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Business Finance 01
Created @September 2, 2022 8:14 AM

Created by

Modified @October 13, 2022 9:39 AM

Class FINC 01

Instructor Marydith Boltiador-Orio

Synchronous https://meet.google.com/cib-jhsm-vvs?pli=1&authuser=1

Course Description:

deals with the fundamental principles, tools, and techniques of the financial
operation involved in the management of business enterprises

covers the basic framework and tools for financial analysis and financial
planning and control, and introduces basic concepts and principles needed in
making investment and financing decisions.

Introduction to investments and personal finance are also covered in the course

to explore all stages of the learning process from knowledge, analysis,

evaluation, and application to preparation and development of financial plans
and programs suited for a small business

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 Course Methodology

Course Requirements:

Grading System

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 Introduction to Financial Management
Understanding Finance

❗ There is NO universally accepted definition of Finance

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 Finance - science & art of managing money (cash, cash equivalents—treasury notes,
short-term notes, )

includes circulation of money, granting of credit, making of investments, & provision

of banking facilities (Merriam Webster)

the management of money, banking, investments, & credit (American Heritage Desk
Dictionary)

directly related to money or to a business activity that primarily deals with money
transactions

both science and art of correct application of the economic & accounting concepts &
principles that define the system, structure, & process of management, allocation, &
utilization of financial resources, investments, & expenditures

💡 The use of factual information in financial decisions and activities emphasizes

that finance is a science

As business practices change overtime, new financial theories are introduced

in the field of finance. Hence, finance is an art

Areas of Finance

Although there has no universally accepted standard regarding to

the areas of finance, Figure 1 provides a general perspective:

1. Public Finance - allocation of government income from (1) taxation or (2)

borrowings for expenditures based on the approved national or local appropriation
or budget

also known as fiscal administration

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 Primary agency —> Department of Finance (DOF)

Collections of tax are done through:

Bureau of Internal Revenue (BIR)

Bureau of Customs (BOC)

Local Government Units (LGUs)

Coordinates with other government agencies such as DBM,

BSP, SEC, NEDA, etc.

2. Private Finance - management of financial resources of private individuals &

organizations, including NGOs and GOCCs without original charters; priority is the
management of funds within the organization itself hand-in-hand with its corporate
social responsibility

a. Personal Finance - deals with management of personal resources of an

individual

💡 Resources refers to income, which inlcudes:

- Compensation
- Self-employed/Business
- Professional

b. Business Finance - handling & management of financial resources of a

business organization

3 types of business organizations:

1. Sole Proprietorship -business owned and operated by one individual

2. Partnership - contract between 2 or more persons to contribute assets to a

common fund, in pursuit of a business or profession, with the intention to divide
the profit among themselves

3. Corporation - artificial being created by operation of law, having the right of

succession and the powers, attributes, & properties expressly authorized by law
or incident to its existence

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 i. Financial Management

(also known as corporate finance) - deals with that decisions that are
supposed to maximize the value of shareholder’s wealth (Cayanan)

focuses on capital budgeting decisions —> acquisition of assets & its

corresponding financing scheme; maximizing value

❓ What should we acquire?

How should we acquire it?
How to manage an organization’s finances so as to maximize stock
value?

financial decisions will ultimately affect the markets perception of the company
and influence the share price

its goal is to maximize the value of shares of stocks

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 IOW: focuses on decisions involving (1) what asset to acquire, (2) how to acquire these
assets, (3) how to manage an organization’s finances so as to maximize stock value

💡 Managers of a corporation are responsible for making the decisions for the
company that would lead towards shareholder’s wealth maximization

ii. Capital Markets

involves the study of (1) different markets where interest rates, stock, & bond prices
are determined, and (2) different financial institutions involved in the supply of
capital/funds to individuals and businesses

💡 “Markets” - place where savers and users of funds meet

”Financial institutions” - organizations which provide financial services, e.g.
loan, credit, etc.

IOW: Determines the different markets and financial institutions involved in the
financial system, including their regulation

iii. Financial Investment - involves decisions concerning (1) stocks and (2) bonds and
their underlying activities:

1. Security Analysis —> valuation and pricing

2. Portfolio Analysis —> best structure of “baskets”

3. Market Analysis —> determining trends

4. Behavioral Finance —> investor psychology

❗ FINC01 wil only tackle on Business Finance — financial management,

capital market, and investments

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 💡 Finance functions as a separate field that operates closely with economics &
accounting

Economics - concerned with the efficient utilization of scarce resources to

satisfy human needs and wants

economic variables: price, demand, supply income, & expenditures

Accounting - language of both business and finance

an art of recording business transactions & deals with the preparation of

financial statements

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 ❗ Accounting: preparation of financial statements; Finance: analysis of financial
statements

Accounting: Accrual method; Finance: Cash Flow Method

Finance in a Business Organization

Business Organization Structure

There is no specific or rigid structure of a business organization;

there are at least 4 functional divisions in every organization:

1. Operations

2. Human Resources/Administrative

3. Finance

4. Marketing

💡 BOD —> CEO, COO, CFO —> managerial —> supervisor —> r-and-f

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 3 types of business organizations:

1. Sole Proprietorship -business owned and operated by one individual

2. Partnership - contract between 2 or more persons to contribute assets to a

common fund, in pursuit of a business or profession, with the intention to divide
the profit among themselves

3. Corporation - artificial being created by operation of law, having the right of

succession and the powers, attributes, & properties expressly authorized by law
or incident to its existence

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 Main Financial Goal
1. Shareholder Wealth Maximization

make decisions to maximize the long-run value of the stock’s value — create
shareholder’s wealth

must be done within ethical and legal boundaries

combination of (1) cash flows and (2) risks

💡 Decisions are evaluated based on financial consequences

Best case scenario: large cash flows, low risks = high stock price/value

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 Financial Markets and Institutions

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 💡 Financial institutions act as middlemen or intermediaries between two
persons in order to facilitate the transaction

Overview:

The Capital Allocation Process

Financial Markets

Financial Institutions

Stock Markets and Returns / Transactions

Stock Market Efficiency

How is capital transferred between Savers and

Borrowers
1. Direct Transfers - when a company sells its stocks or bonds directly to savers
rather than through a financial institution.

2. Indirect Transfers

a. Investment Banks - through investment bankers.

a financial institution that assists individuals and corporations in raising

capital through underwriting.

Underwriter - facilitates the issuance of securities.

The company sells its stocks or bonds to an investment bank, which

subsequently sells them to savers.

b. Financial Intermediaries - the intermediary receives funds from savers in

exchange for securities.

The intermediary utilizes this money to acquire and hold securities issued
by businesses, while savers hold securities issued by the middleman.

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 💡 Higher efficiency = higher ecconomy

The Capital Allocation Process

In a well-functioning economy, capital flows efficiently from those who supply capital
to those who demand it.

Suppliers of capital: individuals and institutions with “excess funds.” These groups
are saving money and looking for a rate of return on their investment.

Demanders or users of capital: individuals and institutions who need to raise

funds to finance their investment opportunities. These groups are willing to pay a
rate of return on the capital they borrow.

A saver refers to the one who deposit their money in bank, invest in
company share and pays premium to an insurance company with
objective to earn interest, dividend and profit.

However, a borrower just the reverse to saver. A borrower

borrowed the money from saver by financial market to fulfill their
need and need to effort the interest charge or give the dividend to
saver.

The capital allocation process can either be direct or indirect:

Direct:

these are transaction in which the business organization directly deals with
the savers (ex. ABC Corporation sells its stocks directly to DEF Corporation
and in turn receives cash) So this is a direct transaction because it is mainly
done by the business organization.

These are usually done by small firms that need to raise only little capital

Indirect:

these are transactions in which the business and the Savers do not meet but
the securities and funds are exchanged, and reaches the other through a
link; middleman, an intermediary which we call financial institutions. So these
institutions could either be an investment bank or financial intermediary.

Underwriters:
are those who help when a company is still having their initial public offering or
their IPO.

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 📌 When a private company first sells shares of stock to the public, this process
is known as an initial public offering (IPO). In essence, an IPO means that a
company's ownership is transitioning from private ownership to public
ownership

Market - venue where goods and services are exchanged

Financial market - place where individuals and organizations wanting to borrow funds
are brought together with those having a surplus of funds.

In financial market, buying and selling transactions occur and the type of transaction
involved determines what kind of Market it is. It is also determined by the nature of
Securities involved and the circumstances of the transaction.

Securities - refers to stocks and bonds or sources of capital

Types of Financial Markets

Physical assets vs. Financial assets
— Physical asset markets, often known as "tangible" or "real" asset markets, are for
commodities such as wheat, automobiles, real estate, computers, and machinery. In
contrast, financial asset markets deal with stocks, bonds, notes, mortgages, and
financial securities.

take note: with regards to financial transactions, you usually receive a document
that symbolizes or is proof of your stock bonds or notes (they prove the existence of
your stocks, bonds, and notes). Even though you receive something physical or
tangible, it is only a mere representation of your actual asset and your actual
financial assets are intangible

Spot vs. Futures

— the main difference of the two is time, when the asset is delivered
— Spot market refers to when assets are delivered on the spot or within a few
days, whereas futures markets are markets in which participants agree today to
buy or sell an item at some future date.
— Spot: is when the asset is delivered either on the spot or within a few days
— Futures: or futures transactions mean that the asset will be delivered at some
future time but the price is already agreed upon today.
— In the futures transaction — Although you have not yet received the asset, the
price is already decided beforehand and this is so, that you are not affected by the
risk in changing prices and this is called a hedging transaction.

Money vs. Capital

— the main difference or distinction is the length of the Securities involved; or
whether or not it is short-term or long term

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 — Money market refers to where instruments with high liquidity are traded and the
length of the securities involves short-term, while a capital market is where assets
are bought and sold for long-term.
— take note: although there is no strict definition or no strict rule in determining
what is short-term and long-term because some authors or it is a general definition
that short-term usually pertains to less than a year to a year and long term refers to
more than a year.

— In short term or long term: risk is affected by the time period, so the longer the
period, the higher the chance of not being paid.

Primary vs. Secondary

Primary market are the markets in which corporations raise new

capital and are when securities are still initially issued, while
secondary markets are when securities are no longer freshly
issued by the corporation but have already been issued but
resold by the owner of the securities and traded among
investors.

— Primary market is when your security is still initially issued and the Issuer is the
seller of the Securities
— Secondary markets: the Securities are no longer freshly issued by the
corporation but have already been issued but resold by the owner of the securities
— Key takeaway: in a primary transaction, the corporation is directly involved (it is
considered a direction section)

Private vs. Public

— Public market involves the exchange of securities over the counter with any
investor and traded in standard exchanges. On the other hand, in a private market,
refers to those transaction that are not done in public setting where there is no need
to use facilities or the services of a financial institution or intermediary, and this is
usually done for simple loans.
— Private: refers to those transaction that are done in private markets where there
is no need to use facilities or the services of a financial institution or intermediary,
and this is usually done for simple loans.
— Public: is usually done for stocks and bonds which are traded in standard
exchanges such as the Philippine Stock Exchange. So, the transactions in public
are regularly recurring and they occur almost every day.

DISTINCTIONS BETWEEN PRIMARY AND

SECONDARY MARKET

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 Primary Market Secondary Market

Seller Issuing Corporation Existing Investor

Parties Involved Issuer and Investor Two Investors - one existing, one potential

Proceeds To the issuing corporation To the selling investor

Securities New Preowned

IMPORTANCE OF FINANCIAL MARKETS

Well-functioning financial markets facilitate the flow of capital from investors to the
users of capital.

Markets provide savers with returns on their money saved/invested, which

provide them money in the future.

Markets provide users of capital with the necessary funds to finance their
investment projects.

— the better the market, the faster these transactions are. the better the
market, the higher the returns of savings

Well- functioning markets promote economic growth

Economies with well-developed markets perform better than economies with poorly-
functioning markets

Why are financial markets essential for a healthy economy and

economic growth?

— A well-developed and smoothly operating financial sector plays an important role in

increasing a country's economic growth efficiency. A healthy economy is based on
efficient funds transfers from net savers to enterprises and individuals in need of
capital. Basically, the economy could not function without efficient transfers.
Additionally, well-functioning financial markets help in the efficient direct flow of savings
and investments in the economy which promotes the accumulation of capital and
contribute in the production of goods and services. Therefore, it is crucial that
financial markets run efficiently—not only promptly, but also inexpensively.

What are derivatives? How can they be used to reduce

or increase risk?
A derivative security’s value is “derived” from the price of another security (e.g.,
options and futures)

Can be used to “hedge” or reduce risk. For example, an importer, whose profit falls
when the dollar loses value, could purchase currency futures that do well when the
dollar weakens.

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 — Basically, in derivatives, this is where you are betting your money on the direction of
future stock prices, interest rates, exchange rates, and commodity prices. Since you are
betting, if you guess right, you can produce high returns, if you guess wrong, then you
can also incur large losses. This is why derivatives can increase risk

Also, speculators can use derivatives to bet on the direction of future stock prices,
interest rates, exchange rates, and commodity prices. In many cases, these
transactions produce high returns if you guess right, but large losses if you guess
wrong. Here, derivatives can increase risk.

— Derivatives are financial instruments whose values are generated from other assets
such as stocks, bonds, or foreign exchange. The value of a derivative security is
"derived" from the price of another security, such as options and futures. Derivatives can
be used to "hedge," or minimize risk, and to protect against the risk of an asset's
adverse move, or to speculate on future movements in the underlying instrument. In
essence, derivatives are bets on the direction of future stock prices, interest rates,
currency rates, and commodity prices. Because one is betting, they can earn significant
returns if they estimate correctly, but they can also incur large loses if they guess
incorrectly. Derivatives can increase risk in this way.

FINANCIAL INSTITUTIONS
Functions:

1. provision of financial services

2. performance as an intermediary

— when there is a financial institutions, there is an indirect transaction hence when that
organization acts as a middleman where money is transferred from one person to
another, that is a financial institution because it facilitates the transfer of funds

THE TYPES OF FINANCIAL INSTITUTIONS

Investment Banks

Commercial Banks

Financial Services Corporations

Pension Funds

Mutual Funds

Exchange Traded Funds

Hedge Funds

Private Equity Funds

etc.

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 1) Traditionally, investment banks assist companies in raising capital and specialize
in providing services designed to facilitate corporate operations, such as capital
expenditure financing and equity offerings, including initial public offerings (IPO).
2) Commercial banks are the traditional “department stores of finance” because
they serve a wide range of savers and borrowers.
3) Financial services corporations are large conglomerates that combine a variety
of financial institutions into a single corporation. Most financial services companies
began in one area and have since expanded to encompass the majority of the financial
spectrum.
4) Pension funds are retirement plans funded by corporations or government
agencies for their employees and primarily handled by trust departments of commercial
banks or life insurance companies.
5) Mutual funds are corporations that accept money from depositors savers and
invest it in these funds stocks, long-term bonds, or short-term debt instruments issued
by businesses or governments.
6) Exchange-Traded Funds (ETFs) are investment funds that hold assets such as
stocks, commodities, bonds, or foreign currency. An exchange-traded fund, like a
mutual fund, is a pooled investment fund that provides an investor with an interest in a
professionally managed, diverse portfolio of investments.
7) A hedge fund is a limited partnership of private investors whose money is
managed by professional fund managers that use a variety of strategies to produce
above-average investment returns, such as leveraging or trading non-traditional assets.
8) Lastly, private equity companies are organizations that function similarly to hedge
funds, except instead of purchasing a portion of a company's shares, private equity
players buy and then manage entire firms.

STOCK MARKET TRANSACTIONS

What are the two leading stock markets? Describe the two basic types of stock
markets
There are a number of different stock markets. The New York Stock Exchange
(NYSE) and the National Association of Securities Dealers Automatic Quotation
System (NASDAQ) are the two leading stock markets.

Stocks are traded using a variety of market procedures, but there are two basic types:
(1) physical location exchanges, which include the NYSE and several regional stock
exchanges and this exchanges are tangible entities. The second basic type is (2)
electronic dealer-based markets, which include the NASDAQ, the less formal over-
the-counter market, and newly established electronic communications networks.
Although most large firms' equities trade on the NYSE, a higher number of stocks trade
off the exchange in what is known as the over-the-counter (OTC) market.

Apple decides to issue additional stock with the assistance of its investment banker.
An investor purchases some of the newly issued shares. Is this a primary market
transaction or a secondary market transaction.

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 — Since new shares of stock are being issued, this is a primary market transaction

What if instead an investor buys existing shares of Apple stock in the open market.
Is this a primary or secondary market transaction?

— Since no new shares are created, this is a secondary market transaction

An initial public offering (IPO) occurs when a company issues stock in the public
market for the first time. (this usually happens in two situations, (a) when the
corporation is newly created, and (b) when the corporations cease to be a closely
held corporation and becomes a public corporation). “Going public” enables a
company’s owners to raise capital from a wide variety of outside investors. Once
issued, the stock trades in the secondary market.

Public companies are subject to additional regulations and reporting requirements.

When a corporation issues stock in the public market for the first time, the company is
said to be going public.  The market for newly issued or offered stock is known as the
initial public offering (IPO) market. This usually happens in two situations, (a) when
the corporation is newly created, and (b) when the corporations ceases to be a closely
held corporation and becomes a public corporation.
— Since initial public offering (IPO) occurs when a company issues stock in the public
market for the first time, we can say it is a primary market transaction, because primary
transactions refers to one that is between the issuing corporator and the investor or
public in general.

STOCK MARKET EFFICIENCY

Market price: is the price derived by investors when they are basing it off on perceived
information.
Intrinsic price: is the price derived by investors when they have true information or
when they have all information available about a certain stock or company.
Equilibrium: is the phenomenon or the point at which market price equals intrinsic price
and this remains stable until new information comes in.

Securities are normally in equilibrium and are fairly priced

Investors cannot “beat the market” except through good luck or better information

Efficiency continuum - which tells us small companies are highly inefficient while
large companies are highly efficient

What does it mean for a market to be efficient? Explain why some stock prices
may be more efficient than others.
Answer:
Market efficiency is the ability of markets to contain information that offers the maximum
number of opportunities for traders to buy and sell assets without incurring additional
transaction costs. When markets are efficient, investors can purchase and sell equities
with confidence that they are getting fair value. When markets are inefficient, investors
may be scared to invest and may place their money "under the pillow," resulting in poor

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 capital allocation and economic stagnation. Thus, market efficiency is beneficial from an
economic aspect. Furthermore, the stock market for some firms' stocks is highly
efficient, whereas the market for other companies' stocks is highly inefficient. The size
of the company is the most important factor—the larger the company, the more analysts
tend to watch it, and thus the faster new information is likely to be reflected in the stock
price.

IMPLICATIONS OF MARKET EFFICIENCY

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 BEHAVIORAL FINANCE: POSSIBLE IMPLICATIONS
FOR MARKET EFFICIENCY
It is costly and/or risky for traders to take advantage of mispriced assets

Cognitive biases cause investors to make systematic mistakes that lead to

inefficiencies. This is an area of research know as “behavioral finance.”

Behavioral finance borrows insights from psychology to better understand how

irrational behavior can be sustained over time. Some examples include:

— Evaluating risks differently in up and down markets.

— Investors become “anchored” to certain viewpoints, and fail to optimally respond to
new information that conflicts with their existing views.
How does behavioral finance explain the real-world inconsistencies of the
efficient markets hypothesis (EMH)?
Answer:
One of the pillars of modern finance theory is the efficient markets hypothesis (EMH). It
implies that asset prices are roughly equal to their intrinsic values on average. The
reasoning behind the EMH is simple. If a stock's price is "too low," rational traders will
seize the opportunity and buy the stock, pushing prices up to the appropriate level.
Similarly, if prices are "too high," rational traders will sell the stock, bringing it back down
to its equilibrium level. Proponents of the EMH argue that these forces prevent prices
from being systematically incorrect. Although the logic behind the EMH is compelling,
many events in the real world appear to contradict the hypothesis, spawning a growing
field known as behavioral finance. Instead of assuming that investors are rational,
behavioral finance theorists use psychological insights to better understand how
irrational behavior can be sustained over time.

Financial Statement Analysis (FSA)

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 Analyzing financial statements involves evaluating:

1. Liquidity - capacity to pay short term obligations (currently maturing obligation)

💡 Company has enough current assets to settle for its current liabilities

2. Profitability - ability of an entity to produce profit (more revenues over

expenses)

3. Solvency - capacity to pay long term obligations (will mature more than 12
months from the reporting period)

Standards for Comparative Analysis

Comparisons can be made on a number of different bases:

1. Intracompany basis - comparison between an item or financial relationship in

the current year with the same item or FR in one or more prior years; useful in
detecting changes in FRs and significant trends

2. Industry averages - compares an item or FR with industry averages or norms

published by financial ratings organizations; provide info as to an entity’s
relative performance within the industry

3. Intercompany basis - compares an item or FR of one entity with the same item
or FR in one or more competing entities; useful in determining an entity’s
competitive position

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 1. Horizontal Analysis - also known as Comparative Analysis or common size or
trend analysis

to determine the increase or decrease that has taken place

expressend in amount or percentage.

base = 100%

Triangle % = Change in percent

Trend Analysis = Current Period Amount divided by
Base Period Amount (earliest year) x 100%

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 2. Vertical Analysis

3. Ratio Analysis

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 focus 1-4

Current assets and Current Liabilities

❓ Is the total current assets enough to settle the total current liabilities?

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 expressed in peso

describes the amount of capital used to run day-to-day business operations

is necessary to finance an entity’s cash conversion cycle - process by which an

entity converts cash into products and then back to cash again

measure of the liquid resources that management will control in the short term

Low = insufficiently liquid; have problems meeting current debt obligations

Very high = ineffective management since current assets seldom yield returns as
great as long-term assets

💡 Firms should seek to maintain working capital levels that provide sufficient
current assets to meet short-term debt BUT in which current asset accounts
are not so excessive that overall entity profit margins suffer.

expressed in decimal

used to evaluate an entity’s liquidity and short-term dept paying capacity

higher ratio = increased ability to pay short-term debt obligations

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 lower ratio = inability to meet short-term debt obligations (could lead to insolvency
and bankruptcy)

💡 Historic rule of thumb = healthy current ratios equal or exceed 2.0

HOWEVER, very high current ratios exceedingly of 2.0 can indicate that the
entity is not using its assets in an ideal manner

❗ Window dressing demonstrates that limiting an analysis to too few statistics,

relying on arbitrary rules of thumb, and not understanding the limitations
behind the calculation of a ratio are pitfalls that should be carefully avoided

Acid-Test Ratio

tells whether the entity could pay all its current liabilities even if none of the
inventory is sold

Quick Assets - those that may be converted directly into cash within a short period
of time

include cash, trading investments and receivables

excluding inventory and prepaid expenses

Net Receivables - NRV after deducting ADA (allowance for doubtful accounts - contra
asset)
Marketable securities - maturity is more than 3 months but less than 12 months

💡 Rule of thumb = at least 1:1 is satisfactory

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 Leverage (amount of debt used by a firm) or Debt Management Ratios

focus on debts (liabilities) and equity (owner’s investments)

Capital Structure - how the firm is financed by (1) debt and (2) equity; correlate
with Assets = Liabilities + Equity

❓ Is the equity enough to meet its liabilities?

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 if closest to 1 = most are financed by the owner

if more than 1 = some portion of the total assets are financed by the creditors

much better the TE is greater than TL

if less than 1 = TE is greater than TL (good)

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 if more than 1 = total liabilities is greater than total equity (not good)

expressed in decimal

shows the percentage of assets financed by debt

higher = has financed a large portion of assets with debt

if increase = creditor risk increases; greater the risk that the entity will be unable to
meet its obligations when due

100% - Equity Ratio

higher equity ratio, the better and favorable for the business

100% - Debt Ratio

❗ Debt Ratio + Equity Ratio = 1 or 100%

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 EBIT = Operating income

higher ratios = healthy entities generating high income that employs little or no debt

if increase = typically less risk to creditors

lower ratios = highly leveraged firms with significant interest expense that generate
small income

if decrease = creditor risk increases

Measuring the Ability to Sell Inventory and Collect

Receivables
Asset Management - ability if the company to utilize its assets

how efficient the business operations are

how the business manages its asssets, particularly in generating cash

Turnover ratios are primarily used to measure operational efficiency

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 how fast the business collect from credit customers

indicates the number of times that the average balance of AR is collected during the
period

emphasize NET CREDIT SALES (ge utang)

Cash Sales vs Credit Sales

Average AR must be NRV (no ADA)

higher = more successfully the business collects cash

❗ If turnover is too high, may indicate that credit is too tight, causing the loss of
sales to good customers

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 also called as Average Age of Receivables

the higher the AR turnover, the better

💡 General rule: Collection period should not materially exceed the credit period

high = relative ease in selling inventory

high = generally increase profitability

❗ However, a high value can mean that the business is not keeping enough
inventory on hand, and thus may result to lost of sales

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 also called Average Age of Inventory

length of time it takes to acquire, sell, and replace inventory

the shorter period, the better

the higher the IT, the better

Operating Cycle - ave. time period between buying inventory and receiving cash
proceeds from its sales

determined by ASP + ACP

opposite of AR Turnover

Cash Purchases vs Credit Purchases

if lower AP turnover = will give time to the business to pay (good indicator)

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 if it’s negative, favorable

if it’s positive, unfavorable

include both Cash & Credit sales

NFA = after deducting the depreciation

if lower, then the fixed asset is not frequently use (may dispose or buy a new one)

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 focus on the IS

how efficient the business generate revenue

measure the financial performance of the business

expressed in percent

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 higher the income, the better

Net income is after interest and tax

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 turnover is frequency unsa kapaspas, while return is basically pila ma earn

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