TABLE OF CONTENTS

Lesson 1: OMSC BACKGROUND AND AIMS

VM of the Institution
Gender Equality
Core values

Lesson 2: AN OVERVIEW OF FINANCIAL MANAGEMENT

Goals of Financial Management
Functions of Financial Management
Financial Manager’s Responsibility
Alternative Forms of Business Organization
Agency Relationships

Lesson 3: FINANCIAL STATEMENTS AND RATIOS, THEIR ANALYSES AND

IMPLICATIONS TO MANAGEMENT

Kinds of Financial Statements

Objectives and Limitations of Financial Statement Analyses
Tools in Comparative Financial Statements Analysis
Financial Ratio Analyses and Its Effects in Decision Making

Lesson 4: INTEREST RATES, BONDS AND STOCKS VALUATION

Interest Rates and Required Returns
Differences Between Debt and Equity Capital
Corporate Bonds Fundamentals and Valuation
Ordinary and Preference Shares Fundamentals and Valuation

Lesson 5: CORPORATE PLANNING, AND BUDGETING

Corporate Planning
Financial Budgeting
Estimating Sales

Lesson 6: Working Capital Management

Fund Management
Inventory Management
Loans and Receivable Management

Lesson 7: International Finance

Multinational Company and Its Environment

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 LESSON 1
INTRODUCE TO THE STUDENTS THE VMGO OF THE INTITUTION AND ORIENT THEM
ABOUT GENDER EQUALITY

TOPICS
1. VM of the institutions;
2. Gender Equality; and
3. Core Values

LEARNING OUTCOMES
At the end of the lesson, you should be able to explain and interpret the
vision, mission, goals objectives, quality policy, and quality objectives of the
institution, college and its program

TOPIC 1: VM OF OMSC

Vision
A premier higher education institution that develops globally competitive, locally
responsive, innovative professionals and life-long learners.
Mission
The OMSC is committed to produce intellectual and human capital by developing
excellent graduates through outcomes-based instruction, relevant research, responsive
technical advisory services, community engagement, and sustainable production.

Task/Activity

Write and discuss comprehensively the following:

➢ OMSC Vision
➢ OMSC Mission

TOPIC 2: GENDER EQUALITY

What does gender equality mean?

This is the different behaviors, aspirations and needs of women and men are considered,
valued and favored equally. It is not explained as the rights of men and women to be the
same but it is about the responsibilities and opportunities to both of them as human.

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What is the example of gender equality?
This is the level of holding of same position of male and female employees but receiving
same salaries regardless other factors such as, experience, education level and others. It
is showing respect and equality.

Five Gender Issues

1. Sexual violence
2. Exploitation
3. Unequal division of unpaid care and domestic work
4. Discrimination in public office
5. Climate change and disasters disproportionate on women and children

What causes gender inequality?

It is a result of the persistent discrimination of one group of people based upon gender
and it manifests itself differently according to race, culture, politics, country and
economic situation.

Task/Activity

Group Activity
Each group will collaboratively discuss their differences and encountered unequal
treatment and will share it to the class in five minutes.

TOPIC 3: CORE VALUES

Obedience to God

This is a biblical request, compliance with an order, and encouragement to people as

manifested in Genesis 22;18, NIV “ And through your offspring all nations on earth will be
blessed, because you have obeyed me.” Jesus Christ we find the perfect model of
obedience. As his disciples, we follow Christ’s example as well as his commands. Our
motivation for obedience is Love.

If you love me, you will keep my commandments. (John14:15)

Mindfulness
It refers to a straightforward word suggesting the mind is fully attending to what is
happening, to what you are doing, to the space you’re moving through. It is our ability to
be fully present and aware of where we are and what we’re doing, and not overly reactive
or overwhelmed by what’s going on around us.

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 8 Things to Know About Mindfulness

1. It is not obscure or exotic.

2. It is not a special added thing we do.
3. You don’t need to change.
4. It has potential to become a
transformative social phenomenon
5. Anyone can do it.
6. It’s a way of living
7. It’s evidence-based
8. It sparks innovation

Service - orientedness
It is expected from the students and to those working in OMSC their quality and focused
on the customers’ needs and requirements. This will integrate values over anything else
and responds to them quickly and efficiently.

What makes a great customer service person?

Communication skills are essential to get a good customer service job. Self-Control is
importance to have patience for those customers that no one really wants to deal with.
The more patient you are, the better off you will be when working in customer service.

Commitment
It is a process of engaging in an obligation that sometime restricts freedom of action. It
involves dedicating yourself to something, like a person or a cause. It also obligates you
to do something completely and adequately.

How do you show commitment?

1. show love and loyalty

2. Express respect and appreciation
3. Convey honesty and trust
4. Work as a team and compromise
5. Disagree agreeably.

Integrity and Ingenuity

Integrity
This is a value of quality of being honest and having strong moral principles. Having
integrity means doing the right thing in a reliable way. It’s a personality trait that we
admire, since it means a person has a moral compass that doesn’t waver.

Five behaviors that signify integrity

1. Taking responsibility for their action.

2. Putting others’ needs above their own.
3. Offering to help others in need
4. Giving others the benefit of the doubt.
5. Choosing Honesty in all things.

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Ingenuity
It is a trait or quality of being original and inventive. A person’s ingenuity I a quality of
being skillfulness in conception of designs and working out how to achieve things or skill
at inventing new things.

Accountability
This is a noun that describes accepting responsibility, and it can be personal or public. It
is an act of admitting you made a mistake to your previous decisions and actions.

TEN ways to make your self Accountable at work, on life and with money

1. Create a personal Mission Statement

2. Set Micro-Goals
3. Use Lists Wisely
4. Make Yourself Accountable
5. Reward Yourself
6. Do one Task at a time
7. Emphasize your strength, improve your weakness
8. Value your time
9. Seek Feedback
10. Review yourself

Nationalism
It refers to the way of thinking that says that some groups of humans such as ethnic
groups should be free to rule themselves. It seeks to preserve and foster a nation’s
traditional culture and cultural revivals have been associated with nationalist movements.
It also encourages pride I national achievements and closely like patriotism.

Furthermore, Nationalism is an ideology and movement that promotes the interest of a

particular nation in a group of people especially with the aim of gaining and maintaining
the nation’s sovereignty over its homeland.

ASSESSMENT: ORAL PRESENTATION

Your task for this lesson is to prepare and deliver a 10 to 15-minute oral presentation in
small groups. The objectives of your presentations are as follows:
➢ present the common thought of OMSC Vision and Mission
➢ present the individual differences of each members
➢ report on the individual behavior adjustments to be made
➢ report on the response of the target audience
➢ describe and reflect on personal experiences of different attitudes
➢ evaluate the overall performance of the members

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 REFERENCES

Chin, Ann (2007). The Daily Transcript. Retrieved on March 30, 2020 from https://www.
sdtranscript.com
Dioso, Melchor (2016). OMSC Faculty Manual.
Hanadeh, Bassim(2007). Integrity and ingenuity drives the growth of University Readers.
Center for Leadership and Innovation. Retrieved on March 30, 2020 from
http://www.sddt.com/news/article.cfm

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 LESSON 2
AN OVERVIEW OF FINANCIAL MANAGEMENT

TOPICS
1. Goals of Financial Management
2. Functions of Financial Management
3. Financial Manager’s Responsibility
4. Alternative Forms of Business Organization
5. Agency Relationships

LEARNING OUTCOMES
At the end of the lesson, you should be able to:
1. Differentiate goals and functions of financial management.
2. Identify financial manager’s responsibility.
3. Identify alternative forms of business organization.

TOPIC 1: GOALS OF FINANCIAL MANAGEMENT

A defined purpose or goal is necessary for effective

financial management since it acts as a benchmark for
determining whether financial decisions are
appropriate by the standards of the business. While a
variety of goals may be realistic, any company's main
goal is to maximize the wealth of its current
shareholders. Shares of common stock serve as a
physical representation of ownership in a company. The market price per share of a
company's common stock, which in turn represents the decision-making of the company
regarding investments, financing, and asset management, serves as a measure of the
wealth of its owners. The basic idea is that the share price will ultimately determine if a
company move was successful or not.

Maximization of the Value of the firm (Valuation Approach)

Anastacio et al. (2016) highlight the significance of profit
maximization in financial management. However, they
assert that the ultimate gauge of a firm's performance lies
not solely in the income it generates but in how that income
is perceived and valued by the firm's owners. Consequently,
financial management's primary objective is not only to maximize profit but to enhance
the overall value of the firm, a concept known as the Valuation Approach.
When evaluating investment proposals or making decisions, the following factors must
be taken into account
• The evaluation of risk associated with the investment proposal or the company's
operations;
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 • The timing and flow of profits into the company, including the planned schedule
for their generation and receipt; and
• The scrutiny of the quality and reliability of the profits reported by the firm.

While a firm's pursuit of the profit motive is understandable, solely focusing on this
objective does not guarantee the satisfaction of all stakeholders' interests or ensure the
long-term survival of the corporation. A company driven exclusively by profit may take
on high-risk projects in an attempt to maximize returns. While these projects offer the
potential for significant gains, they also endanger the interests of fixed interest owners
who did not anticipate such high levels of risk. Profit maximization, as a goal, is most
suitable for short-term objectives, as it prioritizes decisions that yield immediate profits
rather than those that enhance future earning potential. This approach assumes that a
firm's evaluation is solely based on current earnings, overlooking the significance of
future earnings streams.
Maximization if Shareholder’s Wealth
Brigham & Houston (2015) emphasize that
stakeholders are not just theoretical; they are
individuals who invest their hard-earned money in
the firm and seek returns on their investment. The
most appropriate financial objective for guiding
investing and financing actions is the maximization
of the firm's value. This objective considers the
time value of money, risk, various sources of
finance, and differing stakeholder expectations. By maximizing the wealth of equity
owners, the interests of all stakeholders align, promoting economic welfare and efficient
resource allocation.
The objective of value or wealth maximization is clear and prioritizes cash flows over
profits. This approach recognizes the potential earning capacity of a company because
investments are made with the expectation of returns. As such, the wealth maximization
objective is both appropriate and realistic, as it aligns with the fundamental purpose of
investments and emphasizes tangible financial gains.

Social Responsibility and Ethical Behavior

Van Horne & Wachowicz (2009) highlight the
importance of considering the interests of
stakeholders beyond shareholders, including
creditors, employees, customers, suppliers, and
communities where the firm operates. However,
these stakeholders' interests often conflict, and the
company serves as an umbrella for resolving these
conflicts. The responsibility for managing these disparate forces lies with the
management, aiming for the common good.
Today, corporate responsibility gravitates towards sustainability. While long-term
productivity has been a firm's perennial concern, this paradigm now extends beyond,
enabling firms to satiate present needs without imperiling those of the future.

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Consequently, enterprises proactively engage with challenges like climate change and
energy consumption, forging a new path of conscientious action.

Task/Activity
Answer the question below in not less than 200 words taking into consideration the above
lessons.
During the last few decades, a number of environmental, hiring, and other regulations
have been imposed on businesses. In view of these regulatory changes, is maximization of
shareholder wealth any longer a realistic objective? Explain your answer.
Output should be submitted on the set time. Below should the rubric for your output.

TOPIC 2: FUNCTIONS OF FINANCIAL MANAGEMENT

Financial Management guides the tactful

distribution of funds amid current and non-current
assets, crafting a balanced financial tapestry that
aligns with the firm's goals. These vital functions
meld seamlessly into the daily rhythm of business
endeavors.
Investment decisions, the bedrock of modern
finance, revolve around capital allocation to long-term assets, promising future benefits.
In this realm, quantifying potential profitability becomes a complex endeavor due to
uncertain futures. Risk intertwines with this decision, rendering it intricate. Evaluating
proposals necessitates gauging anticipated returns and associated risks.

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Concurrently, the finance manager embarks on the financing quest—when, where, and
how to procure funds for investment. Balancing equity and debt constitutes the capital
structure, with the pinnacle being maximum market value of shares. This dynamic
interplay of investment and financing decisions shapes the financial landscape.

TOPIC 3: FINANCIAL MANAGER’S RESPONSIBILITIES

Anastacio et al. (2016)

Forecasting unveiled the essence of a
and Planing
financial manager's role,
encapsulating activities that
intricately define their realm:
Making Crucial
Risk Investment
Management and Financing

Financial
Decisions
1. Forecasting and
Manager's Planning. The financial
Responsibilities
manager collaborates
with peers, envisioning
and crafting strategies
Trading in
Financial
Coordinating
and
that mold the company's
Markets Controlling
future stance.

2. Making Crucial Investment and Financing Decisions. Guided by long-term plans, the
financial manager mobilizes capital for growth. A thriving firm achieves robust sales
growth, spurring investments in vital assets. Optimal sales growth rate becomes pivotal,
entailing decisions on investments, financing means, and balancing internal vs. external
funds, debt vs. equity, and long-term vs. short-term sources.

3. Coordinating and Controlling. Seamless collaboration across departments is the

financial manager's mandate for optimal business efficiency. Financial implications thread
through every decision, necessitating a holistic approach from all managers. For instance,
marketing choices shape sales growth, cascading into altered investment needs. Thus,
marketing decisions must harmonize with factors like fund availability, inventory strategy,
and plant capacity.

4. Trading in Financial Markets. In the financial realm, the manager navigates money
and capital markets. Every firm leaves an imprint on and is molded by the broader
financial landscape—where funds are sourced, securities traded, and investors' fates
determined.

5. Risk Management. In the world of business, risks are inevitable. They span from
financial uncertainties like commodity prices, currency shifts, and interest rate changes,
to natural disasters such as earthquakes, floods, fires, and the modern challenge of
COVID-19. Guiding this realm, financial managers shoulder the duty of crafting risk
management strategies and spotting potential hazards.

Task/Activity
The class will be divided into groups with 5 members. They will reflect and defend their
answer as to which of the financial manager’s responsibilities is the most important and

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have an effect in the firm. The group will then present their output. Below shows the
rubric for your presentation.

TOPIC 4: ALTERNATIVE FORMS OF BUSINESS ORGANIZATION

Across business landscapes, three fundamental forms

emerge: sole proprietorship, partnership, and
corporation. This module offers concise insights into each,
unraveling their distinct characteristics and defining traits.
Sole Proprietorship. Amidst various business forms, the
oldest, simplest, and most widespread is the sole
proprietorship. This setup entails a single individual
owning and operating the business, but with a caveat—your personal liability extends to
your business obligations. Legal and tax-wise, you and your business are one entity. While
this configuration offers ease in decision-making and minimal regulation, it falters in
terms of capital, posing challenges for substantial funding. Moreover, unlimited liability
for the owner means personal assets can be at
stake in times of business losses. Additionally, the
business's existence is intertwined with that of the
owner's.

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 Partnership. In a partnership, two or more
individuals share ownership, management
responsibilities, and the business's income
or losses. The profits are distributed among
partners and taxed on their personal
returns. Partners are jointly and individually
liable for each other's actions, and decision-
making involves consultation and
negotiation. While partnerships offer flexibility, they can lead to disagreements, and the
arrangement might not suit long-term changes. The partnership's life is contingent on the
partners, and it might have limited scalability. A significant drawback is unlimited
liability—partners are fully responsible for debts and errors. If a partner can't pay, others
might have to cover their share, making partnerships risky in certain scenarios.
Corporation. A corporation is an independent legal
entity formed under state law. It can enter contracts,
own assets, and employ staff. It's separate from
shareholders and shields them from individual legal
responsibilities when they act on behalf of the
business. Shareholders have limited liability, only
risking their investment if the corporation faces
bankruptcy. Corporate stock is transferable, ensuring continuity despite individual
changes. However, corporations have drawbacks. They face "double taxation," as
dividends aren't tax-deductible expenses, and owners are taxed on dividends. Ownership
separation from management can lead to conflicts of interest between managers and
shareholders.

Task/Activity
The students will be group with 5 members and will reflect and analyze on the impact of
COVID-19 pandemic to the three forms of business organization. Make sure that each
member will be able to contribute their insights. The output will be presented to the class.
Below is the rubric that will used for assessment of output.

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 TOPIC 5: AGENCY RELATIONSHIPS
Agency relationship is like a teamwork—principal and agent.
Principal gives agent permission to act legally on their
behalf. Agents must avoid conflicts of interest while doing
assigned tasks. This is called "agency." Laws clearly define
this partnership.
Agency Conflicts
An agency conflict arises when managers and
owners view things differently due to varying knowledge. For instance, managers may
want to retain earnings, but owners might expect dividends. Risk also sparks conflict as
managers and owners weigh risk differently. Managers often get perks like memberships
or jets, which can be misused. Such conflicts cost firms and owners. Secure managers
might not give their best effort, causing additional costs – called shirking.
Agency Costs
Agency costs are like internal fees within an organization due to information
differences or conflicts between bosses and workers. In a company, bosses are
shareholders, workers are managers. Shareholders want profit, managers might want
power, even if it harms the company's value. These differences cause agency costs. There
are three types: checking, securing, and leftover loss. Fixing this isn't free; there's a cost
– usually an expense for the firm.

ASSESSMENT: ORAL PRESENTATION

The students will be group into 5 members. Each group will research on one issue and
development in the field of financial management. The group will be given the freedom
to present their output in any way they want. Example is thru paradigm, short video,
infographic, etc. Each group will present their output and the rubric below will be used.
The group will be given 8-10 minutes to present.

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 LESSON 3
FINANCIAL STATEMENTS AND RATIOS, THEIR ANALYSIS AND IMPLICATIONS TO
MANAGEMENT

TOPICS
1. Kinds of Financial Statements;
2. Objectives and Limitations of Financial Statement Analysis;
3. Tools in Comparative Financial Statements Analysis; and
4. Financial Ratio Analyses and Its Effects in Decision Making

LEARNING OUTCOMES
At the end of the lesson, you should be able to create financial
statements and analyze it using methods and ratios.

Financial Statements represent a formal record of the financial activities of an entity.

These are written reports that quantify the financial strength, performance and liquidity
of a company. Financial Statements reflect the financial effects of business transactions
and events on the entity.

TOPIC 1: KINDS OF FINANCIAL STATEMENTS

There are four main kinds of financial statements, these are:

1. Statement of Financial Position

The Statement of Financial Position, also called as

balance sheet, shows an entity’s financial status on
certain date. It has three (3) parts:

▪ Assets: What the business owns or controls (like

cash, inventory, machines)

▪ Liabilities: What the business owes (like loans,

debts)

▪ Equity: What the business owes to its owners.

Equity: What’s left for owners. It’s what’s left
when assets pay off liabilities.

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2. Income Statement

The Income Statement, also called Profit and Loss Statement, tells how well a company
did in terms of profit or loss for a period. It has two parts:

• Income: What the company earned (like sales, dividends)

• Expenses: What the company spent (like wages, rent, depreciation)
Profit or loss is income minus expenses.

3. Cash Flow Statement

The Cash Flow Statement shows how cash moves during a period. It has three parts:

• Operating Activities: Cash from the main business actions.

• Investing Activities: Cash from buying/selling assets (not inventory).
• Financing Activities: Cash from raising capital, repaying debt, interest, dividends.

4. Statement of Changes in Equity

The Statement of Changes in Equity, or the Statement of Retained Earnings, shows how
owners' equity changed over time. It comes from:

• Net profit/loss from the Income Statement

• Share capital changes
• Dividends
• Gains/losses directly in equity (like revaluation surpluses)
• Changes due to accounting policy or error correction.

TOPIC 2: OBJECTIVES AND LIMITATIONS OF FINANCIAL STATEMENTS ANALYSES

Financial statement analysis serves to address a wide array of questions from diverse
users with different concerns and priorities. Yet, they all share common needs that drive
the analysis of financial statements. This exploration aims to uncover the company's
Profitability, Liquidity and Stability, Asset utilization or Activity, and Debt-utilization or
Leverage.
The core goal of financial statement analysis is to dissect the current and past financial
state (Balance Sheet) and performance (Income Statement) of the firm. This guides in
estimating and predicting future performance. However, it's crucial to note that
interpretations of financial ratios aren't always definitive; they can be challenged.
Moreover, the analysis relies on the financial statement, which has its limitations.
Ignoring these limitations could lead to erroneous decisions. Financial statements'
inherent limitations arise from various factors, including:

Ignoring changes in purchasing power and differing accounting practices in the industry.

• Neglecting currency purchasing power changes.

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 • Dependence on older financial statements weakens reliability, marking a risk
management tool.
• Misinterpreting Notes can misguide managers about risk levels.
• Unaudited statements might not conform to GAAP, leading to faulty analysis and
decisions.
• Unaudited statements might be inaccurate or fraudulent, eroding reliability.
• Audited statements lack absolute accuracy.
Lastly, stock exchange presence and accessible financial statements don't guarantee
financial stability or creditworthiness.

Task/Activity

Discuss comprehensively the following statements. The rubric below will be used in the
assessment.
1. Explain the main purpose of financial statements.
2. Exemplify the different kinds of financial statements.

TOPIC 3: TOOLS IN COMPARATIVE FINANCIAL STATEMENT ANALYSIS

Financial statements provide a comprehensive view of a business's assets, liabilities,
equity, expenses, and profit/loss. They're analyzed to gain insights. Let's explore.
1. Comparative Financial Statements: These include comparative and common size
• Comparative Balance Sheet: Compares assets and liabilities over time,
revealing statements. They reveal financial position and profitability
across different time periods. For accurate comparison, consistent
accounting principles are essential.current and long-term financial
positions and profitability.
• Comparative Income Statement: Compares income, expenses, and
profits over time, highlighting changes in profitability.
2. Common Size Statements: Also called 'Vertical analysis', percentages reveal
financial relationships in balance sheets and income statements.
• Common-Size Balance Sheet: Compares items as percentages of total
assets and liabilities.
• Common-Size Income Statement: Compares items as percentages of total
income and expenses.

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 3. Trend Analysis: This Pyramid Method observes operational results and financial
position over multiple years. Ratios are calculated and compared, showing
upward or downward trends.
4. Ratio Analysis: Quantitative analysis of financial statement data reveals
relationships between items. It assesses profitability, solvency, and efficiency.
5. Cash Flow Analysis: It tracks actual cash movement in and out of a business,
assessing inflows, outflows, and net cash flow. Cash flow statements project cash
utilization over an accounting year, helping evaluate liquidity and decision-
making.
Each method offers insights into different aspects of a business's financial health and
performance.

Task/Activity
Answer the questions comprehensively with 200 words or more:
In your own opinion, what is the benefit of using the different tools of Comparative
Financial Statement Analysis? What are the main view point of each tool? Does it really
help?

TOPIC 4: FINANCIAL RATIO ANALYSIS AND ITS EFFECTS IN DECISION MAKING

Ratios showcase connections between two factors. Financial ratios reveal relationships
between financial items using mathematical expressions.
When using ratios, your goal is to assess whether they are favorable or unfavorable. To
gauge this, you must adhere to established benchmarks that define the positive or
negative nature of the result. Standard ratios are often based on:

1. Company budget for the same period.

2. Industry standards for the firm's sector.
3. Benchmarks set by the firm's successful competitors.
4. Previous periods' ratios of the same firm.
5. Ratios applied by analysts in previous assessments.

Industry ratios represent average values established by a group of experts through

research. These ratios, grounded in real data, serve as benchmarks for financial
statement analysis. Industries have unique characteristics, so tailored ratios were
devised by experts. However, due to the complexity, analysts often rely on readily
available ratios of competitors.
Consistency in ratio calculation and usage ensures results can be compared accurately,
avoiding misinterpretation. Like any financial analysis tool, ratios have limitations. They
provide indicators of a company's strengths and weaknesses, but they are not
inherently good or bad. This stems from ratios originating from financial statements,
which, as mentioned, have their own limitations.

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Ratio analysis results can be expressed as percentages (%), fractions (1/4), currency
amounts (P25.50), or relative ratios (2:1).
Illustrative Example: Let's take the case of Riel Corporation, a prominent clothing
department store with 5 strategic metro branches. In this instance, the authors offer
computed ratios for the present year.
You are tasked to compute the ratio for the previous year.

Riel Corporation
Comparative Statements of Financial Position
Decembers 31, 2015 and 2014

2015 2014
Assets
Current Assets
Cash & Cash Equivalent 106,789 102,375
Trade & Other Receivables 327,611 277,467
Inventory 334,863 297,654
Prepaid Expenses 101,565 114,813
Total Current Assets 870,828 792,309

Non-Current Asset 135,754 166,481

Property, Plant & Equipment 7,500 7,500
Intangibles 143,254 173,981
Total Noncurrent Asset 143,254 173,981
TOTAL ASSETS 1,014,082 966,290

Liabilities and Shareholders’ Equity

Current Liabilities
Trade & Other Payables 238,000 208,703
Unearned Revenues 107,508 82,456
Notes Payable - current 45,000 45,000
Total current liabilities 390,508 336,159
Non-Current Liabilities
Notes Payable – non-current 208,422 253,500
Total Liabilities 598,930 589,659

Shareholders’ Equity
Preference Shares,
P100 par 105,000 105,000
Ordinary Shares, P1 par 15,000 15,000
Premium on Ordinary Shares 135,000 135,000
Total paid-in-capital 255,000 255,000

Retained Earnings 160,152 121,631

Total Shareholders’ Equity 415,152 376,631
TOTAL LIABILITIES & SHAREHOLDERS’ 1,014,082 966,290
EQUITY

Riel Corporation
Comparative Income Statements
For the period ending December 31, 2015 and 2014

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 2015 2014
Sales 3,007,887 2,732,712
Less: Cost of good sold 2,208,520 1,964,865
Gross Profit 799,367 767,847
Less: Selling Expenses 372,000 345,000
Administrative Expenses 207,000 213,000
Total Operating Expenses 579,000 558,000
Operating Income 220,367 209,847
Less: Interest Expense 41,860 43,905
Net Income before taxes 178,507 165,942
Less: Income Tax 62,477 58,080
Net Income after taxes 116,030 107,862

In our analysis, we'll assess the company's status based on:

1. Liquidity: This reflects the company's readiness to cover immediate cash needs,
like paying payables and operating costs.
2. Asset Utilization: We'll evaluate how effectively accounts receivable, inventory,
and long-term assets are being turned over. This measures asset liquidity and
management efficiency.
3. Debt-Utilization (Leverage): We'll gauge the firm's debt position relative to its
asset base and earning ability. This includes the mix of borrowing and equity,
along with the ability to handle fixed charges like interest and other obligations.
4. Profitability: We'll analyze the company's ability to generate satisfactory returns
on sales, total assets, and owners' investment.

Solution:
Liquidity/Short-term Solvency
1. Current ratio

(2015) = Current assets of P870,828 = 2.23:1 or 223%

Current liabilities of P390,508
(2014) =

A current ratio of 2.23:1 signifies that for every P1.0 of current liability, Riel Corporation
holds P2.23 in current assets to cover it. This result is often seen as favorable,
suggesting the ability to settle maturing debts with P1.23 in surplus for each P1 of
liability.
However, a universal current ratio doesn't exist; what's satisfactory varies. Some might
find a 1:1 ratio acceptable. A high current ratio doesn't automatically ensure debt
payment, especially if it's tied up in slow-moving inventory. Prepaid expenses, non-cash
items, aren't always included in ratios for the same reason.
Conversely, a low current ratio can be acceptable if the current assets are quickly
convertible to cash, such as collectible receivables or highly saleable securities.
Comparing the ratio with competitors or the firm's 5-year liquidity trend helps
determine its favorability.

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Upward and Downward Movement of Current Ratio

Changes in the current ratio stem from shifts in its components. Reflect on the
following statements and explore them using Riel Corporation's figures:

a. Increase in current assets or decrease in current liabilities increases the

current ratio.

Previous current
Components Increase (decrease) New current ratio
ratio
Total current assets P 50,000 P 10,000 P 60,000
Total current
P 25,000 P 25,000
liabilities
Current ratio = 2:1 2.4:1 increase

Previous current
Components Increase (decrease) New current ratio
ratio
Total current assets P 50,000 P 50,000
Total current
P 25,000 P (10,000) P 15,000
liabilities
Current ratio = 2:1 3.3:1 increase

b. If the previous current ratio is 1:1 and there is an increase or decrease of the
same amount on both the total current assets and total current liabilities, it
shall have no effect on the new current ratio or the new ratio will be the same
as the previous. To prove this, see the example below.

Previous current Increase of equal

Components New current ratio
ratio amounts
Total current assets P 50,000 P 10,000 P 60,000
Total current
P 50,000 P 10,000 P 60,000
liabilities
Current ratio = 1:1 no effect/ same
1:1
ratio

c. If the previous ratio is positive (current assets > current liabilities), and there
is an increase by the same amount in both total current assets and total
current liabilities, the ratio shall decrease and vice-versa. The opposite will
occur if the previous current ratio is negative (current liabilities > current
assets).
Previous current Increase of equal
Components New current ratio
ratio amounts
Total current assets P 50,000 P 10,000 P 60,000
Total current
P 25,000 P 10,000 P 35,000
liabilities
Current ratio = 2:1 positive 1.71:1 decrease

Components Previous current Increase of equal New current ratio

ratio amounts
Total current assets P 25,000 P 10,000 P 35,000

20
 Total current
P 50,000 P 10,000 P 60,000
liabilities
Current ratio = 0.5:1 negative 0.53:1 increase

2. Acid Test Ratio/quick ratio/liquidity ratio

Quick assets or (Cash + Trading Securities + Receivables)

of P106,789 + 327,611
(2015) = ____________________________________________________
Current liabilities of P390,508

= 1.11:1 or 1.11%

(2014) =

The quick ratio provides a stricter assessment of liquidity. This implies that for each P1.0
of liability, the company possesses P1.11 of current assets for payment. In this light,
Riel's liquidity isn't as robust as it seemed with the current ratio. Generally, a higher
quick ratio indicates better liquidity, enabling timely payment of current debts.
Notably, inventories are omitted due to their uncertain salability and conversion
timeline from raw materials to finished goods to receivables, eventually becoming cash.
This uncertainty necessitates their exclusion from the formula.

Asset Utilization Liquidity Analysis

1. For Accounts Receivable

Accounts Receivable Turnover

Net Sales of P3,007,887

(2015) = _____________________________ = 9.94 times
Average Accounts Receivable of
277,467 + 327,611
_____________________________
2
(2014) =

Note: For the 2014 receivable turnover, you can utilize the closing inventory of
2014 as the average inventory.

Day’s Sales in Average Receivables or Average Collection Period

365 days
(2015) = ___________________________________________ = 36.7 days
Receivable turnover of 9.94 times
(2014) =

This ratio assesses the liquidity of the company's receivables. The outcome of 9.94 times
signifies that the company can recover its receivables about 9.94 times annually. A high

21
turnover rate implies swift collection of receivables. In Riel Corporation's context, it can
gather average receivables every 37 days or roughly every month. This holds significant
managerial importance, as a high receivable turnover expedites cash conversion,
enabling management to bolster operations and ultimately amplify company profits.

A high receivable turnover rate doesn't guarantee flawless or efficient collection

practices. Several factors can contribute to the high turnover rate, including:

• Price level changes

• Changes in sales terms
• Special sales promotions
• Strikes and plant shutdown during the previous period
• Higher cash sales
• The turnover was computed when most receivables are collected

While a high turnover rate suggests swift collections, it's essential to consider these
underlying factors for a more accurate assessment of the company's receivables
management.

2. For Inventory
The inventory turnover ratio measures how many times the average inventory is
sold (for finished goods and merchandise), used (for raw materials), or processed (for
work in process). The formulas vary based on the type of inventory being analyzed:

Raw Materials Raw Materials Used

Inventory Turnover = _____________________________
Average Raw Materials Inventory

Work in Process Cost of Goods Manufactured

Inventory Turnover = _____________________________
Average Work in Process Inventory

Finished Goods Cost of Goods Sold

Inventory Turnover = _____________________________
Average Finished Goods Inventory

Merchandise Cost of Goods Sold

Inventory Turnover = _____________________________
Average Merchandise Inventory

Beginning Inventory + Ending Inventory

Average inventory = _____________________________
2

In our example we used Merchandise Inventory, hence the turnover rate is

computed as:
22
 Cost of Goods Sold of P2,208,520
(2015) = _________________________________ = 6.98 times
Average inventory of P297,654+P334,863
2
(2014) =

Note: Use ending inventory of 2014 to compute 2014 inventory turnover.

The inventory turnover ratio reflects a company's efficiency in managing and selling its
inventory. Generally, a higher turnover rate is considered better. However, this isn't
always the case. A high turnover rate could indicate under-investment in inventory, lost
orders, shortages, or even slow-moving or obsolete stock. Conversely, a low turnover
rate might suggest excessive inventory or slow sales.
It's crucial to note that the interpretation of financial ratios, including inventory
turnover, varies across industries. Perishable goods industries like agriculture tend to
have high turnover, while industries like jewelry or automobiles may have lower
turnover rates but higher profits.
For Riel Corporation, the slightly unfavorable inventory turnover indicates that they
could improve their inventory management. Since fashion is dynamic and items have a
short shelf life, a higher turnover would be more suitable. Management should consider
strategies to enhance their inventory turnover ratio and overall efficiency.

Number of Days in Inventory or Average Sale Period

365 days
(2015) = _____________________________ = 52.30 days
Inventory Turnover of 6.98 times

(2014) =

The days in inventory metric reveals how many days it takes to sell the entire inventory.
Generally, a lower result is better. A shorter time to sell inventory implies faster
conversion of funds into cash, leading to higher earnings. Riel Corporation's 52.30 days
in inventory could be enhanced further. Ideally, management should aim to reduce this
number, meaning they should aim to sell their inventory in a shorter period for
improved efficiency.

3. Property, Plant and Equipment (PPE) or Fixed Asset Turnover

Net Sales of P3,007,887

(2015) = ________________________________ = 19.90:1
Average net PPE of P135,754 + P166,481
2
(2014) =

23
This turnover signifies the efficiency of the company in utilizing its Property, Plant, and
Equipment (PPE) to generate revenue. The calculated ratio of 19.90:1 suggests that for
every P1.0 invested in PPE by the company, it generates P19.90 in sales revenue. This
indicates that Riel Corporation is adept at leveraging its PPE to generate revenue
efficiently.

4. Total Asset Turnover

Net Sales of P3,007,887

(2015) = ________________________________ = 3.04:1 or 304%
Average Total Assets of P1,014,082 + 966,290
2
(2014) =

The asset turnover ratio showcases the company's effectiveness in using its total assets
to generate revenue. A low turnover rate implies sluggish or limited sales generation, or
excessive investment in assets. Observing Riel's asset turnover rate (3.04:1), we can
deduce that for every P1.0 worth of assets held by the company, P3.04 in sales revenue
is generated. From this, we can deduce that management makes efficient use of its assets.
Nonetheless, it might be advisable for the company to implement additional asset
utilization strategies to further bolster asset efficiency.

Debt-Utilization (Leverage) Ratios

Leverage ratios provide insights into how effectively the company handles its financial
responsibilities. In this context, you must evaluate the relationship between liabilities
and owners’ equity in comparison to total assets, or the relationship between total
liabilities and owners’ equity.
As discussed earlier in Chapter 3, owners' equity serves as a safety buffer for creditors. If
the company's assets were to decrease, owners' equity could absorb the decline. In the
case of Riel Corporation, a decline of up to P415,152 (equivalent to stockholders’ equity)
or P598,930 could occur, and the company would still have the ability to meet its
obligations to creditors.
The following ratios may be used in the analyses:

1. Debt to Equity Ratio

Total Liabilities of P598,930

(2015) = ___________________________________ = 1.44:1 or 144%
Total Stockholders’ Equity of P415,152

(2014) =

The utilization of borrowed funds to conduct business operations is known as trading on

equity. This approach involves borrowing money and paying fixed interest charges from
the loan. The borrowed funds are then invested to expand business activities and
potentially increase profits. This practice is a form of financial leverage.
When a company borrows funds for its operations, the total assets and total liabilities
(representing the borrowed funds) increase, while owners' equity remains constant. If

24
profits rise, trading on equity using borrowed funds can amplify the return on owners'
equity but also increase the debt/equity ratio.
The debt/equity ratio reflects a company's capital structure and associated risk.
Liabilities introduce both risk and potential benefits for owners. It's risky if the borrowed
funds are not used effectively and interest expenses surpass operating income, resulting
in financial strain. However, if the borrowed funds lead to improved operations and
higher income, the higher income can outweigh the interest expenses, making liabilities
beneficial. This balance highlights the trade-off between risk and return.
The debt/equity ratio measures the risk linked to a company's capital structure
concerning the relationship between funds from creditors (liabilities) and funds from
owners. A higher ratio signifies a riskier capital structure.
With Riel Corporation's debt/equity ratio at 144%, there's elevated risk in its capital
structure. It's crucial for management to use borrowed funds efficiently to enhance
operations and achieve higher returns while managing associated risks effectively.

2. Debt Ratio

Total Liabilities of P598,930

(2015) = ______________________ = 0.59:1 or 59%
Total Assets of P1,014,082

(2014) =

The debt ratio signifies that for every P1.0 of the company's assets, P0.59 is financed by
borrowing or provided by creditors. This ratio essentially indicates the proportion of
total assets funded by debt. As discussed earlier, a higher debt proportion generally
corresponds to increased risk. Additionally, the risk is heightened because in the event
of bankruptcy, creditors are prioritized for repayment. If the company's assets aren't
adequate to cover all debts, owners may receive no repayment.
With Riel Corporation's debt ratio at 59%, there's a relatively high level of risk for the
company. Management should exercise caution regarding the risks associated with
borrowing. Moreover, this ratio could potentially make it more challenging for
management to secure loans when needed. A lower owners' equity structure diminishes
the safety cushion for creditors.

3. Number of Times Interest Earned

Net Income before interest and Income tax or

Operating Income of P220,367
(2015) = ______________________________________ = 5.26 times
Annual Interest Expense of P41,860

(2014) =

The times interest earned ratio assesses the company's capacity to cover its fixed
interest expenses. It provides insight into the firm's ability to safeguard the interests of
long-term creditors. Riel Corporation's times interest earned ratio of 5.26 times suggests

25
that the company is highly capable of meeting its fixed interest obligations using its
operating income. This indicates a strong ability to manage its debt and fulfill financial
commitments to creditors.

Profitability Ratios

1. Gross Profit Ratio

Gross Profit of P799,367

(2015) = __________________________ = P0.26 or 0.26:1 or 26%
Net Sales of P3,007,887
(2014) =

The gross profit ratio reflects the proportion of gross profit to sales revenue. This ratio is
used to determine if the generated gross profit is sufficient to cover operating expenses
and achieve the desired net income. It also evaluates the company's effectiveness in
managing production or acquisition costs, inventory control, and the markup on
products sold. The markup should not only cover inventory-related costs but also
operating expenses, ensuring a targeted profit.
Riel Corporation's gross profit ratio of P0.26 suggests that they are generating a
substantial gross profit relative to their sales revenue. However, a 26% gross profit ratio
implies a 74% cost ratio, which is relatively high. To improve profitability, management
should implement measures to control costs more effectively, thereby reducing the cost
of sales and enhancing the gross margin ratio in the future.

2. Net Profit Ratio or Profit Margin

Net Profit of P116,030

(2015) = __________________________ = P0.039:P1 or 3.9%
Net Sales of P3,007,887
(2014) =
The net profit ratio represents the proportion of net income to sales revenue. It
provides insight into the firm's profitability after accounting for all revenues, costs,
expenses, and taxes. An interpretation of Riel Corporation's net profit ratio of 39%
indicates that for every P1.0 of sales revenue, the company achieves P0.39 in net
income. This demonstrates a positive level of profitability.
However, it's essential for management to analyze the company's operations carefully
to identify opportunities for increasing revenue and reducing costs. By implementing
strategies that enhance revenue generation and decrease expenses, Riel can work
towards maximizing its profitability.

3. Return on Assets (ROA)

Net Income of P116,030

(2015) = _______________________________________ = 0.12:1 or 12%
Average total assets of P1,014,082 + 966,290
2
OR

26
(Du Pont Method) = Net Profit ratio of 3.9% x Total asset turnover of 3.04 = 12%

(2014) =

4. Return on Equity

Net Income of P116,030

(2015) = ___________________________________________ = 0.29:1 or 29%
Ave. stockholders’ equity of P415,142 + P376,631
2
(2014) =

This ratio can be interpreted to signify that for every P1.0 of capital invested by the
owners to generate revenue, the company achieved P0.29 of net income. Similar to the
Return on Assets (ROA), this ratio is employed to assess the firm's efficiency in utilizing
its total invested assets to generate returns for shareholders.

5. Du Pont System of Analysis

After examining and evaluating the array of ratios, you might find them overwhelming.
Similarly, Donald Brown, the Chief Financial Officer of Du Pont, shared this sentiment.
Consequently, he devised the Du Pont Equation, also known as the Du Pont System
Analysis. This approach centers on achieving a satisfactory return on assets through
either a high net profit ratio or a rapid asset turnover, or a favorable combination of
both.
A favorable net profit ratio indicates effective cost management, while a high asset
turnover rate reflects efficient asset utilization. Different industries exhibit diverse
operational and financial structures. Industries with substantial capital investment lean
towards a high net profit ratio coupled with a relatively low asset turnover. In contrast,
industries like food processing prioritize a low net profit margin but a high asset
turnover, resulting in a satisfactory return on assets.

The model includes the following formula to compute return on equity:

Return on Assets = Profit margin or Net profit ratio x Asset turnover

Debt Ratio = Total liabilities/Total Assets
Equity Ratio = 1-Debt ratio

Return on Assets
Return on Equity = __________________
(Du Pont Method) Equity Ratio

Using the analysis for Riel Corporation:

Return Asset = 12%

(Du Pont)

Debt ratio = 59%

27
 12%
Return on Equity = ______________ = 29%
1-59%

Ratio Used To Gauge Company Liquidity or Short-term Solvency

The following are the most common ratios to gauge a firm’s liquidity or short-term
solvency:

Ratio Formula Significance

_Current Assets_
Current Liabilities
Signifies the firm’s capacity
Note: Some analyst does
1. Current ratio to pay or meet current
not include prepaid
financial obligations.
expenses in the
computation of the
current assets.
__Quick Assets__
A stricter test of liquidity.
Current Liabilities
Suggests the firm’s ability
2. Quick ratio to pay current financial
QA =cash + trading
obligations by considering
Securities + trade and
more liquid current assets.
other receivables
Suggests the relative
3. Current Assets to
_Current Assets_ liquidity of the total assets
Total assets or
Total Assets and shows the proportion
Working capital to
of current assets to total
Total assets
assets.
Signifies the proportion of
each current asset item to
4. Each current asset _Each Current Asset item_ total assets. It also
item to total Total Current Assets indicates the liquidity of
current assets the current assets and the
breakdown of each
component.
Cash & cash equivalents + Gauges the firm’s ability to
Trading Securities + Cash pay current financial
5. Cash flow liquidity
flow from Operating obligations by considering
ratio
Activities cash and other cash
Current Liabilities equivalents.
____Current liabilities____
6. Defensive Interval Indicates the coverage of
Cash and cash equivalents
ratio current liabilities.

Ratios Used To Gauge Asset Management Efficiency and Liquidity

The following are the most common ratios to gauge a firm’s ability to efficiently manage
their assets and measure liquidity or short-term solvency:

Ratio Formula Significance

Net Sales or Net Credit Signifies the number of
1. Receivable
Sales times the average
Turnover
Average Receivables receivables are collected

28
 during the year. It also
measures the firm’s
efficiency in collecting
their receivables.
This ratio is very much
related to accounts
receivable turnover. It
2. Average Collection
_365 days or 360 days_ indicates the number of
Period or Number
Receivable turnover days the firm collects its
of Days in
average receivables. It
Receivables
implies the efficiency of
the firm in collecting their
receivables.
Suggests the number of
times the average
____Cost of goods sold___ inventory was disposed of
3. Merchandise
Average Merchandise during the accounting
Turnover
inventory period. It also signifies the
over or under investment
of the firm in inventory.
Suggests the number times
the average inventory was
____Cost of goods sold___ disposed of during the
4. Finished Goods
Average finished goods accounting period. It also
Turnover
inventory signifies the over or under
investment of the firm in
their inventory.
Signifies the number of
Cost of Goods times average inventory
5. Work in Process Manufactured was produced during the
Turnover Average Work in Process accounting period. It also
inventory indicates the time taken to
produce the products.
Measures the number of
times average raw
___Raw Materials Used__ materials inventory was
6. Raw Materials
Average Raw Materials used during the period. It
Turnover
Inventory also indicates the
sufficiency of the raw
materials available.
Indicates the number of
days by which inventories
365 days or 360 days_
7. Number of Days in are used or sold. Implies
Inventory turnover
Inventory the firm’s efficiency in
consuming or selling
inventories.
Cost of Goods Sold + Signifies the pace by which
Operating Expenses working capital is used. It
8. Working Capital (excluding charges not also indicates the
Turnover requiring working capital) adequacy of working
OR Net Sales capital in the firm’s
Average Working Capital operations.

29
 Cost of Goods Sold +
Operating Expenses +
Income taxes + Other Signifies the pace by which
expenses (excluding current assets are used. It
9. Current Asset
charges not requiring also indicates the
Turnover
current assets like adequacy of current assets
depreciation and in the firm’s operations.
amortization expenses)
Average Current Assets
Signifies the firm’s ability
Net Credit Purchases or to pay trade payables. It
Net Purchases also measures the number
10. Payable Turnover Average Trade and Other of times the amount of
Payables or Accounts average payables is paid
Payables during the accounting
period.
Measures the length of
Day’s sales in merchandise time in order to convert
11. Operating Cycle
inventory + No. of days to cash to inventory to
(Trading Concern)
collect receivables receivables and back to
cash.
No. of days’ usage in raw
Measures the length of
materials inventory + No.
time in order to convert
of days in production
12. Operating Cycle cash to raw materials
process + No. of days’ sales
(Manufacturing inventory to work-in-
in finished goods inventory
Concern) process to finished good
+ No. of days to collect
inventory to receivables
receivables
and back to cash.
Average Cash Balance
Indicates the ability of the
Cash Operating Costs firm’s cash to pay the
13. Days Cash
365 days or 360 days average daily cash
obligations.
Indicates the firm’s ability
_____Net Sales____ to efficiency manage their
14. Asset Turnover
Average Total Assets assets to generate
revenue.
15. Property, Plant &
Indicates the firm’s ability
Equipment _____Net Sales____
to efficiently manage their
Turnover or Fixed Average PPE Assets
PPEs to generate revenue.
Asset Turnover
Ratios Used to Gauge Firm’s Utilization of Debt and Company Stability
The following are the most common ratios used to gauge a firm’s stability or long-term
solvency:

Ratio Formula Significance

Measures the relationship
or proportion of the
1. Debt to Equity _____Total Liabilities____
capital provided by
Ratio Owners’ Equity
creditors to the capital
provided by owners.
2. Equity to Debt _____Owners’ Equity____ Measures the margin of
Ratio Total Liabilities safety of creditors.

30
 Measures the proportion
of the firm’s assets coming
3. Proprietary or _____Owners’ Equity____ from its owners. Signifies
Equity Ratio Total Assets financial stability of the
firm and cautions the
creditors.
Measures the proportion
of the firms’ assets coming
_____Total Liabilities____
4. Debt Ratio from its creditors. It also
Total Assets
signifies the extent of
trading on equity.
5. Fixed Assets to Measures the portion of
PPE or Fixed Assets (net)
Total Owners’ the owners’ equity used to
Owners’ Equity
Equity acquire fixed assets.
Signifies whether the firm
6. Fixed Assets to PPE or Fixed Assets (net)
over or under invested in
Total Assets Total Assets
PPE.
Measures the extent
7. Fixed Assets to
PPE or Fixed Assets (net) covered by the carrying
Total Long-term
Total Long-term Liabilities value of PPE to long-term
Liabilities
obligations.
_______Net Sales_______ Signifies the firm’s
8. Plant Turnover Average PPE or Fixed efficiency in using their
assets (net) PPE.
Measures the carrying
value of net assets for
every ordinary share
Ordinary Shareholders’ outstanding. It also
9. Book Value per Equity indicates the amount
Share Number of Ordinary which the shareholders
Shares Outstanding can recover if the firm sells
its assets upon liquidation
or converts them into cash
at their book values.
Signifies the firm’s capacity
in paying fixed interest
Net Income before Interest
10. Number of Times charges. It measures the
and Income Taxes
Interest Earned number of times interest
Annual Interest Charges
charges is covered by the
firm’s operating income.
11. Number of Times
Measures the firm’s ability
Preference Shares __Net Income After Tax__
to pay the preference
Dividend Preference Shares
shareholders’ dividend
Requirement is Dividend Requirement
requirement.
Earned
Net Income before Taxes &
12. Number of Times Fixed Charges Indicates the firm’s ability
Fixed Charges are Fixed Expenses (Rent, to pay annual fixed
Earned Interest, Sinking Fund charges.
payment before taxes)

Ratios Used To Gauge Firm’s Profitability and Return to Owners

31
The following are the most common ratios used to gauge a firm’s profitability and returns
to owners.

Ratio Formula Significance

Measures the amount of
1. Rate of Return on the net income per peso of
Sales or Net Profit ___Net Income__ sales. It also shows the
Ratio or Net Profit Net Sales proportion of the net
margin income to the firm’s sales
revenue.
Measures the company’s
Return on Sales x Asset profitability in using their
turnover total assets. It indicates
the net income generated
2. Rate of Return to
OR by using the firm’s total
Total Assets (ROA)
assets. Signifies
_____Net Income____ management efficiency in
Average total Assets using their assets to earn
income.
Signifies management
_____Net Sales____ efficiency in using their
3. Asset Turnover
Average Total Assets assets to generate sales
revenue.
Measures the gross profit
per peso of sales revenue.
This ratio is important in
_____ Gross Profit_____
4. Gross Profit ratio ascertaining the adequacy
Net Sales
of gross profit to meet
operating expenses plus
their desired profit.
Measures the portion of
_Operating Income_
5. Operating Ratio sales revenue used to
Net Sales
cover operating costs.
Cash flow from Operating
Indicates the firm’s ability
6. Cash flow margin activities
to translate sales into cash.
Net Sales
Gauges management
7. Rate of Return on
______Net Income_____ efficiency in using current
Current Assets or
Average Current Assets assets to generate net
Working Capital
income.
8. Rate of Return on Measures management
______Net Income_____
Net working capital efficiency in using net
Average net working
(current assets – working capital to
Capital
current liabilities) generate revenue.
Indicates the amount of
return per peso of owners’
9. Rate of Return on ______Net Income_____ equity. Gauges
Owners’ Equity Average Owners’ Equity management efficiency in
using its invested capital to
generate revenue.
Net Income - Preference
Measures the peso return
10. Earnings Per Share share dividend
on each ordinary share
requirement

32
 No. of Ordinary Shares issued. Signifies the firm’s
Outstanding ability to pay dividends.
Indicates the relationship
between the market price
11. Price-earnings _Market price per share_
of ordinary shares and the
Ratio Earnings Per Share
earnings of each ordinary
share.
Measures the rate at
12. Earing-Price Ratio
___Earnings Per Share__ which the share market is
or Capitalization
Market Price per Share capitalizing the value of
Rate
current earnings.
Dividends Paid or Declared Indicates the earnings
13. Dividends Per
Ordinary Shares distributed to the owners
Share
Outstanding on a per share basis.
Measures the percentage
14. Payout Ratio or __Dividends per Share__
of the company’s earnings
Dividends Payout Earnings Per Share
paid to owners.
Measures the probability
15. Retained Earnings __Retained Earnings__
of declaration of dividends
to Share Capital Share Capital
by the firm.
16. Market Price to
_Market Price per Share_ Signifies the under or over-
Book Value per
Book Value per Share valuation of shares.
share

ASSESSMENT: ORAL PRESENTATION

Students will be group into 5 members. Each group will create a short video and will
thoroughly discuss the following topics:
1. Coverage of FSA ratios in terms of liquidity, asset utilization, debt utilization and
profitability.
2. The significance of the following:
a) Liquidity;
b) Asset utilization;
c) Debt utilization; and
d) Profitability ratios.

33
 LESSON 4
INTEREST RATES, BONDS AND STOCKS VALUATION

TOPICS
1. Interest Rates and Required Returns;
2. Differences Between Debt and Equity Capital;
3. Corporate Bonds Fundamentals and Valuation; and
4. Ordinary and Preference Shares Fundamentals and Valuation

LEARNING OUTCOMES
At the end of the lesson, you should be able gauge interest rates,
bonds and stocks valuation and assess the risk inflicted in each transaction.

TOPIC 1: INTEREST RATES AND REQUIRED RETURNS

Interest is an extra fee, known as the interest rate, that borrowers pay to lenders when
borrowing money. It's added to the initial amount borrowed, called the principal. The
interest rate is usually presented as an annual percentage, and the payment can be a
fixed sum (fixed rate) or can vary based on certain conditions (variable payment).
Essentially, interest acts as a toll for using credit, with a defined cost for a set period of
borrowing.
Here are five important things to understand about interest when applying for credit or
taking out a loan:

• Varied Terms: The amount of interest you'll pay is determined by the loan
agreement between you and the lender. It's influenced by factors like the loan
amount, repayment period, and interest rate.
• Additional Cost: Interest is an extra expense on top of the principal amount you
borrowed. You must repay both the principal and the interest over time.
• Linked to Rates: Interest rates for loans are often connected to prevailing
banking interest rates. These rates can change over time, affecting the interest
you pay.
• Credit Score Impact: Your credit score can significantly impact the interest rate
you receive on loans or credit cards. Higher credit scores often lead to lower
interest rates.
• Late Payments Matter: For credit cards and some loans, missing payments or
being late can lead to increased interest rates. It's important to make payments
on time to avoid rising interest costs.

When delving into the world of interest, it becomes evident that there are several
different types of interest that borrowers may encounter. Therefore, it's highly
advantageous for borrowers to familiarize themselves with these various interest types

34
and their implications for obtaining credit or a loan. Gaining a comprehensive
understanding of interest, in all its forms, empowers borrowers to make informed
decisions that can lead to more favorable terms when applying for loans or credit
accounts in the future.
Here's a breakdown of the different types of interest and how they can affect
consumers looking for credit or loans:
1. Fixed Interest

A fixed interest rate is popular among consumers precisely because of its simplicity and
stability. The interest rate remains constant throughout the duration of the loan or credit
account, making it easy for borrowers to anticipate and budget their payments. Since
both the borrower and the lender agree upon a fixed rate from the outset, there are no
surprises or uncertainties regarding the cost of borrowing. This clarity makes fixed
interest rates a straightforward and reliable option for those seeking credit or loans.

For example Imagine borrowing P10,000 from a bank. If the fixed interest rate is 5%, the
total cost of the loan would be P10,500 – that includes both the borrowed amount and
the interest.
2. Variable Interest (Fluctuate)

Interest rates can change, and that's what happens with variable interest rates. They're
linked to base rates like the "prime interest rate." If base rates drop, borrowers benefit
by paying less interest. But if rates rise, borrowers could pay more. Banks use this to
keep rates balanced and fair. If prime rates fall after getting a loan, borrowers with
variable rates save money. It's a trade-off that helps both lenders and borrowers stay on
track with market changes.
3. Annual Percentage Rate (APR)

The annual percentage rate (APR) shows your yearly interest cost on the loan's total
amount. Credit card companies use APR for interest rates when you carry a balance. It's
calculated by adding the prime rate and the lender's margin. That gives you the annual
percentage rate.

4. The Prime Rate

The prime rate is a lower interest rate that banks offer to preferred customers for loans.
It's connected to the U.S. federal funds rate, which banks use when borrowing from each
other. While average borrowers might not get this rate, other loan rates are linked to it,
like mortgages, auto loans, and personal loans.

5. The Discount Rate

The discount rate is the interest rate set by the U.S. Federal Reserve for lending money to
financial institutions on a short-term basis. It helps banks manage funding shortages,
address liquidity problems, and prevent bank failures in times of crisis.

6. Simple Interest

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Simple interest is a straightforward method used by banks to calculate interest rates for
borrowers (the other common method is compound interest). Similar to APR, the
calculation for simple interest is simple. Here's how banks calculate it:

Principal x interest rate x n = interest

For instance, if you deposited P5,000 into a money market account with a 1.5% interest
rate for three years, the interest earned over that period would be P450 (< P5,000 * 0.015
* 3 = P450 >).

7. Compound Interest

Banks use compound interest for rates. It's interest on both loan amount and previous
interest. Each year, interest adds up. Next year's interest is on this total. Like interest on
interest.

Calculating compound interest:

1. Principal × Interest = Year 1 interest.

2. Principal + Year 1 interest = Year 2 interest.

3. (Principal + Year 1 interest) × Interest = Year 3 interest.

The key difference between simple interest and compound interest is time.

Task/Activity

Each student will answer the following statements comprehensively. The rubrics below
will be used to assess the students.

1. Explain what interest rate is.

2. Discuss the difference between short- and long-term interest rates.
3. Explain how interest rates are impacted the health of the economy.

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 TOPIC 2: DIFFERENCES BETWEEN DEBT AND EQUITY CAPITAL

Capital is essential for businesses. It can come from owning or borrowing. Owned capital
is like equity (ownership), while borrowed capital is debt (owed money). Equity means
ownership through stocks. Debt is money borrowed from banks or others, paid back with
interest. Choosing between debt and equity can be confusing for beginners. Let's
compare them to find what suits your business.

Debt
Money a company borrows is called Debt. It means owing money. It's a cheaper way to
get funds than equity. Debt includes loans, debentures, and bonds. Loans are from banks,
while debentures and bonds are for the public. They have fixed interest and must be paid
on time. Interest is tax-deductible. But too much debt can be risky. It can be secured (with
assets as backup) or unsecured.

Equity

Equity in finance means a company's net worth. It's permanent capital divided into shares.
Investing in equity means owning part of the company. It costs more than debt. Equity
includes ordinary and preference shares, plus reserves. Investors get dividends as returns.
Dividends vary for ordinary shares and fixed for preference shares, but not tax-deductible.
Equity is risky; gets paid after debts in a shutdown. Dividends are optional for equity, and
preference shares are redeemed after some time.

Key Differences Between Debt and Equity

Here's the difference between debt and equity simply:

1. Debt is what a company owes, paid later. Equity is money from shares, kept longer.
2. Debt is borrowed, equity is owned.
3. Debt is owed money, equity is owned money.
4. Debt has a time limit, equity is long-term.
5. Debt holders are creditors, equity holders are owners.
6. Debt is safer than equity.
7. Debt is loans, equity is shares.
8. Debt's return is interest, equity's is dividends.
9. Debt's return is fixed, equity's varies.
10. Debt can be secured, equity can't.
Balance debt and equity for success; 2:1 ratio is good.

Task/Activity

Each student will draw a paradigm that maps the differences of debt and equity capital.
The output will be assessed based on the rubric below.

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 TOPIC 3: CORPORATE BONDS FUNDAMENTALS AND VALUATION

What are Corporate Bonds?

Corporate bonds are like loans from companies. They help
fund operations and growth. They offer more interest
than government bonds but can be riskier due to potential
default. Different types have different risk and returns.
Valuing them is like estimating future money, considering
risk. The chance of default and what's received if it
defaults affect the value.

Different Kinds of Bonds

1. Treasury bonds

Treasuries are from the government, fund deficits. Safe due to government
backing. Low yields, tax-free munis have exceptions. They're stable in downturns,
no state tax on interest.

2. Investment-grade corporate bonds

Investment-grade corporates are from strong companies. Ratings are at least

triple-B. Default risk is low. Yields higher than Treasuries, fully taxable. They
underperform Treasuries in downturns.

3. High-yield bonds

These bonds are from weaker companies, ratings below triple-B. Default is
possible. Prices tied to shaky balance sheets. Follow stock prices, not like
investment-grade bonds.

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 4. Foreign bonds

These investments are a bit different. Some are in dollars, but most foreign bond
funds have foreign-currency debt. These bonds promise fixed payments in
another currency. When converted to dollars, payments change with exchange
rates. If the dollar gets stronger, payments become smaller in dollars. Exchange
rates matter more than interest rates for these funds.

5. Mortgage-backed bonds

Mortgage-backed bonds worth P25,000 (others are P1,000 or P5,000) have

"prepayment risk." When more mortgages are paid early, their value falls. They
don't gain from lower interest rates like other bonds.

6. Municipal bonds

"Munis" are bonds from U.S. states and local governments. Tax-free interest, but
not for all. Taxable bonds have higher yields compensating for taxes. Depending
on your bracket, taxable bonds might be better.

TOPIC 4: ORDINARY AND PREFERENCE SHARES FUNDAMENTALS AND VALUATION

Ordinary shares
Ordinary shares (common stock) give voting rights and dividends. You can influence
decisions like salaries. Dividends are not guaranteed; companies might reinvest. Ordinary
shareholders get leftover profits after preferred shares. They're last in line when a
company is liquidated. More risk, more reward. They pay share price when issued. They
can vote for the board and review financial statements.

Value of Ordinary Shares

Ordinary shares are on public exchanges and privately traded. They often have a small
"par value." Market value comes from business worth and investor feelings.

Preference shares

Preference shares lack votes but get priority for dividends. They're first in line during
business operations and liquidation. Dividends are agreed and paid at intervals, making
them less risky. They might not benefit from company growth in dividends. But it also
means stability, appreciated by investors. Companies can skip dividend payments,
impacting preferred shareholders. The type of preference share determines what
happens in such cases.

Ordinary Shares:

- They give ownership and votes.

- Dividends change based on company performance.

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- Dividends come after preferred shares'.

- They're last in line during business liquidation.

- Riskier but more profit potential.

- They only pay share price when issued.

Preference Shares:

- No votes, but priority in dividends.

- Dividends are regular and defined.

- They're less risky but fixed returns.

- Types: cumulative (missed dividends carry over) and non-cumulative (missed dividends
are lost).

ASSESSMENT: ORAL PRESENTATION

The students will be group into 5 members. Each group will research about one local or
one international company with corporate bonds, ordinary and preference shares. It
should be presented in a 5-minute video clip. Each member should contribute their
insights regarding about the companies that they choose.

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 LESSON 5
CORPORATE PLANNING, AND BUDGETING

TOPICS
1. Corporate Planning;
2. Financial Budgeting;
3. Estimating Sales;
4.
LEARNING OUTCOMES
At the end of the lesson, you should be able to:
1. Explain the basic concepts involving financial forecasting, corporate
planning, budgeting, and estimate sales.

TOPIC 1: CORPORATE PLANNING

In a tough business world, good financial

planning helps. Think ahead for events
like inflation and recession. Plan well to
make the business better. Set goals for
short and long terms, then make
financial plans. These show how well the
business is doing and help fix things
when needed.
Anastacio (2016) describe corporate
planning as an organized, step-by-step
process. It helps top managers guide the
company's future by regularly doing strategic, project, and operational planning.
Strategic Planning.
Strategic planning maps out the company's path
ahead. It's like a GPS for business. Everyone
works with the same plan. It defines what the
company is and what it aims for, optimizing its
future. Using TOWS (Threats, Opportunities,
Weaknesses, Strengths) analysis, the company
looks at its environment and itself. Key players,
often led by the president, make the plan as a
team. They find the best way forward together.

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Project Planning
This is also known as capex (capital expenditure)
planning. It's about planning for new things like
equipment or products. Crucial to this is setting
spending targets and deciding where to invest.
It depends on the company and its plans,
history, and economy. This framework helps
decide how much to spend on new things.
Operational Planning
Operational planning uses resources effectively
to meet goals set during strategic planning. It's
department-focused and guides day-to-day
tasks. It's detailed and helps people do their
daily work. It tells what, who, when, and how
much.

Task/Activity

The students will be group into 5 members. They should research about one corporation
and identify its strategic plan, project plan, and operational plan. Each member should
contribute their insights regarding the different plans they have researched. The output
will be presented and the rubric below will be used for the evaluation of their output.

42
 TOPIC 2: FINANCIAL BUDGETING

Once corporate plans are set, the company

must put a money value to them. But plans
need control to happen. Anastacio (2016)
say a budget is a formal plan in numbers. It's
a tool for managers to plan and control
resources use. It shows goals and how to get
and use resources.

Think of the budget like a yardstick for daily

business. Compare actual numbers with the
budgeted ones. This helps check if things are
going as planned. It's like grading individual performance. At IBM, they compare budgeted
and real costs of making computers. This tells how well production managers and
employees are doing.

Budgeting is important because it lets management plan ahead and track performance. It
helps focus on unusual results. Even in uncertain times, budgeting is crucial. Stable
conditions use past experience more, but budgets also consider future plans. Budgeted
performance is better than past performance for assessing results.

Why Budgeting Matters:

1. Planning: Budgeting creates a clear financial plan for the year. It sets goals and how to
achieve them. Think of it as a business's financial flight plan.

2. Coordination: Budgets guide the business and align its operations.

3. Control: Budgets help manage and compare actual performance to goals. They hold
managers accountable for reaching financial targets.

Budget Manuals

Simplify Budgeting with a Manual:

A budget manual makes budgeting easier for management. It includes:

1. Goals
2. Authority explanation
3. Roles of those preparing the budget
4. Control steps
5. Time plan
6. Schedule formats
7. How to get budget approved
8. Performance report look
9. Benefits of budget control

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Components of the Master Budget

Operations
Budget/Profit
Plan

Budgeted
Financial
Master Financial
Resources
Ratios
Budget Budget

Capital
Expenditures
Budget

Simplified Master Budget:

1. Operations Budget/Profit Plan: A complete financial picture, including revenue,

expenses, and profit, combining multiple budgets like sales, production, costs, and
expenses.
2. Financial Resources Budget: Includes cash, balance sheet, and funds flow statements.
3. Capital Expenditures Budget: Plans for equipment and systems.
4. Budgeted Financial Ratios: Based on budgeted financial statements.

Preparing the Master Budget:

1. Top management sets goals and assumptions.

2. Sales projections are made.
3. Each department (like marketing, production) creates their budgets based on sales
plan.
4. Individual budgets are combined.
5. Drafted master budget is reviewed and revised if needed.
6. Final master budget is approved by top management and department heads.

Task/Activity

Each student will draw a paradigm that maps the concept of financial budgeting of a
particular company of their choice. The output will be assessed based on the rubric below.

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 TOPIC 3: ESTIMATING SALES

Several approaches can be employed to predict or project sales. The methods commonly
utilized are as follows:
Sales Trend Analysis

Sales Force Composite Method

Executive Opinion Method

Industry Trend Analysis Method

Correlation Analysis Method

Multiple Approach Method

1. Sales Trend Analysis: This method leverages the product life cycle to estimate sales.
It's crucial to identify where the product stands within its life cycle during sales
estimation. The cycle starts with product introduction, gradually rises, reaches a plateau,
and eventually declines.

2. Sales Force Composite Method: Salespersons forecast sales within their specific
regions. Historical sales data serves as a foundation for predicting upcoming months'
sales.

3. Executive Opinion Method: Top management's perspectives and insights are gathered
to formulate a sales estimate.

4. Industry Trend Analysis Method: This technique establishes a link between the firm's
sales (in terms of market share) and anticipated industry sales. By comparing growth
patterns, the firm's growth is assessed alongside the industry's. This aids in predicting the
firm's sales based on the estimated total market percentage, multiplied by the industry's
projected sales.

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5. Correlation Analysis Method: Employing regression analysis, this statistical method
identifies the cause-and-effect relationship between sales and influencing factors.

6. Multiple Approach Method: This involves combining various methods discussed above
to arrive at a comprehensive sales estimate.

Task/Activity

Students will be divided into groups with 5 members. Each group will research and
analyze one particular company on how they estimate or forecast sales. The rubric below
will be used for assessing the output.

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 LESSON 6
WORKING CAPITAL MANAGEMENT

TOPICS
1. Fund Management
2. Inventory Management
3. Loans and Receivable Management

LEARNING OUTCOMES
At the end of the lesson, you should be able to:

1. Determine and evaluate working capital management for decision making.

TOPIC 1: FUND MANAGEMENT

The term "cash management" used to be mainly

about keeping money safe in a bank. But over time,
its scope has expanded. Now, cash management
concepts and techniques are applied to various
activities and situations. Managing cash properly is
crucial for several reasons:

1. Cash is at the heart of any business, regardless of its type or form.

2. Poor cash management can lead to business failure as cash is susceptible to theft and
misuse.
3. Cash can generate additional income beyond regular operations, provided that the
focus is on maximizing earnings while minimizing risks.
According to Anastacio et al. (2010), cash encompasses money and other negotiable
instruments accepted by banks for deposit and immediate credit. Anyone dealing with
cash needs a solid understanding of what cash truly entails.

Types of Cash
1. Cash on Hand: This pertains to the remaining cash collected during the day, intended
for depositing on the next banking day or ideally on the same day. Implementing this
practice helps the company minimize the risk of unauthorized cash use or theft. The
remaining cash consists of receipts received after the day's initial deposit.

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2. Cash in Bank: This refers to cash that has already been deposited in a bank. It could be
in different types of accounts:
a. Savings Account – earns interest while the money remains unused.
b. Demand Deposit – also known as a checking or current account. Typically, it doesn't
earn interest and is associated with a checkbook.
c. Combo Account – Some banks offer a combined savings and demand deposit account.
This account usually requires a higher maintaining balance, with interest based on
average daily balances.
3. Cash Fund: Company cash needs to be managed alongside the company's funding
requirements. As per Philippine Accounting Standards (PAS), funds intended for current
operations are classified as current assets. If not intended for current operations, they are
categorized as non-current assets. Common classifications of funds include:
a. Petty Cash Fund – used for minor company expenses.

b. Change Fund – maintains small bills or coins for change.

c. Dividend Fund – pays dividends declared by the board of directors, payable in the
future.

4. Cash Equivalent: These are short-term, highly liquid investments acquired three
months before maturity, easily convertible to cash, and nearing maturity with minimal
risk of value changes. According to Anastacio et al. (2010), the following criteria
determine proper valuation:
a. If the term is three months or less, it's classified as a cash equivalent.
b. If the term is more than three months but within a year, it's a short-term or temporary
investment presented as separate current assets.
c. If the term is more than one year, it's categorized as a non-current or long-term
investment, becoming a current asset if it matures within a year.
How to we document cash?
Maintaining accurate records of cash transactions is crucial for proper documentation
with supporting evidence.
1. Temporary Receipt: Collectors issue this receipt for cash or check collections. They
hand it over to the office cashier daily. Office cashiers also issue it for check payments,
which require 3 clearing days within the banking system. Three copies are prepared: the
original goes to the payer, the duplicate to the cashier, and the last duplicate remains in
the booklet for reference or audit purposes.
2. Official Receipt: Cashiers provide this receipt for cash payments, and collectors give it
to cashiers for cash collections. Three copies are prepared: the original is given to the
payer, the duplicate is sent to the accounting department for recording, and the last copy
remains with the cashier.

3. Sales Invoice: These are cash sales invoices, sometimes also used for credit sales or
sales on account. A notation indicates when a sales invoice is used for credit sales if the
account remains unsettled beyond the credit period.

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4. Daily Collectors Remittance Form: This form summarizes the collections of a
designated collector for the day. It is submitted to the office cashier along with the
duplicate copy of the provisional receipt.

These mentioned forms are just a selection of the business forms and documents used by
companies. As companies grow, more forms and documents are introduced to enhance
cash control.
Common Misuses of Cash
1. Lapping: Lapping is a deceitful practice involving tampering with accounts receivables
to conceal stolen receivables payments. It includes using a subsequent payment from a
customer to cover up the theft. This payment is applied to an earlier unpaid receivable,
and the process continues. In a US Fed News Service (2011) article, an ex-administrative
assistant at Beverly Hospital misappropriated $230,000. She manipulated the accounting
system to mask her actions, stealing cash from the hospital’s cafeteria and replacing it
with older checks intended for catering payments.
2. Kiting: Kiting refers to deliberately writing a check for more than the account balance
from one bank, then writing another check from a different bank with insufficient funds
to cover the first check. This second check is meant to cover the shortfall from the first
account. According to a US Fed News Service (2019) report, Plainville Livestock
Commission's owners engaged in a check kiting scheme that cost banks millions. The
owner executed 409 wire transfers and issued 7,584 checks, totaling $2 billion.
3. Fraudulent Documents and Evidence: Some employees create their own documents
to use in transactions, constituting fraudulent documents and evidence.

Task/Activity
The students will be group into 5 members. They will design their own cash control
measure, and illustrate why such control measures can protect the misuse of company
cash. Their output can be presented in a paradigm, powerpoint, video, and the likes. The
rubric below will be used to evaluate their output.

49
 TOPIC 2: INVENTORY MANAGEMENT

According to PAS 2, inventories are items a business

holds for sale, production, or use in providing
services. They are classified as current assets on the
balance sheet and act as a bridge between making
products and fulfilling orders.

In previous lessons, we explored various forms of

business organizations such as sole proprietorship,
partnership, and corporation. Now, we will delve into different types of business
organizations.

1. Service-Oriented Business Entity: These are enterprises that generate income by

providing various services.
2. Trading-Focused Business Entity: These enterprises earn income by selling goods or
merchandise.
3. Manufacturing-Focused Business Entity: These businesses transform raw materials
into finished products for income generation.

How is inventory being done in each type of business organization?

In service-oriented businesses, the control process is uncomplicated as it revolves around

supplies within the inventory. The procedure involves purchasing supplies, recording
them in the accounts, and updating corresponding stock cards. When supplies are
utilized, the same procedure applies. The difference between received and used supplies
signifies the remaining portion.

In trading businesses, the complexity increases as additional accounts need management

and control:
1. Supplies: Same process as service businesses.
2. Merchandise Inventory: Items acquired for selling to customers.

Financial reporting offers various inventory costing methods, including:

- FIFO (First-In, First-Out): Widely accepted.
- LIFO (Last-In, First-Out).
- Sample Average and Weighted Average methods.

In manufacturing businesses, three more inventory accounts augment the standard

supplies and merchandise inventory:
a. Raw Materials Inventory: Materials procured for production.
b. Work-in-Process Inventory: Partially completed products.
c. Finished Goods Inventory: Completed products ready for sale.

Why do we have to manage inventory?

Inadequate inventory management can lead to the following consequences:

1. Understocking: This occurs when available stock falls short of meeting business
demands. This issue can result in a chain of problems, including missed deliveries, lost
sales, dissatisfied customers, production delays, and work stoppages.

50
2. Overstocking: This happens when stock exceeds the actual business demand. The
potential outcomes include high holding costs and missed opportunities to invest funds
in more productive ventures.

To effectively handle inventory and avoid both understocking and overstocking,

businesses should consider implementing at least one of the following strategies:
maintaining a system to track inventory levels on hand and on order, relying on accurate
demand forecasts, understanding lead times, estimating realistic costs for holding,
ordering, and shortages, and implementing an effective inventory item classification
system.

Procedures in managing inventory

Beginning Inventory: Raw materials should cover needs until the next delivery, so
estimating lead time is crucial. Lead time is the duration from order placement to buyer
receipt, including factors like traffic and distance from the supplier's warehouse.

Purchases: Committees are often formed to ensure quality and cost-effectiveness.

Materials should meet quality standards, have a low cost per unit, and align with company
standards..

Considering freight charges in the purchasing of

merchandise inventory is important based on the
contract. Contracts can be classified as follows:

1. Freight on Board (FOB) destination: The supplier

delivers inventory to the buyer's warehouse with no
charge. Ownership transfers upon delivery to the
buyer's warehouse, advantageous for distant
deliveries.
2. Freight on Board (FOB) shipping point: Supplier delivers to the shipping point (e.g.,
airport, seaport). Ownership transfers once inventory is in transit.
3. Cost, Insurance, Freight (CIF): Buyer pays cost, insurance, and freight charges.
4. Free alongside (FAS): Seller covers expenses and risks up to the port; buyer handles
loading and shipment from the port.
5. Ex-ship: Seller covers expenses and risks until unloading; ownership and loss risks pass
to the buyer thereafter.

Who Handles the Inventory?

Inventory, like money in the form of products, needs careful management by

specific individuals:

1. Purchaser: Finds quality inventory at the best price, allowing the company to provide
affordable, quality goods to customers.
2. Warehouseman: Receives and stores merchandise safely, releasing it when needed or
ordered by customers.
3. Stock card clerk: Typically an accounting clerk, records warehouse activities like
receipts and issuances per item. Monthly, totals should match the bookkeeper's records.
4. Bookkeeper: Records purchases from the purchaser and matches them with the stock
card clerk's inventory. Supplier-based recording is done.
5. Auditor: Checks warehouse inventory, purchase documents, book records, and
prepares financial summaries.
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Their tasks are interconnected, forming a robust internal system that prevents mistakes
and fraud, guaranteeing precise inventory management.

Task/Activity
Assume that you are an owner of a buy and sell business. Among the freight charges,
which would you use in our own business? Explain your answer in 200 words or more.
Your final output will be assessed using the rubric below.

TOPIC 3: LOANS AND RECEIVABLE MANAGEMENT

In the earlier discussions, we started with

cash and turned it into inventory. Now,
we're shifting our focus to converting
inventory into receivables.

Receivables, as defined by Anastacio, et al.

(2016), are financial assets that represent a
contractual right to receive money or other
financial assets from another entity or
customer.

Here are a few examples of receivables:

1. Traditional accounts receivable: Often referred to as trade debtors or trade accounts,

this type isn't backed by a promissory note. It's supported by sales invoices with credit
terms. The accounting department uses these credit terms as a basis to track payment
status.
2. Notes receivable: These are supported by a formal note promising payment.
3. Loans receivable: Arising from receivables from banks and other financial institutions..

52
Accounting Elements That Affect Receivable

Discounts:
1. Trade Discount: Not recorded in accounts, given for bulk orders to encourage larger
purchases at a percentage off the total price.
2. Cash Discount: Recorded in accounts, encourages early payment within credit terms by
offering a discount. Recorded in income statement for net sales calculation.

Returns:
1. Sales Returns: Customers return goods due to wrong shipment, substandard
merchandise, or incorrect delivery.
2. Sales Allowances: Defective goods are delivered, and a price reduction is granted
instead of returning the items. Receivables are reduced accordingly.

Risk Evaluation
When extending credit to customers, there's an inherent risk. Customers often seek credit
to enhance their operational capabilities. To mitigate this risk, consider the following
measures:
1. Perform a field investigation into the customer's payment history by consulting third
parties about the customer's interactions with other suppliers.
2. Request a financial report from customers applying for credit facilities, preferably
certified by a Certified Public Accountant, to better assess their financial position.

How to convert your receivable faster?

1. Pledging – Using receivables as security, a company can obtain cash for loan payments.
2. Assignment – A formal type of pledging where receivables serve as collateral. Two
parties are involved: the assignee (lender) and the assignor (borrower). Assignment can
be:
a. Non-notification basis – Customers pay the company unaware of the assignment. The
company remits collections to the lender upon receipt.
b. Notification basis – Customers are informed of the assignment and pay the lender
directly.
3. Factoring – Selling accounts receivable to a factor or lender can be done in three ways:
a. Casual factoring – The difference between asset selling price and book value can result
in gain or loss.
b. Continuing agreement – The factor handles credit and collection, allowing the seller
immediate use of cash.

ASSESSMENT: INDIVIDUAL ASSESSMENT

c. Credit cards – Customers use credit cards for purchasing, treating it as a cash
transaction between the cardholder and the credit card company.

Each student will answer the question below in 100 words.

1. What do you consider to be the biggest challenges for organizations in managing
working capital and why?
2. Why do we as individuals need to manage working capital effectively and what
challenges do you think individuals have that a business may not have?
The rubric below will be used for the evaluation of output.

53
54
 LESSON 7
INTERNATIONAL FINANCE

TOPICS
1. Multinational Company and Its Environment
2. Financial Statements, Risk, and Financing Decisions
3. Mergers and Joint Ventures

LEARNING OUTCOMES
At the end of the lesson, you should be able to analyze and relate international
finance in the global context.

TOPIC 1: MULTINATIONAL COMPANY AND ITS ENVIRONMENT

A multinational company operates in

multiple countries beyond its home nation.
In the last two decades, a new form of
international commercial activity has
emerged, intensifying global economic and
political interdependence. Multinational
corporations now invest directly in
integrated operations, spanning from raw
material extraction to final product distribution worldwide. Here are key reasons for
companies to expand globally:
1. Pursuing Efficiency: With domestic competition saturated and growing demand in
other markets, companies opt to manufacture abroad. They search for countries with
lower production costs, available labor, and transportation infrastructure. For instance,
Apple products are made in China, and Nike operates manufacturing plants in multiple
countries.

2. Overcoming Hurdles: Government restrictions and regulations on imports push

companies to seek nations with fewer barriers. Some streamline labor, production, and
raw material sourcing. Tariff increases, as seen with Hyundai, Philips, and Whirlpool due
to trade tensions, exemplify these challenges.
3. Expanding Markets: When domestic markets peak, companies turn to foreign
markets. Netflix's rapid international growth, despite competitors like Amazon Prime,
illustrates this strategy.
4. Sourcing Materials and Technology: Seeking materials globally, such as oil in the
Middle East, drives companies to establish production facilities in strategic locations.

55
5. Protecting Assets: Intangible assets like brand names and technology face protection
challenges abroad. Coca-Cola faced legal demands to reveal its secret recipe in India.
6. Diversifying Risk: Amid global economic volatility, having production facilities
worldwide can mitigate the impact of adverse conditions in one country, as highlighted
by the COVID-19 pandemic.
7. Customer Retention: Operating abroad fosters local supplier relationships, ultimately
benefiting the company's customer base.

Task/Activity
The class will be divided into groups with 5 members. Each group will research a
multinational company in other country and discuss its controversies. The output will be
presented in class and the rubric below will be used to evaluate their output. Each group
will be given 5 – 8 minutes to present.

REFERENCES

Accounting Simplified (2020). What are Financial Statements?. Retrieved on March 3,

2020 from https://accounting-simplified.com/financial/statements/types.html

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