances equal the the expenses exceed revenues, the credit balances after closing retained earnings will decrease. entries are considered.\ In closing temporary accounts: Financial Statement - is basically a Revenue account balances are summary of all transactions that are transferred to an account called Income carefully recorded and transformed into Summary Account (sometimes profit or meaningful information. It also shows loss summary). the company’s permanent and temporary accounts. Making the Closing Entries In closing temporary accounts: Basically, financial statements are comprised of the following: Revenue account balances are 1. Statement of Financial Position transferred to an account called Income or Balance Sheet - this provides Summary Account (sometimes profit or information regarding the liquidity loss summary). position and capital structure of a company as a given date. Expense account balances are also - It must be noted that the transferred to the Income Summary information found in this Account. report are only true as oa a given date. In closing temporary accounts: Liquidity - refers to the ability of a company to play maturing obligations. The balance of the Income Summary - Generally, assets are expected to (net income or net loss) is transferred to be converted into cash within one the owner’s capital account. year, such as account receivables and inventories, are classified as current assets. Capital Structure - refers to the combination of debt and equity used by a company in financing its assets. - Loans or any other form of liabilities such as payables to suppliers are not necessarily bad. However, too much of them may expose a company to a higher probability of bankruptcy. Therefore, manager have to monitor the level of liabilities a 3. Statement of Cash Flows or company should have. Cash Flows Statement - the statement of cash flows reports a company’s cash inflows and outflows for a period. - This is used by managers in evaluating past operations and in planning future investing and financing activities. - It is also used by external users such as investors 2. Statement of Profit or Loss or and creditors to assess a Income Statement - this is a company’s profit potential summary of the revenue and and ability to pay its debt expenses of a business entity for and pay dividends. a month specific period of time, such as a month or a year. The cash flows are also classified into - In analyzing income three main categories: operating, statement, it is important investing, and financing to identify how much of the income comes from the core business of a company Core Business - refers to the main business of a company