Business FInance.pdf

BUSINESS FINANCE MIDTERMS | FIRST SEMESTER | ACADEMIC YEAR 2024-2025 ensure financial activities align with FINANCE company objectives to boost profitability. Finance, as des...

BUSINESS FINANCE MIDTERMS | FIRST SEMESTER | ACADEMIC YEAR 2024-2025 ensure financial activities align with FINANCE company objectives to boost profitability. Finance, as described by Brealey, Myers, and Allen (2020), is the study of how RISK MANAGEMENT individuals and organizations make decisions A key role of financial management is about resource allocation over time. It identifying and managing financial risks focuses on managing funds, investments, and that could affect the business. This involves risks to maximize value and ensure implementing strategies to mitigate sustainable growth for both businesses and uncertainties, protecting the company’s individuals. assets and profitability. Business finance involves managing a company's financial resources to support DIVIDEND POLICY DECISIONS smooth operations, growth, and profitability. Financial managers decide how much profit Key aspects include raising capital (equity to distribute to shareholders as dividends or debt), making investment decisions to and how much to retain for future growth, maximize returns, and managing daily balancing shareholder satisfaction with the finances like cash flow and liabilities. It also company’s reinvestment strategy. involves financial planning, budgeting, and risk management to control costs, increase revenues, and mitigate financial challenges. FINANCIAL REPORTING AND COMPLIANCE Overall, business finance ensures efficient Financial management ensures accurate use of funds to achieve the company's and timely financial records, including the financial objectives. preparation of financial statements and compliance with regulatory requirements. FINANCIAL MANAGEMENT This is essential for maintaining investor According to Atrill and McLaney (2023), trust and fulfilling legal obligations. financial management involves overseeing and controlling a business's financial operations and strategies to achieve financial LONG-TERM FINANCIAL PLANNING stability and growth. Financial managers are essential in shaping the company's long-term strategy by It includes both long-term and short-term forecasting financial needs, assessing financial planning, risk management, and market conditions, and planning for resource allocation to ensure sustainability. sustainable growth, ensuring the business remains competitive and financially sound ROLES IN FINANCIAL MANAGEMENT over time. CAPITAL BUDGETING Financial management involves evaluating and selecting long-term investment COST CONTROL AND EFFICIENCY projects by analyzing their potential Effective cost monitoring and management returns. It ensures that funds are allocated in financial management enhance to the most profitable ventures, maximizing operational efficiency by identifying areas the company's growth and long-term value. for expense reduction without compromising quality, ensuring optimal resource use. CAPITAL STRUCTURE MANAGEMENT Financial management involves deciding Overall, financial management is essential which projects or investments to pursue by for efficient use of financial resources, analyzing potential returns, ensuring optimizing profitability, maintaining funds are directed to the most profitable liquidity, minimizing risks, and ventures. contributing to long-term growth and stability. It also involves managing the mix of debt and equity to maximize growth and FINANCIAL MANAGER long-term value. Financial managers oversee an organization's financial management by WORKING CAPITAL MANAGEMENT planning, organizing, directing, and Financial management ensures adequate controlling its financial activities to ensure liquidity to meet short-term obligations, financial health and stability. such as paying suppliers and managing inventory, maintaining smooth daily operations and avoiding financial distress. PROFIT PLANNING AND CONTROL Financial managers aim to maximize profitability by setting financial goals, creating budgets, and monitoring progress. They analyze revenues, control costs, and Template by: commissio_nurse BUSINESS FINANCE MIDTERMS | FIRST SEMESTER | ACADEMIC YEAR 2024-2025 PRIMARY ACTIVITIES OF FINANCIAL MANAGERS PREPAID Expenses that have been paid FINANCIAL PLANNING AND ANALYSIS EXPENSES in advance but not yet used, Financial managers develop and manage like rent or insurance. budgets, forecast future financial performance, and analyze financial data to BALANCE A financial statement that inform strategic decisions. SHEET summarizes a company's assets, liabilities, and equity. CAPITAL BUDGETING Financial managers evaluate investment DEBIT The left side of an account, opportunities and projects to assess their often indicating an increase in feasibility and profitability, making assets or a decrease in decisions on which projects to pursue. liabilities. CAPITAL STRUCTURE MANAGEMENT CREDIT The right side of an account, Financial managers determine the optimal typically showing an increase mix of debt and equity financing to fund in liabilities or equity, and a operations and growth while managing the decrease in assets. cost of capital to balance risk and return. GENERAL A record of all accounts used by WORKING CAPITAL MANAGEMENT LEDGER a company, summarizing the Financial managers ensure sufficient balances of these accounts. liquidity for daily operations by effectively BUSINESS Business activities or events managing cash flow, inventory, and TRANSACTION involving the exchange of accounts receivable. S goods, services, or money. RISK MANAGEMENT ACCUMULATE A reduction in the value of an Identifying, assessing, and mitigating D asset over time due to wear and financial risks to protect the company’s DEPRECIATIO tear. financial health and stability. N REVENUE Business earns from selling TERM DEFINITION goods or providing services, and other income generating JOURNAL A financial record where all ways. business transactions are recorded in chronological SALES The total money received from order. customers for products or services sold. ACCOUNTING The systematic recording, reporting, and analysis of ACCOUNTS Money a business is entitled to financial transactions. RECEIVABLE receive from customers for sales made on credit. DOUBLE-ENT An accounting principle where RY every transaction affects at FINANCIAL STATEMENTS ACCOUNTING least two accounts. POSTING The process of transferring journal entries into the ledger. LIABILITIES Obligations or debts a business owes to others, such as loans or T-ACCOUNT ANALYSIS bills to be paid. In double-entry bookkeeping, the terms ASSETS Resources owned by a debit and credit are used to identify which company, such as cash, side of the ledger account an entry is to be inventory, and equipment. made. Example; Mr. Blackpeynk invested an EXPENSES Outflows of cash or other amount of Php. 5,000.00 from equity. assets used to earn revenue, like rent or salaries. FRA. LUCA The founder of modern PACIOLI accounting, who introduced double-entry bookkeeping. NOMINAL ACCOUNTS ACCOUNTS Money a business owes to There are two major categories of nominal PAYABLE suppliers for goods or services accounts ; Expense and Revenue Accounts purchased on credit. Template by: commissio_nurse BUSINESS FINANCE MIDTERMS | FIRST SEMESTER | ACADEMIC YEAR 2024-2025 EXPENSE ACCOUNTS STATEMENT OF CASH FLOWS Expense Accounts is a resource that has This refers to the cash flow reports a been used for the current period. company ’ s cash inflow and outflows for a period REVENUE ACCOUNTS This measures the sustainability of the Revenue Accounts reflect the accumulation business. of potential additions to retained earnings Also known as Cash Flow Statement during the current accounting period STATEMENT OF FINANCIAL POSITION Also known as Balance Sheet Statement BASIC ACCOUNTING It measures the Liquidity, Stability, and 4 ASPECTS OF ACCOUNTING Worthiness of Investment shows the assets, liabilities, and owner ’ s 1. Recording - chronological(what comes 1st equity of the business as of specific date or that is recorded 1st), books of accounting period. 2. Classifying - asset, liabilities and owners 3. Summarizing - financial statements 4. Interpreting - qualitative and quantitative users of financial statements TERM DEFINITION TERM DEFINITION POSTING The process of transferring debits and credits from journal ASSETS An increase will be recorded as entries Debit whilst an decrease will be recorded as Credit. LEDGERS Ledgers provide chronological details as to how transactions LIABILITIES An increase will be recorded as affect individual accounts Credit whilst an decrease will be recorded as Debit. GENERAL the summary of different LEDGER Subsidiary Ledgers OWNER’S An increase will be recorded as EQUITY Credit whilst an decrease will SUBSIDIARY Provide detailed information be recorded as Debit. LEDGER about individual accounts, supporting the general ledger REVENUE An increase will be recorded as and aiding in effective financial Credit whilst an decrease will management, reconciliation, be recorded as Debit. and analysis EXPENSES An increase will be recorded as ADJUSTING The journal entries that bring Debit whilst an decrease will be ENTRIES the accounts up to date at the recorded as Credit. end of accounting period ACCOUNTING CYCLE ADJUSTING The analysis and updating of The process of accounting follows a cycle PROCESS accounts at the end of the called the Accounting Cycle. accounting period before the 1. Analyze Business Transactions financial statements are 2. Record this in the Journal prepared 3. Post the transactions on a ledger 4. Prepare an unadjusted Trial Balance TERM DEFINITION 5. Make Adjustments. Journalize Adjusting Entries PROFITABILIT a company's ability to generate 6. Prepare an Adjusted Trial Balance Y profit relative to its revenue, 7. Prepare the Financial Statements assets, or equity. 8. Make the closing entries 9. Make a Post-Closing Trial Balance SUSTAINABILI how well a business can TY maintain its operations over the long term while minimizing BASIC FINANCIAL STATEMENTS environmental and social STATEMENT OF PROFIT OR LOSS impacts It is commonly known as Income Statement, Statement of Comprehensive Income, or SOLVENCY assesses a company’s ability to Statement of Income. meet long-term debts and This is the summary of the revenue and financial obligations, often expenses of a business entity for a specific analyzed through period of time. debt-to-equity ratios. This measures the profitability of the business. LIQUIDITY indicates a company's capacity to meet short-term financial obligations, Template by: commissio_nurse BUSINESS FINANCE MIDTERMS | FIRST SEMESTER | ACADEMIC YEAR 2024-2025 INCOME STATEMENT INCOME STATEMENT AMOUNT TOTAL REVENUE P500,000.00 CASH RATIO COSTS OF GOODS (P210,000.00) measures a company's ability to cover its SOLD short-term liabilities with its most liquid assets—specifically, cash and cash GROSS PROFIT P290,000.00 equivalents. OPERATING EXPENSE (P100,000.00) FORMULAE OPERATING INCOME P190,000.00 NET OTHER INCOME P3,000.00 (EBIT) (Interest Earned…) SOLVENCY EARNINGS BEFORE P193,000.00 DEBT TO EQUITY RATIO TAX compares a company’s total debt to its shareholders' equity. It indicates how TAX EXPENSE (P57,900.00) much debt a company is using to finance its assets relative to the value of NET INCOME P135,100.00 shareholders’ equity. This ratio is a key indicator of financial leverage and risk, FINANCIAL RATIOS showing the proportion of a company’s Analyzing and comparing accounts for financing that comes from debt as opposed decision making of the company to equity. Helps us to: FORMULAE: 1. Confirm past expectations 2. Evaluate present financial result 3. Predict future outcomes LIQUIDITY CURRENT RATIO This ratio compares a company's current assets to its current liabilities. A higher NOTE current ratio indicates better liquidity ➔ This reviewer is solely made by Prince Xavier because it means the company has more Paje, wherein all information and contents are current assets relative to its current taken from various sources. liabilities, suggesting it can more easily ➔ This template exclusively belongs to @commissio_nurse. The intellectual property of cover its short-term obligations. the design is owned by the party FORMULAE: Therefore, for every P1 of its liabilities, the company has P1.07 of its assets to cover its obligations. ACID TEST RATIO (QUICK RATIO) This ratio is a more stringent measure of liquidity as it excludes inventory from current assets, focusing only on assets that can be quickly converted into cash FORMULAE: Template by: commissio_nurse