Reviewer in Business Finance Understanding Capital market- shares of a company are traded
on stock exchange and there is a continuous sale and purchase of
Finance was derived from the word Financius from the noun Finis
(end). It migrated from latin to old french as finaunce , from finer
(to pay a ransom). While in English fine means (to pay a penalty)
15th century- the sense was ransom and taxation
1770- first recorded in the sense of managing money.
FINANCE MEANING
 The management of large amounts of money especially
by governments or large companies
 The giving monetary support for an enterprise
 The monetary resources and affairs of a government,
organization or person.
Types of Finance
Public Finance- the government helps prevent market failure.
Corporate Finance- business bring in financing through an equity
investment and credit arrangement
Personal Finance- earning more money and spending less is the
basis of personal finance.
FINANCIAL MANAGEMENT WITHIN A BUSINESS
ORGANIZATION
Business- an entity where the skills, energy, and enterprise owners
are linked with money
Business organization- an entity formed for the purpose of carrying
on commercial enterprise.
TYPES OF BUSINESS ORGANIZATION
Sole Proprietorship- one individual doing business
Partnership- consist of two or more individuals
Corporation- the dominant form of business, it is a legal entity
FINANCIAL MANAGER AND THEIR PRIMARY
RESPONSIBILITIES
FINANCIAL MANAGEMENT MEANS:
 To collect fund for the company at a low cost and
 To use this collected fund for earning maximum profits.
Financial management means to plan and control the finance of
the company.
Financial manager- is a person who takes care of all the important
financial functions of an org.
FUNCTIONS OF A FINANCIAL MANAGER
Raising of funds- to meet the obligation of the business
Allocation of funds- raised through different channels to allocate
the funds
Profit planning- refers to proper usage of the profit generated by
the firm
Profit earning- prime functions of the business
securities.
GUIDING PRINCIPLES FOR FINANCIAL MANAGEMENT
SYSTEMS
 Consistency- financial policies and systems must remain
consistent over time
 Accountability- must be able to explain and demonstrate
to all stakeholders
 Transparency- must be open about its work and its
finances
 Integrity- must operate with honesty and propriety
 Financial stewardship- must take good care of financial
resources
 Accounting standards- system for keeping financial
records and documentation
FINANCIAL INSTITUTIONS- an establishment that conducts
financial transaction
Commercial banking- accept deposits and provide security and
convenience to their customers
Investment banks- is a financial intermediary that performs a
variety of services for business
Insurance companies- pool risk by collecting premiums from a
large group of people who want to protect themselves
Brokerage- acts as an intermediary between buyers and sellers
Investment companies- a corporation or a trust through which
individuals invest
Non-bank financial institutions- not technically banks
Savings and loans- also known as S&L or thrifts, saving and loans
companies must have 65% or more of their lending
Credit unions- alternative to regular commercial banks
Financial Market- broad term describing any market place where
buyers and sellers participate
Capital markets- individuals and institutions trade financial
securities.
Stock market- allows investors to buy and sell shares in publicly
traded companies.
Bond market- debt investment in which investor loans money to an
entity
Money market- a segment of the financial market in which financial
instruments with high liquidity and very short maturities are
traded.
Foreign exchange (forex) and interbank market- financial system
and trading of currencies among banks
Primary market- issues new securities on an exchange
 Also known as the “new issue market”
 Where the investors have their first chance to participate in
a new security issuance
Secondary market- where the investors purchase securities or assets
from other investors
 Where the bulk of exchange trading occurs each day
The OTC market- the over the counter market is a type of
secondary market also referred to as a dealer market. The term over
the counter refers to stocks that are not trading on a stock
exchange
Financial instruments- are assets that can be traded
Breaking down “financial instruments- financial instruments can
be real or virtual documents representing legal agreement involving
any kind of monetary value.
Equity based financial instruments- represent ownership of an
asset
Debt based financial instruments- represents loan made by the
investor to the owner of the asset
Foreign exchange instruments- comprise a third, unique type of
financial instrument
INTERNATIONAL ACCOUNTING STANDARDS- define
financial instruments as “any contract that gives rise to a financial
asset of one entity and financial liability or equity instrument of
another entity”
TYPES FINANCIAL INSTRUMENTS
Cash instrument- directly influenced and determined by the market
Derivative- is a financial contract with value that is derived from an
underlying asset
ASSET CLASSES
Short- term debt based financial instruments last for one year or
less (form T-bills means treasury bills)
Long term debt based financial instruments last for more than a
year
Company’s financial statement- provide vital information about
its financial health
Financial statement- formal record of the financial activities of an
entity
4 TYPES OF FINANCIAL STATEMENT
Statement of financial position- also known as Balance Sheet,
presents the financial position of an entity at a given date
 Assets: owns and control by the business
 Liability: owes to someone of the company
 Equity: owes to its owner
Income statement- also known as the Profit and Loss Statement,
reports the company’s financial performance in terms of net profit or
loss over a specified period.
 Income: earned over a period
 Expenses: cost incurred over a period
Cash flow- presents the movement in cash and bank balances over a
period
 Operating activities- primary activities of a business
 Investing activities- purchase and sale of assets other than
inventories
 Financing activities- spent on raising and repaying share
capital and debt together with the payment of interest and
dividends
Statement of changes in equity (retained earnings statement) -
movement in owners' equity over a period
 Net profit or loss during the period as reported in the
income statement
 Share capital issued or repaid during the period
 Dividend payments
 Gain or losses recognized directly in equity
 Effects of a change in accounting policy or correction of
accounting error
Purpose of financial statement- is to provide information about
Financial Position.
USERS
Manager- to manage the affairs of the company
Shareholder- to assess risk and return of their investments in the
company
Prospective investors- to asses viability of investing in a company
Financial institution- to decide whether to grant a loan or credit to
a business
Suppliers- to assess credit worthiness of a business and ascertain
whether to supply good or not
Customers- to assess whether a supplier has the resources to
ensure the steady supply of goods
Employees- for assessing the company’s profitability
Competitors- compare their performance with rival companies
General public- effects of a company on the economy, environment
and local community
Governments- to determine correctness of tax declared in the tax
returns
Accounting cycle- is the financial process starting with recording
business transaction and leading up to the preparation of financial
statement
Accounting worksheet- is a tool used to help book keepers and
accountant
Horizontal or trend analysis- facilitated by showing changes
between years in both peso and percentage form
Vertical analysis – is a procedure of preparing and presenting
common size statement
Ratio analysis- is the most powerful tool of financial statement
analysis
Ratio- means one number expressed in terms of another
Accounting ratio- is used to describe a significant relationship
between figures shown on a balance sheet
ADVANTAGE OF RATIO ANALYSIS
Simplifies financial statement- it simplified the comprehension of
financial statement
Facilitates inter-firm comparison- it provides data for inter-firm
comparison
Helps in planning- it helps in planning and forecasting (planned production in units = expected sales units + planned
ending inventory in units – beginning inventory units)
Makes inter-firm comparison possible- make possible comparison
of the performance of different division of the firm Budgeted income statement- contains all of the line items found
in a normal income statement, except that it is a projection of what
Help in investment decisions- helps in investments decision the income statement will look like during the future budget period
Limitation of financial statement- ratio are based only on the Projected balance sheet- it shows business actual, historical
information which has been recorded financial positions, it also communicates expected changes in
future asset investments.
Comparative study required- ratios are useful in judging the
efficiency of the business Working capital- is a measure of both a company’s efficiency
Ratios alone are not adequate- ratios are only indicators (working capital= current assets – current liabilities)
Problems of price level changes- change in price level Working capital ratio (current assets/ current liabilities)
Lack of adequate standard- no fixed standard Anything below 1 indicates negative while anything over 2 means
that the company is not investing excess assets.
Limited use of single ratio- usually does not convey much of sense.
Working capital management- refers to a company’s managerial
Personal bias- ratio are only means of financial analysis and not an
accounting strategy designed to monitor and utilize the two
end in itself
components of working capital
Incomparable- not only industries differ in their nature
Long-term financing- it is for acquiring new equipment
CLASSIFICATION OF ACCOUNTING RATIOS
Equity financing- includes preferred stocks and common stocks and
Traditional classification or statement Functional classification or is less risky
Significance ratios or ratios according
ratios classification according to tests to importance
Corporate bond- is a bond issued by the corporation to raise money
Profit and loss account ratios Profitability ratio Primary ratios
effectively
Or revenue/income statement ratios Liquidity ratios Secondary ratios
Balance sheet ratios or position Activity ratios Capital note- form of convertible security exercisable into shares
statement ratios leverage ratios or long term
Composite/mixed ratios or inter Solvency ratios Short-term financing- can be used over a period of up to a year to
statement ratios help corporation increase inventory orders
Profitability ratios- measure the results of a business operation
Commercial paper- unsecured promissory note with a fixed
Liquidity ratios- measure the short-term solvency of financial maturity of 1 to 364 days in the gobal money market
position of a firm
Promissory note- negotiable instrument
Activity ratios- calculated to measure the efficiency with which the
resources of a firm have been employed Asset-based loan- often short term, secured by a company’s asset

Long-term solvency or leverage ratios- convey a firm’s ability to Repurchase agreement- short term loans arrange by selling securities
meet the interest costs and payment to an investor with an agreement

Financial analysis- defined as being the process of identifying Letter of credit- documents that a financial institution or similar
strength and weaknesses of a business party issues to a seller of goods or services

Financial plan- can help managers determine if they can achieve Equity financing- often means issuing additional shares of common
the organization’s goal. The financial plan is one of the first things stock
created to help managers make decisions. Debt-financing- means borrowing money and not giving up
Budgeting- is the process of creating a plan to spend money ownership

Budget- the spending plan Loans- provide business with expansion capital

Master budget- is an aggregate of a company’s individual budget Business account services- enables a business to transact its day-to-
designed to present a complete picture of its financial activity day affairs

Operating budget- is a forecast and analysis of projected income Overdraft facilities-enables a business to have a short period of
and expenses over the course of a specified time period credit to smooth out cash flow difficulties

Cashflow budget- is a means of projecting how and when cash Cheque, credit cards and bank drafts – enables a business to
comes in and flows out of a business smoothly manage its day-to day- payments and transactions

Schedule of expected cash collection- it shows the budgeted cash Bank- provide systematic and ongoing advice
collection on sales during a period Merchant banks –issuing houses
Sales budget- the first and basic component of master budget and Unit investment trusts (UITs)- is a company established under an
it shows the expected number of sales units indenture or similar agreement
Production budget- is a schedule showing planned production in
units
Face amount certificates- issues debt certificates at a predetermined
rate of interest
Management investment companies- actively manage a portfolio of
securities to achieve investments objective
Close-end investment companies- issues shares in a one-time public
offering
Open-end investment companies- also known as mutual funds,
continuously issue new shares
Shadow bank- funneled a great deal of money
Bank business loans- a safest business loan to secure
Good personal credit- personal credit will be evaluated
Good business credit- independent credit score
Solid business plan- reflects the estimated profitability of a business
in years to come
Industry experience- it is rare to get a loan for a business that has no
experience
Documentation loan- any loan that requires full information
Income verification- prove you can afford a loan
Asset verification- lenders will consider your asset
Liens and liabilities- debts, liens and liabilities
Credit score- above 650-700 is considered acceptable but does not
guarantee a loan
Debt to income- debts payments should not be more than the 33% of
gross monthly income
Time in business- lenders give unsecured working capital lines and a
term loans business which are over 2 years old
Report on industry risk- based on the government industry code
which is ranked
Report cash flow-the higher the operating cash margin the better the
chance for a business to survive
Voluntary administration- aims to improve the way business
Receivership- secured creditor has certain rights
Liquidation- refers to the winding up of the company
Financial intermediaries- it is a financial institution such as banks
etc.
Financial advisers- they can offer specialist advice on your behalf