Preface

This instructional material is intended to guide students as they journey towards under
standing basic financial management concepts and principles. It is composed of three modules,
namely Module 1 Basic Financial Management Concepts, Module 2 Working Capital Management
and Module 3 Financial Statement Analysis.

Module 1 includes discussion on the basic concepts in financial management. Specifically,

topics presented are as follows; definition , nature and importance of financial management, finan
cial statements, financial forecasting and budgeting.

Module 2 focuses on working capital management, comprised of five lessons. Lesson 1 ex

plores the fundamental concepts on working capital and its management. Lesson 2 revolves around
cash management, with emphasis planning cash needs and control measures for proper cash han
dling. Lesson 3 provides explanations on management of marketable securities, focusing on deter
mining the optimum level of marketable securities to maintain. Lesson 4 presents effective practices
on receivable management while Lesson 5 covers inventory management techniques .

Module 3 highlights the relevance of financial statement analysis in financial management.

Tools and techniques in analyzing financial information are also included to guide the students in
the preparation of the Financial Statement Analysis Report.

Finally, inside each module are lessons with corresponding discussions and simplified exam ples.
There are also activities that students need to do to accomplish the course learning outcomes.
Activities are designed to test the student’s comprehension of the topics presented. However, the
authors would like to remind the users of this module that activities are not intended to measure
their level of intelligence but instead, their commitment and diligence in learning this course.

To the students, feel free to browse over the pages and we hope you are able to learn finan
cial management in a productive and exciting way!!

Donna G. Tilanduca, DM

Nestor Jr. P. Peñalver, MM

Jimmy L. Sabuero, MBM

1
 MANAGEMENT
Module CONCEPTS
INTRODUCTION TO
FINANCIAL
ISpecific Learning Outcomes:
1. Describe the goals, scope, and functions of financial management
2. Justify the importance of financial management in organizations.
3. Discuss the three major types of decisions that the finance
manager
makes.

An organization whether political civic or business, in nature must be

aware of its
immediate and future requirements for funds, possible sources
thereof and the
benefits that may accrue to the organization itself and the community
arising from
efficient and effective utilization of funds (Mejorada & Nenita, 2006).
A business is
defined as an organization or enterprising entity engaged in commercial, industrial,
or professional activities. It also refers to the organized efforts and activities of
individuals to produce and sell goods and services for profit (Hayes, 2019).
Finance is the art and science of managing money. The discipline of finance is concerned with the
procurement, alloca tion, application, and disbursement of money by a business entity in order to
maximize its return on invested capital. It included financial services and financial instruments.

Generally, the subject of finance is divided into two broad categories.

Public Finance

Private Finance

KEY OBJECTIVES OF FINANCIAL MANAGEMENT

∙ Maximization of the value of the firm

∙ Maximization of shareholder’s wealth

∙ Social responsibility and ethical behavior

KEY ELEMENTS TO THE PROCESS OF FINANCIAL

MANAGEMENT
 2
Every business needs
finance to carry on its
operations and to achieve
its objectives. Finance may
also be simply defined as
provision of money at the
time of need.

There are 3 main approaches to finance:

Finance as activity of providing funds to a business entity at

the time of need and
on favorable terms keeping in mind the firm’s objectives.

Finance relates to cash. It view finance as broad-based

function and relates it to all
activities taking place in a business.

Finance is concerned with raising of funds and their effective

utilization in a busi
ness.

Every firm secures the capital it needs and employs it in

activities which generate return on invested capital. Finance
Function refers to the procurement of funds and their effec
tive utilization in the business concern.

Meaning of Financial Management

⇒ A managerial activity which is concerned with the
planning and controlling of the firm’s financial
resources. It is a permanent and continuous process for
The Concept of Finance every business concern.
⇒ It is concerned with the efficient use of an important ♦ It helps in valuation of the business.

economic resource, namely, Capital Funds. ⇒ An

Scope of Finance Function
application of general managerial principles to the area
Estimation Financial Requirements of a business
of financial decision making.
Management of cash flows Selecting a source of finance
Nature of Finance Function Implementing financial control Making good investment
♦ It is an integral and central function to all business
decisions Determining the capital structure of a firm
organizations

♦ It plays a significant role in the long-term growth and

survival of a business ♦ It helps in managerial decision

External Factors
making through analysis and interpretation of financial
State of Economy Government policy
data.
Structure of capital and money markets Requirements of
♦ It is interrelated to other primary business functions investors
like marketing, human resource planning, production
Taxation policy Lending policy of financial institution
planning.
3
Internal Factors

Nature and size of the business Trend of earnings

Expected return, cost and risk involved Composition assets

Structure of ownership Age of the firm

Liquidity position Working capital requirement

Conditions of debt agreements

Word Cloud. Choose at least 10 words that Write your answers below!
will summarize your learning in the concepts
of Fi nance.
 1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

LEGAL FORMS OF BUSINESS *Sole Proprietorship . A business

owned by one person.

Describe this photo:

_______________________________________
_______________________________________
_______________________________________
_______________________________________
_______________________________________
4

*Partnership. An association where two or more persons bind

themselves to contribute money property or industry to a
common fund with the intention of dividing the profits among
themselves.

*Limited Liability Company. An organizational form that is a

cross between a partnership and corporation.
 *Cooperative. A private business organization that is owned and
controlled by the people who use its products, supplies or
services.

*Corporation . An artificial being created by operations of law

having the right of succession, the powers and attributes ex
pressly authorized by law or incident to its existence.

*One Person Corporation

Activity Number 1. List down the Advantages and dis -advantages of these business
organization
________________ Corporation One Person Corporation
Partnership
Sole Proprietorship Advantages: Advantages:
Advantages:
Advantages: ________________ ________________
________________ ________________ ________________
________________ ________________ ________________ ________________
________________ ________________ ________________ ________________
________________ ________________ ________________ ________________
________________ ________________ ________________ ________________
________________ ________________
________________ Disadvantages: Disadvantages:
Disadvantages:
Disadvantages: ________________ ________________
________________ ________________ ________________
________________ ________________ ________________ ________________
________________ ________________ ________________ ________________
________________ ________________ ________________ ________________
________________ ________________ ________________ ________________
________________ ________________

Ten Principles that Form the Basics of Financial Management

∙ The risk-return trade off

Additional risk is not taken unless there is an additional compensation or return is expected.

∙ The time value of money

A peso received today is worth more than a peso received in the future.
∙ Cash- not profits is king

∙ Incremental cash flows

Its only what changes that counts.

∙ The curse of competitive markets

Why it’s hard to find exceptionally profitable projects.

∙ Efficient capital markets

The markets are quick and the prices right.

∙ The agency problem

Managers won’t work for owners unless it’s in their best interest.

∙ Taxes bias business decision.

∙ All risk is not equal.

Some risk can be diversified away and some cannot.

∙ Ethical behavior is doing the right thing, and ethical dilemmas are everywhere in finance.

Activity Number 2: True or False. Determine whether the statements below are correct or not.

1. Financial management can only be applied in business organizations .______ 2. Financial

management has the same objectives as that of the field of accounting.____ 3. Financial

management is also concerned with social responsibility and ethics._____ 4. Financial planning

ensures that funding is available when needed.____

5. Financial control ensures that management is prepared financially.____

6. A limited liability company offers the advantage of unlimited liability for its owners.____

7. A corporation is considered by the law as an artificial person.____

8. Sole proprietorships possess separate legal personality distinct from its owner.____

9. A corporation can only be created by operations of law._____

10. Corporations have the ability to raise more capital compared to partnerships._____
6
Getting to know the
Module I Primary Financial
Statements
Key Terms:
 Income Statement- the statement of the profit or loss for the period,

comprised of revenue less expenses for the period.

Revenue (Sales)- money derived from selling the company’s product or services Cost of

goods sold – the cost of producing or acquiring the goods or services to be sold. Operating

expenses- expenses related to marketing and distributing the product or service Tax

expenses – the amount of taxes owed based on a firm’s taxable income Balance Sheet-

statement of financial position at a particular date

Current assets- assets that are expected to be converted into cash within one year Accounts

receivable – a promise to receive cash from customers who purchased goods from the firm on

credit

Inventory – raw materials, work-in-process, and finished goods held by the firm for eventual
sale.

Prepaid expenses – expenses that have been paid in advance

Fixed assets – assets comprising of equipment, building, land, etc.

Debt – consists of such sources as credit extended by suppliers or a loan from a bank

Current liability– debt due to be paid within one year.

Accounts payable – liability of the firm for goods purchased from suppliers

Other payables – consists of interest payable and income taxes payable that are to be paid within
one year.

Accrued expenses - expenses already incurred but not yet paid.

Short-term notes – amounts borrowed from a creditor that will mature in one year. Long-term

debt – loans from banks or other sources that lend money for longer than 12 months.

7
What are Financial Statements and its components?
Financial Statements are the means by which the information accumulated and
 processed in financial accounting is periodically communicated to the users. In
other words, the financial statements are the product or main output of the final
accounting process. It also a structured financial representation of the financial
position and financial performance of an entity.

The components of
the basic financial statements
include the following:

Primary financial statements answer basic questions

including: ∙ What is the company’s current financial status?

∙ What was the company’s operating results for the period?

∙ How did the company obtain and use cash during the period

Purpose of Financial Statement

The objective of general purpose of financial statement is to provide information about
the financial position, performance and cash flows of an entity that is useful to wide
range of users in making economic decisions. Financial statement also show the results
of the management’s or owner’s stewardship. To meet this objective, financial statements
provide information about the entity’s:

A. Assets

B. Liabilities

C. Equity

D. Income and Expense, including gains and losses

E. Cash flows

8
 The Balance Sheet
A balance sheet is a formal statement showing the financial position of an entity as of a
particular date. The balance sheets represents the three element of financial position,
namely assets, liabilities and owner’s capital.

Summary of the financial position of a company at a particular

date Assets: W hat the firm ow ns

Liabilities: W hat the firm ow es

Owners’ Equity: Net w orth of the firm

It also addresses the following questions:

What are the resources of the company?

What are the company’s existing obligations?

What are the company’s net assets?

https://businesstips.ph/sample-balance-sheet-and-income-statement/
 9
They distinguish between:

Current and Non-current assets

Current and Non-current liabilities

Current Assets - Listed in decreasing order of liquidity

Comparative so financial statement users can identify significant changes over time. They
have more than one year on the Statement of Financial Position.

Activity Number 3: W hat can you say about the Sam ple Balance Sheet?

________________________________________
________________________________________
________________________________________
________________________________________
________________________________________
________________________________________
________________________________________

The Income Statement

An income statement is formal statement shoeing thee financial performance

of the entity for a given period of time. The performance of the entity is primar
ily measured in in terms of the level of income earned by the entity through the
effective and efficient utilization of its resources. This financial performance is
previously known s the result of operations of the entity.

The income statement for the period represents the income, expenses, gains,
losses and net income or loss recognized during the period and thereby pre
sents an indication in conformity with GAAP of the results of the entity’s profit
-directed activities during the period.
 10
The Income Statement shows and addresses the following:

♦ Shows the results of a company’s operations over a period of time.

♦ What goods were sold or services performed that provided revenue for the com
pany?

♦ What costs were incurred in normal operations to generate these revenues?

Revenues

Assets (cash or AR) created through business operations

Expenses
 Assets (cash or AP) consumed through business operations

Net Income or (Net Loss)

Revenues - Expenses

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Activity 4: Classify the following accounts. Choices are as follows.

Current Asset Non-Current Asset Current Liability

Non-Current Liability Owner’s Equity Income Statement

1. Retained Earnings 16. Notes Payable-Short term

2. Cash 17. Accounts Receivable

3. Salaries and Wages 18. Accrued Expenses

4. Rent Expense 19. Marketable securities

5. Mortgage Payable 20. Accounts payable

6. Bond Payable 21. Operating Income

7. Prepaid Expenses 22. Land

8. Ordinary Shares 23. Goodwill

9. Accumulated depreciation 24. Patents

10. Machinery & Equipment 25. Sales/Revenues

11. Buildings 26. Income Taxes

12. Income taxes Payable 27. Accruals

13. Sales Commission 28. Selling Expenses

14. Inventory 29. Administrative Expense

15.Cost of Sales / Cost of Goods Sold 30. Interest Expenses

 12
Statement of Changes in Equity
This lesson presents the Statement of Owner's Equity (or Statement of Changes in Owner's Eq
uity) along with important points you need to know in preparing and understanding this report.

A Statement of Owner's Equity shows the changes in the capital account due to contributions, with
drawals, and net income or net loss.

Capital is increased by owner contributions and income, and decreased by withdrawals and expenses.

The Statement of Owner's Equity, which is prepared for the sole proprietorship type of business,
shows the movement in capital as a result of those four elements.

Statement of Owner's Equity Example

Here is a sample Statement of Owner's Equity of a service type sole proprietorship business, Strauss
Printing Services. All amounts are assumed and simplified for illustration purposes.

Assume that the company started the year 2019 with $100,000 capital. During the year, the owner
made $10,000 additional contributions and $20,000 total withdrawals. The Statement of Owner's
Equity would look like this:

Explanation and Pointers

A Statement of Owner's Equity (SOE) shows the owner's capital at the start of the period, the changes
that affect capital, and the resulting capital at the end of the period. It is also known as "Statement of
 Changes in Owner's Equity".

A typical SOE starts with a heading which consists of three lines. The first line shows the name of the
company; second the title of the report; and third the period covered.

The title of the report is Statement of Owner's Equity. This is used for sole proprietorships. For part
nerships, the title used is "Statement of Partners' Equity" and for corporations, "Statement of Stock
holders' Equity".

Notice that the third line is worded "For the Year Ended..." This means that the SOE presents infor
mation for a specific span of time. In the above example, the period covers 1 year that ends on De
cember 31, 2019. Hence, the amounts presented pertain to changes to owner's equity from January 1,
2019 to December 31, 2019.

13
The capital account used in the illustration is Strauss, Capital. The capital account used would vary
from company to company.

Income increases capital. Expenses decrease it. Net income is equal to income minus expenses. Hence,
net income would increase the capital account. If expenses exceed income, there is a net loss. In such
case, net loss will decrease the capital account.

Notice that the net income above, $ 57,100, is the bottom-line amount in the company's Income State
ment.

Strauss, Drawings represents the total withdrawals made by the owner during the period. The owner
made $ 20,000 total drawings. This amount is deducted to get the capital balance.

The Statement of Owner's Equity example above shows that the company has $147,100 in capital as a
result of the following: $100,000 balance at the beginning of the year, plus $10,000 owner's contribu
tions during the year, plus $57,100 net income, and minus $20,000 withdrawals.

Good accounting form suggests that a single line is drawn every time an amount is computed (it signi
fies that a mathematical operation has been completed). The bottom-line amount is double-ruled, i.e.
$ 147,100.

https://www.accountingverse.com/accounting-basics/statement-of-owners-equity.html

How to prepare Statement of Owner’s Equity : Please hit the link

https://www.accountingverse.com/accounting-basics/how-to-prepare-a-statement-of-owners-equity.html

Statement of Cash Flows

A Statement of Cash Flows (or Cash Flow Statement) shows the movement in the Cash
account of a company.

It presents cash inflows (receipts) and outflows (payments) in the three activities of busi
 ness: operating, investing, and financing.

Accountants follow the accrual basis in measuring income and expenses.

However, some users are particularly interested in the cash transactions of the company;
hence the need to present a Statement of Cash Flows.

This lesson takes a look at the Statement of Cash Flows and provides some important
points in understanding it.

Statement of Cash Flows Example

Here is a sample cash flow statement for Strauss Printing Services, a service type sole
proprietorship business.

All amounts are assumed and simplified for illustration purposes.

14

https://www.accountingverse.com/accounting-basics/cash-flow-statement.html

Explanation and Pointers

Statement of Cash Flows presents the inflows and outflows of cash in the different activities of the busi
ness, the net increase or decrease in cash, and the resulting cash balance at the end of the period. Cash
inflows refer to receipts of cash while cash outflows to payments or disbursements.

A typical cash flow statement starts with a heading which consists of three lines. The first line presents
the name of the company; the second describes the title of the report; and the third states the period cov
ered in the report.

Notice that the third line is worded "For the Year Ended..." This means that the information included in
the report covers a span of time. In the illustration above, the report presents inflows and outflows of
cash for 1 year, i.e. from January 1 to December 31, 2019.

Cash inflows and outflows are classified in three activities: operating, investing, and financing.

Operating activities refer to the main operations of the company such as rendering of professional ser
vices, acquisition of inventories and supplies, selling of inventories for merchandising and manufactur
ing concerns, collection of accounts, payment of accounts to suppliers, and others. Generally, operating
activities refer to those that involve current assets and current liabilities.

Investing activities may be summed up as: "where the company puts its money for long-term purposes",
such as acquisition of property, plant and equipment; and investment in long-term securities. Selling
these properties are also considered investing activities. In general, investing activities include transac
tions that involve non-current assets.

Financing activities refer to: "where the company gets its funds", such as investment of the owner/s, and
cash proceeds from bank loan and other long-term payables. The payment of such items (i.e. withdrawal
of owner/s and payment of loans) are also financing activities. Generally, financing activities include
those that affect non-current liabilities and capital.

15
All inflows are presented in positive figures while all outflows in negative (in parentheses).

After inflows and outflows are presented, the net increase or decrease in cash is computed. Then it is
added to the beginning balance of cash to get the balance at the end. Easy, right? In simple sense, this
report presents the cash balance at the beginning of the period, the changes during the period, and the
resulting balance at the end of the period.

Notice that the cash balance at the end, $ 21,000, is the same as the cash balance presented in the
company's Balance Sheet.

Good accounting form suggests that a single line is drawn every time an amount is computed. It signi
fies that a mathematical operation has been completed. The computed balance at the end of the report
is double-ruled.

Activity Number 5: Describe the image below.

 16

Notes to the Financial Statements

The notes to the financial statements (sometimes called footnotes) are also an integral part of the
overall picture. If the income statement, balance sheet, and statement of cash flow are the heart of the
financial statements, then the footnotes are the arteries that keep everything connected. If you aren't
reading the footnotes you're missing out on a lot of information.

The footnotes list important information that could not be included in the actual ledgers. Could you
imagine if the company listed out individual expenses on the income statement instead of putting
them under one or two neat headings? The income statement would be 20 pages long!

The notes will list relevant things like outstanding leases, the maturity dates of outstanding debt, and
even details on where the revenue actually came from. Generally speaking there are two types of foot
notes:

Accounting Methods - This type of footnote identifies and explains the major accounting policies of
the business. This portion of the footnotes will tell you the nature of the company's business, when its
fiscal year starts and ends, how inventory costs are determined, and any other significant accounting
policies that the company feels that you should be aware of. This is especially important if a company
has changed accounting policies. It may be that a firm is practicing "cookie jar accounting" and is
changing policies only to take advantage of current conditions to hide poor performance.

Disclosure - The second type of footnote provides additional disclosure that simply could not be put
in the financial statements. The financial statements in an annual report are supposed to be clean and
easy to follow. To maintain this cleanliness, other calculations are left for the footnotes. For example,
details of long-term debt such as maturity dates and the interest rates at which debt was issued, can
give you a better idea of how borrowing costs are laid out. Other areas of disclosure include every
thing from pension plan liabilities for existing employees to details about ominous legal proceedings
the company is involved in.

The majority of investors and analysts read the balance sheet, income statement, and cash flow state
ment. But for whatever reason, the footnotes are often ignored. What sets informed investors apart is
digging deeper and looking for information that others typically wouldn't. No matter how boring it
might be, read the fine print, it'll make you a better investor.

17

Summary :
One of the most important areas for any investor to look when researching a company is the financial
statements. It is essential to understand purpose of each part of the statement and how to interpret it.

Let's recap what we've learned:

Financial reports are required by law and are published both quarterly and annually.

Management discussion give investors a better understanding of what the company does and usually
points out some key areas where they did well.

Audited financial reports have much more credibility than unaudited ones.

The balance sheet lists the assets, liabilities, and shareholder's equity.
 For all balance sheets: Assets = Liabilities + Equity. These two sides must always equal each other
(balance).

The income statement includes figures such as revenue, expenses, earnings, and earnings per share.

For a company, the top line is the revenue while the bottom line is net income.

The income statement takes into account some non-cash items such as depreciation. The cash-flow
statement strips away all non-cash items and tells you how much actual money the company generat
ed.

The cash-flow statement is divided into three parts: cash from operations, financing, and investing.

Always read the notes to the financial statements, they give you more in-depth information on a wide
range of figures reported in the 3 financial statements.

A complete set of financial statements includes 5

components.1. Statement of Comprehensive Income
The Income Statement, also known as Profit and Loss Statement (P&L Statement), shows the results of
operations of an entity over a particular period of time. The income statement presents the period's in
come and expenses and the resulting net income or loss.

Many large companies today prepare a Statement of Comprehensive Income. The Statement of Compre
hensive Income presents a company's results of operations (net income or loss) and its other compre
hensive income (OCI). If the company has no other comprehensive income, then the contents of the
Income Statement and Statement of Comprehensive Income would be the same.
Other comprehensive income include gains and losses that cannot be reported in the Income Statement
such as revaluation surplus, translation adjustments, and unrealized gains, for a given period. Other
comprehensive income is covered in higher financial accounting studies.
Income Statement »

18
2. Statement of Changes in Capital
The Statement of Changes in Capital (or Statement of Changes in Equity) shows the balance of the capital
account at the beginning of the period, the changes that occurred during the period, and the ending bal
ance as a result of such changes. Capital is affected by contributions and withdrawals of owners, income,
and expenses.
The title used for this report varies depending upon the form of business ownership. It is called
Statement of Owner's Equity in sole proprietorships, Statement of Partners' Equity in partnerships and
Statement of Stockholders' Equity in corporations.

3. Statement of Financial Position

A Balance Sheet presents an entity's assets, liabilities, and capital as of a given point in time. This report
shows the entity's financial position and condition, hence, also called Statement of Financial Position.
All asset amounts are added. All liability and capital accounts are also added. The total amount of assets
should be equal to the total amount of liabilities plus capital.
4. Statement of Cash Flows
The Statement of Cash Flows, or Cash Flow Statement, presents the beginning balance of cash, the changes
that occurred during the period, and the cash balance at the end of the period as a result of the changes.

The cash flow statement shows the cash inflows and outflows from three activities: operating, investing,
and financing.
Operating activities pertain to transactions that are directly related to the company's main course of busi
ness. Investing activities refer to "where the company puts its money". These activities include long-term
investments, acquisition of property, plant and equipment; and other transactions related to non-current
assets. Financing activities include transactions in which a company acquires its funds. These include
loans from banks (long-term liabilities) and contributions from owners.

5. Notes to Financial Statements

The Notes to Financial Statements, or Supplementary Notes, provide information in addition to those pre
sented in the Balance Sheet, Income Statement, Statement of Changes in Equity, and Cash Flow State
ment. The notes contain disclosures required by accounting standards, supporting computations, break
down of line items in the face of the financial statements, and other information that users may be inter
ested in.
Relationship among the Financial Statements
The financial statements contain interrelated information. This is the reason the financial statements are
prepared in the sequence presented above. In fact, some of the figures in one financial statement compo
nent are actually taken from another component.
1. The net income from the Income Statement is used in the Statement of Changes in Equity. Remember
that income and expenses affect capital.
2. The ending balance of capital in the Statement of Owner's/Partners'/SH's Equity is forwarded to the
Balance Sheet (under Capital).
3. The cash balance presented in the Balance Sheet is supported by the Statement of Cash Flows. The
ending balance of cash in the Statement of Cash Flows is the same amount presented in the Balance
Sheet.
4. The notes to financial statements show supporting computations of the amounts and additional infor
mation about the items presented in the above reports.

19

https://www.jing.fm/iclip/xxwobT_next-stephanie-prepared-a-little-q-a-session/Activity Number 6: Multiple choice.

Encircle the letter of your choice.

1 Accounting standard setters help ensure the consistency of reported financial information by:
 A. recognising and enforcing financial reporting standards

B. establishing how financial reports should be prepared and presented.

C. expressing an opinion on the application of financial reporting standards.

2 The financial statement that provides information about a company’s financial position at a specific point in time is the:

A. Balance sheet B. Income statement. C cash flow statement.

3 Which of the following best shows the accounting equation?

A. Total assets = Total liabilities + Total shareholders’ equity

B. Total assets + Total liabilities = Total shareholders’ equity

C. Total shareholders’ equity – Total assets = Total liabilities

4 The values of assets on the balance sheet are reported:

A. only at historical cost. B. only at fair market value. C. at a mix of historical cost and fair market value. 5 Which

of the following accounts is most likely classified as a current asset?

A. Goodwill B. Inventory C. Property, plant, and equipment 6 Shareholders’ equity, as reported on the balance

sheet, includes:

A. cash B. common stock C. long-term debt. 7 Accounts payable are classified as:

A. assets B. liabilities C. shareholders’ equity. 8 Net property, plant, and equipment is included in:

A. shareholders’ equity. B. long-term debt. C. non-current assets. 9 The profit or loss generated by

a company over a year is presented in the:

A. balance sheet. B. income statement. C. cash flow statement. 10. Which financial statement is not

prepared on an accrual basis?

A. Income statement B. Cash flow statement C. Profit and loss statement

20
Financial Planning,
Module
Budgeting and
I Forecasting
 In order for a business entity to thrive highly competitive environment, it is essential that a fi
nancial manager must be able to plan ahead. Management must be flexible and be able to make
adjustments in the company before relevant events (inflation, deflation, recession, or new competition)
occur.

To maximize the entity’s operations, meticulous and thorough planning is indispensable. Plan
ning entails the creation of both short-range and long-range objectives as well as seasonal financial tar
gets. These financial targets or objectives are the bases for developing the company’s financial plans.

These financial plans shall function as a beacon that would guide company operations. In addi
tion to this, the plans will serve as a control mechanism or barometer against which results of opera
tions shall be measured. Lastly, the financial plans will serve as guide in taking corrective measures
when needed.

A financial forecast is normally an estimate of future financial outcomes for a business organization.
Simply put, a forecast is a calculated guess of what will be the future performance of the business based
on historical financial data and factors in the organization’s external environment.

21
Benefits of Forecasting

Prevents unnecessary expenses

Ensure better monitoring of cash flows

Improved profitability rate

Nature of Financial Forecasting

 Financial forecasting enables the business organization to predict what will happen to the business
in terms of sales, revenue and expenses. It is considered as part of the financial planning function since
forecasting results determines what strategic actions will the management develop in order to achieve
targeted goals. The end product then of financial forecasting is a financial plan, defined as a planned
course of action expressed in quantitative, financial terms.

Sales Forecast

A sales forecast is usually the first activity undertaken in financial planning. It is an estimate of a
business organization’s sales expressed in monetary ( peso sales) or quantitative (unit sales) terms. Re
member , it is important to have a well-planned sales forecast since it will be the main information need
ed to prepare the projected or forecasted financial statements.

Projected Financial Statements ; Statement of Comprehensive Income (Income Statement) , Statement of

Financial Position (Balance Sheet) and Statement of Cash Flows.

Projected financial statements are financial reports (similar to what we normally prepare) but all
amounts and figures presented are estimates or projections. These figures are estimated based on as
sumed changes affecting the business’s operations. Take note however, that assumptions must be based
on facts and reliable data or information to be considered valid and acceptable.

Examples of assumptions:

♦ Sales will increase by 5% this year ( based on the comparison done on the Income Statement of the
business for the last 3 years). Cost of sales will also increase by 5%since you need to purchase or
make additional products to sell.

♦ Income tax expense will increase by 1% as a result of a new tax law.

♦ Salary expense will increase by 2% since the business will hire an additional marketing staff.

22
Steps in preparing Projected Financial Statements

Step 1. Prepare the Projected Income Statement

Illustrative Case 1

The Financial Statements of Kirk Restobar is presented below:

Kirk Restobar
 Income Statement

For the year ended December 31, 2018

Sales ₱ 2,500,000

Cost of sales 1,500,000

Gross Profit 1,000,000

Operating expenses 575,000

Operating income 425,000

Interest expense 30,000

Income before tax 395,000

Income tax (20%) 79,000

Net income ₱ 316, 000

Assumptions:

∙ Sales will increase by 5% as a result of planned intensified marketing and promotional activities. ∙
Operating expenses will increase by 1% due to increase in marketing expenses.

∙ Interest expense decreases as a result of loans to be fully paid (₱ 30,000 Notes payable at 10% per
annum)The projected Income Statement for 2019 is then presented below:

Kirk Restobar

Projected Income Statement

For the year ended December 31, 2019

Sales ₱ 2,625,000

Cost of sales 1,575,000

Gross Profit 1,050,000

Operating expenses 580,750

Operating income 469,250

Interest expense 27,000

Income before tax 442,250

Income tax (20%) 88,450

Net income ₱ 353,800

23
Explanations:

∙ Increase in sales is 5% which is ₱ 125,000 (₱2500,000 x 5% ) ; Projected sales then is P2,500,000 +

P125,000.
∙ Cost of sales will also increase by 5% since additional products will be purchased as a result of
increased sales. Increase in cost of sales is ₱ 75,000 (P1,500,000 x 5%); Projected cost of sales would be
₱1,500,000 + ₱75,000.

∙ Increase in operating expenses is ₱5,750 (₱575,000 x 1%); projected operating expenses would be
₱575,000 + ₱5,750.

∙ Decrease in interest expense is ₱3,000 (₱30,000 x 10%); projected interest expense then is ₱30,000
less ₱3,000.

∙ Projected Income tax expense is computed as follows; ₱442,250 x 20%.

Step 2 Prepare the Projected Statement of Financial Position

Kirk Restobar

Statement of Financial Position

As of December 31, 2018

ASSETS LIABILITIES AND EQUITY

Current Assets: Current Liabilities

Cash ₱350,000 Accounts Payable ₱255,000

Accounts 425,000 Utilities Payable 25,000

Receiva ble

Merchandise 175,000 ₱ 950,000 Accrued Expenses 7,500 ₱287,500

In ventory

Non-Current Assets ₱550,000 Non-current Liabilities

Notes Payable ₱ 375,000

Less: 150,000 400,000 Other liabilities 35,000 ₱410,000

Accumulated
Depreciation

Owner’s Equity ₱652,500

Total Assets ₱ 1,350,000 Total Liabilities and ₱1,350,000

Equity

Assumptions:

∙ Cash will increase by ₱ 353,800 as a result of sales increase.

∙ Accounts receivable will increase by ₱ 20,000 as a result of easing credit terms and policies. ∙
Merchandise inventory decreases by ₱ 50,000.

∙ Notes payable decreases by ₱ 30,000.

The Projected Statement of Financial Position will be as follows;

 24
Kirk Restobar

Projected Statement of Financial Position

As of December 31, 2019

ASSETS LIABILITIES AND EQUITY

Current Assets: Current Liabilities

Cash ₱703,800 Accounts Payable ₱255,000

Accounts Receivable 445,000 Utilities Payable 25,000

Merchandise 125,000 ₱1,273,800 Accrued Expenses 7,500 ₱287,500

Inven tory

Non-Current Assets ₱550,000 Non-current Liabilities

Notes Payable ₱345,000

Less: Accumulated 150,000 400,000 Other liabilities 35,000 ₱380,000

Depreciation

Owner’s Equity 1,006,300

Total Assets ₱1,673,800 Total Liabilities and ₱1,673,800

Equity

Equity is computed as follows ; P652,500 + P383,500 ( Equity ending balance 2018 +Projected Net In
come 2019).

Step 3 Prepare the Projected Cash Flow Statement

Kirk Restobar

Projected Cash Flow Statement

As of December 31, 2019

Operating Activities

Net Income ₱ 353,800

Increase in Accounts Receivable (20,000)

Decrease in inventory 50,000

Net Cash Flow from Operating Activities ₱ 383,800

Investing Activities ₱0
 Financing Activities

Decrease in Notes Payable (₱ 30,000)

Net Change in cash (Operating +Investing +Financing) 353,800

Cash beginning balance ₱ 350,000

Cash ending balance ₱ 703,800

25
Activity Number 7. Assuming you will start a business next year, identify what
possible assumptions would you have on the accounts listed below by evaluating
whether the specific account balance applicable to your chosen business will increase or
decrease. Write a tick mark(/) on the corresponding column of your chosen answer. Then
write a brief explanation for your choice (Note: consider the pandemic effects on economic
activities). You may use the matrix provided. (10 points per account ; 60 total points)

Type of Business:________________________________________________
Account In De Explanation
crease crease

Sales

Operating expenses

Account Increase De Explanation

crease

Cash

Accounts Receivable
 Inventory

Liabilities

26
Rubric for Scoring Activity 1
Criteria Highly Competent Competent Fairly Competent Inadequate

10 points 8 points 6 points 4 points

Content All major points are Most of the major Some of the major No content
discussed. points are points discussed. (missed all
discussed. major points of
Communicates the Communicates the the content).
key ideas/themes/ Communicates the key ideas/themes/
findings with a high key ideas/themes/ findings with little Key
degree of clarity findings with clarity or insight. ideas/themes/
and insight consid erable findings are not
clarity, but lacks com municated
insight. clearly and/or
missed in the
analysis.

Develop Reveals high Critical thinking is Some critical think Ideas are vague
ment degree of critical weaved into points ing is present. with little
thinking. evidence of crit
ical thinking.

Grammar Output is free of dis Essay has few Most spelling, Spelling, punctua
and Me tracting spelling, spelling, punctua punc tuation, and tion, and
chanics punctuation, and tion, and grammati gram mar is grammati cal
grammatical errors. cal errors allowing correct, al lowing errors create dis
reader to follow ide reader to pro gress traction, making
as clearly. though essay reading difficult.

Budgets

A budget is a planned, written statement of a future course of action for a specific period of
time. In finance , budgets are normally expressed in quantitative terms (ex. Pesos, units or per
centages) and is sometimes referred to as a financial plan.

Advantages of Budgeting
Financial resources are properly apportioned.

Easy monitoring and control of financial resources.

Unnecessary spending is avoided, hence, profitability is improved.

Types of Financial Budget

The master budget is the sum total of the company’s budget that includes the allocation of funds to dif
ferent activities of the business.

Sales budget shows the planned sales of the business expressed in peso amount or number of units to
be sold.

Production Budget presents the number of units or products the business plans to manufacture or
make.

Expenditures budget details the anticipated expenses of the business.

27
Activity Number 8. Your parents are planning to give you your one-month’s worth allowance for
your school-related expenses. However, they would like to be assured that this allowance would be
properly spent. To convince your parents, you are going to prepare your personal cash budget fol lowing
the format given. (50 points)

My Personal Cash Budget

Amount of Allowance:___________________________
Expenses Amount Explanation/justification for the amount set
Rubric for scoring Activity 8
Criteria 10 points 7 points 4 points

Justification Reveals high degree of Critical thinking is Some critical thinking

crit ical thinking. weaved into points is present.

Expenses Identified 8 kinds of Identified 4-7 kinds of Identified 1-3 expenses.

ex penses ex penses.

Validity of amount Listed amounts per Listed amounts per Listed amounts per
ex pense is very ex pense is fairly ex pense is omewhat
realistic. realistic. real istic.

Calculations All amounts are 1-2 errors in the More than 3 errors
correctly calculated. calculation of the in the calculation
amounts. of
amounts.

Criteria 10 points 6 points 0 points

Savings Balance Savings balance is A certain amount is set No amount is set as

reasona bly set. as savings. sav ings.

Source:www.cdaschools.org/cms/lib07/ID01906304/Centricity/Domain/654/Budget%20Project%
20Rubric.pdf.

28

Module
II Module Learning Outcome : After finishing this Module you can apply
working capital management techniques in simulated busi
ness environments.

Topic Learning Outcomes :

At the end of the module discussion, you can ;
∙ Discuss the importance of working capital management.
∙ Apply the concepts of cash, marketable securities , receivable
and inventory management.
∙ Develop a working capital management plan.

Working capital management is an essential part of business management. We see business

organizations succeeding and able to withstand the test of times , while some fail and reduced to
bankruptcy. Accordingly, the four main reasons for unsuccessful business ventures are as follows;
 mismanagement, financing hurdles, ineffective business planning and marketing mishaps. It is necessary to
determine what are the factors that leads to business failures in order to prevent such from happen
ing. This is basically the main objective of working capital management; to ensure that the business has
enough and appropriate supply of resources for financing its needs.
Working capital man
Working capital is the source of a business’s funds Basic Concepts
to support its day to day operations. It is often used agement ensures that fund are sufficient
to pay inventory require ments and regular and efficiently used.
expenses such as wage and salary, utilities and the
like. Essential components of working capital
includes cash, accounts receivable and marketable
securities.

Working Capital Management

Working capital management involves the determination of the level, quality and ma
turity of each major current asset and current liability. It also refers to the administration and
control of current assets and current liabilities to insure that they are adequate and used ef
fectively for business purposes. Working capital simply refers to current assets while net
working capital is the excess of current assets over current liabilities. Working capital poli
cies of business organizations differ depending on nature and purpose of operations. How
ever, two basic questions are considered in setting such policies and these are: (a) What is the
appropriate level for current assets both in total and by specific accounts? and (b) How
should current assets be financed?

29
Activity Number 9. Look for the described
terms associated with working capital management
(see Table 1) in the word search figure presented be
low. Encircle the complete answer. Time Allotment :
10 minutes
Description of Terms

Effective and efficient administration and control of current assets

Current assets

Current assets minus current liabilities

 An estimate of cash inflow and outflow for a specific period.

The ease of converting current assets to cash

Current assets that are readily convertible to cash

Products that business are offering for sale

Short-term collectibles of a business

Ability of the company to generate income

The length of time it takes to recover investment in inventories back to cash.

30
Objectives of Working Capital Management
To ensure safety and liquidity of the organization’s
operations.
To maximize the profitability of the firm.

Activity Check : How did you find this activity? Did you have any difficulty? What did
you about this?

Factors Affecting Level of Current Assets

a) General nature of the business and product

b) Effect of sales pattern.

c) Length of the manufacturing process

d) Industry practices

e) Terms of purchases and Sales

Advantages of Adequate Working Capital

a) The company can settle its debts promptly thereby enabling it to maintain its good credit
standing.

b) Credit maybe extended to customers thereby increasing the sales volume of the firm. c)

Inventories can be readily replenished.

d) Current operating expenses are paid promptly.

e) Management and employee morale is enhanced.

f) Profitable opportunities can be taken advantage of.

Disadvantages of Inadequate Working Capital

a) The risk of business failure is increased.

b) The company may not be able to pursue its objectives because of lack of funds.

Disadvantages of excessive working capital

a) Management may become inefficient and complacent.
b) Management may be tempted to speculate.
c) Unnecessary expenses and extravagance may result.
d) Resources are not optimally employed.

31
REFLECTION TIME
Do you think working capital management can be applied in your personal finances?
In what way?
TASK 1. Argumentative Essay
You overheard a friend saying “ It is better to have more working capital than
what the business needs. After all the more assets you have, the greater profit awaits
your business”. Do you agree with your friend’s opinion? Justify your answer. (25
points).
_______________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
_____________________________________________________________________________________
____________________________________________________________________________________.

32
Rubric for Task 1
Source: https://www.scribd.com/document/388830709/english175-fall2011-short-essay-rubric-docx

Module
Cash Management
II
Cash management involves the maintenance of cash and
marketable securities investment level which will enable the com
pany to meet its cash requirement and at the same time optimize
the income on idle funds.

Activity Number 10. In the space below, create a word col

lage of ten words describing the importance of cash to
your personal life.
 33
Activity Check: Did you find the activity challenging? Why or why not?

Objectives of cash management:

To meet cash disbursements needs (payments schedule).
To minimize the funds committed to transactions and precautionary cash balances and;

To avoid misappropriation and handling losses in the normal course of business.

Managing Cash Flows
Management of cash flows starts with the determination of the appropriate level of cash and
cash equivalents a business has to maintain. This could be done through the following;

a) Preparing a Cash Budget

A cash budget is coordinated plan of cash flows and the resulting interim and final balances
based on a program of operations over a specific budget period.

Figure 1 Example of a Cash

 3
4
b) Preparing a Cash Break-even Chart

A cash break-even chart shows the relationship between the company’s cash needs and cash
sources. It indicates the minimum amount of cash that should be maintained to enable the
company to meet its obligations.

Figure 2 Example of a Cash Break-even Chart

Source: https://cdn.accountingnotes.net/wp-content/uploads/2016/06/clip_image014-7.jpg

C) Computing for the Optimal Cash Balance

 The optimal cash balance refers to the appropriate cash balance level a business
has to maintain considering availability and the opportunity costs of holding cash.

One of the models that can be used to help determine the optimal cash balance
is the “Baumol model”. This model balances the opportunity cost of holding cash
against the transaction costs associated with replenishing the cash account by sell ing
off marketable securities or by borrowing.

Baumol Model
of Cash Manage
ment

35

Techniques for lessening cash needs

a. Accelerating Collections

Accelerating collections can be done by;

• Prompt billing

• Offering trade and cash discounts

• Mechanical procedures such as enclosure of self-addressed return envelopes with the bill
to make it easier for the customer to mail payments.

• Maintenance of regional collection office.

• Customer making direct payments to the firm’s depository banks which reduces the time
required for a firm to receive incoming checks, to deposit them and get them cleared
through the banking system. Ex: payments to SSS premiums and BUSECO bills made to
their depository banks.

• Payment by wire. (Use of money transfer companies ex. Western Union) b.

Slowing disbursements

This can be done by;

• Centralized processing of payables

• Delaying payment

• Less frequent payroll

36
Illustrative Case 2
Kikay’s Butingting Shop is evaluating a special processing system as cash receipts acceleration
device. In a typical year, the business receives remittances totaling P7 million by check. The firm
will record and process 4,000 checks over the same time period. First National Bank has
informed the owner of Kikay’s that it will process checks and associated documents through the
special processing system for a unit cost of P0.25 per check. Kikay’s owner has projected that
cash freed by adoption of the system can be invested in a portfolio of near cash assets that will
yield an annual before-tax return of 8 %. The business uses a 365-day year in their procedures.

Requirement:
What reduction in check collection is necessary for Kikay’s Butingting Shop to be either bet
ter nor worse off for having adopted the proposed system?
How would your solution to (a) be affected if Kikay’s could invest the freed balances only at an
expected annual return of 5.5%?
SOLUTION:
Initially , it is necessary to calculate Kikay’s Butingting Shop (a) average remittance
check amount and (b) the daily opportunity cost of carrying cash.
The average check size is (S) ;
P7,000,000 / 4,000 = P1,750 per check
The daily opportunity cost of carrying cash is (i) ;
 365 = 0.0002192 per day
Next, the days saved in the collection process can be evaluated according to the
general format of

So,,,
P = (D) (S) (i)
25 = (D) (P1,750) (0.0002192)
D = 0.6517 days
Kikay’s Butingting Shop will therefore experience a financial gain if it implements the
special processing system and by doing so will speed up its collection by more than 0.6517
days. Here the daily opportunity cost of carrying cash is
0.055 / 365 = 0.0001507 per day

For Kikay’s Butingting Shop to break-even , should it choose to install the special processing sys
tem, cash collections must be accelerated by 0.9480 days as follows;

P0.25 = (D) (P1,750) (0.0001507)

D = 0.9480 days

37
REFLECTION TIME

How can you apply cash management techniques in your personal finances?

Task 2 Caselet Analysis (Note: A 365-day year is used for your case analysis)

Bukids Café is a solely-owned coffee shop with an average cash payments of

P5,000,000 annually. As the need arises, the owner, Jasper, resorts to borrowing cash
and pays an average fee of P80. The owner is planning to apply for a one-time big
time loan of P5,000,000 at the beginning of the year to avoid paying the fees every
time he borrows from lending institutions. However, he is also worried that he might
be hoarding too much cash for a long time and would missed earning an 8% return
on marketable securities investment. Jasper is asking for your opinion being a
Business Administration student. What advice can you give him? Provide numerical
data (computations) to support your point. You may use the space provided below.
 Bucky Veterinary Supply receives an average of P4,000,000 million payment by
checks annually. The owner, Mr. Doggie Chan plans to avail of a special processing
system offered by a local bank that caters the business’s check encashments of 2,000
checks which costs P0.15 per check. Mr. Chan projects that lessening the waiting time
for checks to be converted to cash would result to available cash for investment,
earning 5%. Should Mr. Chan avail of the special processing system? Justify your
answer with the necessary computations. You may use the space provided below.

38

Module Marketable Securities

Management
II

Marketable Securities management involves the determination of the appropriate short

term investment portfolio a firm has to maintain. Investment in marketable securities is an ide al
income-generating option for idle or unused cash in the business as these are securities that are
easily sold and converted back to cash.

Activity Number 11. Think of three words that

comes into your mind when you hear the term “ marketa
ble securities”. Then, briefly provide a justification or rea
son why you are relating such word to Marketable Securi
ties. You may use the space provided below.

1.

2.

3.

39

People or business organizations invest in Marketable Securi

ties because….

- it serves as a substitute for cash balances,

- it is considered as a temporary investment where a return is earned while funds are tem
porarily idle, and
- it is built up to meet known financial requirements such as tax payments, maturing bond
issue, etc.
 In choosing what kind of marketable Securities to invest in, consider the following factors;

1. Risk factors such as

Default risk – the risk that the issuer of the security can not pay the principal or the interest at
due dates.

Interest rate risk – the risk of declines in the market value s of the security due to rising inter
est rates.

Inflation risk – the risk that inflation will reduce the “real “value of the investment.

2. Maturity

3. Yields or returns on securities

4. Marketability (liquidity) risk

40
Illustrative Case 4
1 Mugsy Auto Supply has P2 million in excess that it might invest in marketable securi ties
. in order to buy and sell the securities, however, the firm must pay a transaction fee of P45,000.
2 Requirement:
3 Would you recommend purchasing the securities if they yield 12 % annually and are held
for;
4 One month?
5 Two months?
 6 Three months?
7 Six months
8 One year?
9 What minimum required yield would the securities have to return for the firm to hold
them for three months (what is the break-even yield for a three-month holding period)? 10
11 SOLUTION:
12 Here we must calculate the peso value of the estimated return for each holding period and
compare it with the transaction fee to determine if a gain can be made by investing in the secu
rities. Those calculations and the resultant recommendations follows;

13 Recommendation
14 Interest Earned Comparison to Fee Decision 1. P2,000,000(0.12)(1/12) =
P20,000 < P45,000 No
2. P2,000,000(0.12)(2/12) = P40,000 < P45,000 No
3. P2,000,000(0.12)(3/12) = P60,000 < P45,000 Yes
4. P2,000,000(0.12)(6/12) = P120,000 < P45,000 Yes
P2,000,000(0.12)(12 /12) = P240,000 < P45,000 Yes

Let (%) be the required yield. With P2 million to invest for three months we have;

P200,000 (%) (3/12) = P45,000

P200,000 (%) = P180,000
P200,000 (%) = P180,000/ 2,000,000
= 0.09 or 9%
The break-even yield therefore is 9%.

41
REFLECTION TIME

Do you think investment in marketable securities is possible only for big-time (ten thou
sands or hundred thousands ) investment? Why or why not?

Task 3 Caselet Analysis (55 points)

You are at a party hosted by a relative who just came from a ten-year work abroad.
You overheard him saying he has invested already in real properties such as residen tial
and farm lots, however he still has available cash (we’re talking about hundred
thousand figures here!) which he intends to add to his savings account in a local bank. Your el
der brother said that that is a wise decision since bank deposits are very safe investments. Being
a Business Administration student, you knew that safe investments gives lower returns, which
usually ranges from 1-2% interest per annum. In addition, you recently learned that a money
market security is being offered yielding an average of 5% per annum. How would you help
your relative make the best decision for his cash investment? Justify your argument with com
putations. You may use the space provided below.

42

Module
II
Receivable Management
 Receivable Management refers to the steps and processes involved in determining the ap
propriate credit policies for the business organization. It is primarily done to encourage sales and
gain additional customers by extending credit.

Specifically, it focuses on developing control measures on the areas of credit extension

and collection. Simply put, it answers credit – related questions such as; “Who should be given
credit?, “How much should be extended?”, “How do we ensure collection of receivables”, and
“What are the ways we can improve our credit policies?”.

Activity Number 12. Recall a particular experience

you’ve had which involves credit (either you were the lender
or the borrower, if none, you may interview a member of your
family. Then, write a brief description of the process you have
to go through in order to avail of the credit/loan. Use the
space below for your answer. Note: You don’t have to fill in all
the boxes, just use the necessary boxes depending on your an
swers.

My Credit Journey
STEP 1

STEP 2

STEP 3

STEP 4

43

In order to determine the appropriate Accounts Receivable policy a business

will adopt, the following factors must be considered;
 Credit standards
Credit terms
Collection program
Delinquency and default

Credit standards refers to the criteria on which credit granting is based. It answers
the question “Who should be given credit?” and “How much should be extended?”.
Credit terms is the agreed mode of payment and credit period while the collection program
details how and when collection is done. Lastly, delinquency and default policies determine
necessary actions in case of non-payment by the borrowers/debtors.

Summary of trade-offs in credit and collection policies

Trade -offs

Change in credit policy Benefits Cost

1. Relaxation of credit Increase in sales and total Increase in credit

standards contri bution margin. processing costs
Increase in collection costs
Higher default (bad debts)
costs
Higher capital
(opportunity) costs

2. Lengthening of Increase in sales and total Higher capital (opportunity

credit period contri bution margin cost of higher investment in
receiva bles.)

3. Granting cash discount Increase in sales and total Lesser profit

contri bution margin
Opportunity income on lower

4. Intensified Lower default costs(bad Higher collection expenses

collection efforts debts) Lower opportunity Lower sales
costs or capi

44
How do we make decisions whether to change credit policies or not? A simple way is to
compare additional profits and costs associated with the proposed changes. A summary is pre
sented below;

Additional profits More than Additional costs Change the credit policy
 Additional profits Less than Additional costs Retain the existing policy

In addition, if the proposed credit policy will result to a greater costs than the existing one,
then the best decision would be to continue with the present credit policy.

Illustrative Case 5 Changes in credit terms

Annie Jewelry Shop has 12% opportunity cost of capital and currently sells on terms n/20
(payment is due after 20days). Presently , the business processes an average of P 1,33,333,333
accounts on credit. It is now considering to offer terms of 2/10, (2% discount maybe given if
account is fully paid within 10 days) n/30 in order to reduce the collection period and would
decrease average receivables to P888,888. It expects 60% of its customers to take advantage of
the discount and the collection period to be reduced to 40 days. Annual sales is P10,000,000 of
which 80% is on credit.

Requirement: Should the company change its terms from n/20 to 2/10, n/30?

SOLUTION: Here, we will compare the costs associated with the present or existing and the
proposed credit policies as illustrate below;
Present Proposed
Opportunity cost (return on investment x average receivables):
Present (12% x P1.33m) P160,000 Proposed (12% x 0.888m) P106,667
Sales discount:
(P8m x 60% x 2%) ______ 96,000
TotalCosts P160,000 P202,667

45
Task 4 Caselet Analysis

Paris Clothing is a supplier of textile for local tailoring and dress shops operating
within the region. The business reports an average of P3,000,000 credit transactions in a year.
Presently credit term is at n/30 which results to an average accounts receivable balance of
P750,000 . The owner, Liliana plans to increase sales by offering a new credit term of 3/15,
n/40, hoping to reduce accounts receivable balance to P500,000. This would encourage early
payments for the discount and would give extra time for buyers to settle their payables to the
business. It is projected that 80% of the customers would avail of the discount . Opportunity
cost of

Module

II Inventory Management

Inventory Management refers to all activities conducted to ensure adequacy and quality
of inventory (planning ) and the subsequent control measures adopted to ensure its’ efficient
and effective use or disposal (controlling) . It is important to properly monitor inventories of
business organizations since excessive supply of inventories may result to wastage or obsoles
cence . On the other hand, lesser inventory supply may lead to missed sales and therefore lost
income.

46
Activity Number 13. Write down a word that you
can associate with inventory management that begins
with the letters in the word, INVENTORY. The first one is
done for you as an example.
 I I nventory

N N___________________

V V___________________

E E___________________

N N____________________

T T____________________

O O____________________

R R___________________

Y Y____________________

Inventory Planning
How do business decide when to order additional inventory or stocks of goods and how
many? This could be done by computing the Economic Order Quantity (EOQ) and the Reorder
Point.
Economic order quantity refers to the inventory order size (how many units or pieces per
order) where carrying cost (cost of maintaining the inventory) and ordering costs (expenses in
curred every time an order is placed) are minimized. It is computed as follows;

2 x annual demand x costs per unit

Carrying cost per unit

Where:
Total inventory costs = Total ordering costs + Total carrying costs
Total ordering costs = (Annual demand in units/ EOQ or order size ) x ordering
costs
Total carrying costs = Average inventory x Carrying costs per unit
Average inventory = EOQ or order size /2

Reorder point refers to the inventory level that determines reorder time. It is computed as;
Lead time Usage + Safety stock where
Lead time usage = inventory used while waiting for the replenishment (lead time
refers to the number of days or weeks before delivery of ordered inventory ar
rives).
Safety stock is the buffer stock or reserve stock , intended to provide allowances
in cases of delayed deliveries of inventory replenishment.

47
Illustrative case 6 Inventory Management
 Assume that a local gift shop is attempting to determine how many sets of wine glass
to order. The store feels it will sell approximately 800 sets in the next year at a price of P18
per set. The wholesale price that the store pays per set is P12. Costs of carrying one set of
wine glasses are estimated at p1.50 per year while ordering costs are estimated at P25.
Requirement:
a. Determine the economic order quantity.
Determine the annual inventory costs for the firm if it orders in this quantity.

SOLUTION:

2 x 800 sets XP25

EOQ =
P1.50

=163 sets or units per order

Total inventory costs =Total ordering costs + Total carrying costs

= (800/163)x 25 + 163/2 x P1.50
= P244.95
Illustrative Case 7 Inventory Management

Given the following inventory information and relationship s for the Baguio
Corporation; 1. Orders can be placed only in multiples of 100 units.
2. Annual unit usage is 300,000. (Assume a 50-week year in your calculations).
3. The carrying costs is 30% of the purchase price of the goods.
4. The purchase price is P10 per unit.
5. The ordering costs is P50 per order.
6. The desired safety stock is 1,000 units. (this does not include delivery time stock).
Delivery time is two weeks.

Given this information:

What is the EOQ?
How many orders will be placed annually?
At what inventory level should reorder be made?
SOLUTION:
EOQ = 3,162 units but since orders must be placed in multiples of 100 units, the effective EOQ becomes
3,200.
Number of orders
= 300,000/3,200
= 93.75 orders per year.
Reorder point
= Lead time usage + safety stock
= (300,000/50 weeks x 2 weeks ) + 1,000
= 13,000 units

48
 Inventory Control systems

Inventory control systems are procedures designed to avoid wastage of inventories

due to damage, obsolescence, and misuse. Some commonly used control systems are ; ABC
System, First-in, First-out (FIFO) System and Just In Time (JIT) System .

The ABC System classifies inventories into categories according to its importance. The
most valued inventories are classified as A and are strictly monitored and secured. Only lim
ited personnel are given access to such inventories. Stocks classified as C are of least im
portance and require lesser control and safeguarding measures, while B stocks are between
As and Cs. This system focuses on the degree of importance of the inventories as the basis for
control measures, thus, the more important is an item, the more safekeeping measures
applied.

First-in First-out (FIFO) system simply means that old stocks should be disposed or
sold first to avoid spoilage or obsolescence.

Just In Time (JIT) system is a Japanese-created inventory management system de signed

originally for automotive manufacturing firms. This system requires that inventory
replenishment will only be done when needed or “just in time” for its use.

TASK 5 Caselet Analysis

Peter Pan Bakery is a solely owned bakeshop with ten branches operating within the
province. The owner, Butch is contemplating on digitizing the business’s transactions spe
cially its inventory control system as the business continues to expand and increase its annu
al sales. The bakery purchases an average of 100,000 sets of baking materials ordered from a
supplier which requires P100 per order cost. Cost of maintaining the inventory is P2.50 per
set. Upon consultation with an Information Technology expert, the following information is
needed for the computerized inventory system;

Economic Order Quantity

Total Inventory Costs
Number of orders in a year
Lead time usage
Reorder Point

The owner asked you to assist him in the computation of the needed information above.
Also, he requested that you are going to prepare a one-paragraph short and brief explanation
of what the computed figures (a to e) means. You may use the space provided for your an
swers.
 49
Computations:

Explanations:

References:

(https://www.investopedia.com/articles/personal-finance/120815/4-most-common
reasons-small-business-fails.asp).
 50

Module Statement Analysis

Financial
III Module Learning Outcome : After finishing this Module you can;

∙ apply working capital management techniques in simulated business

environments.

∙ evaluate the financial health of sole proprietorship and partnership.

Topic Learning Outcomes ; At the end of the module discussion, you can ;

∙ Identify the different tools and techniques used in Financial statement analysis

∙ Explain the significance of Financial Statement Analysis

∙ Analyze financial statements using techniques.

∙ Interpret financial statement analysis results.

∙ Compare performance of existing business organizations .

∙ Assess desirability of existing business organizations in terms of financing and investing

INTRODUCTION
Financial statements are the means in which we can look into the financial health of a business organization as financial
statements contain important numbers and figures about the business and its operations. However, these numbers need to be
analyzed further to fully understand what it means. Financial statement analysis gives an –in depth look into the financial status
of organizations in order to provide stakeholders with information needed for decision-making.

Activity Number 14. WARM-UP !

Directions : From the puzzle below, look for at least ten (10) words related to financial statement analysis.
F K J R G D E A B G I P W

L L K E F D W J N D W U T

O M L F G P J K X C G O J
F E B C D E F G W O R
W N M W E G W L Y B E H T
U F C D B A I H K L M
A O B P B I N C O M E S T
N H G D F A A I D E R
N P O D Y J F O U T E U H
D J H F G H L O S S G
 A Q I T D L G S Y V G Z X M X C V E F G R F R A

L R T F Q R H T I O I A O B C E G A R E V E L L

Y S A H R H O T G P G C A S H F L O W Z X Y S T

S T R E N D A N A L Y

I U Q G C R A B C E F
51
S V A P A V E R A G A

Y W H P R O F I T A N

Financial Statement Analysis Tools

Comparative Statements

Comparative statements deal with the comparison of different items of the Income Statement, the
Statement of Financial position which is also known as the Balance Sheet and other financial re ports.
Determining these changes enables the management of the organization to identify whether these
changes are favorable or not to the firm. In addition, the sole proprietor or the partners can de vise
corrective actions in cases of unfavorable changes as determined in the comparative reports.

A. Comparative Income Statement

Comparative Income statements show the changes of the business’s results of operations over a
given period of time. An example is presented below;
Chelsea Garments

Comparative Income Statement for 2017 and 2018

2017 2018 Peso Change % of change

Sales P430,000 P403,000 P27,000 6.28%

Cost of sales 202,000 188,000 P14,000 6.93%

Gross Profit P228,000 P215,000 P13,000 5.70%

Total 142,000 134,000 P8,000 5.63%

expens es

Net Income P86,000 P81,000 P5,000 5.81%

B. Comparative Balance Sheet

Comparative Balance Sheets present the changes that occurred affecting the business organiza
tion’s assets, liabilities and equity accounts.
Chelsea Garments

Comparative Balance Sheet for 2017 and 2018

2017 2018 Peso change % of change

Assets:

Current P100,000 P120,000 P20,000 20%

Fixed (net of accumulated depreciation) 200,000 200,000 0 0%

 Liabilities:

Current P55,000 P60,000 P5,000 9.09%

Long-term 170,000 190,000 P20,000 11.76%

Chelsea , Capital P75,000 P70,000 P5,000 6.67%

Note:

To determine peso change, simply compare 2017 and 2018 accounts and compute the numerical difference.

To compute the percentage (%) of change, divide the peso change by the previous year balance (in our example that is
year 2017).

52
Common Size Financial Statements

Common Size financial statements are financial reports wherein each item is expressed in terms
of a percentage of a common base number. All percentage figures in a common-size balance sheet are
percentages of total assets while all the items in a common-size income statement are percentages of
revenues or net sales.

A. Common Size Income Statement

Common Size Income Statement indicates the percentages of the income statement components
Jacynthe Handicrafts

Common Size Income Statement 2018

Peso value Common-size

Sales P100,000 100%

Cost of sales 60,000 60%

Gross Profit 40,000 40%

Expenses 15,000 15%

Net Income P25,000 25%

B. Common Size Balance Sheet

Common Size Balance Sheets show the percentages of the asset, liabilities and equity or capital
Jacynthe Handicrafts

Common Size Balance Sheet 2018

Peso value Common-size

 Assets

Current P200,00 36.36%

Fixed 350,000 63.64%

Total P550,000 100%

Liabilities:

Current P100,00 18.18%

Long-term 250,000 45.45%

Total P350,00 63.64%

Jacynthe Capital P200,000 36.36%

Thoughts to ponder:

Analysis of financial statements can be done horizontally or vertically. Horizontal analysis

involves the comparison of accounts on a year to year basis (see comparative statements in the ex
ample) while vertical analysis compares data of financial statements for a single year (see common
–size statements).

53
Financial Ratios

Financial ratios shows the relationships of the income statement and statement of financial posi
tion accounts expressed in mathematical form. Common classification of ratios are as follows;

Liquidity ratios measure the business organization’s capacity to pay currently maturing
debts.

Asset management ratios evaluates the performance of the business organization in terms of
using total assets to generate income.

Profitability ratios analyze the performance of the business in terms of generating revenues
or income. Profitability ratios measure the business’s capacity to provide sufficient return
on sales, total assets or owner’s investment .

Solvency or Stability ratios determine the ability to pay off total debts and provides an over
all picture of the debt status of the sole proprietorship or partnership.

Commonly –used Financial Ratios

Ratios Formulas Interpretations LIQUIDITY RATIOS

Current ratio Current Assets /Current Liabilities Higher current ratio means more liquid as sets to pay off
current debts. “The higher,
 the better” rule applies.
Quick or Acid-test ratio Quick assets/ Current Liabilities Higher quick ratio means more liquid assets to pay off
current debts. “The higher, the
better” rule applies
ASSET MANAGEMENT
RATIOS
Average Collection Period Ave. Accounts Receivable Shorter average collection period means fast er cash
/*Daily Credit Sales inflows
Total Asset Turn-over Sales/Ave. Total Assets The faster the turn-over, the better,,,
Accounts Receivable Turn over Net Credit Sales/Ave. Accounts The faster the turn-over, the
Receivable better,,

Inventory Turn-over Cost of sales / Ave. Inventory The faster the turn-over, the better,,,
Fixed Assets Turn-over Sales/ Ave. Fixed Assets The faster the turn-over, the better,,, PROFITABILITY
RATIOS
Gross profit margin ratio Gross profit / Net Sales Higher gross profit ratio indicates a higher capacity of the
business to earn profit.
Return of assets (ROA) Net Income/ ave. Total Assets The higher the ROA, the better,, Return on
Equity(ROE) Net Income/ Owner’s Equity The higher the ROE, the better,,

SOLVENCY RATIOS
Debt Ratio Total Debt /Total Assets Higher debt to total assets means most of the assets of the organization
was financed
by outside creditors/funders.
Times Interest Earned Income before interest and tax / indicates company having diffi culty generating enough
Interest Expense cash flow to pay interest on its debt. Ideally, a ratio
Measures your ability to meet interest pay ment should be over 1.5
obligations with business income. Rati os close to 1
*Note: Daily Credit sales = annual credit sales / number of days in a year
54
MODULE TASK

Riley Pizzeria is a solely-owned pizza parlor operating within the locality. The proprietor,
Ms. Gianne, is thinking of selling the business as her family will be moving to another coun try for
good. Your family is contemplating on buying the business. However, some members of the family
are hesitant since the cost of capital is quite huge. Being a Business Administration student, you were
then tasked by the family to do an evaluation whether it would be a good idea to buy the existing
pizzeria.

The financial data of Riley Pizzeria is presented below as provided by the owner (all Balance
Sheet accounts are average balances and Riley Pizzeria uses a 360-day in a year in its accounting
computations) .
Sales (20% cash, P 3,300,000 Accumulated 1,230,000
80% credit) depreci ation
Cost of sales 1,980,000 Accounts payable 550,000
Selling expenses 650,000 Mortgage 500,000
payable long
term
Depreciation expense 230,000 Accrued expenses 50,000
Interest expense 80,000 Notes payable 160,000
long term
Taxes 140,000 Riley, Capital 1,490,000
(ending balance)
Cash 120,000
Accounts receivable 510,000
Inventory P 640,000
Prepaid expenses 30,000
Fixed assets 2,680,000

Requirement: Prepare a financial statement analysis , including your recommendation

whether to buy or not Riley Pizzeria. Please follow the format presented.

Reminders:

* You first have to prepare Riley’s Income Statement and Balance Sheet following the correct
format.

* Data in the “Actual’ column needs to be computed based on the information presented above

* Round off your computed ratios to the nearest two decimal places and label appropriately (
percentage, days or number of times).

* Content of the financial statement analysis would be as follows

Income Statement

Balance Sheet

Financial Statement Analysis report ( see format below)

Recommendation

55
 A. Income Statement (20 points)

B. Balance Sheet (20 points)

 56

Financial Statement Analysis Report ( 30 points)

___________________________________

(name of the business)

Financial Statement Analysis

Ratio Actual Indus
Interpretation/Analysis
try
Stand
ard
 Current ratio 1.50 or
1.50
:1

Quick ratio 1.0

Accounts receivable turnover 5 times

Average collection period 75 days

Inventory turn-over 2.5

times

Total Assets Turn-over 1 or

once

57
Fixed Assets
Turn-over
2 times
Gross profit margin 35% Return on assets

7% Return on equity 12% Times interest

earned 4 times Debt ratio 44%

58
Recommendation ( 20 points ) . Present your 2-3 paragraph recommendation ( whether to
buy or not Riley Pizzeria) based on the financial statement analysis report you prepared.
 59
Your output in the Module Task will be scored as follows;
Income Statement and Balance Sheet Preparation
 20 points 15 points 5 points 3 points 0 point

Financial state Financial Financial Financial No submission.

ment is correct, state ment is state ment is statement is
with no errors. correct, with correct, but incomplete.
few minor with many
errors. errors.

Source:https://www.rcampus.com/rubricshowc.cfm?sp=yes&code=JX8863C&

Financial Statement Analysis Report and Recommendation

30 points 20 points 15 points 10 points 0 point

Content Content is Content i s Content is not Content is No sub

com mainly accu comprehensiv incom pl et e, m missio
prehensive rate; major e and is aj or points are n.
and accurate; points are inaccu rate at not clear.
ratios are stat ed. times; most
presented maj or points
clearly. is ad

20 points 15 points 5 points 3 points 0 point

Recommenda Recommenda Recommenda Recommenda Recommendati No sub

tion tion is based tion is stated tion is not stat on does not missio
on accurate clearly but ed clearly and refer ence any n.
analy sis of not not supported of the data.
relevant supported by by the
data. the appropri ate
appropriate data.
data.

5 points 4 points 3 points 2 points

Grammar and No Minor Few gram N u me ro

Spelling grammar errors in matical and u s
and grammar spelling er grammatic
spelling and rors. al and
error spelling. spelling
errors.

Source:https://www.rcampus.com/rubricshowc.cfm?sp=yes&code=JX8863C&
 60
REFERENCES:
Aebi, V., Sabato, G. & Schmid, M. (2012). Risk management, corporate governance, and bank performance in the financial crisis.

Alexander, J. (2018) Financial Planning Analysis and Performance Management . Retrieved from https://www.pdfdrive.com/financial
planning-analysis-and-performance-management-d158295390.html
Anastacio, M.F., Dacanay, R.C., & Aliling, L.E. (2016). Fundamentals of financial management. Revised Ed. Rex Books Store Inc.

Cabrera, M. (2012). Financial management principles and applications. 2013 Edition GIC Enterprises & Co.

Higgins, R. (2016) . Analysis for Financial Management. Retrieved from https://www.pdfdrive.com/analysis-for-financial-management

d189487439.html

Guray,K.& Soner,G. Financial Management from an Emerging Market Perspective. Retrieved from https://www.intechopen.com/books/
financial-management-from-an-emerging-market-perspective
Kumar, R. (2017). Strategic Financial Management Casebook. Retrieved from https://www.pdfdrive.com/strategic-financial-management
casebook-d158131121.html

Matur, S. & Rangarajan, C. (2015). Financial Management : Theory and Practice. Retrieved from https://www.pdfdrive.com/financial
management-theory-and-practice-d176024808.html

Yoshino, N. (2015). Financial System Stability, Regulation, and Financial, Inclusion. Retrieved from https://www.pdfdrive.com/financial
system-stability-regulation-and-financial-inclusion-d157813853.html
Zopundis, C. & Galariotis, E. (2015). Quantitative Financial Risk Management: Theory and Practice. Retrieved from https://
www.pdfdrive.com/quantitative-financial-risk-management-theory-and-practice-d157990911.html
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