Reviewer: Financial Management

Chapter 1
Finance person takes charge of the
investments of stakeholders, the use of
funds in the operation and the
distribution of income to the business.
Stakeholders are stockholders or equity
owners and also the lenders or loan
grantors.
Cost-benefit relationships important to
capital budgeting
The return of the investments should be
greater than cost The goal of financial
management is profit maximization not
only short term but also for long term
Working capital management consist of
managing of current assets and current
liabilities.
Chapter 2
3 types of businesses
1. Trading or Merchandising is the
buying of goods and selling the same
without change in form.
2. Manufacturing is the process of
converting raw materials into finished
products.
Raw materials are what you
see in the completed product
Direct Labor is the work in the
raw materials as it is converted
into finished product
Factory overhead is the
resource needed or cost that is
needed to be paid for in making
products other than raw
materials and direct labor.
3. Service is doing work for others.

Forms of Business Organization

Organization is defined as having two
or more individuals working together
towards the attainment of a goal or
goals.
a) Sole proprietorship this is a
simplest form of business
organization;
only
one
individual owns all assets.
Most convenient to
operate and easy to
liquidate.
b) Partnership an association of
two or more persons to carry
on as co-owners of business for
profit
Partners are governed
by
articles
of
partnership,
an
agreement
that
is
needed in registering
the business.
c) Corporation a separate body
consisting of at least five
individuals treated by law as a
unit.
Generate more capital
and to attract high
qualified personnel to
join the company
Existence of 50 yrs.
Classification of Partnership

Type of business operation

1. Marketing or trading
2. Manufacturing
3. Service
According to liability
a. General partnership is the one
wherein all the partners are general
partners who are liable for

partnership debts to the extent of

their personal property after all the
partnership assets have been
exhausted.
b. Limited partnership one formed
by two or more persons under the
provision on limited partnership,
having as members one or more
general partners, and one or more
limited partners. They are liable
only to the extent of their capital
contributions.

as well as his work or industry to

the capital of the partnership.
Business or Accounting Entity Concept
the business is treated as unit
separate and distinct from the owners
Corporate formation
o

Classes of Partners
As to their liability for partnership debts

a. General partner is the one who is

liable for partnership debt to the
extent of his personal property
after the partnership assets have
been exhausted.
b. Limited partner is one whos liable
only to the extent of their capital
contributions.
c. General-limited partner is one who
has all the rights, powers, and
subject to all the restrictions of a
general partner but whose liability
is limited to his capital contribution

As to contribution, partners are

grouped into
1. Capital partner is one who
contributes money or property to
the capital of the partnership
2. Industrial partner is one who
contributed his work, labor, or
industry to the partnership
3. Capitalist-industrial partner is one
who contributes money or property

Promoter
is
one
who
undertakes
to
form
a
corporation, or causes it to be
formed for a specified purpose
or purposes, and who further
undertakes to procure for the
corporation.
No corporate name may be
allowed by SEC if he proposed
named is identical, deceptively
or confusingly similar to that
any existing corporation or to
any other name already
protected by the law.
The purpose for which the
company is formed must be
grouped into primary or
secondary.
Number and qualifications of
incorporators.
Corporation
codes provide that 5 or more
persons, not exceeding fifteen a
majority are residents of the
Phil, may form a private
corporation for any lawful
purpose or purposes
Minors cannot be incorporators

Chapter 3
Accounting is defined as an information
system that measures, processes and
communicates information primarily financial in

nature, about identifiable entity for purpose of

making economic decisions.

Business activities is documented

Activities and documents are analyzed,
recorded, classified, summarized and
interpreted
Balance sheets, cash flows, income
statements

The constraints on relevant and reliable

information are;
1. Timeliness
2. Balance between benefit and cost
3. Balance
among
qualitative
characteristics
4. Fair presentation, true and fair
value.
Managements are responsible for the
preparation and fair presentation of these FS in
accordance with Philippine Financial Reporting
Standards.
Chapter 4
The most common data available for analysis
come from the
1. Balance sheets
2. Income statements
FS as score cards. The analysis will provide
assessment of past performance and projection
of future results. It should also recognize the
limitations inherent in the analysis.
Tools for Analysis
1. Profitability
Operating income/sales
Operating income/average
total assets
Net income/sales

Net
income/Average
stockholders equity
2. Operating efficiency
COGS/ average inventories
Average collection period
Sales/Ave. Fixed Assets
Sales/ Ave. Total Assets
Gross profit/sales
Marketing
and
Administrative expenses/
Sales
Comparative analysis
(Horizontal and vertical)
3. Liquidity
Current assets/ current
liability
Cash, marketable securities,
receivables/current
liabilities
Users of Financial Information
1.
2.
3.
4.
5.
6.
7.

Current owners
Management
Creditors
Future investors
Employees
Government
Public

Horizontal
analysis
involves
sidewise
comparisons. It shows changes from year to
year.
Measures of solvency
1. Networking capital is the excess of
current assets after deducting liabilities.
This is called margin of safety of short
term creditors.
NWC= TCA-TCL
2. Current ratio is the relationship of
available current assets to meet

payments of current liabilities.

Working capital ratio or bankers
ration
CR= current
liabilities

assets/current

3. Acid test ratio or Quick ratio = (cash +

temporary investments + short term
receivables*net)/ total current liability
Composition of Assets and Equities (Vertical
Analysis) this measures of asset composition is
then compared with that of the same company
at earlier dates and with that of similar
companies at the same date.
Measures Stability
Stability of a company is determined by
the companys ability to meet its interest
requirements and repay the principal amount
owed along with its ability to pay regular
dividends to its stockholders.
1. Proprietary or equity ratio = total
owners equity/ total assets
2. Book value per share
3. Earnings per share
Measures of Profitability
Profitability refers to the ability of a
business to earn profits from its operation.
1. Composition of income and
expenses- VA
2. Ratio of Gross Profit to Net Sales
GRP = Gross Profit/ Net Sales
3. Ratio of Net Income to Net Sales
= Net Income/Net Sales
4. Operating Ratio
= (cost of sales + operating exp.)/NS
5. Ratio of Net Income to Owners
equity

=
Net
Income
for
the
period/Average Owners Equity
6. Ratio of Net Income to Total Assets
=Net Income/Total Assets
7. Ratio of Net Sales to Total Assets
= Net Sales/Total Assets
8. Break Even Point Sales is that
volume sales result neither profit
nor loss on operations.

Chapter 5
Types of Corporation
1. Public Corporation is those formed by
legislature for political or governmental
purposes. Municipal Corporation.
2. Private Corporation are those formed
for some private purposed, aim or end.
3. Domestic Corporation are those
incorporated by Phil laws
4. Foreign Corporation are formed,
organized or existing under any laws
other than those of the Philippines and
whose allow Filipino citizens and
corporations to do business in its own
country or state
5. Closely held Corporation
6. Stock
Corporation
are
private
corporations which have capital stock
divided into shares and are authorized
to distribute to the holders of such
dividends or allotments of surplus
profits on the basis of shares held.
7. Non-stock Corporation is one where no
part of its income is distributable as
dividends to its members, trustees, or
officers.

Components of Corporation
a.
b.
c.
d.

Corporators
Incorporators
Stockholders
Members

Classes of Shares in General

1. Voting and non-voting shares
2. Par value share stock that is given a
definite or fixed value in the articles of
incorporation, and non-par value
shares share stock that has no fixed
value.
3. Common stock represents the basic
issue of shares and has all the basic
rights of a share of stock, and preferred
stock is a type which entitles the
owners to some specific preferences
over the common stock.
4. Class A Filipino ownership and Class
B Foreign ownership
5. Founders shares
Terminology Peculiar to a Corporation

Authorized Shares refer to the

maximum of shares which may be
issued by a corporation as set forth in
the articles of incorporation
Issue Shares represents shares which
were issued to stockholders in the past
which represent may or may not be in
the hands of stockholders
Unissued Shares are those shares
which have never been issued and
which are available for issuance in the
future
Outstanding Shares means the total
shares of stocks issued to subscribers or
stockholders, whether or not fully or
partially paid, except treasury shares

Treasury Shares are shares of stock

which have been issued and fully paid
for, but subsequently reacquired by
issuing corporation by purchase,
redemption, and donation or through
some other lawful means.
Subscribe Shares- represents shares
which investors have contracted to
acquire.
Redeemable Shares are those that
may be purchased or taken back by the
corporation upon the expiration of a
fixed period, regardless of the existence
of unrestricted earnings in the books of
the corporation, and upon such other
terms and conditions stated in the
articles of incorporation, which terms
and conditions must also be stated in
the certificate of stock representing
said shares.

Dividends corporate income may be

retained by the corporation for reinvestment or
they may be paid to stockholders in the form of
dividends.
Profit that is not be paid out as dividend
is called Retained Earning
The amount to be paid to stockholders
is labelled Dividends
Dividends from unrestricted retained
earnings are;
1. Cash
2. Stocks
3. Property
Liquidating Dividends are not returned
of profits instead they are return of
investments of stockholders when the
corporation winds up its operation.