NAME: TEACHER:

________________________________ _______________________________

STRAND AND SECTION: DATE:

________________________________ _______________________________

Business Finance - Grade 12- Week 2

EXPLAINING THE FLOW OF FUNDS WITHIN AN ORGANIZATION - THROUGH
AND FROM THE ENTERPRISE - AND THE ROLE OF THE FINANCIAL

BACKGROUND INFORMATION FOR LEARNERS

MANAGER

In accounting, the term "funds" has two distinct meanings: (1) cash and (2) the access
of current assets over current liabilities, which are called "net working capital." Current assets
refer to anything of value that a company will sell, use, or otherwise obtain cash for during the
current year or operating cycle, whichever is longer, such as cash, inventories, and debt owed
to a company. Current liabilities are obligations a company owes within the same period, such
as money a company owes another party, insurance, taxes, and wages. Besides these two
meanings, the term "funds" also can refer to a combination of cash and working capital.

SOURCE: https://www.business2community.com/finance/working-capital-what-is-it-and-why-do-you-need-it-02288952

The term “flow” means movement and includes both inflow and outflow. The term
flow of funds means transfer of economic values from one asset of equity to another. Flow
of funds is said to have taken place when any transaction makes changes in the amount of
funds available before happening of the transfer.

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 If the effect of the transactions results in the increase of funds, it is called a source
of funds and if it results in the decrease of funds, it is known as an application of funds.
Further, in case the transaction does not change funds, it is said to have not resulted in the
flow of funds

According to the working capital concept of funds, the term flow of funds refers to
the movement of funds in the working capital. If any transaction results in the increase in
working capital, it is said to be a source or inflow of funds and if it results in the decrease
of working capital, it is said to be an application or out-flow of funds.

The flow of funds (FOF), therefore, denotes the earning and spending cash or the
growth and reduction of working capital – i.e., fund inflows and outflows. Fund inflows include
activities designed to produce revenue, such as selling products, service, investments, and
other company assets, as well as issuing stocks and bonds. On the other hand, fund outflows
include paying wages, obtaining insurance, purchasing company assets and materials,
making long term – investments, and paying dividends and taxes. At one point, companies
gauged their flow of funds by using any definition of funds and included a financial statement
reporting these activities in their annual reports.

The flow of funds occurs when a transaction changes on the one hand, a non – current
account, and or the other, a current account, and vise – versa. The flow of funds does not
occur when a transaction affects fixed assets and fixed liabilities or current assets and current
liabilities. This kind of transaction flow is called no flow fund and it occurs only between non –
current accounts. Some examples of such transactions which do not affect the flow of funds
or which are not recorded in the fund’s flow statement are: Collection from debtors or payment
to creditors, purchase or sales on inventory in cash or credit, purchase or sales of marketable
securities, exchange fixed assets, purchase of fixed assets by issue of shares, conversion of
debentures into shares, etc.

SOURCE: https://twitter.com/studententprog/status/1217134279987269633

Analyzing the flow of funds helps stockholders and creditors determine how a
company used its additional resources derived from profitable operations and identify the
financial strengths and weaknesses of the business.

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 FLOW OF FUNDS

Operating Investing Financing

Activities Activities Activities

ROLES OF FINANCIAL MANAGER

One of the most important and complex activities of a firm is handling the financial
activities of a firm. The one who takes care of these activities is a financial manager who
also performs all the requisite monetary undertakings.

A financial manager is a qualified person who does have a lot of experiences in

handling all the important financial functions of an organization. He or she should maintain
far sightedness in order to ensure that the funds are utilized in the most efficient manner.
The results of his or her actions will directly affect the profitability, growth and goodwill of
the firm.

Main Functions of a Financial Manager

1. Raising of Funds

In order to meet the obligation of the business, it is important to have enough cash to
maintain liquidity. Funds can be raised by way of equity and debt but its ratio must be
properly sustained. The maintenance of a good balance between equity and debt is one
of the responsibilities of a financial manager.

2. Allocation of Funds

Once the funds are raised through different channels, the next important function is to
allocate the funds. Allocation of funds should be made according to its optimal use
based in order of priorities. The best possible manner of allocation of funds must
consider the following:
a. The fund requirements of the firm based on its growth capability;
b. Status of assets whether they are long-term or short-term; and
c. Mode by which the funds are raised.

A good mix and proper allocation of funds is one of the most important financial
activities as the decision will directly and indirectly influence other managerial activities.

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 4. Profit Planning

Profit planning refers to appropriate utilization of profits generated by the firm.

Profits are brought about by factors such as pricing, industry competition, state of the
economy, mechanism of demand and supply, cost and output. Any increase in the
profitability of the firm is due to proper utilization of variable and fixed factors of
production costs.

The use of fixed factors of production such as land and machinery results to increase
of fixed costs in the form of rent and depreciation expenses. If the use of these factors
of production will not be minimized, it will lead to a reduction in profit.

3. Understanding Capital Markets

A clear understanding of capital market is one of the important functions of a

financial manager. The trading of shares of stock of a company in the stock
exchange will involve
a lot of risks. The finance manager is expected to realize the calculation of the
risk involved if ever a decision is arrived at in trading of shares and other
securities.

The investors’ share in profits of the company is distributed in the form of

dividends which will directly impact the operation of the capital market. If
dividends are not declared, the market price of the shares of stock in the stock
market will be lower while dividends declaration will tend to make the market
price a little higher. However, some companies try to retain accumulated
profits to investors.

LEARNING COMPETENCY

Explain the flow of funds within an organization – through and from the
enterprise – and the role of the financial manager. (ABM_BF12-IIIa-5)

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 ACTIVITIES

Activity 1. Picture Analysis

Direction: Select the word that best describes each picture.

FINANCIAL MANAGER PLANNING

INVESTMENT SAVINGS

INVESTORS

https://taxandbusinessonline.villanova.edu/blog/what-is-the-
https://www.diffen.com/difference/Checking_Account_vs_Savings_Account difference-between-a-financial-manager-and-management-
1. ________________________ analyst/
2. _______________________

https://www.consultingspace.com.au/business-strategic-planning- https://www.alphagamma.eu/entrepreneurship/7-ways-
setting-up-your-off-site-planning-session-for-success-2/ attract-investors-business/
3. ________________________ 4. ________________________

https://corporatefinanceinstitute.com/resources/knowledge/finance/investment-methods/
5. ____________________

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Activity 2. Tell Me.
Directions: Write letter C if the sentence is true and W if the sentence is false. Write your
answer on a separate sheet of paper.

_____1. The access of current assets over liabilities is called net working capital.
_____2. The term funds refer to a combination of cash and net working capital.
_____3. Current assets refer to anything of value that a company will sell or use during the
current year or operating cycle.
_____4. Funds mean inflow and outflow of cash.
_____5. Insurance, taxes, and wages are company’s assets.

Activity 3. Explore Me.

Direction: Explain the concept of flow of funds in three to five sentences on a separate
sheet of paper.

LET’S LEVEL UP

Part I.
Direction: Write the letter that corresponds to the correct answer on a separate sheet of
paper.

1. It means movement which includes both inflow and outflow.

a. Cash b. Flow c. Flow of Funds d. Funds

2. This term refers to the transfer of economic values from one asset of equity to another.
a. Flow b. Flow of Funds c. Funds d. Sources

3. When the effect of the transactions results in the increase of funds, it is called a
_______________.
a. Applications of Funds c. Increase of Funds
b. Decrease of Funds d. Source of Funds

4. When the effect of the transactions results in the decrease of founds, it is known as
______________.
a. Application of Funds c. Increase of Funds
b. Decrease of Funds d. Source of Funds

5. When a transaction does not move or change fund, it is said to be _______.

a. Flow of Funds b. Inflow c. No Flow Fund d. Outflow

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Part II.
Direction. Prepare a graphical illustration that explains the flow of funds. (Any illustration will
do).

GUIDE QUESTIONS

Direction: The following questions will serve as your guide to reflect your learning in this
lesson but not intended to be answered on a separate sheet of paper.

1. What is flow of funds?

2. When does flow of funds happen in a business transaction?
3. What is the importance of flow of funds?

RUBRIC FOR SCORING

RUBRIC SCORE FOR Activity 3 and Let’s Level Up Part II

Point of Scale
Criteria Score
5 3 1
The answer is The answer is The answer is
Relevance relevant to what somewhat irrelevant.
of Content is being asked. relevant to what
is being asked.
The ideas are The ideas are The ideas are
Organization well-organized. somewhat disorganized.
of Thoughts organized.
The piece has no The piece has The piece has
Grammar & spelling, one or two three or more
Mechanics punctuation or spelling, spelling,
grammatical punctuation or punctuation or
error. grammatical grammatical
errors. errors.

TOTAL

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 REFLECTION

Direction: Rate yourself by checking the column that corresponds to your answer for each
parameter.

Have you learned the lesson?

What do you feel about the topic?
How do you find the lesson?

REFERENCES

• Vidal, H.,Sarageon, S., De Ocampo, E. Business Finance for Senior

High School
• De Guzman, Angeles. Business Finance for Senior High School
• Timbang, Ferdinand. Business Finance for Senior High School
• yourarticlelibrary.com
• cleartax.in/g/terms
• https://www.accountingtools.com
• www.kullabs.com

ANSWER KEY

5. W 5. Investment
4. C 4. Investors
3. C 3. Planning
Answer may vary. 2. C 2. Financial Manager
1. C 1. Savings
Activity 3: Explore Me. Activity 2: Tell Me Activity 1: Picture Analysis

Prepared by:

LUHEN NUNCIA B. MAGSAYO

Daraga National High School

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