Topic 1

Financial manager - is the one who is directly involved in making business decisions,
particularly on a day to day basis. He/she represents the interests of the owners and makes
important decisions on their behalf.

Chief Financial Officer (CFO) -who coordinates the activities of a treasurer and a controller.

Controller’s office -handles cost and financial accounting, tax payments, and management
information systems or data processing.

Treasurer’s office-is responsible for managing the firm’s cash and credit, financial planning, and
capital expenditures.

Financial Manager (3 fundamental questions)

1. Capital Budgeting - the process of planning and managing a firm's long-term investment.
- evaluating the size, timing, and risk of future cash flows is the
essence of capital budgeting.
- What long term investment should the firm take on?

Cash flow generated by an asset > cost of asset

Example: A large retail store like S&R deciding whether to open another store in Batangas City
is an important capital budgeting decision to be made by the Financial Manager. Why? Because
it is a long term investment that involves the construction of a new building, purchasing the
equipment and many more non-current assets.

2. Capital Structure- It is a specific mixture of debt and equity maintained by a firm to

finance its operations. 
- Where will the firm get the long-term financing to pay for the
investment?

Example: The total capitalization that a firm needs is P10M. The owners’ total contribution is
P6M only, so they need to borrow P4M from creditors. In this case, the capital structure of the
firm is 60% equity and 40% debt.

3. Working Capital Management- Working capital refers to a firm’s short term assets, such
as inventory, and short term liabilities, such as money owed to suppliers. 
- How will the firm manage its everyday financial activities
such as collecting from customers and paying suppliers?

Topic 2 : 3 Different Legal Forms of Business

Organization

1. Sole Proprietorship - the simplest and most common type of business structure
- This form of business organization is used by businesses that are
owned and managed by one primary individual.

Advantages Disadvantages
Easiest to start Limited to the life of the owner
Least regulated Equity capital is limited to the owner’s wealth
The single-owner keeps all the profits Unlimited liability
Taxes once as personal income Difficult to sell the ownership interest

2. Partnership - this form of business organization is similar to a sole proprietorship,

except for the number of owners.
- The partnership is a business formed by two or more individuals
or entities. 
- There are two types of partnerships, general partnership, and
limited partnership.
General partnership - all owners also called general partners share in
gains or losses of the business. The way a partnership gains and losses are
divided is described in the partnership agreement. The unlimited liability
applies to all partners in a general partnership.
 Limited partnership - one or more general partners will run the business
and have unlimited liability. However, there will be one or more limited
partners who will not actively participate in the business. The limited partner’s
liability for business debts is limited to the amount of his/her contribution to the
partnership. Limited partners cannot be involved in the business or else they may
be deemed as general partners.

Advantages Disadvantages
Two or more owners Unlimited liability (general and limited)
Partnership dissolves when one partner dies or
More capital available
wishes to sell
Relatively easy to start Difficult to transfer ownership
Income taxed once as personal income

3. Corporation - the most important form of business organization, in terms of size, in

the Philippines, and other countries.
- It is considered as a legal “person” separate and distinct from its
owners. 
- It has many of the rights, duties, and privileges of an actual
person. 
- Corporations can borrow money and own property, can sue, and
be sued, and can enter into a contract.

Stockholders - elect the board of directors, who then select the

managers. In principle, they control the corporation because they elect the
directors.
Managers - are in-charged of running the corporation’s affairs in the
stockholders’ interests. 

Advantages Disadvantages
Separation of ownership and management
Limited liability
(because of double taxation)
Double taxation – income taxed at the
Unlimited life corporate rate and then dividends taxed at the
personal rate
Separation of ownership and management
(corporate debts)
Transfer of ownership is easy
Easier to raise capital

Topic 3: The Goal of Financial Management

 The clarity of financial management goals is important because it leads to an objective
basis for making and evaluating financial management decisions.

Goals of FinMan:
 profit maximization
 maximize the current value per share of the existing stock.
 maximize the market value of the existing owners’ equity.
Sarbanes-Oxley - an act to ensure more accurate disclosure of financial
information to investors. The act mandates that accountants conform to regular
accounting standards when preparing s firm’s financial statements and that auditors take
their auditing role seriously. (Madura, 2014, p. 239)
Sarbox - is intended to protect investors from corporate abuses.
- makes company management responsible for the accuracy of the
company’s financial statements

Topic 4: The Agency Problem and Control of The

Corporation
 
AGENCY RELATIONSHIPS
agency relationship - The relationship that exists between stockholders (company owners) and
management (financial manager).  The relationship starts when someone (the principal) hires
another (the agent) to represent his or her interests.

agency problem - conflict of interest 

MANAGEMENT GOALS
Agency cost - refers to the cost of the conflict of interest between stockholders and
management.

CONTROL THE FIRM

Proxy fight -  an important mechanism by which unhappy stockholders can act to replace
existing management

 STAKEHOLDERS
A stakeholder is someone other than a stockholder or creditor who potentially has a
claim on the cash flows of the firm. Such groups will also attempt to exert control over the firm,
perhaps at the expense of the owners.

Topic 5: Financial Markets and the Corporation

Financial market - market in which financial assets (securities) such as stocks and bonds can be
purchased or sold. It facilitates the flow of funds and thereby allow financing and investing by
households, firms, and government agencies.

Cash Flows to and from the Firm

Suppose we start with the firm selling shares of stock and borrowing money to raise
cash. Cash flows to the firm from the financial markets (A). The firm invests the cash in current
and fixed assets (B). These assets generate cash (C), some of which goes to pay corporate
taxes (D). After taxes are paid, some of this cash flow is reinvested in the firm (E). The rest goes
back to the financial markets as cash paid to creditors and shareholders (F).

Primary Versus Secondary Markets

Primary market - refers to the original sale of securities by governments or
by corporations. 

Secondary markets are those in which these securities are bought and sold
after the original sale.

Dealer markets in stocks and long-term debt are called over-the-counter

(OTC) markets.

Auction markets differ from dealer markets in two ways. First, an auction

market or exchange has a physical location (like PSE). Second, in the
dealer market, most of the buying and selling is done by the dealer. The
primary purpose of an auction market, on the other hand, is to match those
who wish to sell with those who wish to buy.

MODULE 2
LIQUIDITY RATIO
The primary liquidity ratio is the current ratio, which is calculated by dividing
current assets by current liabilities

Quick ratio which measures the firm’s ability to pay off short-term obligations
without relying on the sale of inventories, is important.

ASSET MANAGEMENT RATIOS

Inventory Turnover Ratio As the name implies, these ratios show how many
times the particular asset is “turned over” during the year. 
Accounts receivable are evaluated by the day sales outstanding (DSO) ratio, also
called the average collection period (ACP).

The fixed assets turnover ratio, which is the ratio of sales to net fixed assets,
measures how effectively the firm uses its plant and equipment

The final asset management ratio, the total assets turnover ratio, measures the
turnover of all of the firm’s assets; and it is calculated by dividing sales by total
assets

DEBT MANGEMENT RATIOS

 Total Debt to Total Asset
The ratio of total debt to total assets generally called the debt ratio, measures the
percentage of funds provided by creditors. Creditors prefer low debt ratios
because of the lower the ratio, the greater the cushion against creditors’ losses
in the event of a liquidation.

Times Interest-Earned Ratio

The ratio of earnings before interest and taxes (EBIT) to interest charges; a
measure of the firm’s ability to meet its annual interest payments. The times-
interest-earned (TIE) ratio is determined by dividing earnings before interest and
taxes (EBIT in Table 3.2.1) by the interest charges

Profitability ratios
Profitability ratios are a group of ratios that show the combined effects of
liquidity, asset management, and debt on operating results.
Operating Margin The operating margin, calculated by dividing operating income
(EBIT) by sales, gives the operating profit per dollar of sales
Profit Margin The profit margin, also sometimes called the net profit margin, is
calculated by dividing net income by sales.
Return on Total Assets Net income divided by total assets gives us the return on
total assets (ROA)
 Basic Earning Power (BEP) Ratio This ratio indicates the ability of the firm’s
assets to generate operating income. The basic earning power (BEP) ratio is
calculated by dividing operating income (EBIT) by total assets
Common Return on Equity (ROE) The ratio of net income to common equity, it
measures the rate of return on common stockholders’ investment. ROE is the most
important, or bottom-line, accounting ratio

Market Value Ratios