BOBADILLA [FINANCE 2 PRELIMINARY REVIEWER]
CHAPTER 1 - THE FINANCE FUNCTIONS
PRIMARY GOALS OF A BUSINESS CONCERN
To earn profit
EARNINGS PER SHARE- refers to how much net income is earned
for every share of capital stock outstanding
To increase its own value as an economic entity
GROWTH - measured in terms of increase in assets that
appreciate in value, improved production capacity accompanied by
increase in owner's equity
STABILITY - ability to weather the ups and downs in the
economy or its ability to continue operations despite anticipated
risks in the business
OWNER'S EQUITY- difference between total assets and
total liabilities of an entity (net assets or Net asset value)
To improve the quality of life in the community (social
responsibility)
MULTIPLIER EFFECT OF A BUSINESS IN A COMMUNITY-
refers to the chain effects of business
FINANCE - art and science of managing money
BUSINESS FINANCE - art and science of managing the financial
resources of a business
FUNCTIONS OF BUSINESS FINANCE
allocation of financial resources - funds are channeled to activities
that are considered profitable and/or will increase the value of a
business itself
Procurement of funds - making the funds available at the lowest
cost when it is needed
Efficient and effective utilization of financial resources - financial
resources are actually being used for what they have been
intended
PORTFOLIO - brief case that is normally being used in carrying
business papers and documents
INVESTMENT PORTFOLIO - aggregate of assets held as
investments by an organization or individual
FINANCIAL MANAGER PRIMARY ACTIVITIES
financial planning and analysis
Managing the firm's assets
Managing the firm's liabilities and owner's equity
CONTROLLER internal financial affairs
TREASURER external financial affairs
WORKING CAPITAL - amount of long-term capital that is made to
revolve in conducting operations
FINANCIAL DECISIONS - require knowledge of economics, COST-
BENEFIT ANALYSIS is applied
CHAPTER II - ORGANIZING A BUSINESS
ENTREPRENEURSHIP- refers to an individual's undertaking
whereby he invests his money in a business which he manages
STAGES OF PROMOTION
PROMOTION - refers to the activities involved in making a
business ready to operate
PROMOTERS - Individuals who undertake the activities in
organizing a business until it becomes operational
1. DISCOVERY - finding business opportunity and conducting
investigation to determine whether it should be undertaken or not
2. FINANCING - procurement of initial capital that the proposed
business requires to be able operate profitably
3. ASSEMBLING - stage where all the factors required for viable
business operations are made available in their optimum
combination
PROJECT FEASIBILITY STUDY - is a thorough and systematic
analysis of all factors ascertain the viability of an undertaking
FORMS OF BUSINESS ORGANIZATIONS
SOLE PROPRIETORSHIP - there is only one owner (proprietor)
PARTNERSHIP - association of two or more persons who bind
themselves to contribute money, property, or industry to a
common fund, with intention of dividing profits among
themselves
ARTICLES OF CO-PARTNERSHIP - contract between the partners
CLASSIFICATION OF PARTNERSHIPS (Based on object/scope of
subject matter)
1. UNIVERSAL PARTNERSHIP - contribution by partner of all
present property or of all profits
UNIVERSAL PARTNERSHIP OF ALL PRESENT PROPERTIES - refer to
all the properties that actually belong to each of the partners at the
time the partnership is formed and divide among themselves as
well as the profits that they may acquire
UNIVERSAL PARTNERSHIP OF ALL PROFITS- refers to all profits that
the partners may acquire by their industry or work during the
existence of the partnership
2. PARTICULAR PARTNERSHIP - its objects are determinate
things, their use or fruits, or a specific undertaking, or the existence
of a profession or vocation
CLASSIFICATION OF PARTNERSHIPS (Based on object/scope of
subject matter)
1. GENERAL PARTNERSHIP- all partners are general partners
2. LIMITED PARTNERSHIP - partnership having one or more
general partners and one or more limited partners
CLASSIFICATION OF PARTNERS
1. CAPITALIST PARTNER - contribute money or property
2. INDUSTRIAL PARTNER - contributes his work, labor or industry
3. CAPITALIST-INDUSTRIAL PARTNER - contributes money or
property as well as his work or industry
4. GENERAL PARTNER - liable to the partnership debts to the
extent of the personal property after partnership assets are
exhausted
5. LIMITED PARTNERS - liability for partnership dents is limited.
To his capital distribution
CORPORATION - an artificial beings created by operation of law
having the right of succession and the powers, attributes, and
properties expressly authorized by law or incident to its existence
CLASSIFICATION OF CORPORATIONS
STOCK CORPORATION - capital is in the form of capital stock
divided into shares
NON-STOCK CORPORATION - refers to a not-for-profit
organization and organized for the benefit of its members or its
intended beneficiary
GOVERNMENT OWNED AND CONTROLLED CORPORATION-
either owned or controlled by the government
NON GOVERNMENT CORPORATION
PULIC COMPANY - any corporation with a class of equity
securities listed in an exchange or which assets in excess of
P50,000,000 and having 200 or more stockholders each holding at
least 100 shares
NON PUBLIC CORPORATION - one that does not qualify as
public corporation per requirements given above
PARENT CORPORATION - owns the controlling interest (more
than 50%) in another corporation
SUBSIDIARY - the investee corporation in which the investor
corporation has controlling interest
ASSOCIATE - the investee corporation in which the investor
corporation has significant influence (ownership of 20% or more
not exceeding 50%)
DOMESTIC CORPORATION- incorporated under PH laws
FOREIGN CORPORATION- incorporated under laws of foreign
country
CLOSE CORPORATION- limited to selected persons or members
of a family
OPEN CORPORATION - open to any person who may wish to
become a shareholder or member
 BOBADILLA [FINANCE 2 PRELIMINARY REVIEWER]

COMPONENTS OF CORPORATION DIVIDEND - refers to items of value received by stockholders from

an investee corporation arising from the investor-investee
CORPORATORS - refers to all persons composing a corporation relationship
whether they are stockholders or members BOARD OF DIRECTORS - authorized by the Corporation
INCORPORATORS - refers to corporators who are mentioned in Code to declare dividend subject to approval by at least 2/3 of the
the articles of incorporation as originally forming and composing outstanding capital stock
the corporation and who executed and signed the articles of DATE OF RECORD - refers to the date as of which, stockholders
incorporation as such who appear on record as such, are entitled to dividends
STOCKHOLDERS - refers to natural or juridical persons who own at CUM DIVIDEND - from the date of declaration to the date
least 1 share of capital stock of record
MEMBER - corporators in a non stock corporation EX DIVIDEND - after the date of record
BOARD OF DIRECTORS/TRUSTEES - governing body in a CUT OFF DATE - announced record date, actual date up to which
corporation stockholders are entitled to dividends after providing for he time
lag required by stock and transfer offices
CORPORATE FORMATION - requires all the activities that must be DATE OF PAYMENT - refers to the date the stockholders are paid
undertaken in preparing a business and in complying with all the the dividends
legal requirements for the entity to have its legal personality as a
corporation. CLASSIFICATION OF DIVIDENDS
BY-LAWS - rules of action for the internal government of a
corporation and for the government of its officers and stockholders DEFINTION DECREASE/INCREAS
or members (adopted within 1 month after receipt of corporate E
charter) CASH DIVIDEND Paid in cash to the DECREASE Ret.
stockholders Earnings
PRE-EMPTIVE RIGHT OF STOCKHOLDERS - refers to his right to DECREASE Cash
subscribe to all issues or disposition of shares of any class in DECREASE
proportion to his shareholdings subject to certain exceptions Stockholders Equity
PROPERTY In the form of noncash DECREASE Ret.
PROPORTIONATE INTEREST = DIVIDEND assets Earnings
SHARES OWNED DECREASE Assets
SHARES OUTSTANDING DECREASE
Stockholders Equity
STOCK DIVIDEND In the form of stocks of DECREASE Ret.
BOOK VALUE PER SHARE =
the issuing corporation Earnings
TOTAL STOCKHOLDERS EQUITY
INCREASE Capital
OUTSTANDING SHARES Stock
NO EFFECT
WATERED STOCK - stocks issued for a consideration less than par Stockholders Equity
or issued value SCRIP DIVIDEND In the form of DECREASE Ret.
promissory notes Earnings
CUMULATIVE VOTING - manner of voting in a stock corporation indicating the kind of EITHER INCREASE IN
benefits that
liability or
NO. OF SHARES stockholder shall be
entitled to receive
Stockholders Equity
TO ENSURE ELECTION =
BOND DIVIDEND
TOTAL NO . OF DIRECTORS Is in the form of bonds DECREASE Ret.
of the company Earnings
TOTAL NO .OF SHARES OUTSTANDING x DESIRED NO .OF SEATS
BE ELECTED + INREASE Liability

1 LIQUIDATING Refers to return of DECREASE Capital
DIVIDEND capital by a corporation Stock
NO. OF SEATS = DECREASE Premium
NO .OF DIRECTORS on Capital Stock
DECREASE Assets
NO . OF SHARES HELD1 x BE ELECTED+1
TOTAL NO .OF SHARES UTSTANDING
CHAPTER III - FINANCIAL PLANING TOOLS AND TECHNIQUES
CLASSES OF SHARES OF STOCK
COMMON STOCK - represents the basic issue of shares and has all
FINANCIAL PLANNING - process of determining the best uses of
the basic rights of a share of stock
the financial resources of an organization to attain its
PREFERRED STOCK - class of stock having preferences over
predetermined objectives and the procurement of the requires
common stock
funds at the least cost
CLASS A SHARES - for Filipino shareholders
CORPORATE PLANNING - formal and systematic managerial
CLASS B SHARES - for foreign shareholders
process, organized by responsibility, time and information to
PAR VALUE SHARES - shares of capital stock that have been
ensure that planning are carried out regularly
assigned a definite or fixed value in the articles of incorporation
STRATEGIC PLANNING - process of making decisions which will
NO PAR VALUE SHARES - those that have not been assigned a
tend to optimize the organization future position
definite or fixed value (Stated value only)
STRATEGY - is a plan, an integration of an organization's
FOUNDER'S SHARE - those classified as such in the articles of
important objectives, policies and programs into cohesive whole
incorporation and may be given certain rights and privileges not
PROJECT PLANNING - or Capital Expenditure Planning, refers to
enjoyed by other stockholders
working out the detailed execution of an action outside the scope
of current operations
CORPORATE OFFICERS
OPERATIONAL PLANNING - refers to forward planning of existing
1. President (the director)
operations, determination of how to effectively use current
2. Treasurer
resources
3. Secretary
Directors = law making body
FINANCIAL PLANNING PROCESS
Officers = executive body
where are we now
 BOBADILLA [FINANCE 2 PRELIMINARY REVIEWER]

How did we get here Stock NO EFFECT DECREASE CAPITAL

Where do we want to go Dividends STOCK
INCREASE
Scrip DECREASE DECREASE LIABILITIES
BUDGETING - process of translating a plan in quantitative terms
Dividends INCREASE
usually monetary
BUDGET - is a formal statement of a planned course of Bond DECREASE DECREASE LIABILITIES
Dividends INCREASE
action expressed in quantitative terms
Liquidating DECREASE - CAPITAL
dividends STOCK
OBJECTIVES OF BUDGETING
DECREASE
1. PLANNING - the financial plans of the different sub units are
ASSETS-
prepared geared towards the attainment of the company's DECREASE
predetermined objective (Profit Plan, Budgeted Balance Sheet,
Capital Expenditures Budget, cash Budget) 2. BORROWED CAPITAL - capital acquired that gives rise to
2. COORDINATION - heads of the different sub units of an liability
organization are made aware of their common goal and their COST OF CAPITAL = Interest
contributions
3. CONTROL - budgeting provides management with the yardstick CURRENT LIABILITIES - maturing within 1 year
in evaluating performance LONG TERM DEBT - will mature beyond 1 year
BUDGETARY CONTROL - refers to the use of budgets and SHORT TERM LOANS - maturing within 1 year
budgetary reports to coordinate, evaluate and control day to day MEDIUM LOANS - maturing after 1 year up to within 5 years
operations LONG TERM LOANS - maturing beyond 5 years

MASTER BUDGET - consolidation of all budgets of the different
sub units in an enterprise
1. OPERATING BUDGET/PROFIT PLAN - refers to the plan of
operations wherein details of revenues and expenses are shown
and takes the form of budgeted income statement
2. FINANCIAL RESOURCES BUDGETS - show the effects of the
profit plan on the financial resources of the company (budgeted
balance sheet and cash budget)
3. CAPITAL EXPENDITURE BUDGET - is in the form of statement
showing the planned procurement and disposal of plant, property
and equipment
LEVER - a bar or rigid piece rotating about a fixed axis or fulcrum
which lifts or sustains weight at one point by means of applied
force at a second point
LEVERAGE - the mechanical advantage of power gained by using a
lever
FINANCIAL LEVERAGE - refers to the financial advantage derived
from having additional funds considering the costs involved
COST OF BORROWED CAPITAL - interest is paid on borrowed
capital
COST OF BORROWED CAPITAL = INTEREST x (1 TAX RATE)

THE BUDGETING PROCESS INVESTED CAPITAL VS. BORROWED CAPITAL

SALES FORECASTING - the preparation of budget estimates starts
with sales forecasting so that SALES FORECAST are considered the
INVESTED BORROWED
cornerstone in BUDGETING
COST OF CAPITAL Permanent Has maturity date
SALES BUDGET - prepared based on sales forecast
DIVIDENDS Dividends are paid Interest expense is
(not taxable) deducted in
TIME PERIODS IN CASH PLANNING AND CONTROL
computing income
1. OPERATIONAL - when it is undertaken for a period in the
MANAGING Maximize earnings Minimize financing
immediate future (month, week, day)
CAPITAL OF charges
2. SHORT TERM - when it is concerned with anticipating and
BUSINESS
providing for short term credit needs and cash control for the
UPON Borrowed capital is paid first, followed by
coming year and is synchronized with the annual budget
DISSOLUTION Equity capital
3. LONG TERM - extends beyond the coming year for it is
concerned with major outflows and inflows
ANALYSIS - a consideration of anything in its separate parts and
their relation to each other
CASH BUDGET - is part of the master budget so that it is a
FINANCIAL ANALYSIS - refers to examination of financial data of
coordinated plan of cash flows(shows the effect of management's
an entity to determine its profitability, growth, solvency, stability
plans on cash inflows and outflows
and effectiveness of its management
CASH FORECAST - is merely a projection of anticipated receipts
and disbursements within a specified period and the resulting cash
TREND RATIOS - comparative statements are often supplemented
balance
by trend ratios or percentages showing the behavior of financial
data for successive periods
CONCEPTS OF CAPITAL
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from the POV OF A BUSINESSMAN - Capital refer to the
GROSS PROFIT STATEMENT:
resources he has accumulated and invested in his venture( initial
GROSS PROFIT = SALES - COST OF SALES
and additional investments) SALES = SALES VOLUME x UNIT SELLING PRICE
From the POV of the BUSINESS - it refers to all the resources COST OF SALES = SALES VOLUME x UNIT COST
available for its use as an economic entity
GROSS PROFIT VARIATION ANALYSIS:
SOURCES OF CAPITAL VOLUME FACTOR
1. EQUITY CAPITAL - refers to the financial resources provided by Change in volume (increase or decrease)
Multiply by Gross profit per unit in Last Year
owners of the business (initial and additional and the earnings)
Favorable/Unfavorable Effect of Volume factor
PRICE FACTOR
EFFECTS OF DIVIDENDS ON EQUITY CAPITAL Change in selling price (increase or decrease)
Multiply by Current years volume
EFFECTS ON Favorable/Unfavorable Effect of Price factor
Equity Capital Ret. Earnings Others COST FACTOR
Cash DECREASE DECREASE CASH- Change in unit cost (increase or decrease)
DECREASE Multiply by Current years volume
dividend
Favorable/Unfavorable Effect of Cost factor
Property DECREASE DECREASE ASSETS-
DECREASE/INCREASE IN GROSS PROFIT
Dividends DECREASE
 BOBADILLA [FINANCE 2 PRELIMINARY REVIEWER]

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SALES MIX - refers to the combination of products being sold or
the ration between sales volume of the different products

COMMON SIZE STATEMENTS - is one wherein each item is

expressed in terms of a percentage of a common base number/ it
shows the component percentages or the relationship of each item
to the whole
FINANCIAL RATIOS - are the significant relationships between
items in the financial statements expressed in mathematical form