Introduction to Finance PDF

INTRODUCTION TO FINANCE Derived from the Latin word finer, meaning ”to end” or “to pay.” Can be summarized: 1. Allocating available funds; 2. Acquiring needed funds; and 3. Utilizing these funds to achieve set goals ▪ CLASSIFICATION OF FINANCE: AS TO FORM OF NEGOTIATION 1. DIRECT...

INTRODUCTION TO FINANCE Derived from the Latin word finer, meaning ”to end” or “to pay.” Can be summarized: 1. Allocating available funds; 2. Acquiring needed funds; and 3. Utilizing these funds to achieve set goals ▪ CLASSIFICATION OF FINANCE: AS TO FORM OF NEGOTIATION 1. DIRECT FINANCE -Direct borrowing 2. INDIRECT FINANCE -Involves financial intermediaries ▪ CLASSIFICATION OF FINANCE: AS TO USER 1. PUBLIC FINANCE -Deals with the revenue and expenditure patterns of the government 2. PRIVATE FINANCE -All finance other than public finance; can be divided into: a) personal finance; b) finance of non-profit organizations; and c) business finance. ▪ FORMS OF BUSINESS ORGANIZATION: AS TO NATURE OR PURPOSE 1. SERVICE – Engaged in rendering services. e.g. barber shops, massage spa, law firms 2. MERCHANDISING – Engaged in buying and selling of goods. e.g. sari-sari store 3. MANUFACTURING – Engaged in processing raw material to finished products. e. g. furniture business, Procter & Gamble (household essentials) ▪ FORMS OF BUSINESS ORGANIZATION: AS TO OWNERSHIP A. SOLE OR SINGLE PROPREITORSHIP – A business owned and controlled by a single individual. The owner of the proprietorship is referred to as a sole proprietor or a single proprietor. ▪ Advantages of a sole proprietorship 1. Ease of formation 2. Needs only minimum capitalization 3. Sole decision maker 4. Easy to terminate ▪ Disadvantages of a sole proprietorship 1. Unlimited liability 2. Limited access to capital 3. Limited skills, talents, and capabilities 4. Inability to attract or retain good employees 5. Limited term of existence Introduction to Finance 1  6. Difficulty in measuring success 7. Personal problems may hinder operation/success B. PARTNERSHIP - Association of two or more persons who agreed to contribute money, property, or industry to a common fund for the purpose of dividing the profits among themselves. ▪ ESSENTIAL REQUISITES OF A PARTNERSHIP 1. Contract of partnership 2. Two or more persons with legal capacity to enter into a contract 3. Valuable contribution (money, property, or industry) to a common fund 4. Intention to divide the profits between or among the partners 5. Lawful partnership ▪ Characteristics of a partnership 1. Mutual agency – every partner is an agent of the partnership; their actions, so long as it is within the scope of the partnership, bind the partnership 2. Voluntary association – being a partner is voluntary. Each partner is entitled to choose his partners. 3. Based on contract – there must be an agreement which can be oral or written that will bind the partnership. 4. Limited life – the partnership is dissolved/terminated once a partner withdraws, dies, becomes bankrupt, becomes legally incapacitated, or a new partner(s) is admitted into a partnership. 5. Unlimited liability – a general partner (always required) and an industrial partner are liable for partnership debts up to the extent of their personal assets after partnership resources have been exhausted. 6. Division of profits/losses – profits and losses are divided between/among partners in accordance with their agreement, or in the absence of such, in accordance to their capital balances. 7. Co-ownership of contributed assets – partners become co-owners in assets contributed by any partner to the partnership. ▪ Advantages and disadvantages of a partnership ADVANTAGES 1. Ease of formation 2. Allows pooling of financial resources 3. Allows pooling of skills, expertise, and experience of partners 4. Less government control, supervision, and intervention DISADVANTAGES 1. Limited life 2. Unlimited liability 3. Mutual agency Introduction to Finance 2 The written agreement of partnership often filed with Securities and Exchange Commission (SEC) is called the Articles of Co-Partnership. ▪ TYPES OF PARTNERSHIP: AS TO LIABILITY OF PARTNERS 1. GENERAL PARTNERSHIP – All partners are general partners. 2. LIMITED PARTNERSHIP – There is at least one limited partner (could be more) and at least one general partner. ▪ TYPES OF PARTNERS: AS TO LIABILITY 1. GENERAL PARTNER – Liable for partnership debts up to the extent of their assets. 2. LIMITED PARTNER – Liable for partnership debts only up to the extent of their interest (investment and profits) in the partnership. Creditors cannot run after their personal assets. ▪ TYPES OF PARTNERS: AS TO INVESTMENT IN THE PARTNERSHIP 1. CAPITALIST PARTNER – One who contributes money and/or noncash assets in the partnership. 2. INDUSTRIAL PARTNER – One who contributes skill or industry in the partnership. 3. CAPITALIST-INDUSTRIAL PARTNER – One who contributes cash plus and/or other assets and industry or skill in the partnership. C. CORPORATION – An artificial body or being (as differentiated from a natural person), organized in accordance with the provision of law in which ownership is divided into stocks. ▪ Characteristics of a corporation 1. Separate legal existence 2. Created by operation of law 3. Transferable units of ownership 4. Limited liability of stockholders 5. Continuity of existence 6. Centralized management by the Board of Directors ▪ Advantages of a corporation 1. Artificial being 2. Limited liability of shareholders 3. Transferability of shares 4. Greater ability to acquire funding ▪ Parties to a corporation 1. Corporators 2. Incorporators 3. Stockholders 4. Members Introduction to Finance 3  5. Promoters 6. Board of Directors 7. Corporate Officers ▪ Steps in organizing a corporation 1. Promotion 2. Incorporation 3. Formal organization and commencement of business operations ▪ Articles of incorporation: The charter of the corporation. It is the document that establishes the formal organization of the corporation. It is the counterpart of the Articles of Co-partnership for the partnership. These two documents correspond to the birth certificate of a natural person. ▪ By-laws of a corporation: Contains the rules and regulations for the internal government of the corporation and for the government of the corporate officers and stockholders or members. ▪ Classifications of a corporation 1. Nature – public or private 2. Purpose – profit, non-profit, charitable (religious or public charity), or foundation 3. Others – quasi-public or government-owned or government-controlled 4. Membership – stock (open or closed) or non-stock 5. State of Incorporation – domestic or foreign 6. Number of persons – corporation sole or corporation aggregate 7. Legal right to existence – de jure or de facto 8. Relation to other corporations – parent (holding) or subsidiary (sister) ▪ Classes of shares/kinds of stocks 1. Value – par value or no-par value 2. Rights to dividends – common (ordinary) or preference shares D. COOPERATIVE – Organizations established by individuals, called members, to provide themselves with goods and services, or to produce and dispose of the products of their labor. Introduction to Finance 4