CHAPTER 1 Strategic Financial Planning- involves financial planning, financial forecasting,

NATURE, PURPOSE AND SCOPE OF FINANCIAL MANAGEMENT provision of finance and formulation of finance policies which should lead the firm’s
survival and success
Financial Management
Referred to as follows: Short-term and Long-term Financial Objectives of a Business Organization
 Managerial Finance Among are the primary financial objectives of a firm are the following:
 Corporate Finance
 Business Finance Short and Medium-Term (BUDGET)
 Maximization of return on capital employed or return on investment
The Goal of Financial Management is to maximize the current value per share of  Growth in earnings per share and price/earnings ratio through
the existing stock or ownership in a business firm. maximization of net income or profit and adoption of optimum level of
leverage
Types of Financial Decisions  Efficient procurement and utilization of short-term, and long-term funds
1. Investment Decisions
2. Financing Decisions Long-Term (STRATEGIC)
3. Dividend Decisions  Growth in the market value of the equity shares maximization of the
firm’s market share and sustained growth in dividend to shareholders
Significance of Financial Management  Survival and sustained growth of the firm
The importance of financial management is known for the following aspects:
 Broad Applicability Responsibilities to Achieve the Financial Objectives
 Reduction of Chances of Failure  Investing
 Measurement of Return on Investment  Financing
 Operating
RELATIONSHIP BETWEEN FINANCIAL MANAGEMENT, ACCOUNTING AND
ECONOMICS Environmental “Green” Policies and their Implications for the Management of the
 Financial Management and Accounting Economy and Firm
 Financial Management and Economics
i. Microeconomics CHAPTER 8
ii. Macroeconomics UNDERSTANDING THE ROLE OF THE FINANCIAL MARKETS AND INSTITUTIONS

CHAPTER 2 Financial Markets are the meeting place for people, corporations and institutions
RELATIONSHIP OF FINANCIAL OBJECTIVES TO ORGANIZATIONAL STRATEGY AND that either need money or have money to lend or invest.
OTHER ORGANIZATIONAL OBJECTIVES  Public Financial Markets (National, State and Local Governments)
 Corporate Financial Markets (large corporations)
Financial Objective
 It is the goal of the company to be a leader in technology in the industry Structure and Function of the Financial Markets
 To achieve profits through a high level manufacturing efficiency
 To achieve a high degree of customer satisfaction Types of Markets
1) Physical asset markets (tangible/real asset markets) e.g., wheat, autos,
Strategic Financial Management real estate, computer and machinery.
(Course of action 5-10yrs)- Strategic planning is long-range in scope and has its Financial asset markets deal with stocks, bonds, notes and mortgages and
focus on the organization as a whole. also deal with derivative securities whose values are derived from changes
in the prices of their assets.
 2) Spot markets assets are bought or sold “on-the-spot” delivery 10) Private equity companies. Organizations that operate much like hedge
Future markets participants agree today to buy or sell an asset at some funds, but rather than purchasing some of the stock of firm, buy then
future date. manage entire firm.

3) Money Markets funds are borrowed or loaned for short periods (less than Kinds of Stock Market
1yr) 1) The Organized Stock Exchange. Stock exchange will have a physical
Capital Market financial markets for stocks and for intermediate or long- location where stocks buying and selling transaction take place in the
term debt (1yr or longer) stock exchange floor
2) The Over-the-Counter (OTC) Exchange. Where shares, bonds and
4) Primary Markets corporations raise capital by issuing new securities money market instruments are traded using a system of computer
(first issuance of shares) screens and telephones.
Secondary Markets securities and other financial assets are traded among
investors after they have been issued by corporations (selling of shares) Stock Exchange- is an organized secondary market. The purpose of stock exchange
is to facilitate the exchange of securities between buyers and sellers. The stock
5) Private Markets worked out directly between two parties (company to market does not have a physical presence, it is a virtual market.
company)
Public Markets standardized contracts are traded on organized exchanges Trading ring- when share brokers assembled in place
(open to public)
Outcry method- bought and sold shares in trading ring.
Financial Institutions
Listing Agreement- regulates the company’s behavior through requirements agreed
Categories of Financial Institutions upon by the company in order to be listed. It ensures that the company provides all
1) Investment banks. Organization that underwrites and distributes new the information pertaining to its working from time to time.
investment securities and helps business obtain financing
2) Commercial banks. Traditional department store of finance (BPI,BDO Stock market- barometer of the company’s economy. The companies listed on
Metrobank) stock exchanges collectively contribute to the country’s GDP.
3) Financial services corporations. Firm that offers a wide range of financial
services (all in one bank) Listing of Securities on Stock Exchange
4) Credit unions. Cooperative associations whose members are supposed to
have a common bond, such as being employees of the same firm. Cheapest Listing- purpose of protection. The principal objective of listing is to provide
source of funds available to individual borrowers, liquidity and marketability to securities. Admission of securities to dealings on
5) Pension banks. Retirement plans funded by corporations/government recognized stock exchange of any incorporated company.
agencies for their workers
6) Life insurance companies. Savings in the form of annual premiums. Invest Recognized stock exchange- means a stock exchange being recognized by the
in stocks, bonds, real estate and mortgages and make payments to the government through the Securities and Exchange Commission (SEC).
beneficiaries of the insured parties.
7) Mutual funds. (regulated by SEC) organizations that pool investor funds to Official quotation/quoted price- price w/c the securities are bought and sold on a
purchase financial instruments and thus reduce risks through recognized stock exchange.
diversification
8) Exchange trade funds. (regulated by BSP) Similar to regular mutual funds
and are often operated by mutual fund companies.
9) Hedge funds. Similar to mutual funds because they accept money and use
the funds to buy various securities, but there are some important
difference.
Chapter 14 Cost
Operating and Financial Leverage 1) Variable cost
2) Fixed cost
Leverage- represents the use of fixed costs items to magnify the firm’s result, to
maximize the profit. Two-edged sword-- producing highly favorable result when Volume Variable Cost Fixed Cost
things go well and quite opposite under negative conditions. Per Unit Total Per Unit Total
Profit Sales ↑ ⃝ ↑ ↓ ⃝
↓ ⃝ ↓ ↑ ⃝
↑ - increase
↓ - decrease
⃝ - constant

Leverage Sales
Less: COGS (Cost of Good Sold/Cost of Sales)
CVP ANALYSIS (COST-VOLUME-PROFIT ANALYSIS)- to target the profit (Profit GP (Gross Profit/Gross Margin)
Planning) Helps managers to understand the relationship among cost, volume and Less: Selling Price
profit. CVP analysis focused on how profits are affected by the following: Administrative expense
(a) Selling price Other expense
(b) Sales volume Operating profit
(c) Unit variable cost
(d) Total fixed cost Sales (Selling Price x Units)
(e) Mix of products sold Less: _ VC (VC/U x Units)
GP (CM/U x Units)
A 50% or 30% Less: _FxC_
Plant B 30% or 30% OP
C 20% or 40%
(Supply & Demand Analysis) Breakeven Point
 BEPu (Break-Even Point (unit)
This model is used to answer a variety of critical questions such as: BEPu = FxC
 What is the company’s breakeven volume? CM/u = SP – VC/u or FxC+OP
 No loss or profit. The Operation Cost = 0 CM/u
 What is its margin of safety?
 P999.00- (loss)  BEPp (Break-Even Point (pesos)
P1000.00- (no profit) BEPp = FxC
P1200.00- (200 marginal) CMr = CM = CM/u = 100% - VCr
 What is likely to happen if specific changes are made in prices, costs and Sales SP
volume?
 What if analysis, sensitivity analysis
Operating Leverage

DOL = CM
OP = EBIT (Earnings Before deduction of Interest and Tax)

Assumption/Limitation of Break-even Point

1) “Relevant” and limited period of time.
2) All costs can be categorized as fixed or variable
 Variable Costs- change proportionately w/ volume w/in the relevant
volume range
 Fixed Costs- are constant w/in the relevant volume range.
3) Revenues change proportionately w/ volumes w/ Selling price remaining
Constant
4) There is a Constant Product Mix (sells multiple product)
5) Changes in volume alone are responsible for changes in costs and
revenues. Volume is the Cost Driver.
6) There is no significant change in inventories (i.e., in physical units, sales
volume equals production volume)
7) Operation leverage questions can be dealt with in the CVP framework
8) The analysis is deterministic and appropriate data can be found

Sales Mix- refers to the relative proportions in w/c a company’s a products are sold.

Lor, Inc, produces two products, A and B. these account for 60% and 40% of the
total sales pesos of Lor’s respectively. Variable costs as percentage of sales 60% for
A and 85% for B. Total fixed costs are P150,000. There are no other costs.

1) Compute the weighted contribution margin ratio.

A B A B
Sales 100% 100% SMr 60% 40%
VCr 60% 85% CMr 40% 15%
CMr 40% 15% 24% 6% = 30% WCMr

2) Compute the Break-even point in sales pesos

BEPp = Fxc = 150,000 = 500,000
WCMr 30%

Sales 300,000 200,000

VCr 180,000 170,000
CM 120,000 30,000 = 150,000.
GAAP- Generally Accepted Accounting Principle Objective of Financial Statements
 Set of accounting procedures, practices and rules are technically called To provide information about the ff:
GAAP 1) Financial position
 November 1981, PICPA- Philippine Institute of Certified Public Accountant 2) Operating performance
formed the ASC- Accounting Standard Council- to establish the GAAP in the 3) Changes in financial position
Philippines.
SFASs- Statement of Financial Accounting Standards and Principles – the approved Qualitative Characteristics- refer to the attributes that make the information
work or statements of ASC provided in the financial statements useful to users
IASC- International Accounting Standard Committee (1996) formed in 1973 to 1) Understandability- readily understandable by users. Enhanced making
achieve a uniform accounting around the world notes to the financial statements.
IAS- International Accounting Standard (statements) 2) Relevance- influences the economic decisions of users by helping them
1997- ASC totally adopted the statements issued by IASC evaluate past, present, or future events or confirming, or correcting their
May 13, 2004- Republic Act 9298 (Philippine Accountancy Act of 2004) this law past evaluations.
repealed Presidential Decree No. 692, w/c regulates the practice of accountancy in 3) Reliability- free from material error and bias. Refer to the level of
the Philippines. confidence that users place on truthfulness of the information
 Faithful representation- manifested by the management through the
At present, the FRSC issues its standards in a series of pronouncement called representation letter it executes signifying the inclusion of information
PFRSs- Philippine Financial Reporting Standards consists of: in the financial statements.
1) PFRSs- Philippine Financial Reporting Standards- correspond to the IFRS-  Substance over form- it is necessary that they are accounted for and
International Financial Reporting Standards presented in accordance with their substance and economic reality
2) PASs- Philippine Accounting Standards- correspond to the IASs- and not merely their legal form
International Accounting Standards  Neutrality- the information contained in the financial statements must
3) PIs- Philippine Interpretations- Correspond to interpretations of the IFRC- be neutral, that is, free from bias.
International Financial Reporting Committee of the IASB  Prudence- the financial statements should not overstate the equity of
the owners by overstating the assets or understating the liability
Users of Financial Statements and their Information needs  Completeness- information in financial statements must be complete
1) Investors- Providers of risk capital and their advisers are concerned with w/in the bounds of materiality and cost.
the risk inherent in. and return provided by, their investment. 4) Comparability- when users are able to compare the financial statements of
2) Employees- Employees and their representative groups are interested in an entity through time in order to identify trends in its financial position
information about the stability and profitability of their employers. and performance.
3) Lenders- interested in information that enables them to determine
whether their loans, and the interest earned, will be paid when due. Accounting Constraints
4) Suppliers and other trade creditors- interested in information that enables 1) Timeliness- if there is undue delay in the reporting of information it may
them to determine whether amounts owing to them will be paid when lose its relevance. Timeliness serves hindrance to both relevance and
due. reliability.
5) Customers- interest in information about the continuance of an entity, 2) Balance between benefit and cost- is a pervasive constraint rather than
especially when they have long-term involvement with, or are dependent qualitative characteristic.
on, the entity. 3) Balance between qualitative characteristics- to achieve an appropriate
6) Government and their agencies- interested in allocation of resources and balance among the (4) qualitative characteristics in order to meet the
therefore the activities of entities. objective of financial statements.
7) Public- entities affect members of the public in a variety of ways 4) True and fair view/ fair presentation- FS are frequently described as
8) Management- interested in information contained in the financial showing a true anf=d fair view of, or as presenting fairly, the financial
statements position, performance anf changes in financial position of an equity
Recognition Principles 3) Realizable value- realizable into cash. Expected to be paid to satisfy the
1) Asset recognition principle- dictates that asset is recognized in the liabilities in normal course.
statement of financial position when it is probable that the future
economic benefits will flow to the entity and the asset has a cost or value
that can be measured reliably. 1,000,000 800,000
2) Liability recognition principle- when it is probable that an outflow of Jan 2019 Dec 2019
resources embodying economic benefits will result from settlement of a
present obligation and the amount can be measured reliably. 200,000-doubtful
3) Income recognition principle- when an increase in future economic
benefits related to an increased in an asset or a decrease of a liability has 4) Present value- assets are carried at present discounted value of the future
arisen that can be measured reliably. net cash flow that the item is expected to generate in the normal course of
4) Expense recognition principle- when a decrease in future economic the business.
benefits related to a decrease in an asset or an increase of a liability has 5)
arisen that can be measured reliably. Present Discounting Future

4 methods or procedures of recognizing expense

1) Matching of cost with revenues- sale of inventory “cost and effect 10 years
association principle” 1,000,000 Compounding 10,000,000
2) Systematic and rational allocation- straight line method. Method (Estimating the future)
applies to the expenses of using property, plant and equipment by
simply allocating the costs on systematical and rational basis. Conceptual Capital- covered by the Framework. Relates to the measurement of the
3) Immediate recognition- e.g. advertising expense & marketing items that affect the capital of the owners
expense = expense outright, recognizing expense
4) Non-matching principle- e.g. warranty expense. When a liability 1) Transaction approach- computes profit by deducting expenses incurred
under product warranty arises. from income realized.
Equity Beginning: 1,000,000
Warranty expense Investment: 500,000
Sales cost or Withdrawal: 300,000
Equity End: 2,000,000
2019 2020 2021 2022 =1,000,000-500,000+300,000
=800,000 (Profit)
Measurement of the elements
1) Historical cost- base on past transaction. 2) Capital maintenance approach- calculates profit by determining the excess
Land-after 5yrs amount after maintaining the value of the beginning capital.
1,000,000 1,000,000 A=L+E
A – L = Net Assets
2019 2020 2021 2022
2 variations in the Framework to determine profit or loss using the capital
2) Current cost- required to settle the obligation currently. maintenance approach
Land-after 5yrs 1) Financial capital- e.g. number of production per year. Nominal monetary
1,000,000 5,000,000 units or units of constant purchasing power.
2) Physical capital- units of output per day. Requires the adoption of the
2019 2020 2021 2022 current cost as the basis of measurement.