Fundamentals Concepts and

Tools of
Business Finance

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 FINANCE

The study of the acquisition and investment

of cash for the purpose of enhancing value
and wealth.

is the science of funds management.

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 FINANCE
Public Finance general finance, deals
with the revenue and expenditure
patterns of the government and their
various effects on the economy.
Private Finance general finance not
classified as public finance:
1. Personal Finance managing ones own
personal money affairs.
2. The finance of non-profit organizations
undertakings such as charity, religion
and private education
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 3. BUSINESS FINANCE
Refers to the provision of money for
commercial use.
Concerned with the effective use of funds
Covers financial management of private
profit seeking concerns in the business
service, trade, manufacturing, mining,
public utilities and financing.

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 3. BUSINESS FINANCE
Procurement and administration of
funds with the view of achieving the
objectives of the business.
3 aspects of Business Finance
1. Small business finance;
2. Corporation finance; and
3. Multinational business finance

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Categories of
Finance FINANCE

Public Private
Finance Finance

Business Finance of
Personal
Non- Profit
Finance Finance
Organization

Small Multinational
Corporation
Business Business
Finance
Finance Finance
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 Goals of Business Finance
1. Maximizing profit
2. Maximizing profitability
3. Maximizing profit subject to cash
constraint
4. Maximizing net present worth;
5. Seeking an optimum position
along a risk- return frontier.
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 Goals of Business Finance
1. Maximizing profit
- realizing the highest peso or
dollar income.
2. Maximizing Profitability
- obtaining a higher rate of return
on its investment

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 Goals of Business Finance
3. Maximizing profit subject to cash
constraint
- maximize profits and maintain a
cash balance that can take care of cash
requirements anytime.

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 Goals of Business Finance
4. Maximizing Net Present Worth
- the firms objective is to maximize the
current value of the company to its
owners.
- Net Present worth = value of the firm
(now) + values (arising in the future)

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 Goals of Business Finance
4. Maximizing Net Present Worth/Value
Time Value of Money
- money increases in value with
the passing of time.

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 Goals of Business Finance
4. Maximizing Net Present Worth(Net
Present Value)
To convert a future value to its present value,
consider the following formula:
P = F
(1 + i)n
Where:
P = the present value
F = the future value
i = the rate of return
n = the no. of period your name
 Goals of Business Finance
4. Maximizing Net Present Worth/Value
Calculation of Present Worth/Value
Sample problem: What is the present value
of P100,000.00 to be received exactly
1-year from now, assuming the
interest rate is 10% per annum?

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 Goals of Business Finance
4. Maximizing Net Present Worth/Value
Calculation of Present Worth/Value
P = 100,000
(1 + .10)1

P = 90,909.09

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 Goals of Business Finance
5. Seeking an Optimum Position Along a
risk- return frontier
- a firm sets a goal of achieving the best
possible combination of risk and return
Return on Investment or Net worth net
income generated by the use of
investments of a firm (rate of return
when expressed in percentage)
Risk potential incurrence of loss of money
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or its equivalent.
 Goals of Business Finance
5. Seeking an Optimum Position Along a Risk-
Return Frontier
Calculation of Expected Value Using Risk and
Return Factors.
The optimum position of risk and return
may be determined by calculating the expected
value of alternative decisions. The expected
value of a return on investment is equal to the
return times the percentage of probability that will
happen (risk factor) your name
Alternative Return on Probability Expected
Net Worth Value

1 100,000,000.00 60% 60,000,000.00

2 200,000,000.00 50% 100,000,000.00

3 300,000,000.00 30% 90,000,000.00

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 THE FINANCIAL STATEMENT

- Presents the financial information to

various interested parties.
- formal record of the financial activities of
a business, person, or other entity.

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 THE FINANCIAL STATEMENT
Basic financial statements:
Statement of Financial Position: also
referred to as a balance sheet, reports on
a company's assets, liabilities, and
ownership equity at a given point in time.
Statement of Income: also referred to as
Profit and Loss statement (or a "P&L"),
reports on a company's income,
expenses, and profits over a period of
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 THE FINANCIAL STATEMENT
Profit & Loss account provide
information on the operation of the
enterprise. These include sale and
the various expenses incurred
during the processing state.
Statement of cash flows: reports
on a company's cash flow activities,
particularly its operating, investing
and financing activities.
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 BALANCE SHEET

statement produced periodically,

normally at the end of a financial year,
showing an organizations assets,
liabilities and the interest of the
owners.

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 BALANCE SHEET

ASSETS everything that the firm owns

which has monetary value classified as
follows:
1. Current Assets
2. Trade Investments
3. Fixed Assets
4. Intangible Assets

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 BALANCE SHEET
Current Assets composed of cash,
bank deposits and other items readily
convertible into cash like accounts
receivable, stocks and work-in-process
(inventory), and marketable securities.

Trade Investments composed of

investments in subsidiary or associated
companies

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 BALANCE SHEET

Fixed Assets shows the firms

ownership of property like land,
buildings, plant and machinery ,
equipments, vehicles, furniture and
fixtures, all valued at cost less
depreciation written off; and
Intangible Assets present goodwill,
patents, copyright which are attributed
to the firm.
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 BALANCE SHEET
LIABILITIES shows the profile of debts of
the company classified as current liabilities
(payable within 1 year) and long-term
liabilities (payable after 1 year).
Accounts Payable debts payable within a
few days, weeks, or months like those
incurred in the purchase of raw materials

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 BALANCE SHEET

Loans and Notes Payable debts

evidenced by promissory notes and
oftentimes backed up by collaterals.
Creditors of this type of liability are
composed of banks, suppliers,
financing companies, and the public.
Advances from Customers down
payments made before orders are
processed.
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 BALANCE SHEET
Accrued Expenses this refers to
obligations which have been incurred
but not yet paid.
Mortgage Payable company
borrowings and other sources of funds.
This represents long-term debts and is
usually secured by land, buildings, or
equipment.
Bonds Payable issued when a large
amount of long-term debt is sought
from a large number of creditors. your name
 BALANCE SHEET
NET WORTH interest of the owner or
owners in the company.
In a single proprietorship, the owners
interest usually appears as a single
account, for instance, Miriam
Defensor, Capital. This represents
sums invested by the owner, which is
increased by profits and decreased by
losses and withdrawals.

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 BALANCE SHEET
In a partnership, the interests of the
partners are presented separately like the
following:
Jose Rizal, Capital P10,000,000
Andres Bonifacio, Capital 20,000,000
Apolinario Mabini, Capital 30,000,000
Total Net Worth 60,000,000

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 BALANCE SHEET
In a corporation, the net worth section
appear as follows:
1. When the shares of stock have par value:
Capital Stock P50,000.00
2. When the shares of stock have no par
value (but with an arbitrary stated value):
Capital stock (stated value
at P10 per share) P20,000,000
Paid-in surplus 30,000,000
Total Net Worth 50,000,000
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 BALANCE SHEET
In a corporation, the net worth section
appear as follows:
3. When there is a special class of
ownership:
Capital Stock
Preferred(P500par,
8% 100,000 shares) P 50,000,000
Common (P500par,
200,000 shares) 100,000,000
Total Net Worth 150,000,000
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BALANCE SHEET

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 BALANCE SHEET
ABC Corporation Name of the Entity
Balance Sheet Title of the statement
December 31, 200X Specific Date of Statement

Assets
Cash P XXX Amount of Cash in companys bank accounts
Accounts Receivable XXX Amounts owed by customers from prior sales
Inventories XXX
Plant and Equipment XXX Parts and completed but unsold
Land XXX
Factories and production machinery
Total Assets P XXX
Land on which the factories are built
Liabilities
Accounts Payable P XXX Amounts owed to suppliers for prior purchase
Notes Payable XXX
Amounts owed on written contracts
Total Liabilities P XXX

Stockholders Equity
Contributed Capital P XXX
Amounts invested in the Bus. By the stockholders
Retained Earnings XXX
Past earnings not distributed to stockholders
Total Liabilities and
Stockholders Equity P XXX

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 INCOME STATEMENT
The income statement represents
the revenues realized from the sale
of commodities and services
produced by the company as well as
the cost and expenses incurred in
connection with the realization of
said revenues.
Presents a summary of the
transactions for a given period. your name
 INCOME STATEMENT
Revenues refers to the gross
income from the production and sale
of the firms product or service. It
includes cash collections and
receivables or unpaid sale. It does
not include trade discounts allowed
to distributors or other middlemen.
Returns and allowances are
deducted also from the gross
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revenue.
 INCOME STATEMENT
Expenses this refers to the
monetary values of the goods and
services used in the production and
delivery process in order to obtain
revenues. It consist of three items:
1. The cost of goods sold/
manufactured and sold
2. Operating expenses
3. Other expenses your name
 INCOME STATEMENT
Cost of Goods Manufactured and
Sold represents the summary of
the cost of raw materials, labor and
various overhead costs directly
involved in the manufacturing
process and which represent the
manufacturing cost of goods sold
during a period of consideration.
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 INCOME STATEMENT
Overhead cost expenditures like
salaries of supervisors, depreciation, light
and water, supplies and factory rent.
The cost of direct materials is computed
by deducting the raw materials inventory,
end from the total available for use
computed as the sum of raw materials
inventory, beginning and purchases
during the period. your name
 INCOME STATEMENT
Raw materials inventory, beginning
+ Purchases
-------------------------------------------------------
= Raw materials available for use
- Raw materials inventory, end
-------------------------------------------------------
Cost of Raw Materials Used
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 INCOME STATEMENT
The cost of goods manufactured is
computed by deducting the work-in-
process, end from the cost of goods
processed which is the sum of the
work-in-process, beginning and the
sum of raw materials used, direct
labor, overhead.

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 INCOME STATEMENT
Cost of Raw Materials Used
+ Direct labor used
+ Overhead
+ Work-in- Process Beginning
-------------------------------------------------------
= Cost of Goods Processed
- Work-in- Process, end
-------------------------------------------------------
Cost of Goods Manufactured your name
 INCOME STATEMENT
The cost of goods manufactured and
sold may be computed by deducting
the finished goods inventory, end
form the total goods available for
sale which is computed by adding
the finished goods, beginning and
the cost of goods manufactured.

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 INCOME STATEMENT
Finished Goods, Beginning
+Cost of goods Manufactured
-------------------------------------------------------
= Total Goods Available for Sale
- Finished Goods, end
-------------------------------------------------------
Cost of Goods Manufactured and Sold
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 INCOME STATEMENT
2. Operating Expenses represents
the marketing, general and
administrative expenses.
e.g. advertising, salaries and wages
3. Other Expenses includes interest
expense

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 INCOME STATEMENT
Other Income - refers to non-operating
income
Net Profit or Net Loss the excess of
total revenues over total expenses. If
total expenses exceed total
revenues, a net loss is reported.

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INCOME STATEMENT

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 INCOME STATEMENT
ABC Corporation Name of the Entity
Income Statement
For the Year Ended December 31, 200x Title of the Statement

Accounting period
Sales Revenue P xxx
Less cost of goods sold xxx
Gross profit xxx Cash and promises received from sale
Less selling and administrative expenses:
Commission expense P xxx Cost to produce the product sold
Administrative Salaries Expense xxx
Sales Travel Expense xxx
Advertising Expense xxx
Depreciation Expense xxx
Insurance Expense xxx xxx
Net Operating Income P xxx Operating Expenses

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 BUDGET
BUDGET estimate of income and
expenditures for a future period. It
completes the financial picture by
referring to the future
The budget is contrasted with the
income statement ( a summary of the
performance of the firm) and balance
sheet (the financial condition of the firm)
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 BUDGET
Essential in the planning and control of
the financial affairs of the business.
Large corporations emphasizes in the
annual budget broken down into
monthly and weekly periods.

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 BUDGET
Budget includes:
1. Estimated sales and income
2. Estimates of expenditures in
purchasing, administration,
production, distribution and research
3. Detailed budgets of cash flow and
capital expenditures
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 BUDGET
Sales Budget starting point of company
budgets.
- estimated sales in units and peso for
each major subdivision of sales.
Materials and Purchase Budget- estimate of
the materials required by the firm,
specified in quantities, costs, timing of
purchase, required delivery dates and
other purchase requirements your name
 BUDGET
Production Budget estimate of the
quantity of products to be produced in
accordance with the sales budget
- includes monthly breakdown of
quantities to be produced for each product
depending upon the firms seasonal sales
index.

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 BUDGET
Total units produced is computed as:
Budgeted units for sale
+Expected Finished Goods Inventory, beg
-------------------------------------------------------
= Total Units Available for Sale
-Finished Goods Inventory, end
-------------------------------------------------------
Total Units to be Produced

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 SIGNIFICANCE OF FINANCIAL
STATEMENTS AND BUDGET
Interested Groups
1. Owners
2. Management
3. Creditors
4. Government
5. Prospective investors

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 SIGNIFICANCE OF FINANCIAL
STATEMENTS AND BUDGET
Owners use the financial statements
for anticipated financial benefits
- basis for decision making to
continue or discontinue ownership

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 SIGNIFICANCE OF FINANCIAL
STATEMENTS AND BUDGET
Management use the financial
statements for planning and control to:
1. Anticipate asset needs;
2. Plan for necessary financing
3. Establish standards by which to
test current operating performance

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 SIGNIFICANCE OF FINANCIAL
STATEMENTS AND BUDGET
Creditors to see the credit worthiness of
the firm.

Government use financial statements for

tax and regulatory purposes.

Investors to see the financial position and

performance of the firm, whether to
continue as investors or not. your name
 SIGNIFICANCE OF FINANCIAL
STATEMENTS AND BUDGET
Other Users:
Customers to see how stable
the company.

Employees basis for considering long

term employment with the firm.

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 ANNUAL REPORT
Yearly report to stockholders,
members and the government.
Includes:
1. Balance sheet
2. Income statement
3. Auditors report
4. Chairmans report
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