Business Finance PDF

The Commission on Higher Education
in collaboration with the Philippine Normal University
Teaching Guide for Senior High School
BUSINESS
FINANCE
SPECIALIZED SUBJECT
This Teaching Guide was collaboratively developed and reviewed by educators
from public and private schools, colleges, and universities. We encourage
teachers and other education stakeholders to email their feedback, comments,
and recommendations to the Commission on Higher Education, K to 12
Transition Program Management Unit - Senior High School Support Team at
k12@ched.gov.ph. We value your feedback and recommendations.
Development Team
Team Leader: Arthur S. Cayanan, Ph.D.
Writers: Jerelleen A. Rodriguez, Al-Habbyel B.
This Teaching Guide by the
Yusoph, Rachelleen A. Rodriguez, Diogenes C. Dy
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Table of Contents
Introduction to Financial Management Part 3 170
Part 1 1 Part 4 184
Part 2 10 Sources and Uses of Short-Term and Long-Term Funds
Part 3 19 Part 1 201
Review of Financial Statement Preparation, Analysis, and

Part 2
Interpretation 214
Part 1 37 Basic Long-term Financial Concepts
Part 7 94 Introduction to Investment
Financial Planning Tools and Concepts Part 2 300
Part 1 119 Managing Personal Finance 314
Part 2 139 Biographical Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323

Introduction
As the Commission supports DepEd’s implementation of Senior High School (SHS), it upholds the vision
and mission of the K to 12 program, stated in Section 2 of Republic Act 10533, or the Enhanced Basic
Education Act of 2013, that “every graduate of basic education be an empowered individual, through a
program rooted on...the competence to engage in work and be productive, the ability to coexist in
fruitful harmony with local and global communities, the capability to engage in creative and critical
thinking, and the capacity and willingness to transform others and oneself.”
To accomplish this, the Commission partnered with the Philippine Normal University (PNU), the National
Center for Teacher Education, to develop Teaching Guides for Courses of SHS. Together with PNU, this
Teaching Guide was studied and reviewed by education and pedagogy experts, and was enhanced with
appropriate methodologies and strategies.
Furthermore, the Commission believes that teachers are the most important partners in attaining this
goal. Incorporated in this Teaching Guide is a framework that will guide them in creating lessons and
assessment tools, support them in facilitating activities and questions, and assist them towards deeper
content areas and competencies. Thus, the introduction of the SHS for SHS Framework.
The SHS for SHS Framework, which stands for “Saysay-Husay-Sarili for Senior High School,” is at the
core of this book. The lessons, which combine high-quality content with flexible elements to
SHS for SHS accommodate diversity of teachers and environments, promote these three fundamental concepts:
Framework
SAYSAY: MEANING HUSAY: MASTERY SARILI: OWNERSHIP
Why is this important? How will I deeply understand this? What can I do with this?
Through this Teaching Guide, Given that developing mastery When teachers empower
teachers will be able to facilitate goes beyond memorization, learners to take ownership of
an understanding of the value teachers should also aim for their learning, they develop
of the lessons, for each learner deep understanding of the independence and self-
to fully engage in the content subject matter where they lead direction, learning about both
on both the cognitive and learners to analyze and the subject matter and
affective levels. synthesize knowledge. themselves.
Earth Science is a Core Subject taken in the first semester of Grade 11. This learning area is
About this  designed to provide a general background for the understanding of the Earth on a planetary
Teaching Guide scale. It presents the history of the Earth through geologic time. It discusses the Earth’s
structure and composition, the processes that occur beneath and on the Earth’s surface, as
well as issues, concerns, and problems pertaining to Earth’s resources.
Implementing this course at the senior high school level is subject to numerous challenges
with mastery of content among educators tapped to facilitate learning and a lack of
resources to deliver the necessary content and develop skills and attitudes in the learners,
being foremost among these.
In support of the SHS for SHS framework developed by CHED, these teaching guides were
crafted and refined by biologists and biology educators in partnership with educators from
focus groups all over the Philippines to provide opportunities to develop the following:
Saysay through meaningful, updated, and context-specific content that highlights important
points and common misconceptions so that learners can connect to their real-world
experiences and future careers;
Husay through diverse learning experiences that can be implemented in a resource-poor
classroom or makeshift laboratory that tap cognitive, affective, and psychomotor domains
are accompanied by field-tested teaching tips that aid in facilitating discovery and
development of higher-order thinking skills; and
Sarili through flexible and relevant content and performance standards allow learners the
freedom to innovate, make their own decisions, and initiate activities to fully develop their
academic and personal potential.
These ready-to-use guides are helpful to educators new to either the content or biologists
new to the experience of teaching Senior High School due to their enriched content
presented as lesson plans or guides. Veteran educators may also add ideas from these
guides to their repertoire. The Biology Team hopes that this resource may aid in easing the
transition of the different stakeholders into the new curriculum as we move towards the
constant improvement of Philippine education.
This Teaching Guide is mapped and aligned to the DepEd SHS Curriculum, designed to be highly
Parts of the  usable for teachers. It contains classroom activities and pedagogical notes, and is integrated with
Teaching Guide innovative pedagogies. All of these elements are presented in the following parts:
1. Introduction
• Highlight key concepts and identify the essential questions
• Show the big picture
• Connect and/or review prerequisite knowledge
• Clearly communicate learning competencies and objectives
• Motivate through applications and connections to real-life
2. Motivation
• Give local examples and applications
• Engage in a game or movement activity
• Provide a hands-on/laboratory activity
• Connect to a real-life problem
3. Instruction/Delivery
• Give a demonstration/lecture/simulation/hands-on activity
• Show step-by-step solutions to sample problems
• Give applications of the theory
• Connect to a real-life problem if applicable
4. Practice
• Discuss worked-out examples
• Provide easy-medium-hard questions
• Give time for hands-on unguided classroom work and discovery
• Use formative assessment to give feedback
5. Enrichment
• Provide additional examples and applications
• Introduce extensions or generalisations of concepts
• Engage in reflection questions
• Encourage analysis through higher order thinking prompts
6. Evaluation
• Supply a diverse question bank for written work and exercises
• Provide alternative formats for student work: written homework, journal, portfolio, group/individual
projects, student-directed research project
On DepEd Functional Skills and CHED College Readiness Standards
As Higher Education Institutions (HEIs) welcome the graduates of On the other hand, the Commission declared the College
the Senior High School program, it is of paramount importance to Readiness Standards that consist of the combination of knowledge,
align Functional Skills set by DepEd with the College Readiness skills, and reflective thinking necessary to participate and succeed -
Standards stated by CHED. without remediation - in entry-level undergraduate courses in
The DepEd articulated a set of 21st century skills that should be college.
embedded in the SHS curriculum across various subjects and tracks. The alignment of both standards, shown below, is also presented in
These skills are desired outcomes that K to 12 graduates should this Teaching Guide - prepares Senior High School graduates to the
possess in order to proceed to either higher education, revised college curriculum which will initially be implemented by AY
employment, entrepreneurship, or middle-level skills development. 2018-2019.
College Readiness Standards Foundational Skills DepEd Functional Skills
Produce all forms of texts (written, oral, visual, digital) based on:
1. Solid grounding on Philippine experience and culture;
2. An understanding of the self, community, and nation; Visual and information literacies, media literacy, critical thinking
3. Application of critical and creative thinking and doing processes; and problem solving skills, creativity, initiative and self-direction
4. Competency in formulating ideas/arguments logically, scientifically, and creatively; and
5. Clear appreciation of one’s responsibility as a citizen of a multicultural Philippines and a
diverse world;
Global awareness, scientific and economic literacy, curiosity,

Systematically apply knowledge, understanding, theory, and skills for the development of
critical thinking and problem solving skills, risk taking, flexibility
the self, local, and global communities using prior learning, inquiry, and experimentation and adaptability, initiative and self-direction
Global awareness, media literacy, technological literacy,

Work comfortably with relevant technologies and develop adaptations and innovations for
creativity, flexibility and adaptability, productivity and
significant use in local and global communities accountability
Global awareness, multicultural literacy, collaboration and

Communicate with local and global communities with proficiency, orally, in writing, and
interpersonal skills, social and cross-cultural skills, leadership
through new technologies of communication and responsibility
Interact meaningfully in a social setting and contribute to the fulfilment of individual and Media literacy, multicultural literacy, global awareness,
collaboration and interpersonal skills, social and cross-cultural
shared goals, respecting the fundamental humanity of all persons and the diversity of
skills, leadership and responsibility, ethical, moral, and spiritual
groups and communities values
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACADEMIC TRACK
Grade: 12 Semester: 2nd
Core Subject Title: Business Finance No. of Hours/ Semester: 80 hours/ semester
Prerequisite: Fundamentals of ABM1
Co-requisite: Fundamentals of ABM2
Subject Description: This course deals with the fundamental principles, tools, and techniques of the financial operation involved in the management of business
enterprises. It covers the basic framework and tools for financial analysis and financial planning and control, and introduces basic concepts and principles needed in making
investment and financing decisions. Introduction to investments and personal finance are also covered in the course. Using the dual-learning approach of theory and
application, each chapter and module engages the learners to explore all stages of the learning process from knowledge, analysis, evaluation, and application to preparation
and development of financial plans and programs suited for a small business.
CONTENT CONTENT STANDARD PERFORMANCE STANDARD LEARNING COMPETENCIES CODE
1. Introduction to Financial The learners demonstrate an The learners are able to… The learners…
Management understanding of…
1. define Finance 1. explain the major role of
the definition of finance, the 2. describe who are ABM_BF12-IIIa-1
financial management and
activities of the financial responsible for financial the different individuals
manager, and financial management within an involved
institutions and markets organization
3. describe the primary 2. distinguish a financial
activities of the financial institution from financial
ABM_BF12-IIIa-2
manager instrument and financial
4. describe how the financial market
manager helps in achieving
the goal of the organization 3. enumerate the varied
5. describe the role of financial institutions and
ABM_BF12-IIIa-3
financial institutions and their corresponding
markets services
4. compare and contrast the

varied financial ABM_BF12-IIIa-4
instruments
5. explain the flow of funds

within an organization –
through and from the ABM_BF12-IIIa-5
enterprise—and the role of
the financial manager
K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016 Page 1 of 7
2. Review of Financial the process of preparing solve exercises and problems

Statement Preparation, financial statements as well as that require financial statement
Analysis, and Interpretation the methods or tools of analysis preparation, analysis, and
of financial statements, including interpretation using horizontal
1. prepare financial
horizontal analysis, vertical and vertical analyses and ABM_BF12-IIIb-6
statements
analysis, and financial ratios to various financial ratios
test the level of liquidity,
solvency, profitability, and
stability of the business
2. define the measurement

levels, namely, liquidity,
ABM_BF12-IIIb-7
solvency, stability, and
profitability
3. perform vertical and

horizontal analyses of ABM_BF12-IIIb-8
financial statements of a
single proprietorship
4. compute, analyze, and

interpret financial ratios
such as current ratio,
working capital, gross
ABM_BF12-IIIb-9
profit ratio, net profit
ratio, receivable turnover,
inventory turnover, debt-
to- equity ratio, and the
like
3. Financial Planning Tools and the financial planning process, 1. illustrate the financial
Concepts including budget preparation, planning process
cash management, and working 1. identify the steps in the
capital management 2. prepare budgets such as ABM_BF12-IIIc-d-10
financial planning process
projected collection, sales
budget, production budget,
income projected statement
of comprehensive income,
projected of financial 2. illustrate the formula and
position, and projected cash format for the preparation
ABM_BF12-IIIc-d-11
flow statement of budgets and projected
financial statement
3. describe concepts and tools
in working capital
management
3. explain tools in managing
cash, receivables, and ABM_BF12-IIIc-d-12
inventory
4. Sources and uses of short- the sources and uses of short- 1. distinguish debt and equity 1. cite bank and nonbank
term and long-term funds term and long-term funds , and financing institutions in the locality
the requirements , procedure , that would serve as ABM_BF12-IIIe-f-13
obligation to creditor, and 2. identify the bank and possible sources of funds
reportorial necessities nonbank institutions in the for business operations
vicinity that are possible
2. compare and contrast the
sources of funds, and
loan requirements of the
enumerate their ABM_BF12-IIIe-f-14
different bank and
requirements and process
nonbank institutions
for loan application
3. draw a flow chart on the
ABM_BF12-IIIe-f-15
steps in loan application
4. list down obligations of
ABM_BF12-IIIe-f-16
entrepreneurs to creditors
5. identify uses of funds ABM_BF12-IIIe-f-17
5. Basic Long-term Financial basic concepts of risk and 1. distinguish simple and
Concepts return, and the time value of compound interest
1. calculate future value and
money
present value of money ABM_BF12-IIIg-h-18
2. solve exercises and
problems in computing for
time value of money with
the aid of present and
2. compute for the effective
future value tables ABM_BF12-IIIg-h-19
annual interest rate
3. prepare loan amortization
tables
3. compute loan amortization
4. compute for the net present using mathematical
ABM_BF12-IIIg-h-20
value of a project with a concepts and the present
conventional cash-flow value tables
pattern
5. describe the risk-return 4. apply mathematical

trade-off concepts and tools in
ABM_BF12-IIIg-h-21
computing for finance and
investment problems
5. explain the risk-return

ABM_BF12-IIIg-h-22
trade-off
6. Introduction to investment the definition, purpose, kinds, 1. identify the types of

advantages, and disadvantages investments particularly
and the risks of investment bank deposits , insurance,
real estate , hard assets,
mutual funds, and stocks 1. compare and contrast the
and bonds different types of ABM_BF12-IVm-n-23
2. indicate the advantages and investments
disadvantages of each type
of investment
3. explain the risks inherent in
each type of investment
2. classify investment
according to its type and
ABM_BF12-IVm-n-24
features, and advantages
and disadvantages
3. measure and list ways to

minimize or reduce
ABM_BF12-IVm-n-25
investment risks in simple
case problems
7. Managing Personal Finance the philosophy and practices in 1. identify money

personal finance management philosophy
1. enumerate money
ABM_BF12-IVo-p-26
management philosophies
2. apply basic personal finance
principles and practices in
earning, spending, saving,
2. illustrate the money
and investing money
management cycle and
gives examples of sound
ABM_BF12-IVo-p-27
practices in earning,
spending, saving, and
investing money
CODE BOOK LEGEND
SAMPLE CODE: ABM_BF12-IIIa-1

LEGEND SAMPLE
Accountancy, Business and
Track/ Strand Management
Strand
underscore_
First Entry ABM_BF12

Track/ Strand Subject Business Finance
Grade Level 12
-
Roman Numeral
*Zero if no specific quarter
Quarter Quarter III
Lowercase Letter
*Put a hyphen (-) in between letters to indicate Week Week a
more than a specific week
-
explain the major role of financial

Arabic Number Competency management and the different 1
individuals involved
References:
Bernstein, Leopold. Financial Statement Analysis, 4th Ed. Illinois: Irwin, 2014.
Brealey, Richard A., Myers, Stewart.C. and Marcus, Alan .J. Fundamentals of Corporate Finance , 3rd Edition. New York: Mc-Graw Hill Co., 2014.
Brigham, Eugene F. Fundamentals of Corporate Finance, 8th Ed. Canada: Dryden, 2010
Cabrera, Elenita B. Management Advisory Services. Manila: Conanan, 2015.
Cabrera, Elenita B. Management Consulting. Manila: Conanan, 2015.
Cecchetti, Stephen G. Money, Banking and Financial Markets, 2nd Edition. 2010
Cruise, Tom. The Firm. DVD. Directed by Sydney Pollack. USA: Paramount, 1993.
Eakins, Stanley G. The Study Guide. North Carolina: East Carolina University, 2014.
Gitman, Lawrence J. and Joehnick, Michael D. Fundamentals of Investing, 8 th Edition. Boston: Addison Welsey, 2013.
Gitman, Lawrence J. Principles of Financial Management. New York: Pearson 2014
http://suppscentral.aw.com
Ilano, Alberto R. Investment Management and The Philippine Stock Market . Manila: FINEX, 2014
Melicher, Ronald W. and Norton,Edgar A. Introduction to Finance, Markets, Investments and Financial Management, 14th Edition. Canada: McGraw-Hill Ryerson Higher
Education, 2014.
Padilla, Nicanor B. Jr. How to Analyze Financial Statements. Manila: Conanan, 2007.
Pringle, John J. and Harris, Robert Samuel. Essentials of Managerial Finance, 2nd E. Canada: Dryden, 2014.
Saldana, Cesar G. Principles of Managerial Finance: Philippine Setting. Quezon City: AFA Publications, 2000.
Weston, Fred and Copland, Thomas E. Managerial Finance, 9th Ed., Canada: Dryden, 2012.
White, Gerald I., Sondhi, Ashwinpaul C., and Fried, Dov. The Analysis and Use of Financial Statements, New Jersey: Wiley, 2012.
www.aw-bc.com/gitman
Business'Finance 90 MINS
Introduction to Financial Management

Content Standards
The learners demonstrate an understanding of the definition of finance, the LESSON OUTLINE
activities of the financial manager, and the financial institutions and markets. Introduction Introduction to Finance and Key Concepts 40
/Motivation
Performance Standards Instruction Discussion of Shareholder’s Wealth 45
The learners will be able to define finance.
Enrichment Integration of learning 5

Learning Competency
The learners shall be able to explain the major role of financial management Materials Board Notes
and the different individuals involved. (ABM_BF12-IIIa-1)
Resources
Specific Learning Outcomes
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
The learners will be able to: City. Rex Bookstore.
• Have an appreciation of what the overall objective of management should (2) Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial
be. Finance (13th Ed), USA: Prentice-Hall
• Describe the goals of the firm and explain why maximizing the value of the
firm is an appropriate goal for a business.
• Identify factors that influence the change in market price.
1
DAY 1 SESSION
1. Distribute the Course Outline/Curriculum and read the subject description.
2. Go through the various topics and highlight the following:

• Coverage of first quarter exam
• Date of first quarter exam
• Coverage of second quarter exam
• Date of second quarter exam
3. Ask the learners to introduce themselves by answering the following suggested questions:
• What is your full name?
• What is your nickname?
• Why did you choose the ABM Strand?
• What are your expectations for this class?
4. Homework for next session:

5. On a sheet of paper, answer the following questions:
A. How much is your daily allowance? If not given daily, how much is your average allowance per day?
B. Write down all the items you spend money on. List the description and peso amount spent.
C. Compute for the balance of your allowance by deducting the expenses you listed from your daily allowance.
D. If the answer to Question C is positive, what do you do with the money left? If the answer is negative, where do you get additional
money?
INTRODUCTION/MOTIVATION (40 MINS)
1. Finance in Everyday Life

• Begin by presenting a scenario in everyday life (Try: the life of a high school student).
• Narrate the scenario in your own style or as prescribed below:
- Ask the learners how much allowance they are given to and how often do they receive it (daily, weekly, etc.)
- Continue discussing the activities done in a day from getting to school, to attending flag ceremony, classroom discussions, lunch breaks,
end of classes, occasional meriendas or going out with friends and playing computer games, going back home and going back out to a
2
nearby store to buy autoload because they realized that they can’t end the day without texting
their crush.
- Ask learners how many have savings out of the allowance they get from their parents.
- End the story by identifying the expenses they incurred (i.e. tricycle fare, lunch, merienda,
computer games) and letting them recognize the value of savings and possibly investing at a
young age.
- Reveal that most of the activities they do involving decisions on where to use their allowance is a
finance decision.
2. Present Relevant Vocabulary

• Define Finance as follows: Teacher Tips:
- Finance can be defined as the science and art of managing money. (Gitman & Zutter, 2012) Terms Defined:
1. Finance
2. Budgeting
• Engage the learners by exhausting from them the expenses they wrote down on their homework 3. Investments
and listing all these down on the board with the respective peso amounts. Try to get as many 4. Sources of funds
answers as possible.
• Give an allowance cap based on the answers given by the learners during the beginning story. This
will serve as the average daily allowance that the class is able to spend.
• Go back to the list of expenses and ask for the total peso amount of the listed items. If the peso
amount exceeds the daily allowance, ask the learners which items should be dropped off from the
list. Cross out the items dropped but do not erase completely. Continue this until total items
remaining in the list can be covered by the daily allowance.
• Explain that the activity they did is called budgeting.

- Budgeting is the act of estimating revenue (in the form of their allowance) and expenses over a
period of time (in this case, on a daily basis).
- Inform them that budgeting will be further discussed in Lesson 3 – Financial Planning Tools.
• Go back to the activity and focus the learners’ attention on the surplus resulting from their
budgeting. Ask the learners who among them had answered on their homework which resulted in
savings or excess cash. Ask them what they do with the excess money.
- Possible answers:
3
• Carry over to the next day
• Return to parents
• Save. Ask how and where? Coin savers, Hidden under their beds, Deposit in banks, Invest in stocks (rare answer)
- Explain that excess money presents an opportunity for investments.
Investments come in many forms that will generate income or appreciate in the future.
- Between hiding their cash under their bed and depositing it in the bank, it would be better to keep their money in bank deposits
because these earn interest.
- Inform the learners that investments will be discussed further in Lesson 6 – Introduction to investments.
• Go back to the activity that is written in the board. Post the question of what other problems they may face in making financial decisions. Let
them assume that all the expenses listed on the board (including those that were previously crossed out) are incurred during the day. Let
them compute how much more cash they would need to support all those expenses.
• Ask who among the learners who made their homework encountered the same situation. If none, ask them if ever they are in a situation
where they are short of cash, what would they do? Where will they get extra cash? What other sources of cash do they know?
- Possible answers:
• Ask from parents
• Borrow from a friend
• Fund raising activities
• Pawnshops
• 5/6
• Banks
- Explain that all their answers are sources of funds. When faced with financial difficulties (in this case, the lack of funds to meet the
current expenses) we look for people or institutions that will give us the money we need.
- Inform the learners that they will know more about where to get funds on Lesson 4 – Sources of short term and long term funding.
• Summarize the discussion by pointing out that, for individuals, Finance is concerned with decisions about:
- How much of their earnings they spend
- How much they save or how much they need
- How they invest their savings
- How they raise additional funds they need (Gitman)
4
3. Review of Prerequisite Knowledge
• Tell the learners that once they graduate from school, they will no longer receive their daily allowance. Either they would be employed by a
company, manage their family business, or start up their own business.
• Ask the learners who among them wants to own their own business (get a raise of hands). Ask them what type of business organization is
owned by one person who operates it for his or her own profit (Answer: Sole Proprietorship).
• Continue to recall from ABM 1 the forms of business organizations:

- Sole Proprietorship - A business owned by one person and operated for his or her own profit.
- Partnership - A business owned by two or more people and operated for profit.
- Corporation – An entity created by law owned by shareholders.
• Ask the learners if they recall how they can be shareholders of a corporation (Answer: by buying stocks). At this point, ask them if they are
aware of big listed companies like PLDT, Globe, JFC, BPI, Banco Deo Oro, San Miguel Corporation, among others to interest them about the
subject.
• Ask how and where can they buy stocks?

- Corporations may either be privately owned or publicly owned.
- Privately owned corporations are often owned by family members whose stocks may not be offered to outsiders unless consent by the
family members is secured.
- Companies which are publicly listed are owned by unrelated investors and are traded in organized exchanges like the Philippine Stock
Exchange. While there are many stockholders, there is generally a group of investors or a family which controls each listed company. For
example, in the case of BPI, the biggest stockholder is Ayala Corporation and in the case of Banco De Oro, it is SM Investment
Corporation. Prices of stocks of listed corporations are driven by several factors such as the earnings of the companies, the prospects of
the industry where these companies operate, the general market sentiment, and the economic prospects of the country, among others.
4. Knowing the Shareholder

• Tell the learners to assume that they are the biggest shareholder in a corporation. Ask them the objectives they want to achieve as owners of
the corporation.
- Possible answers: Be profitable, Have a lot of cash
• Ask if they think a profitable company is a successful company. Can success be attributed to profitability only? Recall that the determination of
profit is based on the accrual method. Is it possible that a company can have profits but still does not have enough cash to pay its obligations
(i.e. suppliers, lenders)? What will happen if the company cannot pay its obligations?
5
• Ask the learners what they think of a company who has very large amount of cash. (Possible answer:
They may say that this is good because the company will always have enough cash to pay its
obligations.) Tell them that though having a lot of cash has its advantages, it also signals unhealthy
company practices. It may tell them that management has not been putting the company’s resources
into good use. Also, keeping too much cash in the books is like hiding your extra allowance under
their bed. They will be missing out on investment opportunities.
• Reveal that the overall objective of a shareholder should be wealth maximization. What defines a
shareholder’s wealth? Reveal the answer using the example below.
INSTRUCTION (45 MINS)
1. Measurement of the shareholder’s wealth Teacher Tips:

• Post the question of how do we measure shareholders wealth? Simplify the example. An increase of the share price to PHP2,600
- Assume a learner bought 10 shares of Globe Telecom at PHP2,510 each on September 9, 2010. per share means that people are willing to
This brings his investments to PHP25,100. What happens to the value of his investment if the price buy the shares for that amount. If the
learners were to sell their shares at this
goes up to PHP2,600 per share or it goes down to PHP2,300 per share? point, it will result to a profit of PHP90 per
share or PHP900 on their whole investment.
• Conclude that shareholders’ wealth is measured based on the current market price of the Hence, the value of their investment
corporation’s stocks. The market price changes across different periods. Hence, the value of your increased from PHP25,100 to PHP26,000.
Therefore, there is an increase in
investment changes in different points on time based on the market value at that time. shareholder’s wealth.
• At this point, start discussing the factors which can affect prices. On the other hand, a decrease in the share
price to PHP2,300 per share means that
people are only willing to buy shares for
2. Factors that Influence Market Price PHP2,300. If the learners were to sell their
• Group the factors into two: Factors that the Management can control and external factors that investment at this point, they will receive
cannot be controlled by management. PHP23,000 which would result to a loss of
PHP2,100. The decrease in value of their
investment leads to a decrease in
shareholder’s wealth.
6
Controllable by Management Uncontrollable External Factors
• profitability • macroeconomic conditions

• having a good liquidity and reasonable • political stability
leverage position • prospects of the industry where the
• dividends company operates
• competent management which affects the • general market sentiment
company’s operating efficiency • flow of foreign funds invested in the
• coming up with corporate plans that improve Philippine stock market
the business prospects of the company
• Discuss how each factor influences market price

- Profitability
• Profit is a measure of the financial performance of a company for a period of time.
• Although it is a major driver for increasing the value of stock, an investor should not rely on profits alone. As discussed earlier, it is possible
that the company has profits but its cash flow is negative.
- Examples: Suppose the following Income Statements and Cash Flow Statements of companies A, B and C were presented to you. Which
do you think is a more attractive company?
COMPANY A COMPANY B
Income Statement Cash Flows Income Statement Cash Flows
Sales P 100,000 Collection from Customers P0 Sales P 100,000 Collection from Customers P 100,000
Less: Costs 50,000 Payment of Expenses 50,000 Less: Costs 150,000 Payment of Expenses 50,000
Profits P 50,000 Net Cash Flow (P 50,000) Profits (P 50,000) Net Cash Flow P 50,000
COMPANY C
Income Statement Cash Flows
Sales P 100,000 Collection from Customers P 100,000
Less: Costs 70,000 Payment of Expenses 70,000
Profits P 30,000 Net Cash Flow P 30,000

7
• Company A is profitable but generated negative cash flows which resulted from the uncollected accounts receivable of PHP100,000.
Without adequate cash inflows to meet its obligations, the company will face liquidity problems, regardless of its level of profits.
• Company B on the other hand has a positive cash flow but is unprofitable. This is a result of the company’s delay in payment of its costs.
Accordingly, the Company will soon have to pay the remaining PHP100,000 liability and its cash will no longer be sufficient. Again, without
adequate cash inflows to meet its obligations, the company will face liquidity problems.
• Company C is profitable and has a positive cash flow. Based on the information provided, Company C seems to be the best.
- Good liquidity and reasonable leverage position.

• Liquidity and leverage refers to the company’s management of the type and amount of assets and liabilities that it will hold in the course
of its operations. This will further be discussed in Lesson 2.
- Dividends.
• Holders of shares receive dividends from a corporation as returns on their investments in form of cash or other properties. Companies
which have better dividend policies are generally more attractive than companies who do not pay out dividends.
• Note that there may be times that companies do not pay out dividends because of future expansions. Same with the other factors
affecting share price, dividend policies should go hand in hand with other factors in determining market price.
- Competent management.
• Competent managers may have any of the following attributes: 1) visionary 2) decisive 3) people-oriented, 4) inspiring, 5) innovative, 6)
respected and 7) experienced/seasoned manager.
- Corporate plans that improve the business prospects.

• Example: Company A which is in the business of selling Halo-halo in the Dapitan area (or any other area) for 5 years. Company A is
consistently earning profits and has a positive cash flow. When asked how Company A sees itself after 5 more years, Company A answered
that it would continue to sell Halo-halo in Dapitan (or any other area).
• On the other hand, Company B sells Buko Juice in Katipunan area (or any other area different from Company A’s area) for 5 years.
Company B is consistently earning profits and has a positive cash flow. When asked how Company B sees itself after 5 more years,
Company B answered that it has generated enough cash to expand its business to Cubao area (or any other area) to take advantage of
the growing demand of Buko Juice in Cubao.
• Between Company A and Company B, which would be a better investment? Company B. Since it has more concrete future prospects
allowing investors to hope for better revenues and net income.
• External Factors
- These factors influences the general reaction of investors in making an investment decision.
8
- Its effect is not only to a specific company but on all companies or a group of companies under
similar circumstances.
- Such factors are a result of the environment a company operates in rather than the decisions of the
company’s management.
3. Role of Financial Management

• Ask the learners, given the factors that influence market price, how will the company ensure that
such objectives will be achieved? Reveal the answer that this is achieved through financial
management.
• Financial management deals with decisions that are supposed to maximize the value of
shareholders’ wealth. (Cayanan)
- These decisions will ultimately affect the markets perception of the company and influence the
share price.
- The goal of financial management is to maximize the value of shares of stocks.
- Managers of a corporation are responsible for making the decisions for the company that
would lead towards shareholders’ wealth maximization.
• Tell the learners that for the next parts of this course, they will fill in the shoes of a Chief Financial
Officer (CFO) and every problem that they will encounter for this course should be dealt with having
shareholders wealth maximization in mind.
Teacher Tips:
ENRICHMENT (5 MINS)
Possible answers: Ethics, Corporate Social
Responsibilities, Employee Relationships.
1. Integration of Learning
• Ask the learners the following:
- Aside from the factors mentioned during class, what other factors can influence the investor’s
perception on the company’s performance which would ultimately affect share price?
- Why is the study of finance important to you?
2. Homework
• Go to a business in your locality. Ask who is in charge of the finances of the business. Interview the
“Chief Financial Officer (“CFO”) or the Vice-President for Finance” and ask them to report about their
roles and functions within the organization.
9

Content Standards
activities of the financial manager, and the financial institutions and markets. Introduction Identifying the roles in a Corporate 25
Organization
Performance Standards Motivation Message from the CFOs 5
The learners will be able to:
• Describe who are responsible for financial management within an Instruction Identifying the functions of a Financial 25
organization.
Manager
• Describe the primary activities of the financial manager.
• Describe how the financial manager helps in achieving the goal of the
organization.
Materials Board Notes
Learning Competencies
Resources
The learners shall be able to:
• Explain the major role of financial management and the different individuals City. Rex Bookstore.
involved. (ABM_BF12-IIIa-1) (2) Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial
• Explain the flow of funds within an organization – through and from the Finance (13th Ed), USA: Prentice-Hall
enterprise—and the role of the financial manager. (ABM_BF12-IIIa-5)

At the end of this lesson, the learners will be able to:
• Understand the key positions in a corporate organization and identify the roles of each.
• Identify the primary activities of the financial manager.
10
INTRODUCTION (25 MINS)
1. Discussion of Homework
• Begin by asking at least five learners to share in class the result of their interview with a Chief Teacher Tips:
Financial Officer (CFO) or Vice-President for Finance. The various types of functions are expected
if the person they interviewed is a small
• Write on the board the roles and functions that the students identified from their interview.
business owner who makes decisions on
• Take note of functions that are not roles of a Financial Manager but are roles of other managerial various aspects of the business.
positions.
• Discuss that these functions are done by people in the company who are holding other managerial
positions. A Financial Manager is part of a management team whose ultimate goal is to maximize
shareholders wealth.
2. The Corporate organization Structure

• Illustrate the corporate organization structure and inform them that this particular set of people
each play a role in the decision making of the company.
SHAREHOLDERS
elects OWNERS
BOARD OF DIRECTORS
appoints
PRESIDENT (CEO)
MANAGERS
VP FOR VP FOR VP FOR VP FOR

MARKETING FINANCE PRODUCTION ADMINISTRATION
Figure 1: Illustration of the Corporate Organization Structure
• From the diagram presented, emphasize that each line is working for the interest of the person on
the line above them. Since the managers of the company are making decisions for the interest of
11
the board of directors and the board of directors does the same for the interest of the shareholders, it follows that the goal of each
individual in a corporate organization should have an objective of shareholders’ wealth maximization.
• Discuss briefly the roles of each position identified.

• Shareholders: The shareholders elect the Board of Directors (BOD). Each share held is equal to one voting right. Since the BOD is elected
by the shareholders, their responsibility is to carry out the objectives of the shareholders otherwise, they would not have been elected in
that position. Ask the learners again what the objective of the shareholders is just to refresh.
• Board of Directors: The board of directors is the highest policy making body in a corporation. The board’s primary responsibility is to
ensure that the corporation is operating to serve the best interest of the stockholders. The following are among the responsibilities of the
board of directors:
- Setting policies on investments, capital structure and dividend policies.
- Approving company’s strategies, goals and budgets.
- Appointing and removing members of the top management including the president.
- Determining top management’s compensation.
- Approving the information and other disclosures reported in the financial statements (Cayanan, 2015)
• President (Chief Executive Officer): The roles of a president in a corporation may vary from one company to another. Among the
responsibilities of a president are the following:
- Overseeing the operations of a company and ensuring that the strategies as approved by the board are implemented as planned.
- Performing all areas of management: planning, organizing, staffing, directing and controlling.
- Representing the company in professional, social, and civic activities.
• Tell the learners that although the president carries out the decision making for all functions, it would be difficult for him/her to do this
alone. The president cannot manage the company on his own, especially when the corporation has become too big. To assist him are the
vice presidents of different functional areas: finance, marketing, production and administration.
• Determine from the list of roles written on the board the functions that pertain to the respective VPs. Add the following functions if needed:
• VP for Marketing: The following are among the responsibilities of VP for Marketing
- Formulating marketing strategies and plans.
- Directing and coordinating company sales.
- Performing market and competitor analysis.
- Analyzing and evaluating the effectiveness and cost of marketing methods applied.
- Conducting or directing research that will allow the company identify new marketing opportunities, e.g. variants of the existing
products/services already offered in the market.
- Promoting good relationships with customers and distributors. (Cayanan, 2015)
12
• VP for Production: The following are among the responsibilities of VP for Production:
- Ensuring production meets customer demands.
- Identifying production technology/process that minimizes production cost and make the company cost competitive.
- Coming up with a production plan that maximizes the utilization of the company’s production facilities.
- Identifying adequate and cheap raw material suppliers. (Cayanan, 2015)
• VP for Administration: The following are among the responsibilities of VP for Administration:
- Coordinating the functions of administration, finance, and marketing departments.
- Assisting other departments in hiring employees.
- Providing assistance in payroll preparation, payment of vendors, and collection of receivables.
- Determining the location and the maximum amount of office space needed by the company.Identifying means, processes, or systems
that will minimize the operating costs of the company. (Cayanan, 2015)
• Finally, focus the learners’ attention to the role of the VP for finance as this is where the rest of the topics for this course will revolve.
MOTIVATION (5 MINS)
Message from the CFOs

• Share the following quotes from the Chief Financial Officers (CFOs) of the respective corporations:
- Unilever: “Finance plays a critical role across every aspect of our business. We enable the business to turn our ambition and strategy into
sustainable, consistent and superior performance” - Jean-Marc Huët (Unilever)
- Jollibee: “It’s very exciting because you are not just thinking of today but what the company will need in the future” - Ysmael V. Baysa
(Morales, 2013)
- Globe Telecom: “Yesterday’s solutions are never adequate for the future” - Albert De Larrazabal (Klobucher, 2015)
- SM Corporation: “Now, we don’t go out because we need funds. We go out because it’s an opportunity.” – Jose T. Sio (Montealegre, 2015)
• Reflect on the quotes cited and mention how critical and dynamic working in the finance field is.
13
1. Functions of a Financial Manager

• Identify the four functions of a VP for finance (CFO) as follows: Teacher Tips:
- Financing Write the four functions on the board and
identify what is the role of the Financial
- Investing Manager in each function.
- Operating
- Dividend Policies
• Recall from the previous session that there are situations when we are faced with lack of funds. Teacher Tips:
Financing decisions include making decisions on how to fund long term investments (such as Financing – to determine the appropriate
capital structure of the company and to
company expansions) and working capital which deals with the day to day operations of the
raise funds from debt and equity.
company (i.e., purchase of inventory, payment of operating expenses, etc.).
• The role of the VP for Finance of the Financial Manager is to determine the appropriate capital
structure of the company. Capital structure refers to how much of your total assets is financed by
debt and how much is financed by equity. To illustrate, show/draw the figure below:
Equity Liabilities Assets
100%
75%
50%
25%
0%
Total Assets Capital Structure
Table 1: Sample Capital Structure

14
• Recall that Assets = Liabilities + Owner’s Equity.
- To be able to acquire assets, our funds must have come somewhere. If it was bought using cash
from our pockets, it is financed by equity.
- On the other hand, if we used money from our borrowings, the asset bought is financed by
debt.
- In the figure above, the total assets is financed by 60% debt and 40% equity. Accordingly, the
capital structure is 60% debt and 40% equity.
• Ask the learners if they think there is an ideal mix of debt and equity across corporations?
- Answer: No. The mix of debt and equity varies in different corporations depending on
management’s strategies. It is the responsibility of the Financial Manager to determine which
type of financing (debt or equity) is best for the company.
• The advantages of debt and equity financing will be discussed in Lesson 5: Sources and Uses of Teacher Tips:
Funds. A. Investing
• Short term investments:
1. Plan for expected excess in cash using
• Recall that, previously, you discussed investing as where to put your excess cash to make it more Financial Planning tools such as
profitable. We expand that definition by including cash held taken from funds as a result of budgeting and forecasting
financing decisions. 2. Choose which type of investment should
it invest in that would secure the best
profits
• Investments may either be short term or long term.
- Short term investment decisions are needed when the company is in an excess cash position. • Long term investments:
• To plan for this, the Financial Manager should be able to make use of Financial Planning tools Prepare a capital budgeting analysis to
determine if the long term investment will
such as budgeting and forecasting which will be discussed in Lesson 3: Financial Planning
be profitable
Tools and Concepts.
• Moreover, the company should choose which type of investment it should invest in that would B. Operating - determine how to finance
provide an most optimal risk and return trade off. We will learn more about this on Lesson 6: working capital accounts such as
accounts receivable and inventories
Introduction to investments.
(short term vs. long term)
- Long term investments should be supported by a capital budgeting analysis which is among
the responsibilities of a finance manager.
• Capital budgeting analysis is a tool to assess whether the investment will be profitable in the
15
long run and will be further discussed in Lesson 5: Basic Long Term Financial Concepts. This is
a crucial function of management especially if this investment would be financed by debt.
• The lenders should have the confidence that the investments that management will push
through with will be profitable or else they would not lend the company any money.
• Operating decisions deal with the daily operations of the company. The role of the VP for finance Teacher Tips:
There are two types of liquidity risk:
is determining how to finance working capital accounts such as accounts receivable and inventories.
A. Risk that the company will fail to pay its
The company has a choice on whether to finance working capital needs by long term or short term short term obligations.
sources. Why does a Financial Manager need to choose which source of financing a company B. Risk that you will not be able to sell
should use? What do they need to consider in making this decision? investments in financial assets
- Short Term sources are those that will be payable in at most 12 months. This includes short-term immediately.
loans with banks and suppliers’ credit. For short-term bank loans, the interest rate is generally
lower as compared to that of long-term loans. Hence, this would lead to a lower financing cost.
- Suppliers’ credit are the amounts owed to suppliers for the inventories they delivered or
services they provided. While suppliers’ credit is generally free of interest charges, the
obligations with them have to be paid on time to maintain good supplier relationship. Such
relationships should be nurtured to ensure timely delivery of inventories.
- Short term sources pose a trade-off between profitability and liquidity risk. Because this source
matures in a short period, there is a possibility that the company may not be able to obtain
enough cash to pay their obligation (i.e. liquidity risk).
- Long term sources, on the other hand, mature in longer periods. Since this will be paid much
later, the lenders expect more risk and place a higher interest rate which makes the cost of long
term sources higher than short term sources. However, since long term sources have a longer
time to mature, it gives the company more time to accumulate cash to pay off the obligation in
the future.
- Hence, the choice between short and long term sources depends on the risk and return trade
off that management is willing to take. The learners will learn more about this on Chapter 4:
Sources and uses of funds.
• Dividend Policies. Recall that cash dividends are paid by corporations to existing shareholders
based on their shareholdings in the company as a return on their investment. Some investors buy
stocks because of the dividends they expect to receive from the company. Non-declaration of
dividends may disappoint these investors. Hence, it is the role of a financial manager to determine
when the company should declare cash dividends.
16
- Before a company may be able to declare cash dividends, two conditions must exist:
1. The company must have enough retained earnings (accumulated profits) to support cash
dividend declaration.
2. The company must have cash.
• Ask the learners what they think will affect the decision of management in paying dividends. Teacher Tips:
Dividend Policies - These determine when
Remind them that dividends come from the company’s cash and availability of unrestricted retained
the company should declare cash dividends.
earnings.
- Answer Key:
• Availability of financially viable long-term investment
• Access to long term sources of funds
• Management’s Target Capital structure
• Recall that one of the functions of a finance manager is investing and its available cash may be used
to invest in long term investments that would increase the profitability of the company. Some small
enterprises which are undergoing expansion may have limited access to long term financing (both
long term debt and equity). This results to these small companies reinvesting their earnings into
their business rather than paying them out as dividends.
• On the other hand, a company which has access to long term sources of funds may be able to
declare dividends even if they are faced with investment opportunities. However these investment
opportunities are generally financed by both debt and equity.
- The management usually appropriates a portion of retained earnings for investment
undertakings and this may limit the amount of retained earnings available for dividend
declaration.
- Creditors are not willing to finance entirely the cost of a company’s long term investment.
Hence, the need for equity financing (e.g. internally generated funds or issuance of new shares).
- Examples of these companies are publicly listed companies such as PLDT, Globe Telecom, and
Petron. PLDT and Globe are two of the Philippine listed companies which have generously
distributed cash dividends for the last five years (information as of 2014).
• For companies which have limited access to capital and have target capital structure, they may end
up with a residual dividend policy. This means that when companies are faced with investment
opportunities, internally generated funds will be used first to finance these investments and
17
dividends can only be declared if there are excess funds.
ENRICHMENT (5 MINS)
Integration of Learning
- Explain why shareholder wealth maximization should be the overriding objective of management.
- What other positions can you think of that are related to financial management?
Answer: Treasurer, Controller. These are positions under the CFO)
18

Content Standards
activities of the financial manager, and the financial institutions and markets. Introduction Introduce the concept of a Financial System 30
Performance Standards Instruction Identify the types of Financial Markets, 45

The learners will be able to describe the role of financial institutions and
Financial Institutions, and Financial
markets. Instruments
The learners shall be able to: Evaluation Short Quiz on Financial Institutions, Markets, 10
• Distinguish a financial institution from financial instrument and financial
and Instruments
market. (ABM_BF12-IIIa-2)
Materials Board Notes
• Enumerate the varied financial institutions and their corresponding services.
(ABM_BF12-IIIa-3)
• Compare and contrast the varied financial instruments. (ABM_BF12-IIIa-4) Resources
• Explain the flow of funds within an organization – through and from the (1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
enterprise—and the role of the financial manager. (ABM_BF12-IIIa-5) City. Rex Bookstore.
(2) Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial
Finance (13th Ed), USA: Prentice-Hall
• Prepare a diagram illustrating how the Financial System works.
• Define Financial Markets, Financial Institutions and Financial Instruments.
• Identify the types of Financial Markets, Financial Institutions and Financial Instruments.
19
INTRODUCTION/MOTIVATION (30 MINS)
1. Savings and Shortages

• Recall from the previous discussions that one of the functions of a financial manager is financing and
investing of funds.
• Pick a random learner (A) and present a scenario that during his/her management of money, some
cash will remain. Ask him/her what he/she should do with that cash.
- Expected answer: Save or Invest
• Ask your students if they are going to save their money, where would they keep it.
- Expected answers: Banks, Piggy bank, Investments – stocks, mutual funds, insurance
• Pick another learner (B) and ask B what business he/she would like to try. Now, suppose that he/she
had the business running and is profitable for some time. B then decides to expand his/her business
but does not have enough cash to pay for the expansion. Ask the students where can B get the
additional funding?
- Expected answers: Ask from parents, ask from friends, banks, lending institutions.
• Suppose B knew that A had excess money and approached A to lend him/her the capital he/she
needs to expand his/her business for a 20% interest. Since A observed that B’s business has been
profitable, A is willing to lend B the money since he/she is confident that B can repay his loan. A is
now expecting to be 20% richer from his lending to B and B can now expand his operations to gain
more profit from his business.
• Emphasize that this scenario where the lender and the borrower are present at the right time and at
the right place may not happen all the time. In fact, it seldom happens. What happens if they did
not meet? A will not be able to find someone to invest his money to and B cannot get funds to start
his expansion. Here is where the Financial System comes in.
Terms Defined:
2. Role playing to introduce the concept of saving and investing
Financial Markets – organized forums in
• Draw two boxes and label with names of learners A and B. Below [A], write “Saver”, and below [B], which the suppliers and users of various
write “users of funds”. types of funds can make transactions
directly
20
• Continue discussion as follows: Terms Defined:
- If A knows that B is in need of funds, or if B knows that A is willing to invest funds, A and B may Financial Institutions – intermediaries that
channel the savings of individuals,
agree to make a Private Placement. (Draw the box for Private Placement between A and B and
businesses, and governments into loans or
link the boxes as shown in Figure 1.) investments.
Private Placements - the sale of a new

- However, if these facts are unknown to them, A and B can go to a Financial Market which is an security directly to an investor or group of
organized forum that lets A, along with other suppliers of funds, and B, along with other users of investors.
funds, meet and make transactions. Once A and B have met in the Financial Market, they can now
Public Offering - The sale of either bonds or
agree to make a private placement. (Draw the box for Financial Markets and link this to A and B as
stocks to the general public.
shown in Figure 1.)
Financial Instruments – is a real or a virtual
document representing a legal agreement
- If A and B do not want to make an effort to find a counterparty in the Financial Markets, A and B involving some sort-of monetary value
may go to a Financial Institution. A Financial Institution will receive A’s supply of funds and match (Source: Investopedia - Sharper Insight.
it with B’s demand of funds. Unlike the Financial Markets were A and B knows to whom the fund Smarter Investing. | Investopedia. (2016).
Investopedia. Retrieved 8 May 2016, from
went and from whom the funds came, Financial Institutions serve as an intermediary to the
http://investopedia.com). These can be
suppliers and users of funds. (Draw the box for Financial Institutions and link this to A and B as debt securities like corporate bonds or
shown in Figure 1.) equity like shares of stock.
- Moreover, Financial institutions actively participate in the financial markets as both suppliers and
users of funds. (Draw the link between Financial Institutions and Financial Markets as shown in
Figure 1.)
• Mention that the resulting diagram illustrates the Financial System.
21
Financial System
Financial
Institutions
[Learner A] [Learner B]
Savers/Suppliers Private Placement Users/Demanders
of Funds of Funds
Financial Markets
Flow of funds Flow of securities/notes/bonds/debt instruments
Figure 1: The Financial System
• Post the question of how transactions between suppliers and users of funds take place. How would they prove that there was a transaction
so that the demander will be able to repay the supplier on time and at the right amount?
- Answers:
- Verbal agreement
- Written agreement
• Discuss that due to the increased need for security for the performance of obligations arising from these transactions and due to the
growing size of the financial system, the transfers of funds from one party to another are made through Financial Instruments.
• Note that on the diagram presented, the solid lines represent the flow of cash/funds, while the broken lines represent the flow of financial
instruments which represent obligations to transfer cash or other assets in the future.
22
Tell the learners that you will further discuss the composition of the Financial System and that you will identify the types of Financial Markets,
Financial Institutions and Financial Instruments.
1. Financial Instruments
• When a financial instrument is issued, it gives rise to a financial asset on one hand and a financial liability or equity instrument on the other.
• Recall from ABM the following definitions:

- A Financial Asset is any asset that is:
• Cash
• An equity instrument of another entity
• A contractual right to receive cash or another financial asset from another entity.
• A contractual right to exchange instruments with another entity under conditions that are potentially favorable. (IAS 32.11)
• Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment in Bonds
- A Financial Liability is any liability that is a contractual obligation:
• To deliver cash or other financial instrument to another entity.
• To exchange financial instruments with another entity under conditions that are potentially unfavorable. (IAS 32)
• Examples: Notes Payable, Loans Payable, Bonds Payable
- An Equity Instrument is any contract that evidences a residual interest in the assets of an entity after deducting all liabilities. (IAS 32)
• Examples: Ordinary Share Capital, Preference Share Capital
• Ask the learners who are the holders of Financial Assets.

- Answer: Suppliers of Funds
• Ask who the makers of Financial Liabilities and Equity instruments are.
- Answer: Users of Funds
• Continue discussing that when companies are in need of funding, they either sell debt securities (or bonds) or issue equity instruments. The
proceeds from the sale of the debt securities and issuance of bonds will be used to finance the company’s plans. On the other hand, investors
buy debt securities of equity instruments in hopes of receiving returns through interest, dividend income or appreciation in the financial
asset’s price.
23
• Identify common examples of Debt and Equity Instruments.
- Debt Instruments generally have fixed returns due to fixed interest rates. Examples of debt
instruments are as follows:
• Treasury Bonds and Treasury Bills are issued by the Philippine government. These bonds and bills
have usually low interest rates and have very low risk of default since the government assures that
these will be paid.
• Corporate Bonds are issued by publicly listed companies. These bonds usually have higher interest
rates than Treasury bonds. However, these bonds are not risk free. If the company which issued the
bonds goes bankrupt, the holder of the bonds will no longer receive any return from their
investment and even their principal investment can be wiped out.
- Equity Instruments generally have varied returns based on the performance of the issuing company.
Returns from equity instruments come from either dividends or stock price appreciation. The
following are types of equity instruments:
• Preferred Stock has priority over a common stock in terms of claims over the assets of a company.
This means that if a company were to be liquidated and its assets have to be distributed, no asset
will be distributed to common stockholders unless all the claims of the preferred stockholders have
been given. Moreover, preferred stockholders have also priority over common stockholders in cash
dividend declaration. Dividends to preferred stockholders are usually in a fixed rate. No cash
dividends will be given to common stockholders unless all the dividends due to preferred
stockholders are paid first. (Cayanan, 2015)
• Holders of Common Stock on the other hand are the real owners of the company. If the company’s
growth is spurring, the common stockholders will benefit on the growth. Moreover, during a
profitable period for which a company may decide to declare higher dividends, preferred stock will
receive a fixed dividend rate while common stockholders receive all the excess.
• Ask the learners which of the financial instruments presented they find most appealing.
• Inform them that they will learn more about the advantages and disadvantages of debt and equity
instruments in Lesson 4: Sources and Uses of Funds and Lesson 5: Introduction to Investments.
2. Financial Markets Terms Defined

Primary Market - Financial market in which
• Recall the definition of financial markets from earlier discussion. securities are initially issued; the only
24 market in which the issuer is directly
involved in the transaction.
• Classify Financial Markets into comparative groups:
- Primary vs. Secondary Markets Terms Defined
Public offering - The sale of either bonds or
• To raise money, users of funds will go to a primary market to issue new securities (either debt or stocks to the general public.
equity) through a public offering or a private placement.
• The sale of new securities to the general public is referred to as a public offering and the first Private placement - The sale of a new
offering of stock is called an initial public offering. The sale of new securities to one investor or a security directly to an investor or group of
investors.
group of investors (institutional investors) is referred to as a private placement.
• However, suppliers of funds or the holders of the securities may decide to sell the securities that Secondary market - Financial market in
have previously been purchased. The sale of previously owned securities takes place in secondary which preowned securities (those that are
markets. not new issues) are traded.
• The Philippine Stock Exchange (PSE) is both a primary and secondary market. Money market - A financial relationship
created between suppliers and users of
- Money Markets vs. Capital Markets short-term funds.
• Money markets are a venue wherein securities with short-term maturities (1 year or less) are sold.
Capital market - A market that enables
They are created because some individuals, businesses, governments, and financial institutions suppliers and users of long-term funds to
have temporarily idle funds that they wish to invest in a relatively safe, interest-bearing asset. At the make transactions.
same time, other individuals, businesses, governments, and financial institutions find themselves in
need of seasonal or temporary financing.
• On the other hand, securities with longer-term maturities are sold in Capital markets. The key
capital market securities are bonds (long-term debt) and both common stock and preferred stock
(equity, or ownership).
3. Financial Institutions
• Recall the definition of Financial institutions from the earlier discussion.
• Identify examples of financial institutions:

- Commercial Banks - Individuals deposit funds at commercial banks, which use the deposited
funds to provide commercial loans to firms and personal loans to individuals, and purchase debt
securities issued by firms or government agencies.
- Insurance Companies - Individuals purchase insurance (life, property and casualty, and health)
protection with insurance premiums. The insurance companies pool these payments and invest the
proceeds in various securities until the funds are needed to pay off claims by policyholders.
Because they often own large blocks of a firm’s stocks or bonds, they frequently attempt to
25
influence the management of the firm to improve the firm’s performance, and ultimately, the performance of the securities they own.
- Mutual Funds - Mutual funds are owned by investment companies which enable small investors to enjoy the benefits of investing in a
diversified portfolio of securities purchased on their behalf by professional investment managers. When mutual funds use money from
investors to invest in newly issued debt or equity securities, they finance new investment by firms. Conversely, when they invest in debt or
equity securities already held by investors, they are transferring ownership of the securities among investors.
- Pension Funds - Financial institutions that receive payments from employees and invest the proceeds on their behalf.
- Other financial institutions include pension funds like Government Service Insurance System (GSIS) and Social Security System (SSS), unit
investment trust fund (UITF), investment banks, and credit unions, among others.
Figure 2: How Financial Institutions Provide Financing for Firms (Gitman & Zutter, 2012)
• The figure above illustrates how the key financial institutions serve as intermediaries for suppliers and users of funds.
• Ask the learners which type of financial institution do they think is most critical for firms?
26
ENRICHMENT (5 MINS)
Integration of Learning
• Question for reflection: How would you relate the role of financial managers, role of financial markets
and role of investors?
Role of Financial Managers Role of Financial Markets Role of Investors
Financial managers make financing The financial markets provide a Investors provide the funds that are
decisions that require funding from forum in which firms can issue to be used by financial managers to
investors in the financial markets. securities to obtain the funds that finance corporate growth.
they need and in which investors can
purchase securities to invest their
funds.
EVALUATION (10 MINS)
Quiz:
Part 1: True/False
1. To achieve the goal of profit maximization for each alternative being considered, the financial
manager would select the one that is expected to result in the highest monetary return. Teacher Tips
2. Dividend payments change directly with changes in earnings per share. You may use suggested format or take
3. The wealth of corporate owners is measured by the share price of the stock. questions from the test banks found at the
4. Financial markets are intermediaries that channel the savings of individuals, businesses, and end of this file.
government into loans or investments.
Answer Key:
5. The money market involves trading of securities with maturities of one year or less while the capital
market involves the buying and selling of securities with maturities of more than one year. Part 1: T, F, T, F, T
Part 2: B, D, A, C, B
27
Part 2: Multiple Choice
1. The ______ is created by a financial relationship between suppliers and users of short-term funds.
A. financial market
B. money market
C. stock market
D. capital market
2. Firms that require funds from external sources can obtain them from _____.
A. financial markets.
B. private placement.
C. financial institutions.
D. All of the above.
3. The major securities traded in the capital markets are ____.

A. stocks and bonds.
B. bonds and commercial paper.
C. commercial paper and Treasury bills.
D. Treasury bills and certificates of deposit.
4. The primary goal of the financial manager is _____.

A. minimizing risk.
B. maximizing profit.
C. maximizing wealth.
D. minimizing return.
5. A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide
earnings over a three-year period as described below.
Asset Year 1 Year 2 Year 3
1 $ 21,000 $ 15,000 $ 6,000
2 $ 9,000 $ 15,000 $ 21,000
3 $ 3,000 $ 20,000 $ 19,000
4 $ 6,000 $ 12,000 $ 12,000 28

Based on the profit maximization goal, the financial manager would choose _____.
A. Asset 1.
B. Asset 2.
C. Asset 3.
D. Asset 4.
Appendix
Test Bank - Goal of the Firm (Gitman & Zutter, 2012) Answer Key
True/False
True/False 1. T
2. F
1. High cash flow is generally associated with a higher share price whereas higher risk tends to result
3. T
in a lower share price. 4. F
2. When considering each financial decision alternative or possible action in terms of its impact on the 5. T
share price of the firm's stock, financial managers should accept only those actions that are 6. T
expected to increase the firm's profitability. 7. T
8. F
3. To achieve the goal of profit maximization for each alternative being considered, the financial 9. F
manager would select the one that is expected to result in the highest monetary return.
4. Dividend payments change directly with changes in earnings per share. Multiple Choice
1. C
5. The wealth of corporate owners is measured by the share price of the stock.
2. B
6. Risk and the magnitude and timing of cash flows are the key determinants of share price, which 3. C
represents the wealth of the owners in the firm. 4. D
7. _When considering each financial decision alternative or possible action in terms of its impact on 5. C
the share price of the firm's stock, financial managers should accept only those actions that are 6. A
7. C
expected to maximize shareholder value. 8. B
8. An increase in firm risk tends to result in a higher share price since the stockholder must be 9. B
compensated for the greater risk. 10. B
11. A
9. Stockholders expect to earn higher rates of return on investments of lower risk and lower rates of
12. D
return on investments of higher risk. 13. B
14. A
29
Multiple Choice
1. The primary goal of the financial manager is
A. minimizing risk.
B. maximizing profit.
C. maximizing wealth.
D. minimizing return.
2. Corporate owner's receive realizable return through

A. earnings per share and cash dividends.
B. increase in share price and cash dividends.
C. increase in share price and earnings per share.
D. profit and earnings per share.
3. The wealth of the owners of a corporation is represented by

A. profits.
B. earnings per share.
C. share value.
D. cash flow.
4. Wealth maximization as the goal of the firm implies enhancing the wealth of
A. the Board of Directors.
B. the firm's employees.
C. the federal government.
D. the firm's stockholders.
5. The goal of profit maximization would result in priority for

A. cash flows available to stockholders.
B. risk of the investment.
C. earnings per share.
D. timing of the returns.
6. Profit maximization as a goal is not ideal because it does NOT directly consider
A. risk and cash flow.
B. cash flow and stock price.
30
C. risk and EPS.
D. EPS and stock price.
7. Profit maximization as the goal of the firm is not ideal because

A. profits are only accounting measures.
B. cash flows are more representative of financial strength.
C. profit maximization does not consider risk.
D. profits today are less desirable than profits earned in future years.
8. Profit maximization fails because it ignores all EXCEPT

A. the timing of returns.
B. earnings per share.
C. cash flows available to stockholders.
D. risk.
9. The key variables in the owner wealth maximization process are

A. earnings per share and risk.
B. cash flows and risk.
C. earnings per share and share price.
D. profits and risk.
10. Cash flow and risk are the key determinants in share price. Increased cash flow results in ________, other things remaining the same.
A. a lower share price
B. a higher share price
C. an unchanged share price
D. an undetermined share price
11. Cash flow and risk are the key determinants in share price. Increased risk, other things remaining the same, results in
A. a lower share price.
B. a higher share price.
C. an unchanged share price.
D. an undetermined share price.
31
12. Financial managers evaluating decision alternatives or potential actions must consider
A. only risk.
B. only return.
C. both risk and return.
D. risk, return, and the impact on share price.
13. A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide
earnings over a three-year period as described below.
Based on the profit maximization goal, the financial manager would choose
1 $ 21,000 $ 15,000 $ 6,000
2 $ 9,000 $ 15,000 $ 21,000
3 $ 3,000 $ 20,000 $ 19,000
4 $ 6,000 $ 12,000 $ 12,000
A. Asset 1.
B. Asset 2.
C. Asset 3.
D. Asset 4.
14. A financial manager must choose between three alternative investments. Each asset is expected to provide earnings over a three-year
period as described below. Based on the wealth maximization goal, the financial manager would
1 $ 21,000 $ 9,000 $ 15,000
2 $ 15,000 $ 15,000 $ 15,000
3 $ 9,000 $ 21,000 $ 15,000
$ 45,000 $ 45,000 $ 45,000
32
A. choose Asset 1.
B. choose Asset 2.
C. choose Asset 3.
D. be indifferent between Asset 1 and Asset 2.
Test Bank - Financial Markets, Financial Institutions, Financial Instruments (Gitman & Zutter, 2012)
Answer Key
True/False True/False
1. F
1. Primary and secondary markets are markets for short-term and long-term securities, respectively. 2. F
2. Financial markets are intermediaries that channel the savings of individuals, businesses, and 3. T
government into loans or investments. 4. T
3. The money market involves trading of securities with maturities of one year or less while the capital 5. F
6. F
market involves the buying and selling of securities with maturities of more than one year.
7. F
4. Holders of equity have claims on both income and assets that are secondary to the claims of 8. T
creditors. 9. F
5. Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to
Multiple Choice
payment of any interest to outstanding bonds.
1. A
6. Commercial banks obtain most of their funds from borrowing in the capital markets. 2. A
7. Credit unions are the largest type of financial intermediary handling individual savings. 3. B
8. A mutual fund is a type of financial intermediary that obtains funds through the sale of shares and 4. B
5. A
uses the proceeds to acquire bonds and stocks issued by various business and governmental units.
6. C
9. IPO stands for Interest and Principal Obligation. 7. A
8. D
Multiple Choice 9. D
10. B
1. A ______ is one financial intermediary handling individual savings. It receives premium payments 11. D
that are placed in loans or investments to accumulate funds to cover future benefits. 12. A
A. life insurance company 13. A
B. commercial bank
C. savings bank
D. credit union
33
2. The key participants in financial transactions are individuals, businesses, and governments. Individuals are net ______ of funds, and
businesses are net ______ of funds.
A. suppliers; users
B. purchasers; sellers
C. users; suppliers
D. users; providers
3. Which of the following is not a financial institution?

A. A pension fund
B. A newspaper publisher
C. A commercial bank
D. An insurance company
4. A ______ is set up so that employees of corporations or governments can receive income after retirement.
A. life insurance company
B. pension fund
C. savings bank
D. credit union
5. A ______ is a type of financial intermediary that pools savings of individuals and makes them available to business and government users.
Funds are obtained through the sale of shares.
A. mutual fund
B. savings and loans
C. savings bank
D. credit union
6. Most businesses raise money by selling their securities in a.

A. a direct placement.
B. a stock exchange.
C. a public offering.
D. a private placement.
34
7. Which of the following is not a service provided by financial institutions?
A. Buying the businesses of customers
B. Investing customers’ savings in stocks and bonds
C. Paying savers’ interest on deposited funds
D. Lending money to customers
8. Government usually
A. borrows funds directly from financial institutions.
B. maintains permanent deposits with financial institutions.
C. is a net supplier of funds.
D. is a net demander of funds.
9. By definition, the money market involves the buying and selling of

A. funds that mature in more than one year.
B. flows of funds.
C. stocks and bonds.
D. short-term funds.
10. The ______ is created by a financial relationship between suppliers and users of short-term funds.
A. financial market
B. money market
C. stock market
D. capital market
11. Firms that require funds from external sources can obtain them from
A. financial markets.
B. private placement.
C. financial institutions.
D. All of the above.
35
12. The major securities traded in the capital markets are
A. stocks and bonds.
B. bonds and commercial paper.
C. commercial paper and Treasury bills.
D. Treasury bills and certificates of deposit.
13. Long-term debt instruments used by both government and business are known as
A. bonds.
B. equities.
C. stocks.
D. bills.
36
Review of Financial Statement

Preparation, Analysis, LESSON OUTLINE
and Interpretation Pt.1 Introduction Brief introduction on learning objectives 10
Content Standards Motivation Matching type exercise as an ice breaker 20

The learners demonstrate an understanding of the process of preparing
financial statements as well as the methods or tools of analysis of financial Instruction/ Discussion 90
statements, including horizontal analysis, vertical analysis, and financial ratios Delivery
to test the level of liquidity, solvency, profitability, and stability of the business. Practice Board work/exercises and presentation 30
Performance Standards Evaluation Quiz 30

The learners will be able to solve exercises and problems that require financial
statement preparation, analysis, and interpretation using horizontal and vertical
Materials calculators, laptops
analyses, and various financial ratios.
Resources
Learning Competencies (1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
The learners shall be able to prepare financial statements (ABM_BF12-III-6) City. Rex Bookstore.
(2) Valencia and Roxas. Basic Accounting.
Specific Learning Outcomes (3) Copies of sample financial statements
At the end of this lesson, the learners will be able to identify and explain the
basic steps in the accounting process (accounting cycle).
37
INTRODUCTION/REVIEW (10 MINS)
Communicate learning objectives
• Introduce the following learning objectives using any of the suggested protocols (verbatim, own
words, read-aloud):
- I will be able to identify and explain the basic steps in the accounting process (accounting cycle).
MOTIVATION (20 MINS)

Match the letter with the definition that corresponds to the following terms: Teacher Tips
(Modified from Basic Accounting, Valencia & Roxas) Answer Key
1. i
1. Accounting A. Exchanges of goods or services between/among two or more entities 2. h
3. d
System or some other event having an economic impact on a business
4. a
2. Debit enterprise. 5. o
3. Credit B. An accounting record used to list a particular type of frequently 6. q
4. Transactions recurring transaction. 7. p
8. g
5. Double-Entry C. A record used to classify and summarize the effects of transactions. 9. b
Accounting D. An entry on the right side of an account. 10. j
6. Journal Entry E. A record used as the basis for analyzing and recording transactions. 11. c
7. Journals Examples include invoices, check stubs, and receipts. 12. f
13. k
8. Accounting F. A collection of accounts maintained by a business. 14. n
Process (or cycle) G. Procedures used for analyzing, recording, classifying, and 15. l
9. Special Journals summarizing the information to be presented in accounting reports.
10. General Journal H. An entry on the left side of an account.
11. Account I. Procedures and methods used, including data processing equipment,
12. Ledger to collect and report accounting data.
13. Posting J. An accounting record used to record all business activities for which a
14. General Ledger special journal is not maintained.
15. Subsidiary K. The process of summarizing transactions by transferring amounts
Ledgers from the journals to the ledger accounts.
L. The grouping of supporting accounts that in total equal the balance
of a control account in the general ledger.
M. The general ledger account that summarizes the detailed information
in a subsidiary ledger.
38
N. A collection of all the accounts used by a business that could appear
on the financial statements.
O. A system of recording transactions in a way that maintains the
equality of the accounting equation.
P. Records in which transactions are first entered, providing a
chronological record of business activity.
Q. The recording of a transaction in which debits equal credits. It usually
includes a date and an explanation of the transaction.
INSTRUCTION/DELIVERY (90 MINS)
Discuss the following:

Accounting is the systematic and comprehensive recording of financial transactions pertaining to a business. (Investopedia - Sharper Insight.
Smarter Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com)
1. The Accounting Equation

The basic accounting equation is:
ASSETS = LIABILITIES + OWNER’S EQUITY
• This means that the whole assets of the company comes from the liability, or debt of the company, and from the capital of the owner of the
business, and the income it generated from the business operations. This reflects the double-entry bookkeeping, and shown in the balance
sheet.
• Double entry bookkeeping tells us that if we add something from the one side, which is asset, we must add the same amount to the other
side to keep them in balance.
• For example, if we were to increase cash (an asset) we might have to increase note payable (a liability account) so that the basic accounting
equation remains in balance.
P 500.00 P 500.00
39
• In double-entry bookkeeping, there is the concept of debit (dr) and credit (cr). Debit is the left, and credit is the right.
• There is also a concept of normal balances. A normal balance, either a debit normal balance or a credit normal balance, is the side where a
specific account increases.
• In the accounting equation, asset is on the left side, while liabilities and equity is on the right side. Therefore, asset has a debit normal
balance, meaning that cash as an asset is debited to increase, while credited to decrease.
• On the other hand, liabilities and owners’ equity have a credit normal balance. This means that a liability account is credited to increase, while
debited to decrease. The accounting equation provides the foundation for what eventually becomes the balance sheet.
2. T-Account Analysis
In double-entry bookkeeping, the terms debit and credit are used to identify which side of the ledger account an entry is to be made. Debits
are on the left side of the ledger and Credits are on the right side of the ledger. It does not matter what type of account is involved.
CASH ACCOUNTS PAYABLE
DEBIT (DR) CREDIT (CR) DEBIT (DR) CREDIT (CR)
Php 500.00 Php 500.00
• The debit to cash increases the Cash Account by PHP500 while the credit to Accounts Payable increases this liability account by the same
PHP500.
• In the above example, we analyzed the accounting equation in terms of assets, liabilities, and owners’ equity. These are called Real or
Permanent Accounts. These accounts remain open and active for the life of the enterprise.
• In contrast, there are accounts that reflect activities for a specific accounting period. These are called Nominal or Temporary Accounts. After
the end of the specific period and the start of a new period, the balance of the nominal accounts are zero.
• Using the accounting equation, we can now expand the analysis that will include both real and nominal accounts. All nominal accounts will be
then closed to a Retained Earnings account at the end of the period, which is an owner’s equity account.
40
Illustrative Example:
Calvo Delivery Service is owned and operated by Noel Calvo. The following selected transactions were completed by Calvo Delivery Service
during February:
A. Received cash from owner as additional investment, P35,000.
B. Paid creditors on account, P1,800.
C. Billed customers for delivery services on account, P11,250.
D. Received cash from customers on account, P6,740.
CASH ACCOUNTS ACCOUNTS CALVO, SERVICE

RECEIVABLE PAYABLE CAPITAL REVENUE
A PHP35,000 PHP35,000
B PHP1,800 PHP1,800
C PHP11,250 PHP11,250
D PHP6,740 PHP6,740
3. Nominal Accounts
There are two major categories of nominal accounts: Expense and Revenue accounts.
• Expense Accounts
- A resource, when not yet used up for the current period, is considered an Asset and will provide benefits at a future time.
- On the other hand, a resource that has been used for the current period is called an Expense. At the end of each accounting period,
expenses are closed out to the Retained Earnings Account which decreases the Owners’ Equity. Since expenses decrease the owners’ equity,
those expense accounts carry a normal debit balance.
• Revenue Accounts
- Revenue Accounts reflect the accumulation of potential additions to retained earnings during the current accounting period.
- At the end of the accounting period accumulation of revenues during the period are closed to the Retained Earnings Account which
increases Owners’ Equity.
- Therefore revenue accounts carry a normal credit balance meaning the same balance as the Retained Earnings Account.
41
J. F. Outz, M.D., has been a practicing cardiologist for three years. During April 2009, Outz completed the following transactions in her practice
of cardiology:
Mar 1 Provide medical services to clients for cash P35,000.
Mar 2 Paid rent for the month, P3,000.
Paid advertising expense, P1,800.
Mar 6 Purchased office equipment on account, P12,300.
Mar 15 Paid creditor on account, P1,200.
Mar 27 Paid cash for repairs to office equipment, P500.
Mar 30 Paid telephone bill for the month, P180.
Mar 31 Paid electricity bill for the month, P315.
MAR CASH ACCOUNTS OFFICE ACCOUNTS SERVICE EXPENSES

RECEIVABLE EQUIPMENT PAYABLE REVENUE
1 PHP35,000 PHP35,000
2 PHP3,000 PHP3,000
2 PHP1,800 PHP1,800
6 PHP12,300 PHP12,300
15 PHP1,200 PHP1,200
27 PHP500 PHP500
30 PHP180 PHP180
31 PHP315 PHP315
42
If journalized:
March 1 Debit Cash for PHP35,000; Credit Service Revenue for PHP35,000
2 Debit Rent Expense for PHP3,000; credit Cash for PHP3,000
2 Debit Advertising Expense for PHP1,800; Credit Cash for PHP1,800
6 Debit Office Equipment for PHP12,300; Credit Accounts Payable for PHP12,300
15 Debit Accounts Payable for PHP1,200; Credit Cash for PHP1,200
27 Debit Repairs Expense for PHP500; credit Cash for PHP500
30 Debit Utilities Expense (or telephone) for PHP180; Credit Cash for PHP180
31 Debit Utilities Expense (or energy) for PHP315; credit Cash for PHP315
4. The Accounting Cycle
• Because accounting is all about getting data and putting them into the accounting equation, the end products are financial statements such
as a balance sheet and income statements, the process of accounting follows a cycle called the Accounting Cycle.
• It starts with the identification of whether a transaction is accountable or can be quantified, and ends with a post-closing trial balance.
The Process:
Step 1: Analyze Business Transactions.

• In this step, a transaction is analyzed to find out if it affects the company and if it needs to be recorded.
• Personal transactions of the owners and managers that do not affect the company should not be recorded.
• In this step, a decision may have to be made to identify if a transaction needs to be recorded in special journals such as a sales or purchases
journal.
Therefore, what you should do is:

A. Carefully read the description of the transaction to determine whether an asset, a liability, an owner’s equity, a revenue, an expense, or a
drawing account is affected.
B. For each account affected by the transaction, determine whether the account increases or decreases.
C. Determine whether each increase or decrease should be recorded as a debit or a credit, following the rules of debit and credit.
43
• N. Juna resigned from Company X. This does not affect any asset, liability, or the owner’s equity account.
• B. Cano purchased PHP500 cash worth of supplies at Ace Hardware. This affects cash and supplies, both asset accounts.
Step 2: Record This in the Journal.

• Using the rules of debit and credit, transactions are initially entered in a record called a Journal and the entry made is called a Journal Entry.
• The journal serves as a record of when transactions occurred and were recorded.
• For repetitive transactions or high volume transactions (e.g. one thousand sales transactions in one day), Special Journals are made. These
special journals include sales journal, purchases journal, cash receipts journal, and cash disbursements journal.
The Source Document is the file or document (i.e. official receipt, purchase order, contract) that will provide a basis or reason for a journal entry.
For example, an official receipt issued by the business will tell you that a sale transaction occurred and will be reflected by the journal entry.
• M. Jaya resigned from Company X. No journal entry.
• C. Danto purchased PHP500 cash worth of supplies to Ace Hardware. Debit Supplies PHP500, Credit Cash PHP500.
Step 3: Post the Transactions on a Ledger.

• A transaction is first recorded in a journal. Periodically, the journal entries are transferred to the accounts in the ledger.
• The process of transferring the debits and credits from the journal entries to the accounts is called Posting.
• Ledgers provide chronological details as to how transactions affect individual accounts. There are two types of ledgers: the General Ledger
and Subsidiary Ledger. The general ledger is a summary of the different Subsidiary Ledgers and can serve as a control account.
• For example, a general ledger for accounts receivable summarizes the balances found in the different subsidiary ledgers for different
customers.
J. Gaya, a CPA, is an independent auditor with only two clients. The Accounts Receivable ledger account has a balance of PHP100,000. His two
clients are A. Rania, and X. Campos. The subsidiary ledger of A. Rania has a balance of PHP25,000. X. Campos’s ledger balance is PHP75,000.
The sum of subsidiary ledgers must total the general ledger or else there must be an investigation to identify the source of discrepancies.
ACCOUNTS RECEIVABLE
DATE
December 31, 2015 Bal. Php 100,000 44

Subsidiary Ledgers
A. RANIA X. CAMPOS
DATE DATE
December 31, 2015 Bal. Php 25,000 December 31, 2015 Bal. Php 75,000
Posting in the subsidiary ledgers can be done anytime and the balances are summarized at the end of an accounting period. Posting in the
general ledger is done at the end of an accounting period.
Step 4: Prepare an Unadjusted Trial Balance.

• Errors may occur in posting debits and credits from the journal to the ledger. One way to detect such errors is by preparing a trial balance.
• Double-entry accounting requires that debits must always equal credits. The trial balance verifies this equality.
• The steps in preparing a trial balance are as follows:
1. List the name of the company, the title of the trial balance, and the date the trial balance is prepared.
2. List the accounts from the ledger and enter their debit or credit balance in the Debit or Credit column of the trial balance.
3. Total the Debit and Credit columns of the trial balance.
4. Verify that the total of the Debit column equals the total of the Credit column.
Step 5: Make adjustments. Journalize adjusting entries.

• At the end of the accounting period, many of the account balances in the ledger can be reported in the financial statements without change.
• For example, the balances of the cash and land accounts are normally the amount reported on the balance sheet. However, some accounts in
the ledger require updating.
• This updating is required for the following reasons:
1. Some expenses are not recorded daily. For example, the daily use of supplies would require many entries with small amounts. Also,
managers usually do not need to know the amount of supplies on hand on a day-to-day basis.
2. Some revenues and expenses are earned as time passes rather than as separate transactions. For example, rent received in advance
(unearned rent) expires and becomes revenue with the passage of time. Likewise, prepaid insurance expires and becomes an expense
with the passage of time.
3. Some revenues and expenses may be unrecorded. For example, a company may have provided services to customers that are has not
billed or recorded at the end of the accounting period. Likewise, a company may not pay its employees until the next accounting period
even though the employees have earned their wages in the current period.
45
• The analysis and updating of accounts at the end of the period before the financial statements are prepared is called the Adjusting Process.
The journal entries that bring the accounts up to date at the end of the accounting period are called Adjusting Entries.
• The following are normally adjusted at the end of a period:
- Accruals. These include unpaid salaries for the accounting period, unpaid interest expense, or unpaid utility expenses.
- Prepayments. If a company has prepaid expenses such as prepaid rent or prepaid insurance then the correct balances for these accounts
have to be established at the end of each accounting period to reflect their correct balances.
- Depreciation and amortization expenses. Depreciation expenses are recognized at the end of each accounting period through
adjusting entries. If there are intangible assets such as franchise, the allocation of their costs which is called amortization expense, is also
recognized at the end of each accounting period through adjusting entries.
- Allowance for uncollectible accounts. Bad debt expense from accounts receivable is also recognized through adjusting entries.
Step 6: Prepare an Adjusted Trial Balance.

An adjusted trial balance is prepared after taking into consideration the effects of the adjusting entries. Again, this is to ensure that the total
debit balances equal the credit balances after posting and journalizing adjusting entries made.
Step 7: Prepare the financial statements.

From the adjusted trial balance, the financial statements can then be prepared. These are the statement of financial position, statement of profit
or loss, and the statement of cash flows.
Step 8: Make the closing entries.

In the discussion about accounts, it was discussed that nominal accounts (revenue and expense accounts) are closed to retained earnings, or an
owner’s capital account because these accounts refer only to a specific accounting period. Actually, these accounts to be closed are accounts
that can be seen in the income statement.
Upon closing:
- If the revenues exceed expenses during an accounting period, retained earnings will increase.
- The reverse is true which means that if the expenses exceed revenues, the retained earnings will decrease.
In closing temporary accounts:

- Revenue account balances are transferred to an account called Income Summary Account (sometimes profit or loss summary).
- Expense account balances are also transferred to the Income Summary Account.
- The balance of the Income Summary (net income or net loss) is transferred to the owner’s capital account.
- The balance of the owner’s drawing account is transferred to the owner’s capital account.
46
Step 9: Make a Post-Closing Trial Balance.
A Post-Closing Trial Balance shows the accounts that are permanent or real. These are the accounts that can be seen in your balance sheet.
The post-closing trial balance is prepared to test if the debit balances equal the credit balances after closing entries are considered.
5. Basic Financial Statements.

A financial statement is basically a summary of all transactions that are carefully recorded and transformed into meaningful information. It also
shows the company’s permanent and temporary accounts. Basically, financial statements are comprised of the following:
a. Income Statement
• These are also known as the Profit/Loss Statement, Statement of Comprehensive Income, or Statement of Income.
• This is a summary of the revenue and expenses of a business entity for a specific period of time, such as a month or a year.
Figure 1: Sample Income Statement

Source: Warren, Duchac, Fess. Accounting.
b. Statement of Owner’s Equity

•These are also known as the Statement of Changes in Equity.
•This reports the changes in the owner’s equity over a period of time.
•It is prepared after the income statement because the net income or net loss for the period must be reported in this statement.
•Similarly, it is prepared before the balance sheet since the amount of owner’s equity at the end of the period must be reported on the
balance sheet.
• Because of this, the statement of owner’s equity is often viewed as the connecting link between the income statement and balance sheet.
47
Figure 2: Sample Statement of Owner’s Equity
Source: Warren, Duchac, Fess. Accounting
c. Balance Sheet
• Formerly known as the Statement of Financial Position.
• This provides information regarding the liquidity position and capital structure of a company as of a given date.
• It must be noted that the information found in this report are only true as of a given date.
• It shows a list of the assets, liabilities, and owner’s equity of a business entity as of a specific date, usually at the close of the last day of a
month or a year.
Figure 3: Sample Balance Sheet

Source: Warren, Duchac, Fess. Accounting
d. Statement of Cash Flows

• The statement of cash flows reports a company’s cash inflows and outflows for a period.
48
• This is used by managers in evaluating past operations and in planning future investing and financing activities.
• It is also used by external users such as investors and creditors to assess a company’s profit potential and ability to pay its debt and pay
dividends.
Figure 4: Sample Statement of Cash Flows
PRACTICE (30 MINS)
1. Using the following (scrambled) accounts, prepare a balance sheet for ABC, a retail company, for the year ending in December 31, 2014.
Assume that these are the only Balance Sheet Accounts.
49
Accounts Payable 39,000 Answer Key Balance Sheet
ABC, Incorporated
Accrued Expenses 8,000
December 31, 2014
Accumulated Depreciation 51,000
Cash 23,000
Additional Paid-In Capital 86,000
Gross accounts receivable 40,000
Allowance for Doubtful Accounts 2,000
Allowance for doubtful accounts (2,000)
Cash 23,000 Net accounts receivable 38,000
Common Stock (PHP0.20 par) 45,000 Inventories 54,000
Current Portion of L.T. Debt 6,000 Current assets 115,000
Gross Accounts Receivable 40,000 Gross fixed assets 486,000
Gross Fixed Assets 486,000 Accumulated depreciation (51,000)
Inventories 54,000 Net fixed assets 435,000
Long-Term Debt 210,000 Total assets 550,000
Net Accounts Receivable 38,000
Short-term bank loan (notes payable) 18,000
Net Fixed Assets 435,000
Accounts payable 39,000
Retained Earnings 138,000
Accrued expenses 8,000
Short-Term Bank Loan (Notes 18,000
Current portion of L.T. Debt 6,000
Payable)
Current liabilities 71,000
Long term debt 210,000
Total liabilities 281,000
Common stock (P0.20 par) 45,000
Additional paid-in capital 86,000
Retained earnings 138,000
Total liabilities and equity 550,000

50
2. Prepare a multi-step income statement for the retail company, ABC, for the year ending December 31, 2014 given the information below:
Advertising expenditures 68,000 Answer Key Income Statement

The ABC Company
Beginning inventory 256,000 For the 12 month period Ending December 31, 2014
Depreciation 78,000 Net sales 3,162,000
Ending inventory 248,000 Cost of goods sold 2,433,000
Gross Sales 3,210,000 Gross profit 729,000
Interest expense 64,000 Operating expenses (excluding depreciation) 417,000
Lease payments 52,000 Depreciation 78,000
Management salaries 240,000 Operating profit 234,000
Materials purchases 2,425,000 Interest expense 64,000
R&D expenditures 35,000 Earnings before taxes 170,000
Repairs and maintenance costs 22,000 Taxes 51,000
Returns and allowances 48,000 Net income 119,000
Taxes 51,000
51
1. Indicate whether the following items would appear on the income statement (IS), or balance sheet Teacher Tip:
(BS). Answer Key
A. ________ Office Supplies 1. a. BS
B. ________ Accounts Payable b. BS
c. BS
C. ________ Computer Equipment d. IS
D. ________ Commission Fees Earned e. IS
E. ________ Salaries Expense f. BS
F. ________ B. So, Capital g. BS
G. ________ Accounts Receivable
2. Using the following accounts from the retail store, A-Mart Incorporated’s income statement for the 2. a. PHP 400
year ending in December 31, 2013, answer the questions below. Note that all figures are in millions. b. 150
c. 115
Cost of goods sold PHP600
Lease payments 30
Advertising 20
Taxes 35
Repairs and maintenance expenses 40
Management salaries 100
Net sales 1,000
Depreciation 60
A. A-Mart’s gross profit is PHP___________________.

B. A-Mart’s operating profit is PHP___________________.
C. A-Mart’s net profit is PHP___________________.
52
3. Using the following accounts from the A-Mart, Incorporated’s balance sheet for the year ending Teacher Tip:
December 31, 2013, answer the questions below. Use cash as a plug figure. Note that all figures are Answer Key
in millions. 3. a. PHP 410
b. 210
c. 1,410
Current portion of L.T. Debt PHP 60 d. 810
e. 600
Leasehold improvements 300
Accrued expenses 40
Accumulated depreciation 200
Gross fixed assets 900
Accounts payable 90
Inventories 190
Common stock (PHP1.00 par) 400
Short-term bank loan 20
Net accounts receivable 100
Long-term bank loan 600
Retained earnings 200
Cash ???
A. A-Mart’s current assets are PHP___________________.

B. A-Mart’s current liabilities are PHP___________________.
C. A-Mart’s total assets are PHP___________________.
D. A-Mart’s total liabilities are PHP____________________.
E. A-Mart’s total stockholder’s equity is PHP___________________.
53
Business Finance 120MINS

Preparation, Analysis,
LESSON OUTLINE
and Interpretation Pt.2 Introduction Introduce the learning objectives and
/Review
review financial ratios, focusing on
15
liquidity and efficiency ratios. Introduce

Content Standards the case study.
The learners demonstrate an understanding of the process of preparing Case Ask learners to analyze and discuss the case 45
financial statements as well as the methods or tools of analysis of financial Analysis
in groups.
statements, including horizontal analysis, vertical analysis, and financial ratios
Presentation Ask assigned groups to present their case 30
to test the level of liquidity, solvency, profitability, and stability of the business.
analysis to the whole class.
Enrichment Discuss important points of the case and 30
Performance Standards
and
The learners will be able to solve exercises and problems that require financial provides commentaries to the groups’
Summary
statement preparation, analysis, and interpretation using horizontal and vertical analysis
analyses, and various financial ratios. Materials • Calculators
• Laptops
Learning Competencies • Projectors
• Textbook
Resources
• Define the measurement levels namely, liquidity, solvency, stability, and
(1) Several copies of case to distribute to learner-groups
profitability (ABM_BF12-IIIb-7)
• Compute, analyze, and interpret financial ratios such as current ratio, Review
of Financial Statement Preparation, Analysis, and Interpretation

• Apply their knowledge on liquidity and efficiency ratios in tackling real life business problems.
• Pinpoint business problems and formulate relevant recommendations and strategies.
54
PRE-WORK
Provide copies of the financial statement of the subject company to the learners a day before the class. Ask them to compute for liquidity and
efficiency ratios.
1. Review profitability and leverage ratios. Ask learners what profitability and leverage mean. Write the names of the different types of ratios
and their formulas on the board.
2. Explain that business cases are used to discuss certain issues and problems of a specific company. Learners will take the point-of-view of
owners/managers in analyzing the case.
3. Discuss the mechanics of the case discussion:

• The class will be divided in groups of 4 to 6 learners.
• Learners will discuss and analyze the business case among their groups. They will then need to summarize their analysis in an essay/paper.
The paper will have the following outline: Case Background/Story, Analysis (including computations), and Recommendation. The paper can
be one to two pages of yellow sheet or bond paper. They must do this within 45 minutes.
• Two groups will be asked to present. Presenting groups do not need to submit an essay/paper. Instead, they need to prepare their
presentation with materials like manila paper, transparencies, or PowerPoint. Groups can volunteer or the teacher can also assign who will
present. Assignments should be finalized before learners start their case analysis.
• Presentation time is 10 minutes for each group. After the presentation, there will be a 5-minute Q&A session.
4. Distribute the printed cases to the learners.
55
CASE ANALYSIS (60 MINS)
1. Allow the learners to break into groups. From time to time, update them with the remaining time to do the analysis and their essay/
presentation.
2. Make sure to remind them that they will take on the shoes of the owner/manager in solving the case.
Below is the business case. You may look for or make another business case as long as it highlights the same topics.
Zapatoes, Inc
Anthony Cruz owns Zapatoes, Inc., a home-grown Filipino shoe company. His company has experienced
tremendous growth since it has started its operations in 2009. With a growing demand for his products, Anthony
Cruz is considering expanding his operations by opening his first production facility. Currently, he pays another
company to manufacture the shoes he designs. He is contemplating to produce the shoes Zapatoes, Inc. facility,
with the hope of lowering the cost of production.
The company needs PHP10 million to finance this expansion and is at a tight cash position. Anthony Cruz is now
wondering where to get the funds needed – invite an investor or personally borrow from a bank?
Here are the comparative financial statements of Zapatoes, Inc.:
56
Statement of Financial Position
2015 2014 2013
Cash 180,000.00 210,000.00 270,000.00
Accounts Receivable 7,800,000.00 5,400,000.00 3,900,000.00
Inventory 3,400,000.00 3,000,000.00 2,000,000.00
TOTAL ASSETS 11,380,000.00 8,610,000.00 6,170,000.00
Accounts Payable 2,000,000.00 1,800,000.00 1,000,000.00
Short-term Loans Payable 400,000.00 400,000.00 -
Long-term debt 2,000,000.00 2,000,000.00 2,000,000.00
Total Liabilities 4,400,000.00 4,200,000.00 3,000,000.00
Capital Stock 200,000.00 200,000.00 200,000.00
Accumulated Profit 6,780,000.00 4,210,000.00 2,970,000.00
Total Equity 6,980,000.00 4,410,000.00 3,170,000.00
TOTAL EQUITY AND LIABILITIES 11,380,000.00 8,610,000.00 6,170,000.00
Statement of Financial Performance
2015 2014 2013
Sales 9,219,747.90 6,856,235.83 5,040,300.00
Cost of Goods Sold 2,950,319.33 2,536,807.26 1,915,314.00
Operating Expenses 2,350,000.00 2,300,000.00 2,100,000.00
Operating Income 3,919,428.57 2,019,428.57 1,024,986.00
Interest Expense 248,000.00 248,000.00 -
Net Income before Taxes 3,671,428.57 1,771,428.57 1,024,986.00
Taxes 1,101,428.57 531,428.57

57 307,495.80
NET INCOME 2,570,000.00 1,240,000.00 717,490.20

Zapatoes, Inc. sold 3,300 pairs on 2013, 4,500 pairs on 2014, and 6,200 pairs in 2015. With the brand’s target
market – young professionals and college students, it can only sell it at the PHP1,000 to PHP2,000 price range per
pair.
Anthony is wondering whether owning his own manufacturing facility can really improve its profitability. Currently,
he is producing his shoes at PHP475 pesos per pair. He expects that he can lower production costs to as much as
PHP300 per pair if he will manufacture it himself. However, opening a new production facility will increase operating
expenses (including depreciation) by 30%. Currently, most of his operating expenses are marketing and distribution
costs.
To finance the PHP10 million facility, he has three options:

• Accept a PHP10 million equity investment from his friend, Alex. Alex will hold 45% percent ownership of the
business afterwards. Alex does not demand any specific return.
• Short-term loan for 1 year for PHP10 million at 6% per annum from Shortime Bank.
• Long-term loan for 5 years for PHP10 million at 10% per annum from Longly Bank.
Anthony is very confident that his sales volume will still grow for the next 5 years. However, his confidence is tainted
by his uncertainties over the impact of opening a new production facility. What must he do?
PRESENTATION (30 MINS)
1. Time each presentation. Ask groups to stop presenting after 10 minutes. Be strict with the time.
2. After each presentation, ask the presenting group some questions or clarifications. You can also challenge the computations/
recommendations of the learners. You may also provide general comments of the presentation flow and aesthetics. Ask other groups to also
provide comments and questions to the presentations. This should take 5 minutes.
58
ENRICHMENT AND SUMMARY (15 MINUTES) Teacher Tip:
Guide Questions:
1. Write on the board the main points raised by the presenting groups. 1. What is the Zapatoes Inc’s capital
structure? What is the effect of an
additional debt? Additional equity?
2. Provide your own analysis. 2. Assess the profitability of Zapatoes Inc’s.
What is the effect of issuing debt to its
profitability? Effect of equity?
• Start by pinpointing the main issues relevant to the case. 3. What factors are considered in deciding
whether to take long-term or short-term
• Provide the correct figures for the profitability and leverage ratios.
financing?
• Discuss how you arrive at your decision. Highlight important recommendations/changes that must be 4. What financing should Anthony Cruz
done to the operations of Zapatoes, Inc. take?
59

LESSON OUTLINE
and Interpretation Pt.3 Introduction Brief review of the contents of a financial
/Review
statement and introduce the four types
20
of financial ratios.
Content Standards Motivation Discuss stories about households borrowing 10
The learners demonstrate an understanding of the process of preparing from a sari-sari store.
financial statements as well as the methods or tools of analysis of financial
Instruction/ Define liquidity ratios and solve sample 30
problems.
Practice Board work/exercises and presentation 20
Performance Standards Enrichment Analyze and interpret liquidity ratios for 20
The learners will be able to solve exercises and problems that require financial various companies from different industries.
statement preparation, analysis, and interpretation using horizontal and vertical Evaluation
analyses, and various financial ratios. Additional exercises 20
Materials calculators, laptops

Resources
• Define the measurement levels, namely, liquidity, solvency, stability, and
(1) Copies of sample financial statements
profitability. (ABM_BF12-IIIb-7)
• Compute, analyze, and interpret financial ratios such as current ratio, working
capital, gross profit ratio, net profit ratio, receivable turnover, inventory turnover, debt-to- equity ratio, and the like. (ABM_BF12-IIIb-9)

At the end of the lesson, the learners will be able to:
• Define liquidity
• Solve liquidity ratios (current and quick)
60
• Analyze, interpret, and compare the liquidity ratios of sample companies
1. Communicate learning objectives

• Introduce the following learning objectives using any of the suggested protocols (verbatim, own word, read-aloud):
• Introduce financial ratios
• Define liquidity
• Solve for liquidity ratios (current and quick)
• Analyze, interpret, and compare the liquidity ratios of sample Philippine companies
2. Review
• Ask learners what the contents are of the financial statements.
• Ask them how the contents of the financial statements are classified.
• Ask them what they remember about current and non-current classifications for assets and liabilities.
• Emphasize what accounts are considered current assets and liabilities.
1. Ask them if they have tried buying from sari-sari stores on credit.
2. Ask them what the implications are if you or your household don’t pay your obligations to your neighbor’s sari-sari store.
3. Write their answers on the board.
4. Ask them, if a business does not pay its obligations on time, will it also have the same experiences like the household not paying its
obligations? What could possibly happen to the business? Short-run? Long-run?
61
1. Introduce the four main categories of financial ratios:

• Liquidity
• Profitability
• Efficiency
• Leverage
• Ask them what the uses of financial ratios are. Say that for this session we will just focus on liquidity. Teacher Tip:
Emphasize the accounts needed in solving
the ratios. Note that accounts receivable
2. Define liquidity. can have a non-current portion. Make sure it
is removed from the current portion in
• Liquidity refers to the company’s ability to satisfy its short-term obligations as they come due. Refer
computing the liquidity ratios. Marketable
back to the household example to emphasize the meaning of liquidity. securities are short-term investments. Add
that for receivables to be considered
3. Define the types of liquidity ratios and write the formulas on the board. Current ratio and quick current, they should be collected within a
year. Cite that property developers can be
ratio. examples of companies which can have
accounts receivable-trade beyond one year.
Current Assets
Current Ratio =
Current Liabilities
Cash + Marketable Securities + Accounts Receivable

Quick Ratio =
Current Liabilities
4. Show a sample financial statement and ask the learners to compute for the ratios: Answer Key:
Current ratio: 2.64
Quick ratio: 1.60
62
Sample Company Statement of Financial Position as of December 31, 2014
Assets Liabilities and Stockholders’ Equity
Cash P 120,000.00 Accounts Payable P 70,000.00
Marketable Securities P 35,000.00 Short-term notes P 55,000.00
Accounts receivable P 45,000.00 Current liabilities P 125,000.00
Inventories P 130,000.00 Long-term debt P 2,700,000.00
Current assets P 330,000.00 Total liabilities P 2,825,000.00
Equipment P 2,970,000.00 Common stock P 500,000.00
Buildings P 1,600,000.00 Retained earnings P 1,575,000.00
Fixed Assets P 4,570,000.00 Stockholders’ equity P 2,075,000.00
Total Assets P 4,900,000.00 Total liabilities and equity P 4,900,000.00
PRACTICE (20 MINUTES) Teacher Tip:

By this time, the learners should’ve
mastered the computation of liquidity
Provide exercises. Here are sample questions: ratios.
• Current assets is PHP2,000, current liabilities is PHP3,500. What is current ratio?
• Inventory is PHP150. Accounts payable is PHP450. Cash and accounts receivable total PHP800. What Answer Key:
is the current ratio? Quick ratio? • Current ratio: 2,000/3,500 = 0.57
• Current ratio: (800 + 150)/450 = 2.11
• If current ratio is 1.7, what is the total accounts receivable if cash is PHP20,000, inventory is PHP7,500,
Quick ratio: 800/450 = 1.78
and accounts payable is PHP30,000.
• Total receivables: 1.7= (X+20,000+7500)/
• Cash is 30% of total current assets. If current ratio is 2.3, what is the new current ratio if total non-cash 30,000 = 23,500
current assets grow by 50%? • Current ratio: 2.3 = (6,900 + 16,100)/
10,000
Assuming an increase in noncurrent
assets of 50%
New current ratio:(6,900 + 24,150)/
10,000 = 3.105
63 Use hypothetical numbers to compute.
ENRICHMENT (20 MINUTES) Teacher Tip:
A high current ratio is not necessarily good.
1. Summarize and recap the relationship of the accounts in computing the ratios. Although a high current ratio would mean
that there is a higher probability that the
company can meet its short-term
2. Ask the learners to discuss what they think the ratios mean and their applications may be. Some obligations, its assets may not be earning as
reflection questions: much and the company may have given up
long-term investment opportunities.
• What is a good current ratio? 1? 2? 0.5?
• Can a current ratio be lower than the quick ratio? High receivable balances increase liquidity
• Is a high current ratio always good? Is a low current ratio always bad? ratios however, the collectability of these
receivables might not be assured. Quality of
• What factors affect company’s decisions in managing current ratio?
receivables should also be considered in
• If company A has current ratio of 1.3 while company B has a current ratio of 2.3, which is a better analyzing liquidity. This can be explained in
company? the discussion of efficiency ratios where the
average collection period is computed.
3. Show the statement of financial position of three companies: Jollibee, Petron, and Globe. You may
project the financial statements using LCD projector or overhead projector or provide printed
copies. These financial statements can be used for the succeeding topics. You may also select other
companies as examples. Just make sure to simplify and condense the financial reports before
presenting them to class.
Here are the condensed financial statements of the three companies as of December 31, 2014 Teacher Tip:
Learners might give various answers to this
question.
64
JFC Petron Globe
Jollibee Foods Corporation (JFC) – JFC
ASSETS has a relatively high current and quick ratio.
This is driven by its high cash and receivable
Current assets balances. With its mass market operations
and expansion plans, high liquidity ratios
Cash 7,619 90.602 16,757
make sense. It can also be attributed to
Receivables 7,621 17,927 23,543 relatively low levels of current liabilities. This
can be explained later on when efficiency
Inventories 5,972 53,180 3,186 ratios are computed and when operating
cycle and cash conversion cycles are
Other current assets 2,810 57,320 3,256 computed. These cycles will also show later
on why JFC’s operating cash flows are high
24,022 219,029 46,742 and which allows the company to pay its
maturing obligations on time.
Non-current Assets
Petron Corporation - As an established
Property, plant and equipment 13,364 153,650 117,299
company operating in a stable oil industry,
Financial Investments 3,410 1,613 451 Petron’s liquidity ratios can be acceptable.
What made Petron’s liquidity ratios low is
Other non-current assets 13,323 17,032 15,015 the PHP133 billion short-term debt. If this is
taken out, Petron’s liquidity ratios will be
30,097 172,295 132,765 much higher. But this is a decision made by
the management of the company. Later in
TOTAL ASSETS 54,119 391,324 179,507 the course when working capital financing
policies are discussed, this is an indicator
LIABILITIES that the company has adopted a more
aggressive working capital financing policy.
Current Liabilities
Accounts Payable 2,455 29,496 12,458 Globe Corporation – Globe’s liquidity

ratios are relatively low compared to the
Income Tax Payable 182 73 1,587 other two companies. This means that
Globe might need to get more financing to
Short-term debt 1,865 133,388 0 meet its short-term obligations. However,
since Globe is an established company, it
Other current liabilities 14,589 39,630 46,305 won’t be difficult for it to get more credit
from the bank or funding from investors.
19,091 202,587 60,350 Emphasize that there are other financial
ratios that need to be considered in
Non-current Liabilities
determining the credit worthiness of Globe,
Long-term Debt 4,428 66,269 59,146 not just liquidity ratios.
Other Liabilities 2,522 8,776 5,473 Before you end this section, summarize the
importance of liquidity ratios, how they are
6,950 75,045 64,619 computed and the issues behind them such
65
as high liquidity ratios are not necessarily
TOTAL LIABILITIES 26,041 277,634 124,969 good.
JFC Petron Globe
EQUITY
Capital Stock 1,064 9,485 8,429
Additional Paid-in Capital 4,452 19,653 36,049
Retained Earnings 22,646 40,815 10,852
Other Equity Accounts (84) 43,739 (792)
Total Equity 28,078 113,692 54,538
TOTAL LIABILITIES AND EQUITY 54,119 391,324 179,507
Sales Revenue 90,671 482,535 103,235
Cost of Sales/Service (73,728) (463,100) (10,661)
Gross Margin 16,943 19,435 92,574
Operating Expenses (10,806) (11,830) (59,506)
Operating Profie 6,137 7,605 33,068
Other Income 748 1,736 1,255
Other Expenses (126) (5,528) (14,940)
Net Income Before Tax 6,759 3,813 19,383
Income Tax (1,271) (804) (6,011)
Net Income After Tax 5,488 3,009 13,372
4. Ask the learners to compute the ratios of the sample companies and ask them to compare the three companies using the ratios computed.
JFC Petron Globe
Current Ratio 1.26 1.08 0.77
Quick Ratio 0.80 0.54 0.67
66
5. Ask the learners the possible reason why the sample companies have different ratios. What could have possibly caused these differences?
What are the implications?
6. Summarize the discussion for today. Focus on how to interpret the liquidity ratios.
EVALUATION (20 MINUTES)
1. Provide a written true-or-false or multiple-choice quiz similar to the Practice exercises above.
2. Include an essay question in the quiz. Possible questions would be:

• Which ratio is more relevant - quick ratio or current ratio?
• What other factors would a bank or supplier look into in deciding whether to lend short-term credit? (Reflection question as pre-cursor for
next topics)
67

LESSON OUTLINE
/Review
review the concept of ‘profit’ and
15
Content Standards
computation.
The learners demonstrate an understanding of the process of preparing
Motivation 20
financial statements as well as the methods or tools of analysis of financial Ask learners to give real-life business
statements, including horizontal analysis, vertical analysis, and financial ratios examples.
to test the level of liquidity, solvency, profitability, and stability of the business. Instruction/ Define profitability ratios and solve sample 25
Delivery
problems.
Performance Standards Practice Board work/exercises and presentation 10
Enrichment Analyze and interpret profitability ratios for 30
analyses, and various financial ratios. various companies from different industries.
Evaluation Additional exercises 20
Learning Competencies Materials calculators, laptops
Resources
• Define the measurement levels, namely, liquidity, solvency, stability, and (1) Copies of sample financial statements
profitability. (ABM_BF12-IIIb-7)
• Compute, analyze, and interpret financial ratios such as current ratio, working
capital, gross profit ratio, net profit ratio, receivable turnover, inventory turnover, debt-to-equity ratio, and the like. (ABM_BF12-IIIb-9)

• Define profitability.
• Solve profitability ratios (return on equity, return on assets, gross profit margin, operating profit margin, net profit margin).
• Analyze, interpret, and compare the profitability ratios of sample companies.
68
1. Communicate learning objectives Teacher Tip:

Teacher Tip: There are different levels of
• Introduce the following learning objectives using any of the suggested protocols (verbatim, own measuring profit:
word, read-aloud): • gross profit
• operating profit
• Define profitability.
• net profit or net income
• Solve profitability ratios (return on equity, return on assets, gross profit margin, operating
profit margin, net profit margin).
• Analyze, interpret, and compare the profitability ratios of sample companies.
2. Review
• Ask learners what they understand with the concept of ‘profit’.
• Review how the gross profit margin, operating profit margin, net profit or net income is computed.
Write down the formulas. (Refer to the sample financial statements in the Instruction/Delivery part.)
Teacher Tip:
MOTIVATION (20 MINS) Before proceeding to this part, make sure
that the learners still remember the concept
1. Ask learners to give examples of businesses which they think are very profitable and examples of of profit or net income.
businesses that they think are not profitable. Answers can range from specific company names to
general type of businesses.
2. Take a pick from the examples given by the learners – one very profitable and one that is not so
profitable. Discuss what factors affect their profitability. Factors could include pricing, costs,
operating expenses, etc.
3. Ask learners to reflect why businesses have different levels of profitability?
69
1. Define profitability.
• Profitability refers to the company’s ability to generate earnings. It is one of the most important
goals of businesses.
2. Define the profitability ratios and write the formulas in the board. Teacher Tip:
• These are the return on equity, return on assets, gross profit margin, operating profit margin, net In discussing the formula of the ratios, make
profit margin. sure learners know how the components are
computed or where they are taken. For
example, emphasize that stockholder’s
• Return on equity measures the amount of net income earned in relation to stockholders’ equity. equity should include all of its components
• ROE (return on equity) = Net income ÷ Stockholders’ equity including retained earnings.
In computing ROE and ROA, some authors

• Return on assets measures the ability of a company to generate income out of its resources/assets. would prefer that the average stockholder’s
• ROA (return on asset) = Operating income ÷ Total assets equity and average total assets be used in
the computation. The idea is that since net
income is earned over the year, average
• Gross profit margin shows how many pesos of gross profit is earned for every peso of sale. It provides
equity and asset balances should be used. A
information regarding the ability of a company to cover its manufacturing cost from its sales. simple way to compute for the average is
Remember that gross profit is just sales less cost of goods or cost of services. just to add the beginning and ending
• Gross profit margin = Gross profit ÷ Sales balances then divide the sum by two. For
ease, you may just use ending balances in
computing the ratios.
• Operating profit margin shows how many pesos of operating profit is earned for every peso of sale. It
measures the amount of income generated from the core business of a company. Note also that some authors use net
• Operating profit margin =Operating income ÷ Sales income, instead of operating income as the
numerator for ROA. Some use net income
plus interest expense multiplied by (1-tax
• Net profit margin measures how much net profit a company generates for every peso of sales or rate) in the numerator. The idea is to be
revenues that it generates. consistent in the application of the formula.
• Net profit margin = Net income ÷ Sales
70
Answer Key:
PRACTICE (10 MINUTES) Return on equity = 16.98% =
352,240/2,075,000
Return on assets = 7.19% =
Show a sample financial statement and ask learners to compute for the financial ratios. Ask them to 352,240/4,900,000
present in front of the class. Gross profit margin = 35% =
700,000/2,000,000
Operating profit margin = 25.05%
Sample Company Statement of Financial Position as of December 31, 2014 = 501,000/2,000,000
Net profit margin = 17.61% =
ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY 352,240/2,000,000
Cash P 120,000.00 Accounts Payable P 70,000.00 The ROE of 16.98% means that for every
PHP1 of stockholders’ equity, PHP0.1698 or
Marketable Securities P 35,000.00 Short-term notes P 55,000.00 16.98 centavos was earned in 2014. To be
more meaningful, this rate of return is
Accounts Receivable P 45,000.00 Current Liabilities P 125,000.00
compared with the returns on alternative
Inventories P 130,000.00 Long-term debt P 2,700,000.00 investments such as the returns on time
deposits and other fixed income
Current Assets P 330,000.00 Total Liabilities P 2,825,000.00 instruments. For example, if the interest on
time deposits is only 2%, then the 16.98%
Equipment P 2,970,000.00 Common stock P 500,000.00 ROE seems better. However, before a
conclusion is made that the 16.98% ROE is
Buildings P 1,600,000.00 Retained earnings P 1,575,000.00 better than the time deposit rate of 2%, the
risks associated with this company earning
Fixed Assets P 4,570,000.00 Stockholders’ equity P 2,075,000.00 16.98% has to be assessed. Generally, the
2% time deposit rate is guaranteed while
the 16.98% ROE is not. In 2014, ROE of
Sample Company was high, but what if in
the future, it will earn a negative ROE. Is
this possible for a company? Yes! No
manager in his/or sound mind will
guarantee a specific rate of return,
especially when that rate is relatively high.
Why? Because in business, there are always
risks. A company which is doing so well this
year may find itself with too many
competitors in the future and these
competitors may eat its share of the
business in the market and can make a
profitable company today a losing company
in the future.
71
Sample Company Statement of Financial Performance for the Year Ended December 31, 2014
Sales Revenue P 2,000,000.00
Cost of Sales/Service P (1,300,000.00)
Gross Margin P 700,000.00
Operating Expenes P (199,000.00)
Operating Profit P 501,000.00
Other Income P 5,000.00
Other Expenses P (2,800.00)
Net Income before Tax P 503,200.00
Income Tax P (150,960.00)
Net Income after Tax P 352,240.00
ENRICHMENT (30 MINUTES)
1. Summarize and recap the relationship of the accounts in computing the ratios.
2. Show the statement of financial position and statement of financial performance of the three companies: Jollibee, Petron, and Globe. You
may project the financial statements using LCD projector or overhead projector or provide printed copies. These financial statements can be
used for the succeeding topics. You may also select other companies as examples. Just make sure to simplify and condense the financial
reports before presenting them to class.
Here is an extract of the statements of financial position of the three companies as of December 31, 2014. (Please refer to the previous teaching
guide on liquidity ratios for the detailed statement.)
72
JFC Petron Globe
Total Assets 54,119 391,324 179,507
Total Liabilities 26,041 277,632 124,969
Total Equity 28,078 113,692 54,538
Here is the condensed statement of financial performance of the three companies for the year ended December 31, 2014.
JFC Petron Globe
Sales Revenue 90,671 482,535 103,235
Cost of Sales/Service (73,728) (463,100) (10,661)
Gross Margin 16,943 19,435 92,574
Operating Expenses (10,806) (11,830.00) (59,506)
Operating Profit 6,137 7,605 33,068
Other Income 748 1,736 1,255
Other Expenses (126) (5,528) (14,940)
Net Income before Tax 6,759 3,813 19,383
Income Tax (1,271) (804) (6,011)
Net Income after Tax 5,488 3,009 13,372
73
3. Ask learners to compute the ratios of the sample companies and ask them to compare the three
companies using the ratios computed.
JFC Petron Globe
Return on equity 19.55% 2.65% 24.52%
Return on assets 10.14% 0.77% 7.45%
Gross profit margin 18.69% 4.03% 89.67%
Operating profit margin 6.77% 1.58% 32.03%
Net profit margin 6.05% 0.62% 12.95%
4. Ask the learners the possible reasons why the sample companies have different ratios. What could
have possibly caused these differences? What are the implications?
Teacher Tip:
5. Summarize the discussion for today. Focus on how to interpret the profitability ratios. Ask whether the high net income would
mean high net cash inflows to the business.
This is not necessarily the case. High net
income might not result to high cash flows
for the company. Remember that we use
accrual method and not cash method in
accounting for net income. This concept
(quality of earnings) will be discussed in
detail in the following modules.
74
• Provide a written true-or-false or multiple-choice quiz about solving and interpreting profitability
ratios.
1. Which of the following statements is true? Answer Key:

A. Gross profit margin is always less than net profit margin 1.C
2.C
B. Gross profit margin is always greater than net profit margin
C. Gross profit margin is can be less than or greater than net profit margin
2. A business has a decreasing gross profit however, gross margin percentage is constant. What could
be the possible reason?
A. Sales is increasing, but cost of sales is decreasing
B. Sales and cost of sales increase by the same percentage
C. Sales and cost of sales decrease by the same percentage
• Include an essay question asking why it is important to use profitability ratios.
75

LESSON OUTLINE
/Review
review the concepts behind the relevant
20
Content Standards accounts on the income statement and

The learners demonstrate an understanding of the process of preparing financial balance sheet
statements as well as the methods or tools of analysis of financial statements, Motivation Discuss the granting of credit by sari-sari 20
including horizontal analysis, vertical analysis, and financial ratios to test the level
stores
of liquidity, solvency, profitability, and stability of the business.
Instruction/ Define efficiency ratios and solve sample 20
Performance Standards Delivery
problems
The learners will be able to solve exercises and problems that require financial Practice Board work/exercises and presentation 20
analyses, and various financial ratios. Enrichment Analyze and interpret efficiency ratios for 20
various companies from different industries.
Evaluation Quiz and essay 20
• Define the measurement levels, namely, liquidity, solvency, stability, and Materials • Calculators
profitability. (ABM_BF12-IIIb-7) • Laptops
• Compute, analyze, and interpret financial ratios such as current ratio, working • Projectors
capital, gross profit ratio, net profit ratio, receivable turnover, inventory turnover, • Handouts
debt-to-equity ratio, and the like. (ABM_BF12-IIIb-9)
Resources
Specific Learning Outcomes (1) Copies of sample financial statements

• Define efficiency.
• Solve efficiency/activity ratios (accounts receivable turnover, average collection period, average age of AR, or days sales outstanding, inventory
turnover, average age of inventory or days in inventory, accounts payable turnover, average age of payables, average payment period, or days in
accounts payable, total asset turnover, operating cycle, and cash conversion cycle.
• Analyze, interpret, and compare the efficiency ratios of sample companies.
76
INTRODUCTION/REVIEW (20MINS)
1. Communicate the learning objectives

Teacher Tip:
Make sure to emphasize that purchases are
word, read-aloud): not found on the face of the financial
• Define efficiency. statements but rather, are computed using
this general formula:
• Solve for efficiency/activity/turnover ratios (accounts receivable turnover, average collection
period, average age of AR, or days sales outstanding, inventory turnover, average age of Ending Inventory
inventory or days in inventory, accounts payable turnover, average age of payables, average Add: Cost of Goods Sold
Less: Beginning Inventory
payment period, or days in accounts payable total asset turnover, operating cycle, and cash
conversion cycle) Purchases
• Analyze, interpret, and compare the efficiency ratios of sample Philippine companies.
2. Review
• Review the differences between an income statement and a balance sheet and what relevant
accounts (accounts receivable, inventory, sales, cost of goods sold, purchases, accounts payable)
mean.
• Emphasize that income statement represents a period of time or the movement through that period
while the balance sheet represents amounts as a point of time.
MOTIVATION (20 MINS) Teacher Tip:

The following table summarizes the possible
effects of changes in credit terms (tenor).
1. Ask the learners if they have tried buying from sari-sari stores on credit. How many days were given
to them as the “credit period” or the period within which they needed to pay? Do they strictly Short Long
follow this credit period? When do they actually pay? Credit Credit
Period Period
2. This time, ask them about the consequences of paying much later than the credit period on the
operations of the sari-sari stores with respect to their obligations. Will it create problems for the Effect on sales Decrease Increase
sari-sari store if, for example, it has a due obligation tomorrow but none of its customers have paid
Effect on AR Decrease Increase
their obligations yet?
3. Now ask them if a shorter credit period, by itself, is always better than a longer credit period or Effect on Bad Decrease Increase
Debt Expense*
77
* the risk of customer not paying is less
when given a short credit period.
does the length depend on other factors.
4. Write their answers on the board.
INSTRUCTION/DELIVERY (20 MINS) Teacher Tip:

If the learners have a hard time memorizing
1. Define efficiency. the formulas, a simple tip is that the name
of the turnover is the denominator in the
• Efficiency refers to a company’s ability to be efficient in its operations. Specifically, it refers to the formula.
speed with which various current accounts are converted into sales, and ultimately, cash.
• You may refer back to the sari-sari store example to illustrate the meaning of efficiency (in that Assume all sales are on credit.
example, the credit period is the target speed with which the store goals to collect their receivables).
For purchases, if there is no beginning
inventory given, it is sufficient to use cost of
2. Define the efficiency ratios and write the formulas in the board. goods sold as a substitute number, if there
is no other information given. Even if both
• Accounts receivable turnover beginning and ending inventories are made
• Average collection period, otherwise known as average age of AR, days’ receivable or days sales available, some analysts still just use the
outstanding cost of goods sold in computing accounts
payable turnover ratio to facilitate the
• Inventory turnover
computation. Consistency must be
• Average age of inventory or days’ inventory observed in the application of the formula.
• Accounts payable turnover
• Average age of payables, average payment period, or days’ payable In computing for these ratios, some authors
would prefer to use that average amount of
• Total asset turnover
the balance sheet accounts involved
• Operating cycle (accounts receivable, inventory, accounts
• Cash conversion cycle payable, total assets) in the computation.
The idea is that since the income statement
accounts are earned (sales) or incurred (cost
Sales of goods sold, purchases) over the year,
Accounts receivable turnover =
average balances for the balance sheet
Accounts Receivable
accounts should be used.
365 A simple way to compute for the average is

Average collection period = just to add the beginning and ending
Accounts Receivable Turnover balances then divide the sum by two. For
ease, you may just use ending balances in
computing the ratios. Whichever approach
is used, consistency must be observed.
78
For the number of days in a year, 365 or 360
maybe used. Again, consistency must be
Cost of goods sold
Inventory turnover = observed. There are occasions when
Inventory quarterly data instead of annual are used,
hence, use 90 in the formulas for computing
average collection period, average age of
365 inventory, and average payment period.
Average age of inventory =
Inventory Turnover
For our purpose, we will consistently be
using 365 days.
Purchases Cash conversion cycle is also known as net

Accounts payable turnover = trade cycle.
Inventory
365
Average payment period =
Accounts Payable Turnover
Operating Cycle = Average Collection Period + Average Age of Inventory
Cash Conversion Cycle = Average collection period + Average age of inventory - Average age of payables
OR
Cash Conversion Cycle = Operating Cycle - Average Age of Payables
3. Show a sample financial statement and ask learners to compute the ratios:
79
Answer Key:
Sample Company Statement of Financial Position as of December 31, 2014 (provide that the beginning inventory is
P 247,000):
ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY • Accounts recievable turnover: 44.4x
• Average collection period: 8.2 days
Cash P 120,000.00 Accounts Payable P 70,000.00 • Inventory turnover: 10x
• Average age of inventory: 36.5 days
• Accounts payable turnover: 18.57x
Accounts Receivable P 45,000.00 Current Liabilities P 125,000.00 • Average payment period: 19.65 days
• Total asset turnover: 0.41x
Inventories P 130,000.00 Long-term debt P 2,700,000.00 • Operating cycle: 44.7 days
• Cash conversion cycle: 25.05 days
Current Assets P 330,000.00 Total Liabilities P 2,825,000.00
Operating Expenes P (199,000.00)
Other Income P 5,000.00
Other Expenses P (2,800.00)
Net Income before Tax P 503,200.00
80
Provide exercises. Here are sample questions with varying difficulty: mastered the computation of efficiency
ratios and the different names of each ratio.
(Easy)
Answer Key:
• Total asset is PHP750,000. Sales is PHP1,500,000. What is the total asset turnover?
• Total asset turnover = 1.5M/750K = 2
• Accounts receivable turnover is 4. What is the average collection period assuming annual data are • Average collection period: 365/4 = 91.25
used? What is the average collection period assuming quarterly data are used? • Average collection period = 43.8 days,
• Sales for the year amount to PHP100,000. Accounts receivable amount to PHP12,000. What is the Accounts receivable turnover = 8.3x
average collection period assuming annual data are used? What is the average collection period • Inventory turnover = 13.1x, Average age
of inventory = 27.8 days
assuming quarterly data are used?
• Accounts payable turnover = 3.25x,
Average payment period = 112.3 days
(Average/Difficult) • Accounts payable turnover = 2.6x,
Average age of payables = 140.4 days
A. The quick ratio is 1.7 while the current ratio is 2.5. The current liabilities amount to PHP5,000. Cost • Total asset turnover = 2.5x
of goods sold is PHP52,500. What is the inventory turnover? Average age of inventory? • Operating cycle = 71.6 days, Cash
conversion cycle = (40.7) days
B. Beginning inventory is PHP2,000 while ending inventory is PHP5,000. Cost of goods sold is double
the ending inventory and accounts payable is PHP4,000. What is accounts payable turnover?
Average payment period?
C. Ending inventory is PHP13,000 while accounts payable is PHP2,500. Purchases were half the ending
inventory. What is accounts payable turnover? Average age of payables?
D. Current assets amount to PHP30,000 while noncurrent assets are PHP50,000. Sales amount to
PHP200,000. What is the total asset turnover?
E. Based on your answers from letters c, d, and e, what is the operating cycle of the company? Cash
conversion cycle?
81
1. Summarize and recap the relationship of the accounts in computing the ratios.
Teacher Tip:
2. Ask learners to discuss what they think the ratios mean and its applications. Some reflection
A company’s average collection period
questions you may use: (Check the teacher tips to the right for answers/discussions)
should be compared with the credit terms it
• Are high turnover ratios good or bad? (Possible answer: It really depends on the operations of the grants its customers. If the average
company. High inventory turnover ratios are less costly for the company but it can also create more collection period is higher than the credit
period, it may indicate a problem with the
risks for the company. For example, very high inventory turnover ratios could mean that there are
credit department (granting credit to non-
inventory stock-outs or lost sales since a very low turnover is maintained. On the other hand, A creditworthy people or companies) or with
company will want to have a low payable turnover ratios.) the collection department (inefficient or lack
• If company A has accounts receivable turnover of 3.5 while company B has an accounts receivable of means of collection) or both.
turnover of 8.1, which is a better company? Explain why. (Generally, a company with higher receivable
turnover, assuming all other factors are same, is at a better position compared to a company with a
lower receivable turnover)
Teacher Tip:
• What factors affect inventory turnover ratio? (Possible answers: projected sales, industry Inventory turnover is more meaningful when
developments, nature of industry, management decisions, stock out costs) compared with that of the industry norms.
• What factors affect accounts payable turnover ratio? (Possible answers: credit terms of suppliers, High industry turnovers are common (and
relationship to suppliers, availability of supplies in the market) expected) for fastfood restaurants but not
for real estate firms. Fastfood restaurants
• Does a shorter or a longer operating cycle indicate the efficiency of a business? What about for the sell stocks very quickly and keep just the
cash conversion cycle? (See teacher tips for discussion) right amount of inventories to prevent
spoilage, storage, and handling costs. But it
is common for real estate firms to take a
3. Show the statement of financial position and statement of financial performance of three
couple of years before selling units.
companies: Jollibee, Petron, and Globe. You may project the financial statements using LCD
projector or overhead projector or provide printed copies. These financial statements can be used
for the succeeding topics. You may also select other companies as examples. Just make sure to
simplify and condense the financial reports before presenting them to class.
The condensed financial statements of the three companies as of December 31, 2014 were already Teacher Tip:
provided in the previous modules. Average payment period makes sense to be
analyzed in relation to the credit terms
extended by a company’s suppliers. If a
4. Ask learners to compute the following ratios of the sample companies: company manages to pay beyond the credit
82 period available (in finance, this is called
“stretching the payables”) without
damaging its credit rating, then this
A. Average collection period indicates good payables management by
the company because they are able to take
B. Average age of inventory advantage of (almost) free financing. (The
C. Average payment period cost of financing for accounts payable can
actually be computed using the amount of
D. Operating cycle percent discount granted to the firm and
E. Cash conversion cycle the credit period, which shall be discussed
in later topics.)
Answer Key: Total asset turnover indicates the degree to

which management has efficiently used the
firm’s assets to generate sales. Generally,
JFC Petron Globe the higher the ratio, the more efficiently its
assets have been used. In other words, a
Average collection period 30.68 13.56 83.24 higher ratio is a strong positive indicator of
a firm’s operations. However, note that, due
Average age of inventory 29.57 41.91 109.08 to depreciation of fixed assets, older
companies in an industry may appear to be
Average payment period 12.15 23.25 426.52 much more efficient in terms of generating
sales using its assets. Because of this, a
Operating cycle 60.24 55.48 192.32 higher-than-average total assets turnover
might indicate that the company is already
Cash conversion cycle 48.09 32.23 (234.21) in its mature stage (due to high sales
amount relative to assets), that its fixed
assets are getting too old, or that it may
5. Ask the learners the possible reason why the sample companies have different turnover ratios, need to review its depreciation policies (it
operating cycle and cash conversion cycle. may be depreciating its fixed assets too
quickly).
6. Before you end this section, summarize the importance of efficiency ratios, how they are computed, The measure for operating cycle imparts
and the caveats to each ratio (such as high turnover ratios are not necessarily good while low more insight if analyzed in comparison to a
company’s peers in its industry. A longer
turnover ratios are not always a sign of trouble either). operating cycle compared to the industry
average might be a sign of a problem with
its receivables management (poor credit or
collection policies) or with its inventory
management (holding too much inventories,
which could become obsolete or damaged)
or both. In the same manner, a shorter
operating cycle could also be a signal for
too-tight receivables management (very
aggressive collection policies or too strict
with the granting of credit, which might turn
83
away customers eventually or might be a
reason for high administrative costs
associated with collection or extensive
background-checking) or inventory
management (keeping too little stocks,
causing frequent stockouts and lost
opportunities for sales) or both.
The cash conversion cycle goes one step

further by including the measure of average
payment period. Comparing this number
with that of other companies in the industry
also gives insight into the firm’s receivables,
inventory, and payables management. In
addition to the discussion in the previous
paragraph, a cash conversion cycle that is
higher than the industry norm might
indicate that a company pays for its
payables too fast (and does not take
advantage of the financing extended to it)
while a cash conversion cycle that is lower
than the average might be an indication of
poor payables management (the company’s
credit rating might significantly deteriorate
by not paying its payables within the period
given). For the cash conversion cycle, it may
be helpful for the learners if they can see a
“timeline” of events to see the chronology
of the events and understand the period
specified by the number.
Jollibee Foods Corporation (JFC) – JFC

relatively has a high accounts receivable
turnover. This low receivables balance of
JFC is due to nature of its operations where
customers pay in cash. The accounts
receivable balance maybe from its
franchisees where JFC has control over.
Similarly, inventory turnover is the highest

again due to the nature of its operations as
a fastfood company. It holds only enough
quantity of stocks and sells them quickly.
Its relatively low operating cycle makes

84 sense, again, because it reflects the nature
of its business of being in the fastfood
industry. It sells its stocks quickly and
converts its receivables almost
instantaneously, relatively speaking.
Petron Corporation – The average

collection period of Petron is mainly caused
by its industrial customers. These are
customers who are also businesses that are
given credit periods as compared to normal
consumers who need to pay in cash when
purchasing fuel from the gas station. As
expected with Petron’s products, it has a
longer average age of inventory versus
Jollibee. On average, the suppliers in the
fuel and oil industry provide longer credit
terms versus the food industry as evidenced
by Petron’s longer average payment period
(versus JFC).
.
Globe Corporation - The high average
collection period is hard to explain at 83
days. This might be driven by postpaid
subscribers.
Since its inventory is mostly composed of

cellphones and other mobile devices, the
computed average age of inventory is
reasonable. The average payment period is
also quite surprising at 426.52. Globe could
have a high bargaining power with its
suppliers or they have special kinds of
agreements that can’t be inferred from the
provided data.
85
• When compared with last year, a company’s inventory turnover increased. What positive situation might this reflect?
Possible answer: Sales has increased or the company has maintained low levels of inventory due to better inventory management and sales
forecasting.
• What is the incentive of management in computing efficiency ratios?

Possible answer: To monitor performance and do remedial actions if actual performance falls below plans.
86

LESSON OUTLINE
/Review
review the concepts behind the relevant
20
Content Standards accounts on the income statement and

The learners demonstrate an understanding of the process of preparing balance sheet
financial statements as well as the methods or tools of analysis of financial Motivation Discuss the use of borrowings as capital in 10
statements, including horizontal analysis, vertical analysis, and financial ratios
starting a business
Instruction/ Define leverage ratios and solve sample 30
Delivery
problems
Practice 20
The learners will be able to solve exercises and problems that require financial Board work/exercises and presentation
statement preparation, analysis, and interpretation using horizontal and vertical Enrichment Analyze and interpret leverage ratios for 20
analyses, and various financial ratios.
Evaluation Quiz and essay 20
The learners shall be able to: Materials • Calculators
• Define the measurement levels, namely, liquidity, solvency, stability, and • Laptops
profitability. (ABM_BF12-IIIb-7) • Projectors
• Compute, analyze, and interpret financial ratios such as current ratio, working • Handouts
capital, gross profit ratio, net profit ratio, receivable turnover, inventory Resources
turnover, debt-to-equity ratio, and the like. (ABM_BF12-IIIb-9) (1) Copies of sample financial statements

• Define financial leverage.
• Solve leverage ratios (debt ratio, debt-to-equity ratio, interest coverage ratio).
• Analyze, interpret, and compare the leverage ratios of sample companies.
87
Teacher Tip:
1. Communicate the learning objectives
Relevant accounts are those accounts
• Introduce the following learning objectives using any of the suggested protocols (verbatim, own needed to solve leverage ratios.
word, read-aloud):
• Define leverage.
• Solve leverage ratios (debt ratio, debt-to-equity ratio, interest coverage ratio)
• Analyze, interpret, and compare the leverage ratios of sample companies
2. Review
• Review the difference between an income statement and a balance sheet and what relevant accounts
(liabilities, assets, equity, interest expense, earnings before interest and taxes) mean.
• Emphasize that income statement represents a period of time or the movement through that period
while the balance sheet represents amounts as of a point in time.
1. Ask learners how one opens their own business? Ask them what if you have no capital or personal
money ready to start a business?
2. They will most likely answer that one can borrow from friends, family, and banks. Follow-up by
asking them what these borrowings entail? Make sure that idea of paying interest is brought up.
3. Ask them how paying interest affects the earnings of the company.
88
Teacher Tip:
Before reaching this point, make sure the
1. Define financial leverage. class understands what debt and preferred
• Financial leverage refers to the company’s use of debt. It defines the company’s capital structure stocks are.
which indicates how much of the total assets are financed by debt and equity.
2. Illustrate how financial leverage works. The teacher may provide a scenario/case where an
entrepreneur is deciding how to finance a business venture, specifically what capital structure
should be chosen. With this, you can demonstrate that with increased debt comes greater risk as
well as higher potential return. An example is provided before:
• Pam has a small restaurant business with current equity of PHP60,000. With the increasing demand,
she is planning to expand her restaurant space. After much analysis she determined that an initial
investment of PHP50,000 in fixed assets is necessary. These funds can be obtained in either of two
ways. The first is the no-debt plan, under which she would ask a relative to become an investor
(owner) by investing the full PHP50,000. The other alternative, the debt plan, involves borrowing
PHP50,000 from the nearby rural bank at 10% annual interest.
• Pam expects PHP 30,000 in annual sales, PHP18,000 in operating expenses, and a 30% tax rate. The
no-debt plan results in after-tax profits of PHP8,400, which is an 8.4% return on equity (new equity of
PHP100,000)
• The debt plan results in PHP4,400 of after-tax profits or 8.8% return on equity (equity still at
PHP50,000). The debt plan provides Pam with a higher rate of return, but the risk of this plan is also
greater, because the annual PHP5,000 of interest must be paid whether Pam’s business is profitable
or not.”
• Provide sensitivity analysis, focus on Earnings before Income Tax [EBIT]
• You may summarize the results of the two alternatives in the board.
3. Define the types of leverage ratios and write the formulas on the board.
• Debt ratio – This ratio measures the proportion of total assets finance by total liabilities or money
provided by creditors (not by the business owners).
• Debt-to-equity ratio – A variation of debt ratio, shows the proportion of debt to equity.
• The teacher may review the accounting equation (Assets = Liabilities + Equities) in showing how the
first two ratios relate.
• Interest coverage ratio – This ratio shows the company’s ability to pay its fixed interest charges in
89
relation to its operating income or earnings before interest and taxes.
Total Liabilities
Debt Ratio =
Total Assets
Total Liabilities
Debt-to-Equity Ratio =
Total Equity
Earnings before interest and taxes (EBIT)

Interest coverage ratio * =
Interest Expense
* Another name of interest coverage ratio is Times Interest Earned.
4. Show a sample financial statement and ask learners to compute for the ratios.
Answer Key:
Sample Company Statement of Financial Position as of December 31, 2014
Debt ratio = 57.65%
ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY Debt-to-equity ratio = 1.3614
Interest coverage ratio = 180.7143
Cash P 120,000.00 Accounts Payable P 70,000.00
Accounts Receivable P 45,000.00 Current Liabilities P 125,000.00
Inventories P 130,000.00 Long-term debt P 2,700,000.00
Current Assets P 330,000.00 Total Liabilities P 2,825,000.00
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Additional note: “Other
expenses” in the
Operating Expenes P (199,000.00) Statement of Financial
Performance is
composed solely of
Other Income P 5,000.00 interest expense. Hence,
Other Expenses P (2,800.00) interest expense for the
period ended December
Net Income before Tax P 503,200.00 31, 2014 is Php 2,800.

Teacher Tip:
5. Discuss what factors influence capital structure, hence, also affecting leverage ratios. You may refer Nature of Business – If the business is risk
then it has to be financed conservatively
to Cayanan, et.al. for more discussions. The following are just some of the factors that can influence hence, lower debt ratio.
management’s decision in setting its capital structure. State of Business Development – A newly
formed business may have difficulty
• Nature of Business
borrowing from banks. Banks usually look
• Stage of Business Development for the historical financial performance of
borrowers.
• Macroeconomic conditions
Macroeconomic conditions – If the overall
• Prospects of the industry economy is good then management can be
more aggressive on taking in risk through
• Taxes
increased debt financing.
• Management style Prospects of the industry – A growing
industry makes business more confident to
take on more financial risk.
Taxes - Interest expenses are tax deductible
while cash dividends are not. By having
more debt than equity, businesses save on
taxes as interest expense (multiplied by the
tax rate) decreases income tax due.
91 Management style –Management and the
board of directors can be aggressive or
conservative in terms of taking on risk.
Provide exercises. Here is a sample question: mastered the computation of leverage
ratios and the different names of each ratio.
1. (Easy) Total assets is 100,000. Total debt is 50,000. What is the debt-to-equity ratio?
Answer Key:
1. 100% or 1
2. (Average/Difficult) If the pro forma balance sheet shows that total asset increase by PHP400,000 2. c - debt must increase by P171,428.
while retaining a debt-equity ratio of .75 then:
A. debt must increase by PHP300,000.
B. equity must increase by the full PHPH400,000.
C. debt must increase by PHP171,428.
D. equity must increase by PHP100,000.
ENRICHMENT (20 MINUTES) Answer Key: (Change % to times)
1. Summarize and recap the relationship of the accounts in computing the ratios. JFC Petron Globe
Debt Ratio 8% 17% 33%

2. Ask learners to discuss what they think the ratios mean and its applications. Some reflection Debt-to- 16% 58% 108%
questions: Equity Ratio
• What is a good capital structure?
Interest 45.32 1.69 8.56
• Are low debt ratios always favorable?
coverage
ratio
3. Show the statement of financial position and statement of financial performance of three
companies: Jollibee, Petron, and Globe. You may project the financial statements using LCD
Recall:
projector or overhead projector or provide printed copies. These financial statements can be used
for the succeeding topics. You may also select other companies as examples. Just make sure to JFC Petron Globe
simplify and condense the financial reports before presenting them to class.
Return on 19.55% 2.65% 24.52%
• The condensed financial statements of the three companies as of December 31, 2014 were already equity
provided in the previous modules.
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• Note: Included in the 2014 Income Statement of the three companies are Interest Expenses:
Company Interest Expense
JFC 152.50
Petron 5,528.00
Globe 2,565.00
4. Ask the learners to compute the ratios of the sample companies and ask them to compare the three companies using the ratios computed.
Recall other relevant ratios like return on equity in highlighting how leverage magnifies risk and return in companies.
5. Ask the learners the possible reason why the sample companies have debt ratios.
Answers will mostly focus on the selected companies’ nature of business, management style/preference, stability of cash flows.
6. Summarize the discussion for today. Focus on how to analyze and interpret the efficiency ratios.
• In starting a business, is it okay to start with having debt during the early stages?
• What dictates the company’s choice of leverage structure?
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LESSON OUTLINE
/Review
review financial ratios, focusing on
15
Content Standards liquidity and efficiency ratios. Introduce

The learners demonstrate an understanding of the process of preparing the case study.
financial statements as well as the methods or tools of analysis of financial Case Ask learners to analyze and discuss the case 45
statements, including horizontal analysis, vertical analysis, and financial ratios Analysis
in groups.
Presentation Ask assigned groups to present their case 30
analysis to the whole class.
Enrichment Discuss important points of the case and 30
and
statement preparation, analysis, and interpretation using horizontal and vertical Summary provide commentaries to the groups’
analyses, and various financial ratios. analysis.
Materials • Calculators
Learning Competencies • Laptops
The learners shall be able to: • Projectors
• Define the measurement levels, namely, liquidity, solvency, stability, and • Textbook
profitability. (ABM_BF12-IIIb-7) Resources
• Compute, analyze, and interpret financial ratios such as current ratio, working (1) Several copies of case to distributed to learner-groups
capital, gross profit ratio, net profit ratio, receivable turnover, inventory
turnover, debt-to-equity ratio, and the like. (ABM_BF12-IIIb-9)

• Apply their knowledge on liquidity and efficiency ratios in tackling real life business problems.
• Pinpoint business problems and formulate relevant recommendations and strategies.
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PRE-WORK
Provide copies of the financial statement of the subject company to the learners a day before the class. Ask them to compute for liquidity and
efficiency ratios.
1. Review profitability and leverage ratios. Ask learners what liquidity and efficiency mean. Write the names of the different types of ratios and
their formulas on the board.
2. Explain that business cases are used to discuss certain issues and problems of a specific company. Learners will take the point-of-view of
owners/managers in analyzing the case.
3. Discuss the mechanics of the case discussion:

• The class will be divided in groups of 4 to 6 learners.
• Learners will discuss and analyze the business case among their groups. They will then need to summarize their analysis in an essay/paper.
The paper will have the following outline: Case Background/Story, Analysis (including computations), and Recommendation. The paper can
be one to two pages of yellow sheet or bond paper. They must do this within 45 minutes.
• Two groups will be asked to present. Presenting groups do not need to submit an essay/paper. Instead, they need to prepare their
presentation with materials like manila paper, transparencies, or PowerPoint. Groups can volunteer or the teacher can also assign who will
Presentation time is 10 minutes for each group. After the presentation, there will be a 5-minute Q&A session.
4. Distribute the printed cases to the learners.
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CASE ANALYSIS (60 MINS)
1. Allow the learners to break into groups. From time to time, update them with the remaining time to do the analysis and their essay/
presentation.
2. Make sure to remind them that they will take on the shoes of the owner/manager in solving the case.
3. Below is the business case. You may look for or make another business case as long as it highlights the same topics.
Chloe’s Closet
Chloe Mendez owns a clothing company, Chloe’s Closet. She has a team of tailors who work for 8 hours every day
from Monday to Saturday. Demand for her business is strong but there seems to be something preventing her from
meeting the demands of her customers.
Chloe sells to both big department stores and small boutique stores under the brand Chloe’s Closet. Some brands
also ask her to manufacture their own designs. Business for Chloe has been good since it started last 2014. In fact,
despite the tough competition from cheaper manufacturers abroad, she still manages to grow her customer base.
On December 4, 2015 Chloe received a billing statement from a raw material supplier for an amount of
PHP400,000 which will be due in 5 days. She is also scheduled to pay her employees’ monthly salary of PHP70,000
the following day. Upon checking her bank account, she only has a PHP67,000 balance. She knew she had
exceeded her sales target last October and November so she is wondering why she only has this amount of cash in
her bank account. Was her money stolen? Being a CPA, she checked the bank statement and her financial records
and found no mistakes.
Here is the latest financial statement of Chloe’s Closet as of November 30, 2015:
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Nov 30, 2015 Dec 31, 2014
Cash 60,000.00 270,000.00
Accounts Receivable 740,000.00 500,000.00
Inventory 600,000.00 400,000.00
Machinery 800,000.00 850,000.00
TOTAL ASSETS 2,200,000.00 2,020,000.00
Accounts Payable 400,000.00 500,000.00
Salaries Payable 150,000.00 150,000.00
Total Liabilities 400,000.00 500,000.00
Capital Stock 200,000.00 200,000.00
Accumulated Profit 1,600,000.00 1,320,000.00
Total Equity 1,800,000.00 1,520,000.00
TOTAL EQUITY AND LIABILITIES 2,200,000.00 2,020,000.00
Nov 30, 2015 Dec 31, 2014
Sales 800,000.00 600,000.00
Cost of Goods Sold 300,000.00 225,000.00
Operating Expenses 100,000.00 105,000.00
Operating Income 400,000.00 270,000.00
Machinery 120,000.00 81,000.00
NET INCOME 280,000.00 189,000.00

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What’s wrong with Chloe’s Closet?
PRESENTATION (30 MINS)
1. Time each presentation. Ask groups to stop presenting after 10 minutes. Be strict with the time.
2. After each presentation, ask the presenting group some questions or clarifications. You can also
challenge the computations/recommendations of the learners. You may also provide general
comments of the presentation flow and aesthetics. Ask other groups to also provide comments and
questions to the presentations. This should take 5 minutes.
ENRICHMENT AND SUMMARY (15 MINUTES) Teacher Tip:

Guide Questions for the Case:
1. Write on the board the main points raised by the presenting groups. 1. Did learners check the efficiency of AR
management? What was AR turnover
between 2014 and 2015?
2. Provide your own analysis. 2. Did learners check the efficiency of
Inventory management? What was
• Start by pinpointing the main issues relevant to the case (AR, Inventory, Payables).
Inventory turnover between 2014 and
• Provide the correct figures for the profitability and leverage ratios. 2015?
3. What was the payable turnover for
• Discuss how you arrived at your decision. Highlight important recommendations/changes that must
Chloe’s Closet? How did it affect the
be done to the operations of Chloe’s Closet. problem?
4. What factors lead to the low cash
balance for Chloe’s Closet?
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LESSON OUTLINE
and Interpretation Pt.8 Introduction Brief review of the contents of a financial
/Review
statement and introduce the four types
10
of financial ratios.
Content Standards Motivation Discuss stories about households borrowing 20
The learners demonstrate an understanding of the process of preparing from a sari-sari store.
financial statements as well as the methods or tools of analysis of financial
Instruction/ Define liquidity ratios and solve sample 60
problems.
Practice Board work/exercises and presentation 15
Enrichment Analyze and interpret liquidity ratios for 45
analyses, and various financial ratios. Evaluation Additional exercises 30
Learning Competencies Materials • Calculators

The learners shall be able to perform vertical and horizontal analyses of • Laptops
financial statements. (ABM_BF12-IIIb08) Resources
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex
Bookstore.
(2) Gitman and Zutter. Principles of Managerial Finance.
At the end of the unit lesson, the learners will be able to:
• Explain why managers analyze financial statements.
• Perform horizontal and vertical analysis of balance sheets and income statements.
99
1. Communicate learning objectives.

word, read-aloud):
• I will be able to explain why managers analyze financial statements.
• I will be able to perform horizontal and vertical analysis of balance sheets and income
statements.
2. Review the previous lessons.

• Ask learners what are the different types of financial statements.
• Ask learners what the contents are of the financial statements.
Show the following Financial Statements of ABC, Inc. and ask the learners the following questions: Teacher Tip:
• Is ABC, Inc. profitable? The purpose of this activity is to expose the
• Is the company’s financial performance improving based on the two year data presented? learners to the financial statements and for
them to come up with useful conclusions on
• Is the company heavily financed by debt or equity?
the company’s financial results and status.
The learners are assumed to be already
familiar with different financial statements.
Elicit as many opinions as possible.
100
ABC, INC.
Condensed Balance Sheets
December 31
(In millions)
Assets 2014 2015
Current Assets P 1,902.0 1,617.1
Plant Assets 2,952.8 2,526.9
Other Assets 5,513.8 742.0
Total Assets P 10,368.6 4,886.0
Liabilities and Stockholders’ Equity
Current liabilities P 2,017.6 2,482.3
Long-term liabilities 7,289.5 1,506.2
Total libailities 9,497.1 3,988.5
Stockholders’ equity
Common stock 195.3 205.8
Retained earnings 1,013.3 1,065.7
Treasury stock (337.1) (374.0)
Total stockholders’ equity 871.5 897.5
Total liabilities and stockholders’ equity P 10,368.6 P 4,886.0

Teacher Tip:
Ask the learners if their answers to previous
questions have changed.
101
ABC, INC.
Condensed Income Statement
For the Years Ended December 31
(In millions)
2014 2015
Net sales P 8,853.3 6,954.7
Cost of goods sold 4,128.5 3,327.0
Gross Profit 4,724.0 3,627.7
Selling & Admin. 3,523.6 2,551.4
Nonrecurring charges 33.3 86.5
Income from operations 1,167.9 989.8
Interest Expense 351.5 137.5
Other income
(expense), net (12.3) 15.4
Income before taxes 804.1 867.7
Income tax expense 322.1 280.0
Net income P 482.0 P 587.7
• Ask the learners to compute the percentage share of each Balance Sheet account vis a vis total assets.
• Ask the learners to compute the percentage share of each Income Statement vis a vis Net Sales.
102
After discussing the answers of the learners, introduce financial statement analysis with emphasis on
common size and horizontal analyses. Discuss the following to the learners.
1. Analysis and Interpretations of Financial Statements

• To guide different users of financial statements, i.e. creditors, investors, regulators and managers, in
their decisions, financial statement analysis tools can be used.
• These are financial ratios, common size financial statements, and trend or horizontal analyses.
• For the purposes of this course, four major categories of financial ratios will be covered: liquidity
ratios, efficiency or turnover ratios, profitability ratios, and leverage ratios.
• To be more specific, financial statement analysis is undertaken to serve the following purposes
(objectives):
• To assess the current profitability and operational efficiency of the firm as a whole as well as
its different departments so as to judge the financial health of the firm.
• To ascertain the relative importance of different components of the financial position of the
firm.
• To identify the reasons for change in the profitability/financial position of the firm.
• To judge the ability of the firm to repay its debt and assess the liquidity and solvency
position of the firm.
• For this module inform the learners that focus will be on common size or vertical analysis and trend
or horizontal analysis.
2. Vertical Analysis or common size analysis.

Teacher Tip:
• This is a technique for evaluating the data of financial statements that express each item within a Remind the learners that the activity they
financial statement in terms of a percent of a base amount. did before was actually common size
• For the Statement of Financial Position or Balance Sheet, all accounts are presented as a percentage analysis.
of total assets.
• For the statement of Profit or Loss or Income Statement, all accounts are presented as a percentage
of net sales.
• In using this type of analysis, attention must be focused on items with significant changes from one
period to another. Depending on the nature of the business, it is possible that even a slight change in
103
the percentage may warrant the attention of top management.
• For example, a reduction of 0.5% in the gross profit margin of a consumer based company with
annual sales of PHP 200 billion translate to a PHP 1 billion in gross profit.
3. Horizontal Analysis
• This allows the learners to see the trend for the different accounts in the Financial Statements.
• This is also known as trend analysis.
• To establish the trend, percentage changes of accounts from one period to another have to be made.
To compute:
Amount of change = Current year amount – Base (earlier) year amount
Percent of change = Amount of change/Base (earlier) year amount
Some of the more important accounts to monitor when doing trend analysis are the following:
• Sales
• Operating profits
• Total assets
• Interest bearing liabilities
• Interest expense
Horizontal Analysis of a Balance Sheet:
AC CORPORATION Teacher Tip:

Condensed Balance Sheets Show the sample financial statements with
December 31 the computed vertical and horizontal
analyses. Discuss how to perform the
2014 2015 Increase Percentage Change horizontal and vertical analyses with the
(Decrease) from 2011 learners. Compute with them the example
numbers. This will help them easily see how
Assets to go through the process.
Current assets P 74,000 P 80,000 P (6,000) (7.5%)
Property, plant & equipment (net) 99,000 90,000 9,000 10.0%
Intangibles 27,000 40,000 (13,000) (32.5%)
Total Assets P 200,000 P 210,000 P (10,000) (4.8%)

104
2014 2015 Increase Percentage Change
(Decrease) from 2011
Liabilities and stockholders’ equity
Current liabilities P 42,000 P 48,000 P (6,000) (12.5%)
Long-term liabilities 143,000 150,000 (7,000) (4.7%)
Stockholders’ equity 15,000 12,000 3,000 25.0%
Total liabilities and stockholders’

equity P 200,000 P 210,000 P (10,000) (4.8%)
Horizontal Analysis of an Income Statement:
AC CORPORATION
Increase or (Decrease)
During 2011
2014 2015 Amount Percentage
Net sales P 600,000 P 500,000 P 100,000 20.0%
Cost of goods sold 483,000 420,000 63,000 15.0%%
Gross profit 117,000 80,000 37,000 46.3%%
Operating expenses 57,200 44,000 13,200 30.0%
Net income P 59,800 P 36,000 P 23,800 66.1%%
105
Vertical Analysis of a Balance Sheet:
AC CORPORATION
Condensed Balance Sheet
December 31, 2012
Amount Percent
Assets
Current Assets P 74,000 37.0%
Property, plant, and equipment (net) 99,000 49.5%
Intangibles 27,000 13.5%
Total Assets P 200,000 100.0%
Current liabilities P 42,000 21.0%
Long-term liabilities 143,000 71.5%
Stockholders’ equity 15,000 7.5%
Total liabilities and stockholders’ equity P 200,000 100.0%
106
Vertical Analysis of an Income Statement:
AC CORPORATION
Condensed Income Statements
2012 2011
Amount Percent Amount Percent
Net sales P 600,000 100.0% P 500,000 100.0%
Cost of goods sold 483,000 80.5% 420,000 84.0%
Gross profit 117,000 19.5% 80,000 16.0%
Operating expenses 57,200 9.5% 44,000 8.8%%
Net income P 59,800 10.0% P 36,000 7.2%
PRACTICE (15 MINUTES)

Teacher Tip:
Ask the learners to practice computing the
Provide these practice exercises: horizontal and vertical analyses on the given
practice sets.
Horizontal Analysis:
Increase or (Decrease)
Dec. 31, 2012 Dec. 31, 2011 Amount Percentage
Accounts receivable PHP 520,000 PHP 120,000 400,000 30.0%
Inventory PHP 840,000 PHP 240,000 600,000 40.0%
Total Assets PHP 3,000,000 PHP 2,500,000 500,000 20.0%
107
Vertical Analysis:
Dec. 31, 2012 Dec. 31, 2011
Amount Percentage* Amount Percentage**
Accounts receivable P 520,000 17.3%% P 400,000 16.0%
Inventory P 840,000 28.0% P 600,000 24.0%
Total Assets P 3,000,000 100.0% P 2,500,000 100.0%
1. Group the learners for a group work. Ask them to compute the Horizontal and Vertical Analyses of Teacher Tip:
ABC Inc’s financial statement shown above in the motivation section. Refer to the answers of the learners above
in the Motivation section. Ask them to make
2. After the groups have computed the Horizontal and Vertical Analyses, ask them the same question opinions and a conclusion about the
about their opinions about the company’s profitability, the ability pay debt obligations, and how company after they have used the
well it is manage financially. horizontal and vertical analyses tools. Make
them compare their answers in the
Motivation and Enrichment sections. This
will make them realize the importance of
using the horizontal and vertical analyses for
judgement and making better decisions.
108
Below are the computed Horizontal and Vertical Analyses:
ABC, INC.
December 31
(In millions)
Increase (Decrease)
during 2015
Assets 2014 2015 Amount Percent
Current Assets PHP 1,902.0 PHP 1,617.1 PHP 284.9 17.6%
Plant Assets 2,952.8 2,526.9 425.9 16.9
Other Assets 5,513.8 742.0 4,771.8 643.1
Total Assets 10,368.6 4,886.0 PHP 5,482.6 112.2
Current liabilities PHP 2,017.6 PHP 2,482.3 PHP (274.7) (11.1)%
Long-term liabilities 7,289.5 1,506.2 5,783.3 384.0
Total libailities 9,497.1 3,988.5 5,508.6 112.2
Common stock 195.3 205.8 (10.5) (5.1)
Retained earnings and other 1,013.3 1,065.7 (52.4) (4.9)
Treasury stock (337.1) (374.0) 36.9 9.9
Total stockholders’ equity 871.5 897.5 (26.0) (2.9)
Total liabilities and stockholders’ P 10,368.6 P 4,886.0 P 5,482.6 112.2%

equity
109
ABC, INC.
December 31
(In millions)
Increase (Decrease)
during 2015
2014 2015 Amount Percent
Net sales PHP 8,853.3 PHP 6,954.7 PHP 1,898.6 27.3%
Cost of goods sold 4,128.5 3,327.0 801.5 24.1
Gross Profit 4,724.0 3,627.7 1,097.1 30.2
Selling & Admin. 3,523.6 2,551.4 972.2 38.1
Nonrecurring charges 33.3 86.5 (53.2) (61.5)
Income from operations 1,167.9 989.8 178.1 18.0
Interest Expense 351.5 137.5 214.0 155.6
Other income
(expense), net (12.3) 15.4 (27.7) (179.9)
Income before taxes 804.1 867.7 (63.6) (7.3)
Income tax expense 322.1 280.0 42.1 15.0
Net income P 482.0 P 587.7 PHP (105.7) (18.0)%
110
ABC, INC.
December 31
(In millions)
2015 2014
Assets Amount Percent Amount Percent
Current Assets PHP 1,902.0 18.3% PHP 1,617.1 33.1%
Property Assets 2,952.8 28.5% 2,526.9 51.7%
Other Assets 5,513.8 53.2% 742.0 15.2
Total Assets PHP 10,368.6 100.0% PHP 4,886.0 100.0%
Liabilities and Stockholders’

Equity
Current liabilities PHP 2,207.6 21.3% PHP 2,482.3 50.8%
Long-term Liabilities 7,289.5 70.3% 1,506.2 30.8%
Total Liabilities 9,497.1 91.6% 3,988.5 81.6%
Common stock 195.3 1.9% 205.8 4.2%
Retained earnings and other 1,013.3 9.8% 1,065.7 21.8%
Treasury stock (337.1) (3.3) (374.0) (7.6)
Total stockholders’ equity 871.5 8.4% 897.5 18.4%
Total liabilities and stockholders’ PHP 10,368.6 100.0% PHP 4,886.0 100.0%
equity
*Percentages may be rounded up or down

111
ABC, INC.
Condensed Income Statement
(In millions)
2015 2014
Net sales PHP 8,853.3 100.0% PHP 6,954.7 100.0%
Cost of goods sold 4,128.5 46.6% 3,327.0 47.8%
Gross profit 4,724.8 53.4% 3,627.7 52.2%
Selling & admin. 3,523.6 39.8% 2,551.4 36.7%
Nonrecurring charges 33.3 0.4 86.5 1.3%
Income operations 1,167.9 13.2% 989.8 14.2%
Interest expense 351.5 4.0% 137.5 2.0%
Other income
(expense), net (12.3) (0.1) 15.4 0.2
Income before income taxes 804.1 9.1% 867.7 12.4%
Income tax ex. 322.1 3.6% 280.0 4.0%
Net income PHP 482.0 5.5% PHP 587.7 8.4%
*Percentages may be rounded up or down
Below are the Statement of Financial Position and Statement of Result of Operation of JFC for the Years 2012 to 2014. Perform a Horizontal and
Vertical analyses on both statements.
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2014 2013 2012
ASSETS
Current Assets
Cash 7,618.0 9,903.0 8,848.0
Receivables 7,479.0 3,128.0 2,715.0
Inventories 5,972.0 3,560.0 2,630.0
Other current assets 2,952.0 1,793.0 1,430.0
24,012.0 18,384.0 15,623.0
Non-current Assets
Property, plant, and equipment 13,363.0 11,772.0 11,059.0
Financial Investments 3,410.0 3,353.0 3,139.0
Other non-current assets 13,324.0 12,517.0 11,947.0
30,097.0 27,642.0 26,145.0
TOTAL ASSETS 54,118.0 46,026.0 41,768.0
LIABILITIES
Current Liabilities
Accounts Payable 6,576.0 6,007.0 4,714.0
Income Tax Payable 182.0 155.0 79.0
Short-term Debt 865 - -
Other current liabilities 11,468.0 9,457.0 11,828.0
19,091.0 15,619.0 16,621.0
Long-term Debt 716 4,063.0 855
Other Liabilities 6,234.0 2,984.0 2,561.0
6,950.0 7,047.0 3,416.0

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TOTAL LIABILITIES 26,041.0 22,666.0 20,037.0

2014 2013 2012
EQUITY
Capital stock 1,064.0 1,051.0 1,047.0
Additional Paid-in Capital 4,452.0 3,640.0 3,284.0
Retained Earnings 22,646.0 19,017.0 17,871.0
Other Equity Accounts (84) (347) -471
TOTAL EQUITY 28,078.0 23,361.0 21,731.0
TOTAL LIABILITIES AND EQUITY 54,119.0 46,027.0 41,768.0
Sales Revenue 90,671.0 80,283.0 71,059.0
Cost of Sales/Service (73,728.0) (65,285.0) (58,435.0)
Gross Margin 16,943.0 14,998.0 12,624.0
Operating Expenses (10,806.0) (9,067.0) (8,279.0)
Operating Profit 6,137.0 5,931.0 4,345.0
Other Income 748.0 431.0 567.0
Other Expenses (126.0) (116.0) (51.0)
Net Income Before Tax 6,759.0 6,246.0 4,861.0
Income Tax (1,271.0) (1,523.0) (1,149.0)
NET INCOME AFTER TAX 5,488.0 4,723.0 3,712.0
Answer Key:
Vertical Analysis:
114
2014 2013 2012
ASSETS
Current Assets
Cash 14.08% 21.52% 21.18%
Receivables 13.82% 6.80% 6.50%
Inventories 11.04% 7.73% 6.30%
Other current assets 5.45% 3.90% 3.42%
44.39% 39.94% 37.40%
Non-current Assets
Property, plant, and equipment 24.69% 25.58% 26.48%
Financial Investments 6.30% 7.29% 7.52%
Other non-current assets 24.62% 27.20% 28.60%
55.61% 60.06% 62.60%
TOTAL ASSETS 100.0% 100.0% 100.0%
LIABILITIES
Current Liabilities
Accounts Payable 12.15% 13.05% 11.29%
Income Tax Payable 0.34% 0.34% 0.19%
Short-term Debt 1.60% 0.00% 0.00%
Other current liabilities 21.19% 20.55% 28.32%
35.28% 33.93% 39.79%
Long-term Debt 1.32% 8.83% 2.05%
Other Liabilities 11.52% 6.48% 6.13%

115
12.84% 15.31% 8.18%
TOTAL LIABILITIES 48.12% 49.25% 47.97%

2014 2013 2012
EQUITY
Capital stock 1.97% 2.28% 2.51%
Additional Paid-in Capital 8.23% 7.91% 7.86%
Retained Earnings 41.84% 41.32% 42.79%
Other Equity Accounts -0.16% -0.75% -1.13%
TOTAL EQUITY 51.88% 50.75% 52.03%
TOTAL LIABILITIES AND EQUITY 100.0% 100.0% 100.0%
Sales Revenue 100.0% 100.0% 100.0%
Cost of Sales/Service 81.31% 81.32% 82.23%
Gross Margin 18.69% 18.68% 17.77%
Operating Expenses 11.92% 11.29% 11.65%
Operating Profit 6.77% 7.39% 6.11%
Other Income 0.82% 0.54% 0.80%
Other Expenses 0.14% 0.14% 0.07%
Net Income Before Tax 7.45% 7.78% 6.84%
Income Tax 1.40% 1.90% 1.62%
NET INCOME AFTER TAX 6.05% 5.88% 5.22%
Horizontal Analysis:
116
2014 2013
ASSETS
Current Assets
Cash -2,285.00 -23.07% 1,055.0 11.92%
Receivables 4,351.00 139.10% 413.00 15.21%
Inventories 2,412.00 67.75% 930.00 35.36%
Other current assets 1,159.00 64.64% 363.00 25.38%
5,637.00 30.66% 2,761.00 17.67%%
Non-current Assets
Property, plant, and equipment 1,591.00 13.52% 713.00 6.45%
Financial Investments 57.00 1.70% 214.00 6.82%
Other non-current assets 807.00 6.45% 570.00 4.77%
2,455.00 8.88% 1,497.00 5.73%
TOTAL ASSETS 8,092.00 17.58% 4,258.00 10.19%
LIABILITIES
Current Liabilities
Accounts Payable 569.00 9.47%% 1,293.00 27.43%
Income Tax Payable 27.00 17.42% 76.00 96.20%
Short-term Debt 865.00
Other current liabilities 2,011.00 21.26% -2,371.00 -20.05%
3,472.00 22.23% -1,002.00 -6.03%
Long-term Debt -3,347.00 -82.38% 3,208.00 375.20%
Other Liabilities 3,250.00 108.91% 423.00 16.52%

117
-97.00 -1.38% 3,631.00 106.29%
TOTAL LIABILITIES 3,375.00 14.89% 2,629.00 13.12%

2014 2013
EQUITY
Capital stock 13.00 1.24% 4.00 0.38
Additional Paid-in Capital 812.00 22.31% 356.00 10.84%
Retained Earnings 3,629.00 19.08% 1,146.00 6.41%
Other Equity Accounts 263.00 -75.79% 124.00 -26.33%
TOTAL EQUITY 4,717.00 20.19% 1,630.00 7.50%
TOTAL LIABILITIES AND EQUITY 8,092.00 17.58% 4,259.00 10.20%
Sales Revenue 10,388.00 12.94% 9,224.00 12.98%
Cost of Sales/Service -8,443.00 12.93% -6,850.00 11.72%
Gross Margin 1,945.00 12.97% 2,374.00 18.81%
Operating Expenses -1,739.00 19.18% -788.00 9.52%
Operating Profit 206.00 3.47% 1,586.00 36.50%
Other Income 317.00 73.55% -136.00 -23.99%
Other Expenses -10.00 8.62% -65.00 127.45%
Net Income Before Tax 513.00 8.21% 1,385.00 28.49%
Income Tax 252.00 -16.55% -374.00 23.55%
NET INCOME AFTER TAX 765.00 16.20% 1,011.00 27.24%
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Financial Planning Tools and Concepts

pt.1 LESSON OUTLINE
Content Standards Introduction Importance of planning 20
/Review
The learners demonstrate an understanding of the financial planning process,
including budget preparation, cash management, and working capital Motivation Formulation of an Event Plan 50
management.
Instruction/ Steps of Financial Planning 30

The learners will be able to illustrate the financial planning process. Enrichment Integration of Learning 10
Learning Competency Materials • Board notes

The learners shall be able to identify the steps in the financial planning
• Play money
process. (ABM_BF12-IIIc-d-10) • Cartolina
• Colored Papers
Specific Learning Outcomes • Tape
The learners will be able to: • Glue
• Pencils
• Explain the importance of planning.
• Markers
• Differentiate between strategic planning and tactical planning. Resources
• Enumerate and apply the steps in planning. (1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
City. Rex Bookstore.
(2) Gitman, L. J., & Zutter, C. J. (2012). Principles of Managerial
Finance (13th ed.). USA: Prentice Hall.
119
1. Discuss the importance of Planning. Teacher Tips

• Ask the learners how they see themselves five years from now. Write the answers on the board and If the learners still do not know what they
tally repeating answers. want five years from now, write “not sure”.
• Reveal that their answers are the long-term goals that they plan to achieve in the future. Tell the
learners that in the activity you did, you have demonstrated that planning plays an important role in
everyday life as the learners already have in mind a set of plans for the next five years. Tell them that
even those who said they are not yet sure what they want five years from now will probably still have
an idea of what kind of life they want. They are still in the process of planning.
• Proceed to defining planning as suggested below:

- Planning is an important aspect of the firm’s operations because it provides road maps for
guiding, coordinating, and controlling the firm’s actions to achieve its objectives (Gitman & Zutter,
2012).
- Management planning is about setting the goals of the organization and identifying ways on how
to achieve them (Borja& Cayanan, 2015).
• Continue by focusing on one example given by the learners. Suppose some of the students answered Teacher Tips
that in five years, they will be owners of a successful business. How will they be able to attain this Alternative Example:
goal? If they want to be able to be an owner of a successful business, they should first be able to set • Long term goal: Graduate from a
up one, or buy into one which would require capital. Hence, they must be able to raise the necessary university
• Short term goal: Pass the college entrance
funds. This new milestone is their short term goal.
exam
2. Presentation of Relevant Vocabulary.

• There are two phases of financial planning. Financial planning starts with long term plans which would
then translate to short term plans.
• Strategic vs. Tactical Planning

- Discuss the difference between Strategic and Tactical planning.
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• Long-term financial plans
- These are a set of goals that lay out the overall direction of the company.
- A long-term financial plan is an integrated strategy that takes into account various departments such as sales, production, marketing, and
operations for the purpose of guiding these departments towards strategic goals.
- Those long-term plans consider proposed outlays for fixed assets, research and development activities, marketing and product
development actions, capital structure, and major sources of financing.
- Also included would be termination of existing projects, product lines, or lines of business; repayment or retirement of outstanding debts;
and any planned acquisitions(Gitman & Zutter, 2012).
• Short-term financial plans

- Specify short-term financial actions and the anticipated impact of those actions. Part of short term financial plans include setting the sales
forecast and other forms of operating and financial data. This would then translate into operating budgets, the cash budget, and pro forma
financial statements (Gitman & Zutter, 2012).
- For the purpose of this topic, emphasis will be made on short-term financial planning.
Long-Term Planning Short Term Planning
Persons More participation from top Top management is still involved but there is more
Involved management participation from lower level managers (production,
marketing, personnel, finance and plant facilities) because
their inputs are crucial at this stage since they are the ones
who implement these plans
Time Period 2 to 10 years 1 year or less
Level of Less More

Detail
Focus Direction of the company Everyday functioning of the company
Table 1: Comparison of Short-Term and Long-Term Planning (Gitman & Zutter, 2012)
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Teacher Tips
1. Event Planning
If the teacher does not have enough funds
• Description of the Activity to supply the materials, the teacher may
- This is a simulation of conducting a campaign event beginning from inception (planning stage) change the materials or the learners may be
to actual performance (execution). asked to use their own materials as long as
- This will involve the facilitator role playing as provider of the goods and services needed, and their simulated budget can cover the
materials.
the learners as the event coordinators and performers for the event (i.e. the learners will act as
the celebrities/dancers/singers who are part of promoting the cause of the event.)
• Objectives
- Inform the learners that this section aims to let them experience the planning process in a
simple activity given a short amount of time and resources.
- At the end of this activity, they will be able to:
• Organize a small classroom event given the limited time and resources in the class.
• Perform the functions of planning and implementing plans under a controlled set up.
• Evaluate result of event based on a predetermined criteria (see Annex for Grading Rubrics).
• Materials
Cartolina (or 1/4 manila paper) Php 8 (or 4)
Bond Papers (5 pieces) 5
Colored Papers (or art paper) 10
Tape 5
Glue 5
Pencils 15
Markers 20
Pens 12
Crayons 20
PHP 100
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• Mechanics
- As facilitator, you will act the following roles:
• Supplier of materials/paraphernalia to be used in the campaign.
• Proprietor of the venues where the event will be held.
• Talent manager of the special guests.
- All of the following should be present during the event proper:

• Event title and campaign slogan (Example: Existence: Cut the Greed, Not the Green, a benefit concert to save endangered forests,
featuring a performance from the XX group of dancers)
• Campaign paraphernalia (posters/brochures) containing the following:
‣ Title of the event
‣ Date and time
‣ Campaign slogan
‣ Vision Statement (Example: To save the endangered Philippine Forest)
‣ Mission Statement (Example: To increase awareness of deforestation by organizing events that emphasize on tree planting)
• to 5 minutes informative presentation on the campaign.
3
• 3 to 5 minutes production number (may be song, dance or any creative presentation) from the special guest (which will be role played
by the learners). Back up performers may participate.
• The informative presentation may be incorporated in the production number. Whole presentation should be 7 (min) to 10 (max) minutes.
- Allow the students to assign themselves to perform the following functions:
Position Description Short Term Planning
Event Chairperson Oversees the functions of the other • Event title and slogan
committees. Must be able to set the • Mission and vision of the campaign
overall direction of the group.
Administrative Team Responsible for other functions that the

Event Chairperson deems necessary.
This may include stage direction, event
conceptualization, crowd control,
backstage organizer, etc.
123
Position Description Short Term Planning
Budgeting Team Responsible for the allocation of the • Record of goods and services
given budget to purchase the necessary purchased
materials to make the event possible. • Documentation of timeline of
They will also negotiate with the activities done during the planning
facilitator regarding prices of the and execution stage
required materials.
Production Team Responsible for organizing the • Song/dance number incorporated in

performances to be presented during the campaign
the event. This includes role playing as • Not all need to present. Some may
the celebrities who will perform in the just choreograph.
campaign event.
Marketing Team Responsible for the presentation that • Persuasive/informative speech

would persuade the audience to join incorporated in the campaign. May be
the campaign initiative. done in between song/dance
numbers
Tip: Emphasize on the importance of • Not all need to present. Some may
the campaign, how the audience can be just formulate the script.
involved and what would they get from
supporting the campaign.
Creatives Team Responsible for the production of the • Whole cartolina campaign poster
campaign paraphernalia. The posters • Whole bond paper campaign
and brochures should be able to catch pamphlet
the attention of the target audience.
- In 20 minutes, the learners should be able to come up with an event to raise awareness of either of the following suggested issues:
• Proper Waste Segregation
• Anti-Smoking Campaign
• Barangay or Community Cleaning
• Dengue Prevention
• Community Image Improvement
124
- The following are available to them:
• Venue
‣ Center of the Community Plaza – PHP150,000 (Restrictions: Performance must include singing)
‣ Concert grounds – PHP200,000 (Restrictions: None, any type of performance is allowed)
‣ School Auditorium – PHP100,000 (Restriction: Performance must include dancing)
‣ Basketball Court – PHP90,000 (Restriction: Performance must include a song and dance number)
• Materials – may be used for posters, stage design, and other campaign paraphernalia.
‣ Cartolina – PHP50,000 each
‣ Marker – PHP10,000 each
‣ Pencil – PHP5,000 each
‣ Pens – PHP7,000 each
‣ Crayons – PHP5,000 each stick
‣ Tape – PHP8,000 per roll
‣ Glue/paste – PHP3,000 per bottle/tube
‣ Colored papers – PHP5,000 per piece
‣ Bond Papers – PHP10,000 per piece
• Special Guest (to be role played by the learners from the productions team)
‣ Kathryn Bernardo and Daniel Padilla – PHP200,000 (Restrictions: None, may perform anywhere)
‣ Nadine Samonte and James Reid – PHP100,000 (Restrictions: Will not perform in a basketball court or school auditorium)
‣ Maine Mendoza and Alden – PHP150,000 (Restrictions: Will not perform in a basketball court)
‣ Jolina Magdangal and Marvin Agustin – PHP90,000 (Restrictions: Will not perform in a school auditorium)
- Provide them with a budget of P 300,000.
2. Event Evaluation
• At the end of the activity, summarize what the learners have done and integrate this to the objectives of the activity. Allow the students to
reflect on the activity.
125
1. Presentation of the Financial Planning Process.

• From the event planning activity, the learners were able to experience an actual planning process.
• Ask the learners to identify what are the steps they did in planning for their event.
- Sample Answers:
• Identify the leader
• Divide the group to different functions
• Think of a slogan
• Conceptualize an idea/design
• Made a budget
• Made the plan operational
• Measuring the actual performance vis a vis the plans
• Inform the learners that the events they presented are a result of the planning process.
• Continue discussing the planning process as follows:

1) Set goals or objectives.
• For the activity done, the objective was to increase awareness of (chosen issue).
• For corporations, long term and short term objectives are usually identified. These can be seen in the company’s vision and mission
statements. The vision statement states where the company wants to be while the mission statement states the plans on how to achieve the
vision.
• Examples of a company’s Vision-Mission statements are as follows:
Jollibee Foods Corporation (JFC)

Vision: To excel in providing great tasting food that meets local preferences better than anyone; To become one of the three largest
and most profitable restaurant companies in the world by 2020.
Mission: To serve great tasting food, bringing the joy of eating to everyone.
126
McDonalds Philippines
Vision: First to respond to the fast changing needs of the Filipino family; First choice when it comes to food and dining experience; First
mention as the ideal employer and socially responsible company; First to respond to the changing lifestyle of the Filipino family
Mission: To serve the Filipino community by providing great-tasting food and the most relevant customer delight experience.
2) Identify Resources
For the activity done, the resources the learners have are the following:
• PHP 300,000
• Man power
Resources include production capacity, human resources who will man the operations and financial resources (Borja & Cayanan, 2015).
3) Identify goal-related tasks

• For the activity done, the goal-related task is to prepare an event to increase awareness of (whatever issue you want).
4) Establish responsibility centers for accountability and timeline.

For the activity done, there were different responsibilities formed as follows:
• Event Chairperson
• Budgeting Team
• Production Team
• Marketing Team
• Creatives Team
• Administrative Team
Also, there must be a timeline for the activities, especially since they were allotted a specific time to do the activity.
127
5) Establish the evaluation system for monitoring and controlling
• For the activity done, the learners were given an expectation of their output and the teacher will Teacher Tips
This section is further discussed in the
grade them based on a predetermined criteria. Other evaluation for awareness events may be
budgeting discussion proper.
number of attendees, feedback, etc.
• For corporations, the management must establish a mechanism which will allow plans to be
monitored. This can be done through quantified plans such as budgets and projected financial
statements. The management will then compare the actual results to the planned budgets and
projected financial statements. Any deviations from the budgets should be investigated.
6) Determine contingency plans

Teacher Tips
• In planning, contingencies must be considered as well. Recognize that this step is not done in the
activity, but in reality, this is something that
• Budgets and projected financial statements are anchored on assumptions. If these assumptions do
should be part of planning.
not become realities, management must have alternative plans to minimize the adverse effects on
the company (Borja & Cayanan, 2015).
ENRICHMENT (10 MINS)
1. Integration of learning.
- Retell briefly the steps in Planning.
- What is the difference between long term and short term goals?
2. Homework
• Assign the students to read about budgeting and projected financial statements. Refer to the
following references:
- Business Finance (Cayanan and Borja): Chapter 3
- Principles of Managerial Finance (Gitman and Zutter): Chapter 4
3. Assign the case study in Appendix 2. Teacher Tips

• Have the learners form four groups. Each group will be working on the assigned case. The case study is not meant to be solved
yet but is given in advance to give the
• Assign two groups who will be the presenting groups and two who will be critic groups.
learners some ideas of what they are
128 expected to cover the following meeting.
• The presenting groups will have a 20 minute class presentation followed by a 10 minute cross examination from the critic groups. Assign a
critic group to each presenting group. They will be required to ask questions from the presenters.
Appendix
Annex 1: Event Planning Evaluation Rubrics
Position Description Expected Output Evaluation Critera
4 - Outstanding 5 - Competent 2 - Emerging 1 – Needs 0 – Objectives

Improvement not met
On the whole The event was The event was There were The event was There were a lot
carried out carried out minor carried out but of disorder in
smoothly and the smoothly but challenges the members of the
whole class was there are during the the class were presentations
participative. members of the presentations only focusing on and the
class that did not but the class their own members of the
participate. made the effort functions which class have not
to give a good did not translate been working
presentation. to the whole. together.
Event Oversees the functions of • Event title and Leads Leads the Did not Occasionally Watches and
Chairperson the other committees. slogan discussions and discussions but consistently intervenes in the lets everyone
Must be able to set the • Mission and made timely was reluctant at engage in activity only else do their
overall direction of the vision of the decisions. making discussions but when problems own job.
group. campaign decisions. still had a final arises.
say on what to
do.
Administrative Responsible for other Present in Present in May Stopped No initiative to

Team functions that the Event coordinating the coordinating the occasionally working after direct shown.
Chairperson deems different different lose focus on expected output
necessary. This may include functions and functions but the direction of has been
stage direction, event motivating the allows other the functions. formulated.
conceptualization, crowd members of the members of the
control, backstage class to work on class to slack off.
organizer, etc. 129
their functions.

Improvement not met
Budgeting Responsible for the • Record of goods Was on time on Had a few delays Wanted to cater Prepared No
Team allocation of the given and services creating the on delivering the to ALL needs of budgets but did documentation
budget to purchase the purchased budget and budget but was ALL teams not show was presented.
necessary materials to • Documentation organized in the able to give what which initiative to
make the event possible. of timeline of documentation the other teams compromised incorporate what
They will also negotiate activities done of the timeline of needed. deadlines. other teams
with the facilitator during the events. needed.
regarding prices of the planning and
required materials. execution stage
Production Responsible for organizing • Song/dance Was confident Provided a good Provided a Presented with a Unable to
Team the performances to be number and entertaining presentation but good lot of flaws but present
presented during the incorporated in and was able to time limit was presentation made the effort anything.
event. This includes role the campaign present within not observed. but some of the to give the
playing as the celebrities the time limit. members did presentation.
who will perform in the not participate.
campaign event.
Marketing Responsible for the • Persuasive/ Spoke loud and Spoke well but Provided a Presented with a Unable to
Team presentation that would informative audibly to be did not work good lot of flaws but present
persuade the audience to speech able to catch the within the time presentation made the effort anything.
join the campaign incorporated in attention of limit. but some of the to give the
initiative. the campaign. listeners. members did presentation.
May be done in not participate.
Tip: Emphasize on the between song/
importance of the dance numbers
campaign, how the • Not all need to
audience can be involved present. Some
and what would they get may just
from supporting the formulate the
campaign. script
130

Improvement not met
Creatives Responsible for the • Whole cartolina Materials were Materials were Both materials Only the poster No campaign
Team production of the campaign poster appealing and appealing but were made but or the pamphlet materials were
campaign paraphernalia. • Whole bond complete in all incomplete. it wasn’t very was made. made.
The posters and brochures paper campaign requirements . appealing.
should be able to catch the pamphlet
attention of the target
audience.
Annex 2: Sweet Beginnings Co. Case Study
Sweet Beginnings Co. is currently the most talked about clothing shop in town. Not only was the shop filled with customers every day, but they
have been a major supplier of clothing to other shops. Ms. Muff, the owner of the shop has remained confident that the operations will go
smoothly until one early morning when there had been problems with the delivery that was supposed to leave the shop. The clothes which
were scheduled to be delivered were already packed and waiting on the loading bay. It was past 30 minutes of the scheduled delivery and no
delivery truck was in sight. Ms. Muff decided to call the delivery contractor to find out what was taking the trucks so long.
“You’ve been one month late from your scheduled payment for our delivery service,” the frustrated delivery contractor said. “We’ve been
sending you notices every day for the past week and your company doesn’t seem to be responding. Unless you will be able to pay the amount
due by this morning, we will not send any truck to deliver your goods.
Ms. Muff was astounded to hear of the unpaid fee. To clear up the mishap, Ms. Muff hurriedly approached the company’s accountant, Mr. Phil in
hopes of drawing cash from the company. Mr. Phil regrettably reported that the company does not have cash to pay the delivery contractor. In
fact, the company has been consistently borrowing short term funds for three months from the start of the year. The company has yet to pay
any of these borrowings and Mr. Phil informed Ms. Muff that the short term lenders have been reluctant to lend money at this point.
As a result, the shipments will not be delivered to the customers until the company figures out how to pay their delinquency with the delivery
contractors. The outside customers have been understanding enough to acknowledge that there will be a delay on the deliveries for this day.
However, too much delay may frustrate these customers and may cause bad reputation to the company. Ms. Muff is looking into taking a loan
131
from Fresh Rural Bank to pay for the delinquent fees. The bank manager of Fresh Rural Bank has requested a meeting with Ms. Muff to discuss
the financial condition of Sweet Beginnings Co. and plans for restoring its liquidity.
Outraged, Ms. Muff told Mr. Phil, “Why don’t we have any balance in our cash account? Our company has been very profitable but we seem to
be depending on loans to finance our operations. We need to figure out what is going wrong. Otherwise, we may lose our customers.”
Company Background
Sweet Beginnings Co. was founded in 20X0 as a manufacturer of summer clothes. The first shop was located near a calm beach with sky blue
waters and powdery sands. Families and tourist would usually flock to the beach on summer weekends which gave the clothing shop foot traffic
and gained the market’s attention. Due to its high quality products, the clothing store became a popular stop shop for vacation goers. In 20X1,
a known blogger fancied the clothing line displayed in Sweet Beginnings and published an article promoting the shop. This earned the
company nationwide publicity which led to other clothing stores offering shelf space for Sweet Beginning’s brand. In 20X3 it expanded its
garment productions due to the increasing demand of their products. To this day, the company maintained its position as a summer clothing
store since this line has brought its brand equity.
Clothing Market
The demand for clothing was characterized by a stable year-to-year growth. Unit demand increased with both population and individual
income. However, the seasonal character of the company’s product has resulted to cyclical sales.
Competition among other clothing shops in the town is unlikely to clash with the company’s sales growth. The company believes it will maintain
its average growth rate for sales for the succeeding years.
Sales Forecast
Sweet Beginnings Co. had been consistently profitable. Moreover, sales had grown at an annual rate of 18 percent in 20X5. Gross sales were
projected to grow at 20% of the sales of the same months on the first quarter, 30% of sales of the same months on the second quarter and 25%
of sales of the same months on the third and 4th quarter. This growth rate is expected to be constant until 20X8.
132
Financial Information
To prepare a forecast on a business-as-usual basis, Ms. Muff and Mr. Phil agreed on various parameters. Cost of goods sold would run at 73.7%
of gross sales—a figure that was up from recent years because of increasing price competition. Operating expenses would be about 6% of sales
—also up from recent years to include the addition of a quality-control department and two new sales agents. Depreciation is at 10% of cost of
property, plant and equipment (PPE). Additions during 20X6 is expected to amount to PHP1,200,000 which will be paid on January 20X7. The
Company’s policy is to expense full year’s depreciation on the date of purchase. The Company expects inventory level for 20X6 to be the same
as 20X5.
The company’s income tax rate was 30% paid for each quarter in May, August, November, and April of the following year, respectively. The
company opts to use optional standard deduction of 40% from the company’s gross profit to arrive at the taxable income for the quarter.
The delivery contractor’s fee (at 3% of sales) was collected at the loading gate as trucks left to make deliveries to customers. Ms. Muff proposed
to pay dividends of PHP450,000 per quarter. For years Sweet Beginnings had paid high dividends.
Mr. Phil observed that sales collections in any given month had been running steadily at the rate of 40% of the last month’s sales plus 60% of
the sales from the month before last. The value of raw materials paid in any month represented on average 55% of the value of sales expected
to be made two months later. Wages and other expenses in a given month were equivalent to about 34% of purchases in the previous month.
As a matter of policy, Ms. Muff wanted to see a cash balance of no less than PHP640,000.
Sweet Beginnings Co. had a line of credit from Fresh Rural Bank, where it also maintained its cash balances. Fresh Rural Bank’s short-term
interest rate was currently 16%. Return on investment for short term investments is at 12%.
133
Historical Information
Sweet Beginnings Co. Sweet Beginnings Co. Sweet Beginnings Co.

Monthly Sales Historical Income Statements Balance Sheet
2015 December 31, 20X5
Problem
Ms. Muff needs to prove that the company will be liquid enough to pay for its loans with Fresh Rural Bank so that it will be allowed to ask for
another loan to meet the delivery contactor’s fee. How should Ms. Muff explain to First Rural Bank that the company is in a good financial
position? Moreover, should the company prove to have financial liquidity problems, what can to company do to cope with their need for cash?
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Learner’s Guide
1. Assume that you are Ms. Muff and you will be presenting to the Fresh Rural Bank. Convince the bank that you are in a good financial
position evidenced by your cash budget and projected financial statements.
2. Prepare a monthly cash budget for Sweet Beginnings Co. for the year ending December 20X6. Start with the monthly sales forecast (Tip:
Forecast sales up to Feb 20X7).
3. The following table format may be used for the cash budget:
Jan Feb … Nov Dec Total
Cash Receipts From Collections
Less: Purchase of Raw Materials
Less: Payment for Salaries and Wages
Less: Payment to Delivery Contractors
Less: Dividends Paid
Less: Income Tax Paid
Net Cash Flow
Add: Beginning Cash
Less: Required Ending Balance
Add: Return on Investment (12%)
Less: Interest on Borrowing (16%)
Less: Repayment of Principal
Add: Liquidation of Investment
Required Financing
Excess Cash
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Loan Balance - Beginning 587,575
Add: Required Financing
Less: Repayments
Investment Balance - Beginning
Add: Excess Cash
Less: Liquidations
Investment Balance - End
4. Forecast Financial Statements. Start with income statement.
Gross Sales Total of monthly forecasted sales
Cost of goods 73.7% of Sales
Gross profit
Delivery Fees 3% of sales
Operating expenses 6% of sales
Depreciation 10% of Total PPE cost
Interest expense Total of Interest from borrowings and return of investment from cash budget
Pretax profit
Income tax Gross profit x (1-40%) x 30%
Net profit
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5. Forecast Financial Statements. Start with income statement.
Cash Required cash balance
Accounts receivable Accounts receivable beginning + Sales - Collections from Customers
Inventories Same as last year
Short term investments Resulting balance from cash budget
Total current assets
Gross plant, property and Beginning balance + current year additions

equipment
Accumulated depreciation Beginning balance + depreciation expense
Net PPE
Total Assets
Accounts payable Accounts payable 20X5 + Purchases* + Operating Expense - Cash payment
for raw materials - Cash Payment for Salaries and Wages
*Purchases = Cost of goods sold + Inventory 20X6 – Inventory 20X5
Short term borrowings Resulting balance from cash budget
Payable to PPE supplier Additions to PPE payable on January 20X7
Accrued taxes Tax payable for the last quarter
Total current liabilities
Owners’ equity Owners’ Equity 20X5 + Net Income - Dividends paid
Total liabilities and equity
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Format of Paper/Presentation
Prepare a paper containing the following:

1. Letter to Fresh Rural Bank explaining that the company is in a healthy financial position and has capacity to pay loans when they come due.
2. Cash Budget for 20X6 in good form.
3. Projected Financial Statements for 20X6 in good form.
4. Supporting computations.
Presenting Group
Prepare a 20-minute presentation using the following outline

• Case Background: Brief explanation of the problem of the Company.
• Methodology: Explain why the cash budget and projected financial statements was made in order to help the company in their dilemma.
• Budgets and Projections: Present the resulting budgets and implications of the figures that were derived. Explain in class how you were able
to derive your figures.
• Conclusion: Was the company performing well based on the budgets and projections and will it be able to sustain its operations?
Critic Group
Take the point of view of Fresh Rural Bank. From the presentation of Budgets and Projections, ask questions that will challenge the presenting
group’s conclusions. The critic may also ask clarifications on the presentation or comment on how differently they did their analysis.
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pt. 2 LESSON OUTLINE
Content Standards Introduction Review of the Financial Planning Process 15
/Review
The learners demonstrate an understanding of the financial planning process,
including budget preparation, cash management, and working capital Motivation Planning and Controlling 15
management.
Instruction/ Budgeting and Financial Statement 235

Performance Standards Practice Projection
The learners will be able to prepare budgets such as projected collection, sales a. Sales Forecast (20 mins)
budget, production budget, projected statement of comprehensive income, b. Production Forecast (30 mins)
projected statement of financial position, and projected cash flow statement. c. Operations Forecast (5 mins)
d. Cash Budget (75 mins)
e. Uncertainties in the Cash Budget (45
Learning Competency mins)
The learners shall be able to illustrate the formula and format for the f. Projected Financial Statements (60 mins)
preparation of budgets and projected financial statements. (ABM_BF12-IIIc- Evaluation Preparing a Budget and Projected Financial 100
d-11)
Statements Case Presentation
Enrichment Integration of Learning 10
The learners will:
Materials Board materials
• Know and apply the tools used in planning and forecasting.
• Know and apply the tools used in budgeting.
Resources
(2) Gitman, L.J., & Zutter, C.J. (2012). Principles of Managerial
Finance. (13th ed.). USA: Prentice Hall.
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• Review the Financial Planning Process.

• Recall that the financial planning process involves setting up long term and short term goals.
- Long term goals set the direction of the company.
- Short term goals are the specific steps or actions that will ultimately reach the company’s long term goals.
• Recall the steps in planning as follows:

A. Set goals or objectives.
B. Identify Resources.
C. Identify goal-related tasks.
D. Establish responsibility centers for accountability and timeline.
E. Establish the evaluation system for monitoring and controlling.
F. Determine contingency plans.
• Inform the learners that for the rest of the sessions, they will learn how to establish the evaluation system of monitoring and controlling.
• Characteristics of an Effective Plan.

• In planning, the goal of maximizing shareholders’ wealth must always be put in mind.
• The following criteria may be used for effective planning:
- Specific – target a specific area for improvement.
- Measurable – quantify or at least suggest an indicator of progress.
- Assignable – specify who will do it.
- Realistic – state what results can realistically be achieved, given available resources.
- Time-related – specify when the result(s) can be achieved. (Doran, G. T. (1981). "There's a S.M.A.R.T. way to write management's goals and
objectives". Management Review (AMA FORUM) 70 (11): 35–36.)
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Planning and Controlling

Teacher Tips
1. Recall the previous class activity. Ask the students one of the most important activities they have On asking what the most important activity
done in the previous exercise. done in the previous class activity, the
teacher should be able to lead the answers
2. Get insights from the learners on the following questions: to Budgeting.
- What is a budget? Get at least two to three insights from the

- What is the importance of a budget? learners. Relate their answers to the class
- What will happen if the budget is not met? activity done taking note what should
happen or what could have happened
based on their answers.
• Tell the students that a plan is useless if it is not quantified. A quantified plan is represented through
budgets and projected or pro-forma financial statements.
• These budgets and pro-forma financial statements are useful for controlling. They serve as the bases
for monitoring actual performance.
• Tell the students that meeting the plans is good. However, failing to meet the plans is not equivalent
to failure if the reasons for not meeting such plans can be justified especially when the reasons are
fortuitous in nature and are beyond the control of management.
- Measuring actual performance vis a vis the plans even at the early start of the year allows the
management to assess the company’s performance and come up with remedial actions if
warranted (Cayanan, 2015).
INSTRUCTION/PRACTICE (205 MINS)
1. Sales Budget
• Discuss how a sales budget is formulated.
- The most important account in the financial statement in making a forecast is sales since most of
the expenses are correlated with sales.
- Recall from Lesson 2: Financial Statement analysis that cost of sales ratio, gross profit ratio, and
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variable operating expenses ratio are based on the sales figure.
- Given the importance of the sales forecast, the financial manager must be able to support this figure with reasonable assumptions. The
following external and internal factors should be considered in forecasting sales:
External Internal
• Gross Domestic Product • production capacity

(GDP) growth rate • man power requirements
• Inflation • management style of
• Interest Rate managers
• Foreign Exchange Rate • reputation and network of
• Income Tax Rates the controlling stockholders
• Developments in the • financial resources of the
industry company
• Competition
• Economic Crisis
• Regulatory Environment
• Political Crisis
Table 1: Factors that Influence Sales
• Discuss the following external and internal factors influencing sale, among others:
- Macroeconomic Variables (external)
Macroeconomic variables such as the GDP rate, inflation rate, and interest rates, among others play an important role in forecasting
sales because it tells us how much the consumers are willing to spend. A low GDP rate coupled by a high inflation rate means that
consumers are spending less on their purchases of goods and services. This means that we should not forecast high sales of the periods
of low GDP.
- Developments in the Industry (external)
Products and services which have more developments in its industry would likely have a higher sales forecast than a product or service in
slow moving industry. Consumer trends are always changing, thus the industry should be competitive to be able to appeal to more
customers and stay in the market.
- Competition (external)
Suppose you are selling bread and you know that each person in your community eats an average of one loaf of bread a day. The
population of your community is 500 people. If you are the only person selling bread in your town, then your sales forecast is 500 units
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of bread. However, you also have to take account your competition. What if there are 4 other sellers of bread? You will need to have to
divide the sales between the 5 of you. Does this mean your new forecast should be 100 units of bread? Not necessary. You should also
know the preference of your consumers. If more of them would prefer to buy more bread from you, then you should increase your sales
forecast.
- Production Capacity and man power (internal)
Suppose that you have already evaluated the macroeconomic factors and identified that there is a very strong market for your product
and consumers are very likely to buy from you. You forecasted that you will be able to sell 1,000 units of your product. However, you
only have 20 employees who are able to produce 20 units each. Your capacity cannot cover your expected demand hence, you are
limited by it. To be able to increase capacity, you should be able to expand your operations.
• Discuss the implications if sales budget is not correct. If understated, there can be lost opportunities in the form of forgone sales. If it is too
optimistic, the management may decide to unnecessarily increase capacity or hire more employees and end up with more inventories.
2. Production Budget
• Discuss what a production budget is and how it is formulated.
- A production budget provides information regarding the number of units that should be produced over a given accounting period based
on expected sales and targeted level of ending inventories.
- It is computed as follows
Required production in units = Expected Sales + Target Ending Inventories - Beginning Inventories
Note: Ending inventory of current period is beginning inventory of next period.
• Provide the following example (EASY):

- [A] Company forecasts sales in units for January to May as follows:
Jan Feb Mar Apr May
Units 2,000 2,200 2,500 2,800 3,000
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- Moreover, [A] Company would like to maintain 100 units in its ending inventory at the end of each month.
- Beginning inventory at the start of January amounts to 50 units.
- How many units should [A] Company produce in order to fulfill the expected sales of the company?
- Answer Key:
MONTH
Jan Feb Mar Apr May Total
Projected Sales 2,000 2,200 2,500 2,800 3,000 12,500
Target level of ending inventories 100 100 100 100 100 100
Total 2,100 2,300 2,600 2,900 3,100 12,600
Less: beginning inventories 50 100 100 100 100 50
Required production 2,050 2,200 2,500 2,800 3,000 12,500
3. Budgeting Cash
• Discuss what an Operation Budget is and how it is formulated.
- Operations budget refers to the variable and fixed costs needed to run the operations of the company but are not directly attributable to
the generation of sales.
- Examples of this are the following:
• Rent payments
• Wages and Salaries of selling and administrative personnel
• Administrative Costs
• Travel and representation expenses
• Professional fees
• Interest Payments
• Tax Payments
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4. Cash Budget
• Discuss the importance of a Cash Budget and how it is formulated.
• Recall from the start of the term the exercise you did where the learners were asked how much
allowance they were given and how much expenses they would incur in a day. Recall that at the end
of the activity, they were able to identify whether they had excess cash or they had a deficit.
• Relate that this is what the cash budget aims to do.

- For a business enterprise, having the right amount of cash is important since cash is used to make Teacher Tips
The cash budget, or cash forecast, is a
payments for purchases, for operational expenses, to creditors, and for other transactions.
statement of the firm’s planned inflows and
- The cash budget forecasts the timing of these cash outflows and matches them with cash inflows outflows of cash. It is used by the firm to
from sales and other receipts. The cash budget is also a control tool to monitor the way the estimate its short-term cash requirements,
with particular attention being paid to
company handles cash.
planning for surplus cash and for cash
shortages (Gitman & Zutter, 2012).
• Below is the general form of the Cash Budget:
CASH BUDGET
Cash Receipts xxx xxx … xxx xxx xxx
Less: Cash Disbursements xxx xxx … xxx xxx xxx
Net Cash Flow xxx xxx … xxx xxx xxx
Add: Beginning Cash xxx xxx … xxx xxx xxx
Ending Cash xxx xxx … xxx xxx xxx
Required Ending Cash Balance xxx xxx … xxx xxx xxx
Required total financing (xxx) … (xxx)
Excess cash balance xxx … xxx xxx
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• The following are the steps in formulating a cash budget:
A. Form the sales forecast, identify how much would be collected in the cash budget period. Sales may be made in cash or for credit. Cash
sales are translated to cash at the point of sale while credit sales are collected depending on the credit period. Credit periods may range
from 10 days to more than a month depending on the strategy of the company. Recall from Lesson 2: Financial Statement Analysis the
implications of the company’s credit policy.
- Continuing from previous example, assume selling price is PHP100/unit. Sales for each month are expected to be collected as follows:
‣ Month of sales : 20%
‣ A month after sales: 50%
‣ 2 months after sales: 30%
- How much is total receipts from sales (DIFFICULT)?
Units 2,000 2,200 2,500 2,800 3,000 12,500
Sales in Pesos 200,000 220,000 250,000 280,000 300,000 1,250,000
Collection from current months sales 40,000 44,000 50,000 56,000 60,000 250,000
Collection from previous months sales 100,000 110,000 125,000 140,000 150,000
Collection from two months prior sales 60,000 66,000 75,000 84,000
Total Collections from Sales 40,000 144,000 220,000 247,000 275,000 926,000
B. Identify other receipts.

- Examples:
‣ interest received
‣ return on principal investments
‣ proceeds from sale of non-operating assets
‣ issuance of capital stock
‣ proceeds from borrowings
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- Add these receipts to the collections from sales to get to total receipts.
C. From the Production Budget, identify how much of the purchases made will be paid by the company on the cash budget period. Like
sales, purchases may be made in cash or on credit depending on the supplier’s credit terms.
- Continuing from previous example:
‣ Assume that cost per unit is PHP50.
‣ All purchases this month are paid the following month. How much is total cash disbursements for purchases (AVERAGE)?
Required production 2,050 2,200 2,500 2,800 3,000 12,550
Cost in Peso 102,500 110,000 125,000 140,000 150,000 627,500
Payment from current months sales 102,500 110,000 125,000 140,000 477,500
Payment from previous months sales 150,000
Payment from two months prior sales
Total Payments for Purchases 0 102,500 110,000 125,000 140,000 477,500
D. From the operations budget, identify which expenses will be paid in cash during the cash budget period.
- The following expense items will be paid based on the following periods:
‣ Rent payments: Rent of PHP5,000 will be paid each month.
‣ Wages and salaries: Fixed salaries for the year are PHP96,000, or PHP8,000 per month. Wages are estimated as 10% of monthly sales.
‣ Tax payments: Taxes of PHP25,000 must be paid in April.
E. Identify all other cash payments to be made.

- Examples:
‣ Fixed-asset purchases in cash
‣ Cash dividend payments
‣ Principal Payments
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‣ Repurchase of common stock
‣ Purchase of stock/bond investments
- It is important to recognize that depreciation and other noncash charges are NOT included in the cash budget.
- The following items will be paid based on the following periods:
‣ Fixed-asset outlays: New machinery costing PHP130,000 will be purchased  
and paid for in April.
‣ Interest payments: An interest payment of PHP10,000 is due in May.
‣ Cash dividend payments: Cash dividends of PHP20,000 will be paid in January.
‣ Principal payments (loans): A PHP20,000 principal payment is due in February.
Total Payments for Purchases - 102,500 110,000 125,000 140,000 477,500
Rent Payments 5,000 5,000 5,000 5,000 5,000 25,000
Wages 20,000 22,000 25,000 28,000 30,000 125,000
Salaries 8,000 8,000 8,000 8,000 8,000 40,000
Tax Payment 25,000 25,000
Fixed Asset Outlay 130,000 130,000
Interest Payment 10,000 10,000
Cash Divident 20,000 20,000
Principal Payment 20,000 20,000
Total Cash Disbursements 53,000 157,500 148,000 321,000 193,000 872,500
F. Match the receipts and disbursements on the periods they become collectible and payable, respectively.
G. Set a minimum required cash balance. This balance is maintained in case contingencies arise. Recall from the steps in planning that we
should also plan for contingencies.
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H. If the net cash flow is above the minimum cash balance, the company is in excess cash and may consider putting it in short term
investments. If it is below, the company should make a short term borrowing during that period.
- Moreover, [A] Company has a beginning cash balance of PHP80,000 and would like to maintain an ending cash balance of PHP100,000
per month. Prepare [A] Company’s Cash Budget for January to May. Prepare a cash budget (DIFFICULT).
Cash Receipts 40,000 144,000 220,000 247,000 275,000 926,000
Less: Cash Disbursements (53,000) (157,500) (148,000) (321,000) (193,000) (872,500)
Net Cash Flow (13,000) (13,500) 72,000 (74,000) 82,000 53,500
Add: Beginning Cash 80,000 67,000 53,500 125,500 51,500 80,000
Ending Cash Balance 67,000 53,500 125,500 51,500 133,500 133,500
Less: Minimum Cash Balance (100,000) (100,000) (100,000) (100,000) (100,000) (100,000)
Cumulative excess cash balance (33,000) (46,500) 25,500 (48,500) 33,500 33,500
(Cumulative required financing)
- Evaluating the Cash Budget:

‣ If the ending cash balance after payment of all required disbursements is less than the required ending balance, the company needs to
borrow additional cash from short term borrowings to meet its required ending balance. Should the ending cash balance exceed the
company’s minimum cash requirement the next period, the company may be able to repay the loan plus accrued interest.
‣ Should the Company have excess cash above its required maintaining cash balance, the company may invest this cash on short term
investments so that it will have an opportunity to earn additional profits. If the company’s cash balance would then fall below its
minimum cash requirement, the company may withdraw the investment to be able to meet the required cash balance.
5. Projected Financial Statements (60 mins)

• Discuss the purpose of projected financial statements.
149
- Projected financial statements is a tool of the company to set an overall goal of what the company’s performance and position will be for
and as of the end of the year. It sets targets to control and monitor the activities of the company. The following reports may be
forecasted:
‣ Projected Income Statement
‣ Projected Statement of Financial Position
‣ Projected Statement of Cash Flows
• Provide the learners a historical financial statement that they would use to make their forecast. You may use your own set of financial
statements or the one found below.
[A] Company
Income Statements
For the years ended December 31
2014 2013 2012 2011 2010
Net Sales 5,250,000 4,770,000 4,310,000 3,910,000 3,547,000
Cost of sales 4,305,000 3,959,100 3,663,500 3,128,000 2,979,480
Gross Profit 945,000 810,900 646,500 782,000 567,520
Operating expenses 314,750 297,890 246,231 221,500 217,538
Operating income 630,250 513,010 400,259 560,500 349,982
Interest Expense 250,000 250,000 250,000 450,000 300,000
Income before taxes 380,250 263,010 150,259 110,500 49,982
Taxes 114,075 78,903 45,078 33,150 14,995
Net Income 266,175 184,107 105,181 77,350 34,987
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[A] Company
Statement of Financial Positions
As of December 31
2014 2013 2012 2011 2010
Assets
Current Assets
Cash 1,060,000.00 990,000.00 770,000.00 760,000.00 880,000.00
Receivables 2,300,500.00 1,921,000.00 1,722,000.00 1,454,000.00 1,396,000.00
Inventories 4,850,000.00 4,500,000.00 3,797,000.00 3,290,000.00 3,350,000.00
Other current assets 1,050,000.00 980,000.00 984,000.00 735,000.00 998,000.00
Total Current Assets 9,260,500.00 8,391,000.00 7,273,000.00 6,239,000.00 6,624,000.00
Non-current Assets
Property, plant, and equipment, net 2,440,000.00 2,260,000.00 1,810,000.00 1,870,000.00 1,900,000.00
Other noncurrent assets 835,689.00 925,681.00 896,842.00 876,235.00 827,490.00
Total non-current assets 3,275,689.00 3,185,681.00 2,706,842.00 2,746,235.00 2,727,490.00
Total assets 266,175.00 184,107.00 105,181.00 77,350.00 34,987.00
Liabilities and Equity
Current Liabilities
Notes payable (external funds needed)
Trade payables 5,050,000.00 4,756,000.00 4,130,000.00 3,300,000.00 2,870,000.00
Income taxes payable 28,520.00 19,725.00 11,270.00 8,290.00 3,750.00
Current portion of long-term debt 2,250,000.00 2,500,000.00 1,000,000.00 2,000,000.00 2,000,000.00
Other current liabilities 85,600.00 28,700.00 40,990.00 30,688.00 37,890.00
7,414,120.00
151 7,304,425.00 5,182,260.00 5,338,978.00 4,911,640.00
2014 2013 2012 2011 2010
Long-term debt, net of current portion 2,000,000.00 1,250,000.00 - 1,000,000.00 3,000,000.00
Total liabilities 9,414,120.00 8,554,425.00 5,182,260.00 6,338,978.00 7,911,640.00
Capital stock 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00
Retained earnings 2,122,069.00 2,022,256.00 3,797,582.00 1,646,257.00 439,850.00
Total stockholders’ equity 3,122,069.00 3,022,256.00 4,797,582.00 2,646,257.00 1,439,850.00
Total liabilities and stockholders’ 12,536,189.00 11,575,681.00 9,979,842.00 8,985,235.00 9,351,490.00

equity
Earnings Income Tax Expense Finance Cost Operating Expense

• Enumerate and discuss the Steps on Cost of Sales
Financial Statement Projection.
100
a. Forecast Sales.
- Reiterate the importance of Sales
in forecasting financial statements.
75
Recall from lesson 2: Financial
Statement Analysis that most of
the income statement items are
related to sales. 50
- Recall the financial ratios related
to sales and show how they are
related to each other as follows:
25
0
Sales Gross Profit Operating Profit Earnings Before Tax Net Income
152
- Start the exercise in financial statement projection with the Projected Income Statement. Provide the information below.
Sales are expected to increase by 10% in 2015 from the 2014 sales level. This
growth assumption is based on the assessment of the external and internal
factors related to the Company and the historical growth of the company. The
company’s sales grew by 10.3% annually from 2010 to 2014.
- Ask the learners to prepare pro-forma financial statements without numbers. The blank spaces will be filled as the steps on financial
statement projections are discussed.
- Flash an excel file of the blank FS on the screen if there are available facilities. Otherwise a set of blank pro-forma FS can be written on
the board.
[A] Company
Projected Income Statement
For the year ending December 31
Net Sales xxx
Cost of sales xxx
Gross Profit xxx
Operating expenses xxx
Operating income xxx
Interest Expense xxx
Income before taxes xxx
Taxes xxx
Net Income xxx
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[A] Company [A] Company
Projected Statement of Financial Position Projected Statement of Financial Position
December 31, 2015 December 31, 2015
Assets Non-current liabilities
Current Assets Long-term debt, net of current xxx

portion
Cash xxx
Total liabilities xxx
Receivables xxx
Inventories xxx
Capital stock xxx
Other Current Assets xxx
Retained earnings xxx
Total Current Assets xxx
Total stockholders’ equity xxx
Non-current assets
Total liabilities and stockholders’ xxx
Property, plant, and equipment, net xxx
equity
Other non-current assets xxx
Total non-current assets xxx
Total Assets xxx
Liabilities and Equity
Current liabilities xxx
Notes payable (external funds xxx

needed)
Trade payables xxx
Income taxes payable xxx
Current portion of long term debt xxx
Other current liabilities xxx
xxx
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- Compute for projected sales.
Projected Sales in 2015 = 5,250,000 x (1 + 10%) = 5,775,000
b. Forecast Cost of Sales and Operating Expenses

- In determining the cost of sales and operating expenses, variable and fixed costs should be identified.
- Cost of sales are direct costs associated in the generation of sales. One way of projecting cost of sales is using the cost of sales ratio.
Companies would generally have a consistent historical cost of sales ratio. The company may use this as a starting point.
- Suppose that the company has an average of 60% cost of sales ratio. In doing projections, the financial manager may use the same
average ratio or, if the company is pushing for efficiency, the financial manager may reduce this ratio to say 57% depending on his
judgment.
- Operation costs are a mix of variable and fixed costs. Variable costs usually vary with sales. To project these costs, the percentage of
sales method may be used. On the other hand, fixed costs remain the same no matter how the volume of sales has changed.
The Company wants to maintain the same gross profit per year as 2014.
Variable operating expense is 5% of sales.
Depreciation expense is 5% of the gross beginning balance of property, plant and equipment. As of December
31, 2014, the gross balance of PPE is PHP5,200,000. For January 2015, PHP1,000,000 new PPE will be acquired.
It is the policy of the company that PPE acquired in the first half of the year will be depreciated for one full year.
- Compute for Cost of Sales, Variable Operating Expense, and Depreciation Expense.
Cost of sales percentage in 2014 = 4,305,000 ÷ 5,250,000) x 100%

Cost of sales percentage in 2014 = 82%
Projected cost of sales in 2015 = 82% x 5,775,000
Projected cost of sales in 2015 = 4,735,500
Variable (5% x Sales of 5,775,000) 288,750
Fixed (depreciation expense)
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(5,200,000 + 1,000,000) x 5% 310,000
Total operating expenses 598,750
- Compute for net PPE.
PPE net, beginning 2,440,000

Additions 1,000,000
Less: Depreciation (310,000)
PPE net, end 3,130,000
c. Forecast Net Income and Retained Earnings.

- To forecast net income, interest expense and income tax expense should also be considered using the relevant interest and tax rates.
Retained earnings is arrived at by adding projected net income to beginning retained earnings then deducting dividends to be declared
during the year.
- Just note this information. Return to this when all income statement items are complete.
Income tax rate is 30% of the income before taxes. 75% of the income tax expense will be paid in 2015 while the
balance will be paid in 2016.
d. Determine balance sheet items that will vary with sales or whose balances will be highly correlated to sales.
- Balance sheet items that may vary with sales or will be highly correlated with sales are cash, accounts receivable, inventories, accounts
payable, and accrues expenses payable.
- Compute as follows:
The following financial statement accounts are expected to

vary with sales based on the 2014 financial statements:
A. Cash
B. Trade accounts receivable
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C. Inventories
D. Other current assets
E. Trade accounts payable
Cash
Cash as a percentage of sales in 2014 = ( 1,060,000 ÷ 5,200,000) x 100%
Cash as a percentage of sales in 2014 = 20.19%
Projected cash in 2015 = 20.19 % x 5,775,000
Projected cash in 2015 = 1,165,973
Accounts receivable
Accounts receivable as a % of sales in 2014 = (2,300,500 ÷ 5,200,000) x 100%
Accounts receivable as a % of sales in 2014 = 43.82%
Projected accounts receivable in 2015 = 43.82% x 5,775,000
Projected accounts receivable in 2015 = 2,530,605
Inventories
Inventories as a % of sales in 2014 = ( 4,850,000 ÷ 5,200,000) x 100%
Inventories as a % of sales in 2014 = 92.38%
Projected inventories in 2015 = 92.38% x 5,775,000
Projected inventories in 2015 = 5,334,945
Other current assets

Other current assets as a % of sales in 2014 = (1,050,000 ÷ 5,200,000) x 100%
Other current assets as a % of sales in 2014 = 20%
Projected other current assets in 2015 = 20% x 5,775,000
Projected other current assets in 2015 = 1,155,000
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Accounts payable
Accounts payable as a % of sales in 2014 = (5,050,000.00 ÷ 5,200,000) x 100%
Accounts payable as a % of sales in 2014 = 96.19%
Projected accounts payable in 2015 = 96.19% x 5,775,000
Projected accounts payable in 2015 = 5,554,973
e. Determine payment schedule for loans.

- Compute for interest expense:
As of December 31, 2014, there are two long-term loans. Both have an annual interest rate of 8%.
A. The first loan will mature on June 30, 2015 and the remaining principal balance to be paid on June 30, 2015 is
PHP1,250,000.
B. The second loan which was incurred on December 31, 2014 is paid at the rate of PHP500,000 principal
balance every June 30 and December 31.
New loans of PHP3,500,000 will be incurred on December 31, 2015 payable at the rate of PHP500,000 every June
30 and December 31. Annual interest rate is expected at 8%.
First Loan
Interest from January 1 to June 30, 2015
1,250,000 x 8% x (6 mos ÷ 12 mos) 50,000
Second Loan
Interest from January 1 to June 30, 2015
(1,000,000 + 2,000,000) x 8% x (6 mos ÷ 12 mos) 120,000
Interest from July 1 to December 31, 2015 100,000

(500,000 + 2,000,000) x 8% x (6 mos ÷ 12 mos)
Total interest expense for 2015 270,000
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- Complete projected income statement as follows:
[A] Company
Projected Statement of Profit or Loss
For the year ending December 31
Net Sales 5,775,000
Cost of sales 4,735,500
Gross Profit 1,039,500
Operating expenses 598,750
Operating income 440,750
Interest Expense 270,000
Income before taxes 170,750
Taxes 51,225
Net Income 119,525
- Compute for Income Tax Payable.
Projected Income Tax Payable in 2015: 51,225 x (1 – 75%) = 12,806
- Compute for current and non-current portion of long term assets:
Loan Current Portion Long-term Portion Total
Loan incurred on December 31, 2014 of PHP3 million 1,000,000 1,000,000 2,000,000
Loan of PHP3.5 million to be incurred on December 1,000,000 2,500,000 3,500,000

31, 2015
Total 2,000,000 3,500,000 5,500,000
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f. Check for other information
Cash dividends of PHP300,000 will be paid for 2015.
Other non-current assets and other current liabilities will remain unchanged.
- Compute for retained earnings
Retained earnings, beginning 2,122,069

Add: Net Income 119,525
Less: Dividents (300,000)
Retained earnings, end 1,941,594
g. Determine external funds needed (EFN).
h. Determine how external funds needed may be financed.

- External Funds Needed is a plug figure to make projected assets equal projected liabilities and shareholders’ equity.
EFN = change in total assets – (change in total liabilities + total change in stockholders’ equity)
Or
EFN = Squeeze figure to balance assets to Liabilities and equity
2015 Balances Without EFN 2014 Balances Change
Total assets 14,152,212 12,536,189 1,616,023
Total liabilities 11,153,379 9,414,120 1,739,259
Total stockholders' equity 2,941,594 3,122,069 (180,475)
EFN 57,239
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- Ask the learners what the implication of a positive or negative EFN is.
- Suggested discussion:
‣ A positive value for EFN, means that the company needs more funds equivalent to the positive value of EFN. As to how this will be
raised depends on the management and the company’s ability to access funds. This EFN can be raised in the form of short term
borrowing, long term borrowing or equity, or a combination of all sources. The projected balance sheet which generated this EFN is
just the first iteration in preparing a pro-forma balance sheet.
‣ A negative value for EFN, means that the company has excess cash. As to how this excess cash will be distributed will be the subject
of the next iteration for the pro-forma balance sheet. This can be disposed by adding it to the projected cash balance or it can be
used to retire some of the debt if pre-termination is allowed.
- Complete FS as follows:
[A] Company [A] Company [A] Company

Projected Statement of Financial Position Projected Statement of Financial Position Projected Statement of Financial Position
December 31, 2015 December 31, 2015 December 31, 2015
Assets Liabilities and Equity Non-current liabilities
Current Assets Current liabilities Long-term debt, net of current 3,500,000

portion
Cash 1,165,973 Notes payable (external funds 57,239
needed) Total liabilities 11,210,618
Receivables 2,530,605
Trade payables 5,554,973 Stockholders’ equity
Inventories 5,334,945
Income taxes payable 12,806 Capital stock 1,000,000
Other Current Assets 1,155,000
Current portion of long term 2,000,000 Retained earnings 1,941,594
Total Current Assets 10,186,523 debt
Total stockholders’ equity 2,941,594
Non-current assets Other current liabilities 85,600
Total liabilities and stockholders’ 13,152,212
Property, plant, &equipment, net 3,130,000 7,710,618 equity
Other non-current assets 835,689
Total non-current assets 3,965,689
Total Assets 13,152,212 161

- Prepare the projected statement of cash flows. Follow the discussion.
[A] Company [A] Company

Projected Statement of Cash Flows Projected Statement of Cash Flows
For the Year Ending December 31, 2015 For the Year Ending December 31, 2015
Cash flows from operating activities Cash flows from financing activities
Income before taxes 170,750 Payment of cash dividents (300,000)
Adjustments: Short-term notes payable (EFN) 57,239
Depreciation 310,000 Loans, net of payments 1,250,000
Changes in the following accounts Cash flows from financing activities 1,007,239
Decrease (Increase) in accounts receivable (230,105) Net change in cash 105,973
Decrease (Increase) in inventories (484,945) Cash, beginning 1,060,000
Decrease (increase) in other current assets (105,000) Cash, ending 1,165,973
Increase (decrease) in accounts payable 504,973
Increase (decrease) in other current liabilities -
Income taxes paid (66,939)
Cash flows from operating activities 98,734
Cash flows from investing activities (1,000,000)

Acquisitions of PPE
Acquisition of other non-current assets -
Cash flows from investing activities (1,000,000)
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1. Case Study Introduction (10 minutes)

• The learners were given a copy of a case before the discussion of cash budgets and projected financial statements began.
• Provide a brief summary of the case and explain what is required to be submitted and presented in class.
2. Case Presentation (60 minutes)

• The presenting groups will have a 20 minute class presentation followed by a 10 minute cross examination from the critic groups.
• Assign a critic group to each presenting group. They will be required to ask questions to the presenters. Let the second presenting group
leave the room while the first presenting group is doing their presentation. All groups are required to submit their papers.
3. Case Discussion (30 minutes)

• Reveal to the class any oversight they may have made in analyzing the case. Discuss corrections and additional solutions. See Annex 1 for
suggested solutions.
ENRICHMENT (5 MINS)
Integration of Learning:
Ask the learners the following: What should the management do if the actual performance of the company fell short of the plans as early as in
the first quarter?
Suggested Answer: Try to identify the sources of the differences, whether these are beyond or within the control of the management. Whatever
the causes are, remedial actions should have to be taken. Or depending on the circumstance, the plans may have to be adjusted.
163
Appendix
ANNEX 1: Sweet Beginnings Co. Suggested Solution
Jan Feb Mar Apr May June
Sales 20X5 1,361,240 2,035,060 3,008,340 6,193,650 10,617,680 13,449,060
Sales Forecast 20X6 1,633,488 2,442,072 3,610,008 8,051,745 13,802,984 17,483,778
Sales Forecast 20X7 1,960,186 2,930,486
Cash receipts from sales two months before (60%) 1,433,388 1,167,942 980,092.80 1,465,243.20 2,166,004.80 4,831,047
Cash receipts from sales last month (40%) 778,628 653,395 976,829 1,444,003 3,220,698 5,521,194
Cash Receipts From Collections 2,212,016 1,821,337 1,956,922 2,909,246 5,386,703 10,352,241
Less: Payment for purchase of Raw Materials 1,985,504 4,428,460 7,591,641 9,616,078 8,577,092 4,318,964
Less: Payment for Salaries and Wages 456,667 675,071 1,505,676 2,581,158 3,269,466 2,916,211
Less: Payment to Delivery Contractors 49,005 73,262 108,300 241,552 414,090 524,513
Less: Dividents Paid 450,000 450,000
Less: Income Tax Paid 1,321,900 363,835
Net Cash Flow (279,161) (3,355,456) (7,698,696) (10,851,442) (7,237,780) 2,142,552
Add: Beginning Cash 641,123 640,000 640,000 640,000 640,000 640,000
Less: Required Ending Balance (640,000) (640,000) (640,000) (640,000) (640,000) (640,000)
Add: Return on Investment (12%) - - - - - -
Less: Interest on Borrowing (16%) (7,834.33) (11,645.96) (56,540.65) (159,943.81) (306,762.29) (407,356.18)
Less: Repayment of Principal (1,735,195)
Required Financing (285,872) (3,367,102) (7,755,237) (11,011,386) (7,544,542) -
Excess Cash 164 -

Loan Balance - Beginning (587,575) (873,447) (4,240,549) (11,995,786) (23,007,172) (30,551,714)
Add: Required Financing (285,872) (3,367,102) (7,755,237) (11,011,386) (7,544,542) -
Less: Repayments - - - - 1,735,195
Loan Balance - End (873,447) (4,240,549) (11,995,786) (23,007,172) (30,551,714) (28,816,518)
Investment Balance - Beginning - - - - - -
Add: Excess Cash - - - - - -
Less: Liquidation of Investment - - - - - -
Investment Balance - End - - - - - -
165
Jul Aug Sep Oct Nov Dec Total
Sales 20X5 12,475,770 6,282,130 3,539,230 3,008,340 2,388,980 1,946,570 66,306,050
Sales Forecast 20X6 15,594,713 7,852,663 4,424,038 3,760,425 2,986,225 2,433,213 84,075,350
Sales Forecast 20X7
Cash receipts from sales two months before (60%) 8,281,790.40 10,490,266.80 9,356,827.50 4,711,597.50 2,654,422.50 2,256,255.00 49,794,878
Cash receipts from sales last month (40%) 6,993,511 6,237,885 3,141,065 1,769,615 1,504,170 1,194,490 33,435,483
Cash Receipts From Collections 15,275,302 16,728,152 12,497,893 6,481,213 4,158,593 3,450,745 83,230,361
Less: Payment for purchase of Raw Materials 2,433,221 2,068,234 1,642,424 1,338,267 1,078,102 1,611,768 46,689,754
Less: Payment for Salaries and Wages 1,468,448 827,295 703,199 558,424 455,011 366,555 15,783,183
Less: Payment to Delivery Contractors 467,841 235,580 132,721 112,813 89,587 72,996 2,522,261
Less: Dividents Paid 450,000 450,000 1,800,000
Less: Income Tax Paid 1,862,285 1,319,433 4,867,453
Net Cash Flow 10,905,792 11,734,758 9,569,548 4,471,709 1,216,460 949,426 11,567,710
Add: Beginning Cash 640,000 640,000 640,000 640,000 640,000 640,000 641,123
Less: Required Ending Balance (640,000) (640,000) (640,000) (640,000) (640,000) (640,000) (640,000)
Add: Return on Investment (12%) - - - 26,747 71,732 84,614 183,092
Less: Interest on Borrowing (16%) (384,220.24) (243,932.63) (90,721.62) - - - (1,668,958)
Less: Repayment of Principal (10,521,571) (11,490,826) (6,804,121) (587,575)
Required Financing - -
Excess Cash 2,674,705 4,498,456 1,288,192 1,034,040 9,495,393
166
Loan Balance - Beginning (28,816,518) (18,294,947) (6,804,121) - - -
Add: Required Financing - - - - - -
Less: Repayments 10,521,571 11,490,826 6,804,121 - - -
Loan Balance - End (18,294,947) (6,804,121) - - - -
Investment Balance - Beginning - - - 2,674,705 7,173,161 8,461,353
Add: Excess Cash - - 2,674,705 4,498,456 1,288,192 1,034,040
Less: Liquidation of Investment - - - - - -
Investment Balance - End - - 2,674,705 7,173,161 8,461,353 9,495,393
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Income Statement Computation
Gross Sales 84,075,350
Cost of Goods 84,075,350 x 73.70% 61,963,533
Gross Profits 22,111,817
Delivery Fees 84,075,350 x 3.00% 2,522,260.50
Operating Expenses 84,075,350 x 6.00% 5,044,521
Depreciation 9,896,000 x 10.00% 989,600
Interest Expense Return on Investment + Interest on borrowings 1,485,866
Pretax profit 12,069,570
Income Tax 22,111,817 x (1-40%) x 30% 3,980,127
Net profit 8,089,443
Balance Sheet Computation
Cash Ending balance of cash budget 640,000
Accounts receivable 3,379,958 + 84,075,350 - 83,230,361 4,224,948
Inventories Same as last year 1,076,000
Short term investments From cash budget 9,495,393
Total Current Assets 15,436,340
Gross plant, property, and equipment 8,696,000 + 1,200,000 9,896,000
Accumulated depreciation 1,278,500 + 989,600 2,268,100
Net PPE 7,627,900
Total Assets 168 23,064,240

Balance Sheet Computation
Accounts payable 654,234 + 61,963,533* + 5,044,521 - 5,189,351

46,689,754 - 15,783,183
Short term borrowings -
Payable to PPE supplier Cost to be paid for purchase equipment 1,200,000
Accrued taxes 9,179,863 x (1-73.7%) x (1-40%) x 30% 434,575
Total current liabilities 6,823,926
Owners equity 9,950,872 + 8,089,443 - 1,800,000 16,240,315
Total liabilities and equity 23,064,240
Inventory 20X5 1,076,000

Add: *Purchases 61,963,533
Less: Inventory 20X6 1,076,000
Cost of goods sold 61,963,533
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pt.3 LESSON OUTLINE
Content Standards Introduction Communicate the learning objectives 10
/Review
The learner demonstrates and understanding of the financial planning process
including budget preparation, cash management, and working capital Motivation Present Actual Company Financial 20
management.
Statements
Instruction/ Discussion Proper 90
The learner will be able to describe concepts and tools in working capital Practice Seatwork 20
management.
Enrichment Group work 30

Learning Competency
The learner shall be able to describe the concepts and tools in working capital
Materials • Calculator
management. (ABM_BF12-IIIc-d-12)
• Computer
• Internet Connection
• LCD Projector
At the end of this lesson, the learners will be able to: • Manila Paper
• Understand working capital management, net working capital, and the • Pens
related trade-off between profitability and risk. Resources
• Appreciate working capital financing policies and their effects on the (1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
profitability and risk of the company. City. Rex Bookstore.
• Compute and analyze the effects of an operating cycle and cash conversion
cycle on the working capital requirements of the company,
170
Communicate the learning objectives by asking a learner to read the following aloud in class: Teacher Tips
1. I will be able to understand working capital management, net working capital, and the related If the learners still do not know what they
trade-off between profitability and risk. want five years from now, write “not sure”.
2. I will be able to describe the cash conversion cycle, its funding requirements, and the key strategies
for managing it.

Teacher Tips
1. Give an example of a local Philippine company and its working capital practices. You can choose a local company that the
learners’ are familiar with. The purpose of
Sample: this exercise is to expose the learners to a
real world example. The learners should be
guided on the importance of working
Jollibee Foods Corporation capital on the daily operations of a business
Statements of Financial Position enterprise.
As of December 31, 2014
(In Millions of PHP)
Current assets
Cash and cash equivalents 7,618
Accounts receivable, net 7,621
Inventories 5,972
Other current assets 2,810
Total current assets 24,021
Noncurrent assets 30,097
Total assets 54,119
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Current liabilities
Trade payables 6,576
Other current liabilities 12,515
Total current liabilities 19,091
Noncurrent liabilities 6,950
Total liabilities 26,041
Total equity 28,078
Total liabilities and equity 54,119
2. Ask the students: What are the assets needed by Jollibee for its daily operation?
3. Cross reference the students’ answers with the Statement of Financial Position of Jollibee.

Teacher Tips
Discuss the following financial planning tools and concepts: Relate the classification of the working
capital assets to operations.
1. Introduce the different Working Capital Assets and their important in the operations of the You can discuss and differentiate the
company. classification of the same assets as classified
in the statement of financial position.
• Working capital is the company’s investment in current assets such as cash, accounts receivable, and
inventories. You may relate your discussion with the
financial ratios topic.
• Net Working capital is the difference between current assets and current liabilities.
2) Illustrate the flow of the operating cycle.
172
• The operating cycle is the sum of days of inventory and days of receivables.
3) Explain how to compute the Days of Inventory and Days of Receivables.

• Days of Inventory or inventory conversion period or average age of inventories, is the average number of days to sell its inventory.
- A DSI of 20 days means that on the average it takes 20 days to sell its inventory. The formula is:
- Since the Statement of Financial Position tells the financial condition of a company at the end of the period, we take Average Inventory for
the year in our calculation.
365 (or 360) days

Days of Inventory =
Inventory Turnover*
Cost of Goods Sold

*Inventory Turnover =
Beginning Inventory + Ending Inventory
2
Or, this formula can be used without computing for inventory turnover:
173
Average Inventory
Days of Inventory =
Average COGS per day
• Days of Sales Outstanding (DSO) is the average time for the company to collect its receivables.
- For example, a DSO of 40 days means that a customer who purchased on the company on account will pay his/her balance in 40 days.
- The formula is:
365 (or 360) days

Days of Inventory =
Receivable Turnover*
Net Credit Sales

*Receivable Turnover =
Beginning Accounts Receivable + Ending Accounts Receivable
2
- Revenue is from the Statement of Comprehensive Income and Accounts Receivables is from the Statement of Financial Position.
- We use the Average Receivables for the year in our calculation. For revenue we generally use the credit sales so we may have to exclude
cash sales from the total sales figure.
4) Discuss how to compute Cash Conversion Cycle (CCC).

• Cash Conversion Cycle, also called the net operating cycle, is computed as the operating cycle less days of payable.
- In formula form:
Cash Conversion Cycle = Operating Cycle - Days of Payables

Cash Conversion Cycle = (Days of Inventory + Days of Receivables) - Days of Payables
- The Cash Conversion Cycle is the length of time it takes for the initial cash outflows for goods and services purchased (materials, labor,
etc.) to be realized as cash inflows from sales (cash sales and in the collection of receivables).
174
• Days of Payables Outstanding (DPO) is the average number of days for the company to pay its Teacher Tips
creditors. A DPO of 30 days means that the company waits for 30 days before paying its creditors. Ending Balance Sheet Accounts such as
- The formula for DPO is: Ending Accounts Receivable can also be
used in the computation of Turnover ratios
however, consistency must be applied.
365 (or 360) days
Days of Inventory =
Payables Turnover*
Net Credit Purchases

*Payables Turnover =
Beginning Accounts Payables + Ending Accounts Payables
2
- Purchases are taken from the Statement of Comprehensive Income and Accounts Payables are
taken from the Statement of Financial Position.
- Since the Statement of Financial Position tells the financial condition of a company at the end of
the period, we take Average payables for the year in our calculation.
- For purchases we are generally concerned about the credit purchases so the learner may have to
exclude cash purchases from the total sales figure.
FORMULA NUMERATOR DENOMINATOR
Inventory Turnover Cost of Goods Sold Average Inventory
Receivables Turnover Net Credit Sales Average Receivables
Payables Turnover Net Credit Purchases Average Payables
- We can see that the numerators of the turnovers needed for the computation of cash conversion
cycle are all Income Statement Accounts, while the denominators are all Average Balance Sheet
Accounts.
- Graphical Representation
175
Figure 1: Corelation of the Operating Cycle and Number of Days
Also, there must be a timeline for the activities, especially since they were allotted a specific time to do Teacher Tips
the activity. It should be noted that as the operating
cycle and cash conversion cycle increase,
more funds are tied up in the working
• Using the above figures, the CCC will be: capital accounts.
CCC = 20 + 40 – 30 = 30
30 days is the time between the cash outlay and the cash received.
If the CCC is negative, it indicates that the company has excess cash to invest. A CC of -10
indicates that the company has excess cash to invest for 10 days.
5) Discuss the different working capital policies:

• Working Capital Management is the administration and control of the company’s working capital.
The primary objective is to achieve a balance between profitability and risk. Basically, there are
three types of working capital financing policies the management can choose from:
- Maturity-matching working capital financing policy
- Aggressive working capital financing policy
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- Conservative working capital financing policy
• Managing working capital is important because failure to do so may result in the closure of business.
- It must be noted that working capital requirements increase as the size or volume of the business increases.
- For example, a company needs PHP10 million in working capital to support an annual sales of PHP50 million. If the sales increase to
PHP100 million, will the PHP10 million working capital be enough? Most likely, the answer is no.
• Why? Because with PHP100 million sales, there will be more cash needed for the operations, more accounts receivable, and if the
company is a trading or a manufacturing company, more inventories.
6) Define Permanent and Temporary Working Capital.

• Permanent Working Capital is the minimum level of current assets required by a firm to carry-on its business operations given its
production capacity or relevant sales range.
• Temporary working capital is the excess of working capital over the permanent working capital given its production capacity or relevant
sales range. (Source: Learn Accounting with Online Accounting Course | Simplestudies.com. (2016). Simplestudies.com. Retrieved 13 May
2016, from http://simplestudies.com/what-are-the-types-of-working-capital)
• During the year, sales are not the same every month. This is why companies have slack season and peak season. If a company has annual
sales of PHP50 million, chances are these sales are not generated uniformly throughout the year. Given this situation, the net working capital
requirements during the slack season is lower than those during the peak season. The net working capital needed to support an operation
during the slack season represents the permanent working capital requirements while the additional net working capital needed during the
peak season represents the temporary working capital requirements.
• Illustrative Sample: Bugay is managing the working capital of SR Ice Cream. SR Ice Cream is engaged in the selling of different ice creams.
The following are the sales volume, and the working capital needed based on the recent years:
QUARTER SALES WORKING CAPITAL
1st (January to March) PHP200,000 PHP120,000
2nd (April to June) PHP900,000 PHP300,000
3rd (July to September) PHP750,000 PHP250,000
4th (October to December) PHP350,000 PHP150,000

PHP150,000
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- We can see that the working capital never goes below PHP120,000. That is the permanent working capital requirement.
- The maximum temporary working capital is PHP180,000 (difference between the PHP300,000 working capital and the permanent working
capital of PHP120,000) at the peak season with PHP900,000 sales level. For the 4th Quarter, the temporary working capital is PHP30,000
(difference between the PHP150,000 working capital and the permanent working capital of PHP120,000).
7) Explain the Working Capital Financing Policies.

• Financing policies can either be aggressive, conservative or maturity-matching:
- Maturity-matching working capital financing policy
• Based on the maturity-matching working capital financing policy, permanent working capital requirements should be financed by long-
term sources while temporary working capital requirements should be financed by short-term sources of financing.
• Long-term sources of financing include long-term debt and equity such as common stock and preferred stock. Short-term sources include
short-term loans from a bank.
• These short-term loans from banks are called working capital loans which perfectly describe the reasons why these loans are incurred.
Source: Cayanan and Borja. Business Finance.

2016.
178
• In maturity-matching, all permanent working capital must be financed by long-term sources while temporary working capital requirements
should be financed by short-term sources.
- Aggressive Working Capital Financing Policy
• Under the aggressive working capital financing policy, some of the permanent working capital requirements are financed by short-term
sources of financing.
• Why do managers of some companies adopt this policy? It is because long-term sources of funds have higher cost as compared to short-
term sources of financing. By financing some of the permanent working capital requirements with short-term sources of financing,
financing cost is minimized which in turn, improves net income.
• But what is the trade-off? Since it is short-term, the debt has to be paid soon and the company may not yet have enough cash by the time
the debt matures. This refers to liquidity risk and this risk increases with the aggressive working capital financing policy.
Source: Cayanan and Borja. Business Finance. 2016.
- Conservative Working Capital Financing Policy

• Based on the conservative working capital financing policy, even some of the temporary working capital requirements are financed by
long-term sources of financing.
• This policy minimizes liquidity risk but it also reduces the company’s profitability because long-term sources of financing entail higher cost.
179
Source: Cayanan and Borja. Business Finance. 2016.
• Illustrative Sample: B. Bugay is managing the working capital of SR Ice Cream. SR Ice Cream is engaged in the selling of different ice
creams. The following are the sales volume, and the working capital needed based on the recent years:
QUARTER SALES WORKING CAPITAL
1st (January to March) PHP200,000 PHP120,000
2nd (April to June) PHP900,000 PHP300,000
3rd (July to September) PHP750,000 PHP250,000
4th (October to December) PHP350,000 PHP150,000
The following banks offered the following loans:
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BANK TERM (OR DURATION) AMOUNT
BPI 3 years PHP40,000 - PHP90,000
BDO 5 months PHP25,000 - PHP60,000
AUB 4 years PHP90,000 - PHP150,000
PNB 9 months PHP65,000 - PHP105,000
What banks will be probably chosen by B. Bugay when choosing different policies?
Answer Key:
Permanent working capital = P120,000
Temporary working capital = P300,000 – P 120,000 = P180,000
POLICY TEMPORARY PERMANENT
Maturity-Matching BDO, PNB AUB, BPI
Aggressive BDO, PNB All banks are considered
Conservative All banks are considered AUB, BPI
8) Explain the strategies for managing the cash conversion cycle.

• The central issue in managing the working capital is the ability to reduce operating cycle days. This is to ensure that such operating cycle
days will be shorter than the payable days. The quickness of completing the operating cycle is measured by the operating cycle days.
• The following are some of the strategies in efficiently managing the cash conversion cycle:
1. Turn over inventory as quickly as possible without stockouts that result in lost sales.
2. Efficiently manage the accounts receivable consistent with the company’s credit policies. You need to also consider accelerating the
collection of receivables through:
A. Shorter credit terms.
B. Offering special discounts to customers who pay their accounts within a specified period.
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C. Speeding up the mailing time of payments from customers to the firm.
D. Minimizing the float or reducing the time during which payments received by the firm remain uncollected funds. For example, a
customer deposited a check in the name of the company on a Friday and the check will be cleared on Monday. The payment is said
to be floating for two days.
3. Manage mail, processing, and clearing time to reduce them when collecting from customers and to increase them when paying
suppliers.
4. Pay accounts payable as slowly as possible without damaging the firm’s credit rating.
PRACTICE (20 MINS)
Philippine Products Company is concerned about managing cash efficiently. On the average, inventories have an age of 90 days and accounts
receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about PHP30
million. Assume there is no difference in the investment per peso of sales in inventory, receivables, and payables and that there is a 360-day
year.
1. Calculate the firm’s operating cycle.
2. Calculate the firm’s cash conversion cycle.
3. Discuss how management might be able to reduce the cash conversion cycle.
Answer Key:
1. 90+60=150 days
2. 90+60-30=120 days
3. Reduce days to sell inventory, reduce days to collect accounts receivable and lengthen payable payment period without negatively affecting
relationship with suppliers.
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ENRICHMENT (30 MINS) Teacher Tips
Make sure that all members of the group
participate in the discussion and no one
As a group work, ask the learners to download the financial statements of Jollibee Foods Corporation. dominates the discussion.
Reflection questions:
1. What is the impact of the working capital management to the profitability and risks based on the
group’s analysis of Jollibee Foods Corporation financial statements?
2. What types of working capital policies is JFC using based from your analysis of it’s financial
statements?
3. What impact can you observe this strategy has to JFC's profits?
4. Is there any effect on the riskiness such as liquidity or solvency?
Notes:
• Remind the groups to have a “Group Facilitator” who will direct the discussion.
• Remind the groups to have a “Scribe/Reporter” who will write the key concepts shared by each
member and report the group’s findings to the class.
• Allow them to discuss for ten (10) minutes.
• Ask each group to share their findings to the class for 2 minutes per group.
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pt.4 LESSON OUTLINE
Content Standards Introduction Communicate the learning objectives 10
/Review
The learner demonstrates and understanding of the financial planning process
including budget preparation, cash management, and working capital Motivation Real life situational analysis 20
management.
Instruction/ Discussion 90
The learner will be able to describe concepts and tools in working capital Enrichment Group work
management. 30
Evaluation Quiz 30
Learning Competency
The learners shall be able to explain the tools in managing cash, receivables,
Materials • Calculator
and inventory. (ABM_BF12-IIIc-d-12)
• Computer
• Internet Connection
• LCD Projector
At the end of this lesson, the learners will be able to explain how to manage • Manila Paper
cash, accounts receivables, and inventories. • Pens
Resources
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Communicate the learning objectives by asking a learner to read the following aloud in class: Teacher Tips
1. List the reasons for holding cash. If the learners still do not know what they
want five years from now, write “not sure”.
2. Construct a cash budget and explain its purpose.
3. Briefly explain useful tools and procedures for effectively managing cash inflows and outflows.
4. State the goal of inventory management and identify the three categories of inventory costs.
5. Identify and briefly explain the use of several inventory control systems.
6. List and explain the four elements of a firm’s credit policy and identify other factors influencing
credit policy.
MOTIVATION (20 MINS) Teacher Tips

This exercise is geared toward letting the
You are to organize your birthday celebration this year. What are the things that should be considered learners relate common activities and the
need of working capital for these activities.
in planning? List on the board the needed resources that will be needed for the birthday celebration.
Based on the listings the learners made, separate the current assets and long term assets then relate
them to the need of working capital assets in any activity.
1. Cash
• Being the most liquid asset, cash is an important account in the balance sheet that will affect the
liquidity, and solvency of a company. It is also the most vulnerable when it comes to theft.
• A good internal control must be properly implemented to safeguard this asset:

- A basic internal control system entails the assignment of custodial function and recording function
to separate individuals, unless you are the owner. Why is this so? Imagine a cashier of a company
who is also the chief accountant. If tempted, this person can steal cash from the company and can
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manipulate the records so that nobody can discover that he is stealing. If you are the owner, you
probably will not steal from yourself and adjust the records?
- Cash collections should be supported by official receipts which are summarized in a daily
collection report. The daily collection report is going to useful for the next control measure for
cash – depositing collections.
- A good internal control over cash is by depositing all collections intact. The daily collection reports
are now compared with the deposit slips to find out if all collections are indeed deposited.
- If all collections need to be deposited, then payments must be made through a check voucher
system. There must also be two signatories in the check to provide a check and balance. If the
business is small then the entrepreneur’s signature may suffice.
- For small payments like the fare given to a messenger, a petty cash fund is used. A petty cash fund
which should be minimal in amount, will be issued to a petty cash fund custodian, say the office
administrator. The petty cash fund may be PHP10,000 or PHP20,000. Disbursements from this
petty cash funds must be supported by a petty cash voucher signed by the recipient of the petty
cash. When the petty cash fund is almost depleted, the petty cash fund custodian will get
reimbursements. This reimbursement will go through the check voucher system where the
custodian gets a check with the petty cash vouchers as supporting documents.
- The check must also be cross-checked by drawing two lines on the payee section of the check.
This cross-checking requires depositing of a check. It cannot be encashed. This makes it more
difficult for somebody who stole a check to get the money. Teacher Tips
Relate the classification of the working
capital assets to operations.
2. Motives For Holding Cash
• The following are the reasons for holding cash: You can discuss and differentiate the
classification of the same assets as classified
- Primary Reasons
in the statement of financial position.
a. Transactional. This is the cash used for paying expenses such as salaries, utilities, rent and
taxes, among others. You may relate your discussion with the
financial ratios topic.
b. Compensating balance. This is the cash held to meet bank requirements such as the minimum
cash balance you maintain for checking accounts and if you have existing loans, banks may also
require a minimum amount of deposit with them.
- Secondary Reasons
a. Precautionary. This is the cash maintained for emergencies such as the additional cash you
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keep during political and economic uncertainties. For example, if your business requires a
substantial amount of importation, a relatively higher amount of cash has to be maintained
when the exchange rate becomes highly volatile due to political instability such as what
happened during EDSA II.
b. Speculative. This refers to the cash held by the company to take advantage of opportunities
(e.g. buying stocks during major corrections such as what happened at the height of the global
financial crisis in 2008 and 2009 where stock valuations went down by as much as 80% for some
companies).
3. Budgeting Cash
Teacher Tips
• The Cash Budget Money market placements refer to short-
- The cash budget provides information regarding the company’s expected cash receipts and term financial instruments with a maximum
tenor of one year.
disbursements over a given period.
- It is useful for identifying future funding requirements or excess cash within a given period. This
allows managers to find possible sources of financing if the cash budget shows cash shortage or
identify appropriate tenors for money market placements for excess cash.
- Normally, a cash budget is prepared for a one year period broken down into smaller intervals like
months. This allows managers to see the seasonality of the business which affects the cash flows.
B. BUGAY INDUSTRIES
Cash Budget
For the months of October, November, and December 2015
OCTOBER NOVEMBER DECEMBER
Cash Receipts xxx xxx xxx

Less: Cash Disbursements (xxx) (xxx) (xxx)
Net Cash Flows xxx xxx xxx
Add: Beginning Cash Balance xxx xxx xxx
Ending Cash xxx xxx xxx
Less: Minimum cash balance (xxx) (xxx) (xxx)
Cumulative financing requirement (if negative) or xxx xxx xxx

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Cumulative excess cash balance (if positive)
• Basically, cash budget has the following parts:
- Cash Receipts include all of a firm’s inflows of cash in a given financial period. The most common components of cash receipts are cash
sales, collections of accounts receivable, and other cash receipts.
- Illustrative Example:
Source: Gitman, L. (1976). Principles of managerial finance. New York: Harper & Row.
B. Bugay Industries, a defense contractor, is developing a cash budget for October, November, and December. Jungaya’s sales in August
and September were PHP100,000 and PHP200,000 respectively. Sales of PHP400,000, PHP300,000, and PHP200,000 have been forecast
for October, November, and December respectively.
Historically, 20% of the firm’s sales have been for cash, 50% have generated accounts receivable collected after 1 month, and the
remaining 30% have generated accounts receivable collected after 2 months. In December, the firm will receive a PHP30,000 dividend
from stock in a subsidiary.
Required: Prepare the cash receipts section of the cash budget.
Answer Key:
Forecasted sales 100,000 200,000 400,000 300,000 200,000
August September October November December
Cash Sales (20%) P20,000 P40,000 P80,000 P60,000 P40,000
Collection of AR
1st month (50%) P50,000 P100,000 P200,000 P150,000
2nd month (30%) P30,000 P60,000 P120,000
Other cash receipts P30,000
TOTAL CASH RECEIPTS P210,000 P320,000 P340,000
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- Cash Disbursements include all outlays of cash by the firm during a given financial period. The most common cash disbursements are:
• Cash purchases
• Purchasing fixed assets
• Payments of accounts payable
• Interest payments
• Rent (and lease) payments
• Cash dividend payments
• Wages and salaries
• Principal payments (loans)
• Tax
• It is important to recognize that depreciation and other noncash charges are not included in the cash budget, because they merely
represent a scheduled write-off of an earlier cash outflow.
• Illustrative Example:
Jungaya Industries has gathered the following data needed for the preparation of a cash disbursements schedule for October, November,
and December.
- Purchases - The firm’s purchases represent 70% of sales. Of this amount, 10% is paid in cash, 70% is paid in the month immediately
following the month of purchase, and the remaining 20% is paid 2 months following the month of purchase.
- Rent Payments - Rent of PHP5,000 will be paid each month.
- Wages and Salaries - Fixed salary cost for the year is PHP96,000, or PHP8,000 per month. In addition, wages are estimated as 10% of
monthly sales.
- Tax Payments - Taxes of PHP25,000 must be paid in December.
- Fixed Assets - New machinery costing PHP130,000 will be purchased and paid for in November.
- Interest Payments - An interest payment of PHP10,000 is due in December.
Answer Key:
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Forecasted purchases (70%) 70,000 140,000 280,000 210,000 140,000
August September OCTOBER NOVEMBER DECEMBER
Cash Purchases (10%) P7,000 P14,000 P28,000 P21,000 P14,000
Payment of AP
1st month (70%) 49,000 98,000 196,000 147,000
2nd month (20%) 14,000 28,000 56,000
Total Cash Purchases P7,000 P63,000 140,000 245,000 217,000
Rent 5,000 5,000 5,000
Wages and Salaries 48,000 38,000 28,000
Tax 25,000
Machinery purchase 130,000
Interest 10,000
TOTAL CASH DISBURSEMENTS 193,000 P418,000 P285,000
4. Net Cash Flow, Ending Cash, Financing, and Excess Cash

• The firm’s net cash flow is found by subtracting the cash disbursements from cash receipts in each period. Then we add beginning cash to
the net cash flow to determine the ending cash for each period. Finally, we subtract the desired minimum cash balance from ending cash to
find the required total financing or the excess cash balance. If the computed amount is negative, the company needs financing. Otherwise,
the company has excess cash.
• The cash budget is part of planning. It helps managers anticipate future funding requirements in order to obtain proper financing even
before the need arises. This will help them avoid usurious rates. On the other hand, if the company has excess cash, managers are able
identify the investment instruments that will maximize the returns on the excess cash.
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• Illustrative Example: Given the two illustrative examples, generate a cash budget showing the net cash flow, ending cash flow, financing,
and excess cash. At the end of September, Jungaya’s cash balance was PHP50,000,and its notes payable and marketable securities equaled
PHP0. The company wishes to maintain as a reserve for unexpected needs, a minimum cash balance of PHP25,000.
• Answer Key:
B. BUGAY INDUSTRIES
Cash Budget
For the months of October, November, and December 2015
OCTOBER NOVEMBER DECEMBER
Cash Receipts 210,000 320,000 340,000

Less: Cash Disbursements (193,000) (418,000) (285,000)
Net Cash Flows 17,000 (98,000) 55,000
Add: Beginning Cash Balance 50,000 67,000 (31,000)
Ending Cash 67,000 (31,000) 24,000
Less: Minimum cash balance (25,000) (25,000) (25,000)
Cumulative excess cash balance (Cumulative 42,000 (56,000) (1,000)

required financing)
• Comprehensive Illustrative Example:

It was December 2014 and the president of DCD Corporation wants to find out if the company has enough cash to pay the principal
balance of the company’s loan worth PHP3 million by the end of 2015. He asked the chief accountant to prepare the cash budget for 2015.
The following assumptions which will be used for the preparation of the cash budget for 2015 are as follows:
- Projected quarterly sales for 2015 are as follows:

First quarter - Php 5 million
Second quarter - -Php 7.5 million
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Third quarter - Php 8.5 million
Fourth quarter - Php 10 million
Fourth quarter sales in 2014 was Php 8 million.
Sales are collected 90% in the quarter the sales are made. The remaining 10% is collected the following quarter.
- The cost of sales is 75% of sales. Merchandise inventories are purchased in the quarter these are sold. All merchandise purchased in
the quarter are paid in the same quarter.
- Operating expenses for each quarter paid in cash are as follows:

First quarter - PHP500,000
Second quarter - -PHP750,000
Third quarter - PHP850,000
Fourth quarter - PHP1,000,000
On top of these cash operating expenses, depreciation expenses that should be charged to operations is PHP150,000 per quarter.
- Interest expense paid every quarter is PHP75,000.
- Income tax rate is 30%. The income taxes to be paid every quarter will be as follows:
First quarter - PHP157,500
Second quarter - - PHP270,000
Third quarter - PHP315,000
Fourth quarter - PHP382,500
- Expected cash balance at the end of 2014 is about PHP350,000. For 2015, target cash balance is raised to PHP500,000 because of
expected increase in sales.
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Given the above assumptions, a cash budget can now be prepared for 2015.
DCD Corporation
Cash Budget
For the Year Ending December 31, 2015
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Collections
Quarter of Sale 4,500,000 6,750,000 7,650,000 9,000,000
A quarter after sale 800,000 500,000 750,000 850,000
5,300,000 7,250,000 8,400,000 9,850,000
Payments
Purchases 3,750,000 5,625,000 6,375,000 7,500,000
Cash operating expenses 500,000 750,000 850,000 1,000,000
Income taxes 225,000 157,500 270,000 315,000
Loan payment 3,000,000
Interest expense 75,000 75,000 75,000 75,000
Total payments 4,550,000 6,607,500 7,570,000 11,890,000
Net cash flow for the period 750,000 642,5000 830,000 (2,040,000)
Cash balance, beginning 350,000 1,100,000 1,742,500 2,572,500
Cash balance without financing 1,100,000 1,742,500 2,572,500 532,500

Teacher Tips
Target cash balance 500,000 500,000 500,000 500,000
The 5Cs of credit will also be discussed in
Sources and Uses and long-term funds that
Cumulative excess cash (funding 600,000 1,242,500 2,072,500 32,500
will be discussed in the third quarter.
requirements)
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5. Accounts Receivable
• Accounts receivables spring out of the need to sell merchandise.
• An excellent business proposition is to generate sales without offering a credit facility to customers. However, this concept is theoretically
sound, but not sustainable.
- Consider a real estate company which sells condominium units at PHP5 million per unit. How many units can the property developer sell if
he sells the units only on cash basis? Do you think he can sell a lot? Probably not as many as compared to providing instalment payments.
• Credit management strategically defines the quality of account receivables collection.
• The collectability of accounts receivables depends largely on the quality of customers. The quality of customers depends on the standards
or credit policies set up and used by an organization. Credit policies are an integral part of the credit evaluation and there are 5C’s used in
credit evaluation. These are:
- Character –the willingness of the borrower to repay the loan
- Capacity – a customer’s ability to generate cash flows
- Collateral – security pledged for payment of the loan
- Capital – a customer’s financial resources
- Condition – current economic or business conditions
• Proper management of accounts receivable entails having a good billing and collection system.
- A good system should lead to the sending of statements of account to customers on time.
- Follow-ups through phone calls or any form of gentle reminders should be made if customers fail to pay on time. These follow-ups can also
serve as the management’s way of validating if the contact details given by customers are still valid and if the customers still occupy the
same office.
• Aging of receivables is also a control measure to determine the amount of receivables that are still outstanding and past due.
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Current P 60 million
1 - 30 day past due 20 million
Over 90 days past due 7 million
Total Php 100 million
• Accounts which have been past due for more than 90 days have higher probability to default. The aging of receivables is useful in
determining the allowance for doubtful accounts.
6. INVENTORY MANAGEMENT
• Inventory management involves the formulation and administration of plans and policies to efficiently and satisfactorily meet production and
merchandising requirements and minimize costs relative to inventories.
- Effective inventory management becomes critical when the nature of the products are either perishable (e.g. fruits, vegetables), fragile
(e.g. glasses), or toxic (e.g. bleaching agent).
• Proper inventory management involves the determination of reasonable levels of inventories considering the size and nature of business.
- Maintaining too much inventories has costs such as carrying or holding costs, possible obsolescence or spoilage.
- On the other hand, too low inventory can result to stockout, and eventually lost sales.
7. Inventory In A Manufacturing Company

• In a manufacturing company, there are three types of inventory:
- Raw materials – these are purchased materials not yet put into production.
- Work in process – these are goods and labor put into production but not yet finished.
- Finished goods – these are goods put into production and finished. These are ready to be sold.
8. The ABC Analysis
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• One way to control inventory is to classify inventory into a classification system called ABC Analysis.
• Inventories classified as “A” are high valued items which should be safeguarded the most.
• B items, on the other hand, are average-cost items that should be safeguarded more than C items but not as much as A items.
• While C items have low cost and is the least safeguarded.
To summarize:
INVENTORY CLASS
A B C
Money value High Medium Low
Quality of control Very strict Strict Not too Strict
Inventory movement (flows) Slow Relatively fast Fast
Sources:
Agamata, F. (2014). Management Services.
Gitman, L. (1976). Principles of managerial finance. New York: Harper & Row.
Gitman, L. & Joehnk, M. (1981). Fundamentals of investing. New York: Harper & Row.
Horngren, C. (1972). Cost accounting; a managerial emphasis. Englewood Cliffs, N.J.: Prentice-Hall.
Roque, R. (1990). Reviewer in Management Advisory Services. Roque Press, Inc.
Group work:
What are the three ways for Maria to better manage her cash balance?
196
Maria Luna, a 25-year-old nurse, works at a hospital that pays her every 2 weeks by direct deposit into her checking account which pays
no interest and has no minimum balance requirement. She takes home about PHP9,000 every 2 weeks or about PHP18,000 per month.
She maintains a checking account in the bank that does not earn any interest income with a balance of around PHP7,500. Whenever it
exceeds that amount she transfers the excess into her savings account, which currently pays 1.5% annual interest.
She currently has a savings account balance of PHP85,000 and estimates that she transfers about PHP3,000 per month from her
checking account into her savings account.
Maria pays her bills immediately when she receives them. Her monthly bills average about PHP9,500, and her monthly cash outlays for
food and transportation cost total about PHP4,500.
An analysis of Maria’s bill payments indicates that on average she pays her bills 10 days early. Bank Time Deposit are currently yielding
about 4.2% annual interest. Maria is interested in learning how she might better manage her cash balances.
Answer Key:
The three ways for Maria to better manage her cash balance:
1. Invest current balances. Maria can transfer her current savings account balances into a Time Deposit, thereby increasing the rate of interest
earned from 1.5% to about 4.2%. On her current P17,000 balance, she will immediately increase her annual interest earnings by about
PHP2,295. (0.042 - 0.015) X P85,000
2. Invest monthly surpluses. Maria can transfer monthly the PHP3,000 from her checking account to the Time Deposit, thereby increasing the
annual earnings on each monthly transfer by about PHP81(0.042 - 0.015) X PHP3,000 which, for the 12 transfers, would generate additional
annual earnings of about PHP972 (12 months X PHP81).
3. Slow down payments. Rather than paying her bills immediately on receipt, Maria can pay her bills nearer their due date. By doing this she
can gain 10 days of disbursement float each month, or 120 days per year (10 days per month over12 months), on an average of PHP9,500 of
bills. Assuming she can earn 4.2% annual interest on the PHP9,500, slowing down her payments would save about P133 annually (120/360)
X 0.042 X P9,500 .
Based on these three recommendations, Maria would increase her annual earnings by a total of about PHP3,400 (PHP2,295 + PHP972 +
PHP133) . Clearly, Maria can grow her earnings by better managing her cash balances.
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Teacher Tips
Multiple Choice Answer Key
1. B
2. C
1. The _________ inventory consists of all items currently in the production process. 3. D
(a) raw materials 4. A
5. D
(b) work-in-process
(c) finished goods
(d) apital goods
2. The _________ inventory consists of items that have been produced but not yet sold.
(a) raw materials
(b) work-in-process
(c) finished goods
(d) capital goods
3. The three basic types of inventory are all of the following EXCEPT
(a) raw materials
(b) work-in-process
(c) finished goods
(d) capital goods
4. The _________ inventory contains the basic components of the production process.
(a) raw materials
(b) work-in-process
(c) finished goods
(d) capital goods
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5. The credit applicant’s _________ is the amount of assets the applicant has available for use in securing the credit.
(a) character
(b) capacity
(c) capital
(d) collateral
Problem Solving:
Gerry Jacobs, a financial analyst for Best Valu Supermarkets, has prepared the following sales and cash disbursement estimates for the period
of August through December of the current year.
Month Sales Cash Disbursements
August $400 $300
September 500 500
October 500 700
November 600 400
December 700 500
90% of sales are for cash, the remaining 10% are collected one month later. All disbursements are on a cash basis. The firm wishes to maintain a
minimum cash balance of $50. The beginning cash balance in September is $25. Prepare a cash budget for the months of October, November,
and December, noting any needed financing or excess cash available.
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Answer Key:
A Cash Budget for Best Valu Supermarkets
Sept Oct Nov Dec
Cash receipts
Sales (cash 90%) $ 450 $ 450 $ 450 $ 630
Sales Collected (1 mo. lag 10%) 40 50 50 60
Total cash receipts $ 490 $ 500 $ 590 $ 690
Total cash disbursements 500 700 400 500
Net cash flow (10) (200) 190 190
Beg. cash balance 25 15 (185) 5
Ending cash balance 15 (185) 5 195
Minimum balance 50 50 50 50
Required financing 35 235 45
Excess Cash 45
Best Valu Supermarkets should arrange for a line of credit for at least $235 during the four-month period.
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Sources and Uses of Short-Term and

Long-Term Funds Pt. 1
LESSON OUTLINE
Introduction Communicate the learning objectives 15
Content Standards /Review
The learners demonstrate an understanding of the sources and uses of short-
term and long-term funds, and the requirements, procedures, obligation to Motivation A. Share news articles that feature actual 35
creditor, and reportorial necessities. companies that avail of debt and equity
financing.
B. Discuss potential liquidity problems or
higher default risk if company does not
use appropriate source of financing.
• Distinguish debt and equity financing as well as the risks associated with Instruction/ Discussion proper
each source of financing. 60
Delivery
• Identify the bank and non-bank institutions in the vicinity that are possible
Practice Seatwork on matching the company 20
sources of funds.
objectives with either short or long-term
financing
Evaluation Essay questions about the lesson. 30
Materials
• Cite bank and nonbank institutions in the locality that would serve as • Projector, if available
possible sources of funds for business operations. (ABM_BF12-IIIe-f-13) • Board and writing materials will suffice
• Identify uses of funds. (ABM_BF12-IIIe-f-17) Resources
(1) Brealey, R. Myers, S., & Marcus, A. (2004). Fundamentals of corporate
finance. Boston, Mass.: McGraw-Hill Irwin.
(2) Cayanan, A. Manuscript.
At the end of the unit lesson, the learners will be able to:
(3) Gitman, L. (2009) Principles of managerial finance. Boston: Pearson
• Know the advantages and disadvantages of using debt and equity Prentice Hall.
financing. (4) Roque, R. (1990). Management Advisory Services. Malabon: Roque
• Distinguish the different sources and uses of funds available in the Press, Inc.
Philippines and their applicability in different situations.

201

• Define financing - It means to provide funding for a particular need.
• Ask the students what they think the possible sources of funds for a small business are (i.e. small
sari-sari store).
Sample Responses: Definitions:
• Equity Infusion from investors/business partners Settlement Risk – risk that the bank may
not be able to give back their deposit.
• Start-up capital from owner Philippine banks are normally insured by the
• Loan from a bank Philippine Deposit Insurance Corporation
(PDIC). Depositors may recover up to
• Loan from other financial institutions, etc. PHP500,000 per depositor from PDIC in
• Loan from family members/friends, etc. case of bank default/bankruptcy.
Misconceptions:
MOTIVATION/ENRICHMENT (20 MINS) Emphasize to the students that it is a
1. Ask the students to read news articles relating to financing used by companies. common misconception that all of these
investments will earn for certain. Clarify that
• Possible articles: (see APPENDIX) each investment type has inherent risks
• Filinvest Land raises P8 billion from debt sale. (2015). InterAksyon.com. Retrieved 5 April involved, which nevertheless can be
2016, from http://www.interaksyon.com/business/116404/filinvest-land-raises-php8-b-from- mitigated.
bond-issue-to-boost-recurring-business
• Jonsson, A. (2013). JG Summit raises $200 million from placement. FinanceAsia. Retrieved 5
April 2016, from http://www.financeasia.com/News/365482,jg-summit-raises-200-million-
from-placement.aspx
• Companies can choose between two sources of financing, either debt or equity.
2. Discuss the articles using the following guide questions (EASY TO AVERAGE):
• What are the subject companies? What are their main activities?
• What do they need financing for?
• How much did they raise through financing? In what manner did they manage to raise funds?
• What are the companies’ plans after achieving their proposed funding?
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1. Ask the learners which they think is more expensive, debt, or equity financing?
• Learners will usually answer that equity financing is less expensive since equity uses their own funds
and they do not pay interest.
• Discuss that equity financing also has costs that may be more expensive than the cost of debt.
Why? Because there is no guaranty on the returns. Even if the cost of equity is more expensive,
companies still utilize equity due to its benefits such as no maturity, and other advantages which will
be further discussed.
2. Definitions
• Debt Financing - borrowing money from lenders and not giving up ownership.
• Equity Financing - the method of raising capital by selling company stock to investors (stockholders)
in exchange of ownership interests in the company.
Teacher Tip:
• Discuss the advantages and disadvantages of debt financing and equity financing.
This is in the point of view of the Company.
DEBT FINANCING EQUITY FINANCING Note that if debt is cheaper, why doesn’t
the company avail of 100% debt financing?
Advantages Disadvantages Advantages Disadvantages Possible answer: No bank/creditor will
provide 100% debt financing. Creditors
Cost It is limited to interest It does not require It has the highest cost
evaluate the paying capacity of borrowers
payments. a fixed dividend (see discussion on risk). which means the amount of loans they will
payment. tend depends on the ability of the company
to serve the debt. Normally, this is based on
Control Lender has no control It may limit cash dividend the projected cash flows of the borrower.
over operations and declaration by
investment decisions. management. Note that it is risky because:
• Stockholders are not guaranteed of
Maturity There is a specified There is no returns unlike creditors which have
maturity date or periodic maturity date. It is guaranteed interest and principal
amortization payments. perpetual. payment.
• Under the corporation code, creditors
Risk There is a risk of not Among the sources of have to be paid first in case of
meeting the obligation financing, it is the liquidation before anything is paid to
the stockholders
(default risk) riskiest.
• If the company is losing, it’s the
Tax Interest expense is tax Dividends are not tax stockholders who bear the loss.
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deductible (it can deductible.
minimize tax expense).
Table 1: Comparison of Advantages and Disadvantages of Debt Financing vs. Equity Financing
MOTIVATION (15 MINUTES)
1. Consider the following situations:
• Fabrics Inc. put up a clothing outlet worth PHP10 million and funded the entire amount using a one-year short-term loan. The company’s
average annual operating cash flows for the last three years is PHP 1.5 million.
Ask the learners what they think would happen to the company.
Sample Response:
• Given the average annual operating cash flows of the company of only PHP1.5 million, there is a very high probability that Fabrics
Inc. will not be able to pay the loan within one year.
• Given the amount of the loan in relation to operating cash flows, management may be become very stressed thinking about how to
settle this loan. This will adversely affect the executive time they spend in managing the core business of the Company.
• Dragon Inc. is in the business of fireworks production. Their peak season is usually during the holidays, especially during Christmas and New
Year. The company needs additional PHP500,000 to finance their working capital needs during the holiday season.
Ask the learners how this should be financed. Should it be financed using short-term loan, long-term loan, or through equity?
Sample Response:
• This should be financed by short-term loan. Long-term loan and equity financing are not recommended for this temporary financing
requirement because of the following reasons:
• The need for financing is limited to the holiday season.
• Equity financing is the most expensive, as previously discussed, while interest rates on long-term debt is also generally higher as
compared to interest rates on short-term debt. Also, if the funds are needed only for a limited period, there is no need for the
company to secure a long-term source of funds.
2. Ask the students if they can think of other scenarios where a mismatch for financing could be a problem for a business.
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• Sample response: Financing a long-term investment through a short-term loan. Let us say you are a
Teacher Tip:
restaurant owner and you are planning to open another branch which will cost you PHP8 million.
If the learners are passive, cite a few more
The returns on this investment will be realised over a number of years. Therefore, financing it examples, such as a small lending company
through a short-term loan, say one year, will give you too much pressure to pay the loan because with collections that have mismatched when
the new branch may not have generated enough cash flow within the year to cover the PHP8 giving out loans, to give them more insights
million. on the topic at hand.
INSTRUCTION (35 MINUTES)
1. Differentiate long-term and short-term financing.

Short term financing is debt scheduled to be paid within a year while long-term financing is debt to be
paid in more than a year.
2. Recap on liquidity risks and liquidity ratios.

Liquidity risk typically refers to the inability of an investor to buy or sell an asset to avoid financial loss. It
can also refer to the inability to meet obligations since assets are tied up with investments or inventory.
Ratios such as the current ratio and quick ratio measure the institution’s liquidity. There should be a
balance between liquid funds and investments. Too high liquidity ratios will have opportunity costs
since these funds could have been invested to yield earnings. Too low liquidity ratios, however, may
cause the institution to default on payments should emergency situations arise. Enough liquid assets
should be available to meet short term obligations.
3. Enumerate and describe the sources and uses of short-term funds. Provide actual examples under Teacher Tip:
each type of source, if applicable. You may ask the learners to identify the
sources of short-term and long-term funds
• Suppliers Credit – refers to the extension of payment due date by suppliers. in class or in groups. This activity may be
• Discuss the effects of stretching payables and show the computation for interest effects of performed before enumerating the sources
not taking discounts. on the teaching guide. The objective of this
activity is to get the learners’ interest about
• For example, the terms 2/10 (2% discount if paid within 10 days) with the due date of
the subject.
60 days will result in annual interest of (2/98)*(360/50 days), or 14.69%. Therefore, by
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not availing of the discount, the one who ordered the supplies from the supplier in
Teacher Tip:
effect borrowed at 14.69%. It may also be viewed as the opportunity cost forgone.
There are other sources of short-term funds.
• Advances from stockholders or other owners – personal funds advanced by a stockholder to a Single proprietors and rich members of
company that usually requires interest. These usually require little to no interest on advances, family and friends can be taped. Tell the
especially if the owner is advancing funds to assist the company in sudden liquidity crisis. This learners that should they decide to do this
source, however, is depended on the availability of funds of an individual. in the future, everything has to be
documented to avoid a fall out or a family
• Credit cooperatives – provided lending services to its members. Members usually pay feud. The ones listed in this teaching guide
contributions to the cooperative. are the most commonly used. Add personal
• Banks – provides several loan products catering to different types of needs. experiences and ask the learners whether
• Credit Cards – just take note of the high interest rates on this source of funds. they have encountered or have utilized
funds from these sources.
• Lending Companies – companies that are dedicated to lending. They usually charge higher interest
than banks but their credit requirements are more lenient compared to banks.
• Pawnshops – provides funds in exchange for collateral, usually jewellery, or other items of value.
• Informal lending sources (5/6)
• Describe the actual interest paid for this type of lending
• Interest is usually paid per month, and monthly interest is (6-5)/5 or 20%. Annual
interest is actually 20%*12 or 240%.
4. Discuss the factors considered in selecting the source of short-term financing.

• Cost (Interest)
• Informal lending sources like 5/6 may be the most expensive.
• Availability of short-term funds
• Informal lending sources like 5/6 is most available because there are no formal requirements
to avail of the facility.
• Risk
• Whatever the source of fund is, if the company defaults, the lenders may foreclose some of
the company’s properties or even the entire business itself to settle the loan.
• Flexibility
• This pertains to the ability of the company to access funds.
• or example, a bank loan may be cheaper but the bank may reject the loan application of the
borrower because he/she did not pass the credit evaluation process of the bank.
• This financial flexibility can be influenced by:
• Nature of the Company’s business
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• Leverage ratio
• Stability of operating cash flows
• Restrictions (Debt covenants)
• Some lenders like banks may require a minimum deposit balance with their branch for as
long as the loans remain outstanding.
• The bank’s approval may also be secured before cash dividends can be declared.
5. Enumerate and describe the sources and uses of long-term funds.

• Equity investors – these are the individuals/corporations which are issued common stock. They Teacher Tip:
share in the ownership of the company. There are also equity investors who do not have voting In times of liquidation, this is the order of
payment priority:
rights in the company but have a share in dividends, usually a fixed percentage. These investors are • Creditors
issued preferred stock. Holders of preferred shares are first to receive dividends than common stock • Preferred stockholders
holders. • Common stockholders
• Internally generated funds – not all profits are distributed to stockholders. Most of the profits are
re-invested and used by companies to finance their needs.
• Banks – they provide long-term loans, depending on the nature of the need. For example, a 5-year
to 10-year loan may be granted if the purpose of the loan is construction of an office building.
• Bonds – these are debt investments where an investor loans money to an entity which borrows the
funds.
• Lending companies – they can also provide long-term loans.
6. The company’s capital structure is a major consideration for deciding which long-term sources of
funds to utilize. The target would be to balance debt and equity and come up with the minimum
cost of capital.
PRACTICE (20 MINUTES)
1. Group the class into 4 teams

2. Have them identify whether the following are short-term or long-term sources of financing. (EASY)
207
3. Provide scenarios and let them decide whether long-term or short-term financing is needed.
Teacher Tip
(AVERAGE TO DIFFICULT)
In addition, define the so-called revolving
line of credit. It allows the borrowers to
Need/Activity Answer Key
renew their loans with a certain limit
Acquisition of equipment Long-term whenever they need it.
Franchise of a fast-food outlet Long-term
Purchase of inventory for a clothing shop Short-term
Loan for agricultural needs (i.e. palay production, Short-term

mango, etc.)
Loan for purchase of a commercial space Long-term
Development of a subdivision Long-term
Auto-loan Long-term
Loan for sari-sari store supplies Short-term
Housing Loan Long-term
Emergency loans (advances) Short-term
4. Provide a time limit for them to write their answers on a piece of paper.
5. After the activity, ask the class ‘Why is it important to distinguish between long-term or short term
financing?’
• It is important so that the sources or funds are matched with the needs of the company/business.
Matching of sources and uses of funds saves the business from encountering defaults on
obligations and incurring losses, and at the same time, use the funds at hand to earn profits.
Teacher Tip
EVALUATION (30 MINUTES) This exercise is given to make sure the
learners understand the lessons. Self-test
questions may be discussed through class
SELF-TEST QUESTIONS (RECITATION – MEDIUM TO DIFFICULT)
recitation or you may opt to give these
1. What are the advantages and disadvantages of long term debt financing? Give at least 3. Explain. questions as an essay quiz. Since time is
limited, if you opt an essay quiz, choose at
208 most 3 questions for them to answer. If
given as a recitation, make sure that all
notes are kept before proceeding.
2. What are the advantages and disadvantages of equity financing? Give at least 3. Explain.
3. Identify the different sources of short-term funds and long-term funds. Give at least 3 and define.
4. Discuss when to use short-term funds in business.
5. Discuss when to use long-term funds in business.
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Appendix
Filinvest Land raises P8 billion from debt sale

By Philippines News Agency 
August 21, 2015 11:15 PM
MANILA - Property developer Filinvest Land, Inc. (FLI) has raised P8 billion from a bond issue to partially fund new projects that can triple its
retail and office space portfolio in the next five years. FLI president Josephine Gotianun-Yap said the company had budgeted P24 billion in
capital expenditures this year. FLI listed successfully its seven- and 10-year peso fixed-rate bonds in the Philippine Dealing and Exchange Corp.
on Thursday. The bonds attained the highest PRS Aaa rating from the Philippine Rating Services Corp. (PhilRatings). The Gotianun-owned
property arm's fixed-rate bonds due 2022 and 2025 had an oversubscription of almost thrice the base amount of P5 billion, enabling the
company to exercise the P3 billion oversubscription option approved by the Securities and Exchange Commission. “With this bond issuance,
FLI is now in full-gear for office and retail space expansion. We are tripling our office and retail rental portfolio to hit close to one million square
meters of gross leasable area in the next five years. We tap the long-term bond market to match our funding sources with our project horizons,”
said Gotianun-Yap. FLI launched P6 billion worth of projects in the first half of 2015 while it targets a total of P16 billion for the entire 2015. It
has developed over 2,400 hectares of land and more than 600,000 square meters of prime office, residential and retail spaces. “With the
country’s real estate sector experiencing a continued robust growth, in line with the Philippine economy, FLI is in the best position and time to
address the needs of a flourishing economy,” Gotianun-Yap said.
JG Summit raises $200 million from placement

By Anette Jönsson
26 November 2013
JG Summit, the Philippine conglomerate controlled by the Gokongwei family, has raised Ps8.8 billion ($200 million) from a share placement that
it will use partly to fund its purchase of a stake in power producer Manila Electric Co (Meralco).
The deal was completed after the market closed on Monday, ahead of JG Summit’s inclusion in the MSCI Philippines index from the close of
trading on Tuesday. The entry into the index was announced on November 7 and, according to a source, is estimated to result in $60 million to
$85 million of additional buying of the company’s shares by passive index funds.
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JG Summit’s share price jumped 12.1% in the first three days after the MSCI announcement to match the record closing high of Ps49 that it hit
in April this year. It has given up all those gains since then, however, as the Philippines have been dealing with the fall-out from Typhoon Haiyan,
which is known to have killed at least 4,000 people.
The share price fell 4.9% on Monday as there may have been some leaks in the market that a placement was coming. Sources said the
bookrunners built a shadow order book in the run up to the transaction and the base deal was largely covered at launch.
JG Summit offered 220 million shares, which accounted for 3.2% of the existing share capital and consisted of approximately 98.1 million
treasury shares and 121.9 million common shares that were sold through a top-up placement.
They were marketed at a price between Ps40 and Ps41 apiece, which translated into a discount of 1.7% to 4.1% versus Monday’s close of
Ps41.70.
According to a source, there was pretty good demand, with orders from more than 40 investors when the books closed after about three-and-a-
half hours, but the price was fixed at the bottom for the maximum 4.1% discount. Even in light of the drop earlier in the day that is still a fairly
tight discount for the Philippines, though.
The bookrunners clearly felt that was the case as the term sheet listed the discount range versus Monday’s volume-weighted average price
rather than versus the close. Since the VWAP, at Ps42.50, was higher than the closing price, the implied discount listed on the term sheet was
3.5% to 5.9%.
Most investors are unlikely to have been fooled by that though and it was no real surprise that the price was fixed at the bottom of the range.
After all, the deal accounted for more than 60 days of trading based on the average daily volume in the past three months, or 35 days based on
the more active trading in the past month.
By comparison, the most recent overnight placement of size in a Philippine-listed company in early October, which was actually a sell-down by
JG Summit in its food and beverage subsidiary Universal Robina, raised $280 million and was priced at a 6.5% discount. A $173 million
placement of treasury shares in Universal Robina in July came at a 4.8% discount.
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JG Summit was also unable to exercise the upsize option of up to 110 million common shares, which could have increased the total deal size to
as much as $300 million.
The deal attracted a mix of long-only funds, passive index funds and hedge funds, the source said. The index funds will have to buy JG Summit
before it goes into the MSCI index in order to keep their exposure intact. The MSCI announcement did not include any information about the
weighting, but analysts estimate the conglomerate will account for between 5.5% and 6% of the index.
JG Summit is the only stock to go into the MSCI Philippine index following the latest semi-annual index review. No stocks will be removed.
The Philippine conglomerate said on October 1 that it has agreed to buy the San Miguel Group’s 27.1% stake in Meralco for approximately
Ps72 billion ($1.6 billion). This is the Gokongwei family’s first move into the power sector and, while the deal has yet to be completed, it seems
to have received the thumbs up from investors.
Confirmation of the acquisition helped to propel JG Summit’s share price from a low of Ps35 in mid-September to the November 12 close at
Ps49 – a gain of 40%.
Aside from getting a sizeable stake in a high dividend-paying company that supplies electricity to a quarter of the Philippine population, the
acquisition will give JG Summit a foothold in the country’s power industry, which is in the process of ramping up capacity to meet the needs of a
strongly growing economy.
The deal will also cement the company’s relationship with First Pacific. The Hong Kong-listed investment company owns just under 50% of
Meralco following a battle for control of the Philippine utility with the San Miguel group in 2009. After losing out to JG Summit, the San Miguel
Group has been trying to get out of its holdings in Meralco and after the sale of this 27% stake, the group will own no more shares in the
company.
When announcing the deal, JG Summit said that it intends to fund the acquisition through a combination of debt and equity, and president
Lance Gokongwei later told reporters in Manila that about two-thirds of the financing will come from debt.
The company has already sold $280 million worth of shares in Universal Robina in early October and, together with the $200 million raised from
this latest placement, it now has enough fresh cash to cover the equity portion.
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Aside from food and beverage, JG Summit is also involved in hotel and property development, airlines, telecommunications, banking and
petrochemicals. In the first nine months this year, the company posted a 9.4% increase in revenues to Ps110.9 billion and a 17.4% improvement
in Ebitda to Ps25.9 billion.
According to local media reports, JG Summit and First Pacific’s Philippine infrastructure unit (Metro Pacific) plan to team up to bid for a $400
million airport project in Cebu province.
The placement was arranged by CLSA and UBS.
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Sources and Uses of Short-Term and

Long-Term Funds Pt. 2
LESSON OUTLINE
Introduction Communicate the learning objectives 5
Content Standards /Review
The learners demonstrate an understanding of the sources and uses of short-
term and long-term funds, and the requirements, procedures, obligation to Motivation A. Connect the lesson to real life situations. 15
creditor, and reportorial necessities. B. Share the importance of the banking
industry.
Performance Standards Instruction/ Discussion proper 30
Delivery
The learners shall be able to identify the bank and non-bank institutions in the
vicinity that are possible sources of funds. Enrichment Discussion of the research homework. 30
Learning Competencies Evaluation Self-test questions regarding the 5 Cs of 10

The learners will be able to: Credit
• Show the steps in loan application (ABM_BF12-IIIe-f-15) Materials • Projector, if available
• Compare and contrast the loan requirements of the different bank and non- • Board and writing materials will suffice
bank institutions (ABM_BF12-IIIe-f-14) Resources
• List down obligations of entrepreneurs to creditors (ABM_BF12-IIIe-f-16) (1) Brealey, R. Myers, S., & Marcus, A. (2004). Fundamentals of corporate
finance. Boston, Mass.: McGraw-Hill Irwin.
Specific Learning Outcomes (2) Cayanan, A. Manuscript.
At the end of this lesson, the learners will be able to: (3) Gitman, L. (2009) Principles of managerial finance. Boston: Pearson
Prentice Hall.
• Know the basic requirements in loan application of different types of (4) Roque, R. (1990). Management Advisory Services. Malabon: Roque
borrowers; and Press, Inc.
• Define the 5C’s of credit and their applicability in loan approval.
214
Communicate learning objectives.
1. Option A: Remind the learners of an example discussed previously regarding the restaurant
expansion worth PHP8 million.
• Financing a long-term investment through a short-term loan. Let us say you are a restaurant owner
and you are planning to open another branch which will cost you PHP8 million. The returns on this
investment will be realised over a number of years. Therefore, financing it through a short-term
loan, say one year, will give you too much pressure to pay the loan because the new branch may
not have generated enough cash flow within the year to cover the PHP8 million.
• Pose this question to the learners: How do you plan to finance the PHP 8 million?
• Answer Key: Since this is a long-term investment where the expected benefits are going to be
realized over a couple of years, this investment should be financed by long-term sources. Assuming
that both long-term debt and equities are accessible, part of the requirements must be financed by
long-term debt. The question is how do you obtain long-term debt.
2. Option B: Connect to real-life situations. Teacher Tip:

• Ask whether the learners have family businesses and whether they have witnessed the application If the learners do not have any such first-
for loans of their respective businesses/families from financial institutions. hand experience in loan applications and
business partnerships, share personal
• In addition, inquire whether they are aware of business partnerships. Their respective family experiences or witnessed practices.
businesses might have experiences of equity infusion from investors or business partners.

Teacher Tip:
If you have access to the internet, go to the
1. Ask the students what the usual loan products from banks they encounter are. website of some of our banks (eg. BDO,
• Sample Responses BPI, Metrobank) and look for their loan
products. These loan products can be
• Auto-Loan presented in class for the learners to
215
appreciate.
• Housing Loan
• Credit Card loan
• Working Capital Loan, etc.
2. Discuss the importance of Know-Your-Customer (KYC) initiatives. Banks are required to verify the
identity of their customers to ensure that the funds will not be used for illegal activities such as, but
not limited to, money laundering and terrorist financing.
3. Explain the 5C’s of Credit - the institution’s primary consideration in approving loan applications.
• Character –the willingness of the borrower to repay the loan
• Capacity – a customer’s ability to generate cash flows
• Collateral – security pledged for payment of the loan
• Capital – a customer’s financial resources
• Condition – current economic or business conditions
4. Discuss the following example/case:

Mr. Joe Salazar applied for a PHP1.5 million loan in behalf of his business, “Joe’s Restaurant”, for Teacher Tip:
additional capital in 2015. He is the Chairman of the Board of Joe’s Restaurant. In their meeting, the Ask the students to read the case out loud.
Involve them in the analysis of the 5C’s of
Board decided to open an additional branch for the restaurant. Joe’s Restaurant currently has 3
credit. Ask them what other considerations
branches in Metro Manila and would like to open up a small branch in Quezon City. Joe’s Restaurant they could think of in analysing whether to
has been in the business for 12 fruitful years and has been a previous borrower of the bank. The grant the loan or not. Take note that the
company had previous late payments before but the reasons are usually justifiable, and the balance of feasibility of the new project is yet to be
established. Otherwise, the loan analysis is
the loan, along with any penalties, if any, is paid. The three branches earn a net income of PHP900,000/
incomplete. Collateral in itself is not enough
year. The lot where the main restaurant is located is pledged as collateral to the bank. This property is to ensure repayment. The loan should be
valued at PHP2 million. Shown below is an excerpt from Joe’s Restaurant’s 2014 consolidated audited long-term to accommodate the project as
financial statements. well as the company’s cash flow and profit.
216
As of 31 December 2014 As of 31 December 2013
Current Assets 1,200,000 900,000
Long-term Assets 4,400,000 4,200,000
Short-term Liability 500,000 460,000
Long-term Liability 2,300,000 3,500,000
Equity 2,800,000 1,140,000
Net Income 900,000 950,000
Cash Flow from Operations 500,000 450,000
Table 1: Sample Consolidated Audited Financial Statements
Ask the students to identify the information to be used in analysing the 5C’s of Credit. (AVERAGE TO DIFFICULT)
• Character: Check Joe’s Restaurant’s payment history and experience in the business. The fruitfulness of the business proves Mr. Salazar and
the BOD’s ability to manage the business well.
• Capacity: The positive income from the business and positive cash flows from operations proves the borrower’s capacity. Current assets also
show that the borrower has funds easily available for repayment if necessary. The term of the loan, should be adjusted to the cash flow of the
borrower.
• Collateral: The property pledged serves as collateral. Its value is usually greater than the loan to provide the bank security for sudden
changes in value of the collateral, as well as to compensate the bank for the collateral’s illiquid nature.
• Capital: The audit financial statements give a preview of the borrower’s resources.
• Condition: The income statement shows that the business is earning and is even growing. The business has already grown to 3 branches.
This shows a preview of the growth in the food industry. Learners may also research on other business growth trends to know about
macroeconomic conditions.
5. Discuss the duties of the Borrower to Creditors.

• Pay the creditors based on the payment schedule agreed upon. If you cannot pay on time, notify the creditors ahead of time. But as much as
possible, pay on time.
217
• Provide the collaterals as agreed upon in the loan negotiation with proper documentation, if necessary and if applicable (e.g. annotation of
the TCT or CCT). Ensure that these collaterals are in the physical condition perceived by the creditors in determining the loanable value of the
loans.
• Comply with the provisions of loan covenant such as maintaining certain liquidity and leverage ratios. These conditions are supposed to
benefit the borrower so that his company will not be over-exposed to borrowing or he will monitor the liquidity position on a more regular
basis.
• Notify the creditor if the company is acquiring another company or the company is now the subject of acquisition. The interest of creditors
may be jeopardized if new owners take over the company or if the company is going to acquire another company.
• Do not default on the loans as much as possible. Aside from the creditors, there may be other parties such as the guarantors of the loan who
will be put at a disadvantage if the borrower defaults.
MOTIVATION (10 MINUTES)
Share the importance of the banking industry.

• Provision of Credit and Liquidity – Banks provide credit facilities to borrowers which allow them to address their liquidity concerns.
}
• Risk Management Services – Banks provideBanksadvisory service
provide on asset-liability
a mechanism management
for people and can
to save which in also provide recommendations regarding
the appropriate financing schemes for a company’s funding
turn is used requirement.and corporations. This
by entrepreneurs
• Money Remittance – Banks can act as conduits or intermediaries
function for money
of the bank enhances remittances.
economic activity.
• Economic Development
• Channel for Saving and Investment
• Promotion of Entrepreneurship
A. Ask the students to visit a bank before the class. Have them inquire on the different loan requirements and steps in loan application, and
compare the different rates for the different loan products. Give them ample time to prepare for a report on what they have researched.
Divide the class into groups and assign each a topic to report on.
• Different Loan requirements for small business loan, loans to corporation, personal consumption loans, and other desired loan products.
• Steps in Loan Application for secured and unsecured loans.
218
Teacher Tip
Evaluate the reports based on content,
especially on the interview part. Have the
B. Assign two groups to report on the requirements of the following institutions: other non-reporting groups turn-in a written
report.
• Pawnshop
• Lending company
C. Ask the learners to discuss the general steps on Loan Application. Make them prepare a flowchart.
Sample responses of the learners research on the general steps are as follows:
• Loan applicant inquires with the loan officer to apply for a loan.
• The loan officer provides the loan applicant a loan application form and interviews the client.
• The loan officer then decides what type of loan product the borrower qualifies in, and then provides
them a list of requirements.
• The applicant then submits the requirements along with the loan application form.
• If collateral is required, the corresponding mortgage documents are made ready.
• The loan officer then forwards the documents to the credit evaluation department.
• The credit evaluation department checks whether the applicant provided the complete documents.
• Credit investigation is done, and the credit worthiness of the loan applicant is evaluated. Teacher Tip
• The credit analyst prepares a recommendation and will present the recommendation before a loan References to this material are actual
committee who approves the loan application. The loan committee is generally composed of top requirements from different institutions
executives from the bank.
• If the loan is approved, then the post-approval requirements will be sent to the loan applicant for
compliance.
D. Let the learners enumerate the different requirements for a sole proprietorship, consumption loans,
and loans to corporations, as well as the requirements for non-bank financial institutions. (AVERAGE
TO DIFFICULT)
Here is a sample of bank requirements for your reference:
219
Teacher Tip
List of Bank Requirements for Loan Application for a Corporation
This may be given as recitation and
(Arthur S. Cayanan) questions may be asked per group or
individually.
Pre-approval Requirements:
• Duly accomplished application form
• Securities and Exchange Commission (SEC) registration
• Articles of incorporation and by-laws
• List of elected officers
• Board resolution or corporate secretary’s certificate regarding loan application
• Company profile or business background
• List of major suppliers and customers with contact information
• Audited financial statements (2 to 5 years depending on the bank)
• Bank statements (most banks require bank statements for the past 6 months)
• Collateral documents such as the following:
• Copy of transfer certificate of title (TCT) or condominium certificate of title (CCT)
• Copy of tax declaration
• Appraisal Fee with official receipt
• For construction loan
• Building plan or floor plan
• Bill of materials and labor cost
• Building specifications certified by architect/civil engineer
• Development permit
• Copy of lease contracts (if applicable)
Post-approval Requirements:
• Original owner’s duplicate copy of TCT/CCT
• Original certified true copy of latest tax declaration on land and improvement
• Master deed of declaration (for condominium)
• Electronic-certified true copy of TCT/CCT with original official receipt
• Original certified true copy of tax clearance
• Original real estate tax receipts
• Mortgage redemption insurance
• Fire insurance
220
EVALUATION (10 MINUTES) Teacher Tip
This may be given as recitation and
Self-Test Questions: questions may be asked to a group or an
individual.
1. Enumerate the 5C’s of credit (EASY)
2. What do you think is the most important consideration of banks in approving a loan? (AVERAGE TO
DIFFICULT)
‘Character and Capacity are the most important factors a bank considers in approving a loan. They go
hand-in-hand because without willingness to repay, the available funds to pay the loan will not in itself
guarantee payment.’
3. Why is it important for banks to collect all the loan requirements? Which requirements are meant to
be used to evaluate each of the 5C’s of credit? (AVERAGE TO DIFFICULT)
Sample Responses:
• Documents are required to provide support on the analysis of the borrower’s existence and
creditworthiness.
• Character – Interview, Fully filled out loan application form, NBI clearance, Police Clearance, etc.
• Capacity – Income documents (Certificate of employment, Audited financial statements, Income tax
return, etc.)
• Collateral – Copy of TCT, Tax declaration, Building plan, etc.
• Capital – Statement of Assets and Liabilities, Audited financial statements, etc.
• Condition – Latest news articles relating to the company (if listed), Trends in the financial statements,
Business Background/Company Profile, etc.
221
Basic Long-Term Financial Concepts

Content Standards
The learners demonstrate an understanding of the basic concepts of risk and LESSON OUTLINE
return, and the time value of money. Introduction Communicate learning objectives 5
Performance Standards Motivation a. Connect to real life situations 35

b. Present a short scenario relating the
• Distinguish simple and compound interest. importance of interest and compounding
• Solve exercises and problems in computing for the time value of money with c. Present a scenario showing the use of
the aid of present and future value tables. future value and present value
Instruction/ Discussion Proper 95
Delivery
The learners will be able to: Practice Exercises regarding solving for the present 25
• Calculate future value and present value of money. (ABM_BF12-IIIg-h-18) value
• Compute for the effective annual rate. (ABM_BF12-IIIg-h-19) Enrichment Short case regarding which payment 20
methods to choose in order to optimize
Specific Learning Outcomes receipts using concepts learned in present
At the end of this lesson, the learners will be able to: value and future value
• Define the concepts regarding the time value of money. Materials • Projector, if available. Board and writing
• Compute the present value and future values with the aid of formulas and materials will suffice.
tables. • Scientific calculator
• PV and FV tables
• Apply the concepts in real life scenarios.
Resources
(1) Brealey, R., Myers, S., & Marcus, A. (2004). Fundamentals of
corporate finance. Boston, Mass.: McGraw-Hill Irwin.
(2) Gitman, L. (2009). Principles of managerial finance. Boston:
Pearson Prentice Hall.
(3) Roque, R. (1990). Management Advisory Services. Malabon:
222 Roque Press, Inc.

• Ask the learners to define ‘interest’.
• Interest - the cost of holding money. It is the amount charged by the lenders to the borrowers/
users of money, and is usually paid at regular intervals.
1. Ask the learners one or two of their experiences in investing their money. Let them share their Teacher Tips
experiences. If the learners are passive, be able to share
personal experiences in investing money.
2. Have the learners read the story below: (Appendix A) Time deposits and bank savings can also be
a type of investment although it only has a
small yield. The objective is to show the
One day, the Master was going on a trip and decided to entrust his wealth to three of his most concept of interest in real-life scenarios
trusted servants. The wealth shall be given to each servant based on the Master’s assessment of
their talents. To his first servant, he entrusted PHP500,000. To his second servant, believing that
he can make wise choices as well, he also gave an amount of PHP500,000. Finally, he called on
his third servant and gave him PHP500,000. The Master then went on his journey and told the
servants he will not be back for a long time. Since the first servant was a very smart person, he
decided to invest the PHP500,000 given to him. He was very pleased that he was quoted a
long-term investment for 5 years at 8% per annum compounded annually, and decided to invest
the money in that institution. The second servant saw what the first servant did and also decided
to invest the money. However, when given the choice by the investment firm, he did not Teacher Tips
understand simple and compound interest. In the end, he accepted the quote at 8% per annum This story is based on the Parable of talents
simple interest. The third servant saw them and thought that they were being too much of a from the Bible. It has been modified for the
risk-taker and decided just to keep the money locked in a vault in his home. purpose of discussion. In this story, the risk
of losing money due to the failure of a
financial institution is not taken into
The Master returned after 5 years. He then called on the servants and asked them what has consideration. Give the learners a copy of
become of the wealth he had entrusted them. The first servant presented his PHP500,000 plus the material which is included in the
the interest he earned worth PHP500,000 x (1.08)5 – 500,000 = 234,664.04 . The second servant appendix of this teaching guide for their
reference.
223
presented his PHP500,000 along with the interest earned at 500,000 x .08 x 5 = 200,000 Lastly
the third servant returned his PHP500,000.
SERVANT 1 SERVANT 2 SERVANT 3
Principal 500,000.00 500,000.00 500,000.00
Interest 234,664.04 200,000.00 0.00
Total Returned 734,664.04 700,000.00 500,000.00
3. Ask the learners ‘Which servant will make the Master most pleased?’
1. Differentiate simple and compounded interest. Teacher Tips

Learners have the option to use calculators
• Simple Interest – the charging interest rate r based on a principal P over T number of years.
or the present value and future value tables
provided at the end of this module .
Interest = P x r x T
In the story above,

Principal = PHP500,000
Rate = 8%
Time = 5 years
Thus,
Interest = 500,000 x .08 x 5 = PHP200,000
Teacher Tips
• Compound Interest - the interest in the first compounding period is added on the principal, which
Usual compounding will make use of annual
will then be the basis for the interest to be computed for the next period. So in our earlier example, compounding. This simplifies the formula
the interest to be earned on the first year is equal to 500,000 x .08 = 40,000. The 40,000 interest to:
will be added to the 500,000 principal which will then be the basis for interest computation for the Interest = P x (1+r)T – P
224
second year; 540,000 x .08 = 43,200, and so on. The formula below shows the summary of the
effects of adding on the interest, where m is the compounding frequency.
r
Interest = ( P x (1 + ) (T x m) ) - P
m
In the story above,

Principal = PHP500,000
Rate = 8%
Time = 5 years
Compounding frequency = annually
Thus,
Interest = 500,000 x (1 + (0.08/1))(5x1) – 500,000 = PHP234,664.04
2. Discuss the use of compounding frequency and provide illustrations.

• Compounding Frequency - the number of times interest is computed on a certain principal in one Teacher Tips
year. Interest rates when quoted without any
qualification is assumed to be an annual
• If the investment pays annually, the interest is the same as computed above since m=1. rate.
• If the investment pays semi-annually, the total interest will be equal to:
Note that with more compounding, interest
income can be higher as shown in the
Interest = 500,000 x (1+(0.08/2))(5x2) – 500,000 = PHP240,122.14 illustrative example. Banks offer time
deposit products with different types of
compounding, thus affecting the interest to
3. Ask the learners to compute the interest earned over the 5 year term with PHP500,000 as principal be earned.
using the following compounding periods. (EASY)

• Quarterly: PHP242,973.70
• Monthly: PHP244,922.85
• Semi-monthly: PHP245,416.34
• Daily (365 days): PHP245,879.66
225
4. Introduce the Effective Annual Rate (EAR).
So far, we have discussed about interest earned on investments. It is also important to look at interest
rates from the point of view of borrowers. Both businesses and investors need to make an objective
comparison of loan costs or investment returns over different compounding periods. The effective
annual rate allows this comparison because it is the actual interest actually paid or earned. It should be
distinguished from the nominal rate, or the stated contractual rate which is the interest charged by a
lender or promised by a borrower. It does not reflect the effect of compounding frequency.
The formula for computing the EAR is as follows:
r
EAR = ( 1 + ) m) - 1
m
This is very similar to the formula for computing for interest earned using compounded interest. The
only difference is that EAR only takes into consideration the actual interest for one year.
5. Discuss the following illustrative example:
Mr. Lopez wishes to find the effective annual rate for his loan in BOD bank with a 5% nominal annual
rate when interest is compounded (1) annually, (2) semi-annually, and (3) quarterly.
• For annual compounding: 5%
• For semiannual compounding: 5.06%
• For quarterly compounding: 5.09% Teacher Tips
Walkthrough the process of getting each
EAR using the formula provided.
Ask the learners to compute for the EAR for the following: (AVERAGE)
• For monthly compounding: 5.12%
• For daily compounding: 5.13%
The effective annual rate increases with increasing compounding frequency, up to a limit that occurs
226
with continuous compounding, which is almost equivalent to daily compounding.
The Truth-in-Lending act for Banks and other financial institutions requires that they disclose the
effective interest rates for loan products to borrowers. The effective rates should reflect the service
charges and other deductions from the loan proceeds.
1. Ask the learners which is more valuable to them, to receive PHP1,000 today or receive PHP1,000
five months from now.
• Sample Response: PHP1,000 today, because there is uncertainty with regard to the receipt of the
PHP1000 five months from now. The student can be indifferent if he will be compensated by
receiving more 5 months from now, which is in the form of interest income.
• Recall the following saying: ‘A bird in the hand is worth two in the bush’ – Miguel de Cervantes
2. Read the following story in class.

Consider the case of Lola Clara. When she was 24 years old, her Papa gave her PHP50,000. She was Teacher Tips
very happy and was immediately planning on spending the money. However, before she could spend This story shows how money grows over
the money, her Mama taught her the importance of saving. Not wanting to disappoint her Mama, she time. Its worth in the future is dependent on
invested her money in a bank time deposit with an interest rate of 5% at that time. the amount invested today, which would be
a prelude to our discussion in future and
present value.
Lola Clara became a very successful career woman but she somehow forgot that she placed PHP50,000
in the bank. She suddenly remembered and was shocked at what had happened to her money after 50
years.
It is now valued at 50,000 x (1.05)50 = 573,369.99.
This example is something of an exaggeration, of course. Nevertheless, it is important to note that

money grows through time.
227
A. Differentiate future value and present value.

• Future Value - the amount to which an investment will grow after earning interest. In our previous
examples, it is the principal plus total interest earned over a stated period. So the future value of an
investment of PHP500,000.00 yielding an interest of 8% for a 5-year period compounded annually is
PHP734,664.04.
• Present Value - the amount you have to invest today if you want to have a certain amount of cash
flow in the future.
• These definitions can better be illustrated in a timeline. Teacher Tips
Show the timeline to better explain the
0 1 2 3 4 5 concept.
Write the equations on the board and solve

Initial Investment T-0 Value of investment at T-5 the problems.
(PV): Php 500,000 (FV): Php 734,664.04
Figure 1: Growth of Value over 5-year period
• The time value of money analysis helps managers and investors compare cash flows today versus
cash flow in the future. It answers questions such as what amount in the future is equal to
PHP500,000.00 today or what amount today is equivalent to PHP734,664.04 in the future. The
future value is computed using compounding while the present value is computed using
discounting. In practice, when making investment decisions, investors usually adopt the present
value approach.
B. Differentiate the basic patterns of cash flow.

• Single Amount (Lump Sum) - a single cash outflow is made and the total receipts will be at a single
future date.
• Annuity - periodic stream of equal cash flow at equal time intervals (annually, monthly, etc.). For
example, payment for a certain item shall be for 12 equal monthly instalments of PHP1,000.
• Mixed Stream - unequal periodic cash flows that reflect no particular pattern. For example,
228
payments made by a customer are in 3 unequal instalments.
TIME AMOUNT
Year 1 1,500
Year 2 3,000
Year 3 2,500
Table 1: Sample of Mixed Stream
C. Ask the learners to compute for what amount they will receive (what is the future value) if PHP150,000 is invested at 6% per annum
compounded semi-annually for 3 years.
0.06 (3x2)
Answer: 150,000 x (1+ ) = PHP179,107.8
2
Reminder: Future value is simply the principal multiplied by the FV factor.
D. Discuss the present value of a single amount.

• Present Value - answers the question: How much must be invested today to produce a certain amount in the future. Since future value is
calculated by multiplying the present investment by 1 + interest rate compounded by the number of periods, we shall just reverse the
process. This method is called discounting
FV = PV x (1 + r)T
FV
PV =
(1 + r)T
• Illustration: You need P25,000.00 to buy a laptop when you enter into college 2 years from now. How much must you invest now if the
interest rate is at 6% per annum?
PV = 25,000/(1.062) = PHP22,249.91
You need to invest PHP22,249.91 to have PHP25,000.00 by the end of 2 years.
229
E. Illustrate how to calculate future value and present value of mixed streams of cash flows.
• Future Value: Suppose that you choose to put your savings annually in MRI bank at 8% per annum. Teacher Tips
For today, you put PHP1,200, on the second year PHP1,400, and PHP1,000 for the third year. How Distinguish when the amounts are paid. If
much will you have available at the end of three years? payments are made on the last day or
maturity date, the amount is already the
future value.
Factor multiplied by the Amount Deposited Future Value
(1.08)3 = 1.2597 PHP1,200 1,511.65
(1.08)2 = 1.1664 PHP1,400 1,632.96
(1.08)1 = 1.08 PHP1,000 1,080.00
Total FV P4,224.61
Table 2: Sample Computation to Identify Future Value
• The FV factor can either be computed or looked up in the FV table.
• This timeline illustrates the timing of cash flows:
0 1 2 3
-1,200 -1,400 -1,100 4,224.61
Figure 2: Timing of Cash Flows
• (Present Value) Suppose that you can buy a phone for PHP8,000 down payment with 4,000 for
each of the next two years or pay PHP15,500 cash today. Given an interest rate of 8%, which is a
cheaper alternative?
230
Present Value Teacher Tips
Distinguish when the amounts are paid. If
PHP8,000 8,000.00 payments are made on day 1, the amount
no longer needs to be discounted, and is
PHP4,000/(1.081) 3,703.70 already the present value.
PHP4,000/(1.082) 3,429.36
Total PV PHP15,133.06
Table 3: Sample Computation for Present Value
0 1 2
-8,000 -4,000 -4,000
PV = 15,133.06
Figure 3: Sample Timeline for Computation of Present Value
It shows that the installment plan is cheaper. The present value of a stream of future cash flows is
the amount you have to invest today to generate the stream.
F. Discuss how to compute for present value and future value of annuity payments. Illustrate how the
present and future values are used.
• An annuity is a stream of equal periodic cash flows over a specified period. First, you have to
distinguish between ordinary annuity and annuity due. Ordinary annuity payments are made at the
end of each period (usually annually), while for annuity due, the cash flow occurs at the beginning of
each period. We shall first illustrate ordinary annuities.
• (Future Value of an Ordinary Annuity) The formula for computing the future value of an ordinary
annuity is as follows:
231
[(1+r)t - 1]
Cash flow x {[(1+r)t - 1)]/r} Cash flow x
r
or
Cash flow multiplied by the FV factor seen on the table.
To use the table provided, look for the rate of interest at the uppermost row and the number of periods on the left most column. The
intersection will be the factor to be multiplied to the cash flow.
Illustration: Mr. Mendoza wishes to determine how much the value of his savings in 5 years will be if he will put PHP1,000 per year in a bank
which provides 7% interest per annum.
FV = 1,000 x (FVA factor: 5.7507 period=5, rate=7%) = PHP5,750.70
• (Present of an Ordinary Annuity) The formula for computing the present value of an ordinary annuity is as follows:
1
1- (1+r)t
Cash flow x
r
or
Cash flow multiplied by the PV factor seen on the table
Illustration: Mr. Yusoph wants to buy a pair of shoes worth PHP10,500. He has the option of paying it today for PHP10,500 or buying them in
instalment where he has to pay a down payment of PHP4,000 today, and the balance will be paid in two equal payments of PHP4,000 each
for the next two years. Given an interest rate of 10%, which is the better option?
PV = 4,000 + 4000 x (PVA factor: 1.7355 period=2, rate=10%) = PHP10,932.00 for buying on instalment vs. PV PHP10,500 for buying today.
The 4,000 down payment is not multiplied by the annuity factor because it is paid today.
Since buying on instalment would be more expensive, Mr. Yusoph should buy the pair of shoes today.
232
PRACTICE (25 MINS)
Give these questions to the learners in the form of a graded quiz/exercise.
(EASY)
1. You deposited PHP1,500 in a bank with an interest rate of 5% for 1 year. What is the future value of your deposit?
Answer Key
FV = 1,500 x (1+0.05) = 1,575
2. You need to save up for P1,500 in 1 year. How much should you save now if the bank offers a rate of 5%? (Find the present value)
Answer Key
PV = 1,500/(1+0.05) = 1,428.57
1. FNB pays 6% interest compounded semi-annually. SNB pays 6% compounded monthly. Which bank offers the higher effective annual rate?
Answer Key
FNB = (1+(0.06/2))2 - 1 = 6.090%
SNB = (1+(0.06/12))12 = 6.168%
Therefore, SNB offers the higher effective annual rate. For equal rates, the more compounding the better.
2. Compute the present value and future value of PHP100 cash flow for the following combination of discount rates and times:
a. r = 8%, t = 5 years
233
b. r = 8%, t = 10years
c. r = 5%, t = 5years
d. r = 5%, t = 10 years
Answer Key
r t PV FV
0.08 5 68.05832 146.9328
0.08 10 46.31935 215.8925
0.05 5 78.35262 127.6282
0.05 10 61.39133 162.8895
3. You deposit PHP1,000 in your bank account. If the bank pays 4% simple interest, how much interest will you accumulate in your account
after 10 years? What if the bank pays compound interest?
Answer Key
Simple Interest = 1000 x .04 x 10 = 400
Compound Interest = 1000 x (1.0410) – 1000 = 480.24
4. Mario will be making a lump sum payment of PHP1.6 million on the condominium he is buying two years from now. If he wants to set aside
funds from now and invest it that will earn interest of 3%, net of taxes every year and this amount is compounded annually, how much does
he need to invest today? What if the interest is compounded semi-annually, how much does he need to invest today?
Answer Key
• PHP1,600,000/(1.03)2 = 1,508,153.45
• PHP1,600,000/(1.015)4 = 1,507,494.77
234
5. What is the present value of the following cash flow stream if the interest is 6%?
Year Cash Flow
1 300
2 400
3 500
Answer Key
PV = 300/1.06 + 400/(1.062) + 500/(1.063) = 1,059.827
6. What is the present value of a 3-year annuity of PHP100 if the discount rate is 6%?
Answer Key
PVA = 100 x PVA factor(2.673) = 267.3
7. What is the present value of a 5-year annuity payment of PHP1,000 with a discount rate of 5% if the
first payment will be made today?
Answer Key
PVA = (1000 x PVA factor(4.329))/1.05 = 4,122.87

Teacher Tips
Give this exercise if the time permits. This
Discuss the following scenario:
medium length problem shows the
importance of compounding and future
value. Have the learners answer in groups
Mr. Sotto won PHP10 million in the lottery. He was very excited to collect his winnings and had several
on their best option. This will allow them to
plans for his PHP10 million. He would buy his dream house, car, and a lot more. However, he was very discuss among themselves and develop
disappointed when the officers from PCSO said that he will not get his PHP10 million pesos upfront. their understanding on time value.
235
He, however, has the following options:
• Get 8.1 million upfront
• Receive 1 million every year for 10 years
• Receive 1.8 million every year for 5 years
The current government bonds have a yield of 5% per annum. Which is the best option?
Answer Key
Option 1 = PV is 8.1 million
Option 2 = PV = 1 million x PV factor (7.721) = 7.721 million
Option 3 = PV = 1.8 million x PV factor (4.329) = 7.792 million
Option 1 is the best option.
236
Appendix
Table 4: Present Value of Ordinary Annuity

AccountingExplanation.com,. Present Value of Ordinary Annuity. Retrieved from http://www.accountingexplanation.com/present_value_ordinary_annuity_table.PNG
237
Table 5: Future Value of Ordinary Annuity
PrinciplesofAccounting.com,. Future Value of Ordinary Annuity. Retrieved from http://www.principlesofaccounting.com/ART/fv.pv.tables/futurevalueofordinaryannuity.PNG
238
Appendix A
One day, the Master was going on a trip and decided to entrust his wealth to three of his most trusted servants. The wealth shall be given to
each servant based on the Master’s assessment of their talents. To his first servant, he entrusted PHP500,000. To his second servant, believing
that he can make wise choices as well, he also gave an amount of PHP500,000. Finally, he called on his third servant and gave him PHP500,000.
The Master then went on his journey and told the servants he will not be back for a long time. Since the first servant was a very smart person, he
decided to invest the PHP500,000 given to him. He was very pleased that he was quoted a long-term investment for 5 years at 8% per annum
compounded annually, and decided to invest the money in that institution. The second servant saw what the first servant did and also decided
to invest the money. However, when given the choice by the investment firm, he did not understand simple and compound interest. In the end,
he accepted the quote at 8% per annum simple interest. The third servant saw them and thought that they were being too much of a risk-taker
and decided just to keep the money locked in a vault in his home.
The Master returned after 5 years. He then called on the servants and asked them what has become of the wealth he had entrusted them. The
first servant presented his PHP500,000 plus the interest he earned worth PHP500,000 x (1.08)5 – 500,000 = 234,664.04 . The second servant
presented his PHP500,000 along with the interest earned at 500,000 x .08 x 5 = 200,000 Lastly the third servant returned his PHP500,000.
239
Business Finance 70 MINS
Basic Long-term Financial Concepts Pt.

2 LESSON OUTLINE
Content Standards Motivation Connect to real-life situations; short scenario 20
Basic concepts of risk and return, and the time value of money.
relating the importance of interest and
compounding; scenario showing the use of
Performance Standards future value and present value
The learners shall be able: Instruction/ Discussion proper 50
Delivery
• Distinguish simple and compound interest
• Solve exercises and problems in computing for time value of money with Materials projector, of available; if projector not
the aid of present and future value tables available, board and markers will suffice;
scientific calculators; PV Tables
Learning Competencies Resources
The learners: (1) Fundamentals of Corporate Finance by Brealey, Marcus and Myers,
Management Advisory Services by Rodelio S. Roque, Principles of
• Calculate future value and present value of money (ABM_BF12-IIIg-h-18) Managerial Finance by Lawrence J. Gitman
• Compute for the effective annual rate (ABM_BF12-IIIg-h-19) (2) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City.
Rex Bookstore.

At the end of the unit lesson, the learners shall be able to:
• Define the concepts regarding the time value of money;
• Compute the present value and future values with the aid of formulas and tables; and
240
Ask the learners which is more valuable to them, to receive P1,000 today, or receive P1,000 five months
from now.
• Possible answer: P1,000 today, because there is uncertainty with regard to the receipt of the P1000
five months from now. The student can be indifferent if he will be compensated by receiving more 5
months from now, which is in the form of interest income.
• Recall the following saying:
Teacher Tip
If the learners are passive, be able to share
A bird in the hand is worth two in the bush–Miguel de Cervantes personal experiences in investing money.
Time deposits and bank savings can also be
Read the following story in class. a type of investment although it only has a
small yield. The objective is to show the
concept of interest in real-life scenarios
Consider the case of Lola Clara. When she was 24 years old, her Papa gave her PHP50,000. She was
very happy and was immediately planning on spending the money. However, before she could spend
the money, her Mama taught her the importance of saving. Not wanting to disappoint her Mama, she
invested her money in a bank time deposit with an interest rate of 5% at that time.
Lola Clara became very successful career woman but she somehow forgot that she placed PHP50,000
in the bank. She suddenly remembered and was shocked at what had happened to her money after 50
years.
Teacher Tip
It is now valued at 50,000 x (1.05)50 = 573,369.99. This story is based on the Parable of talents
from the Bible. It has been modified for the
purpose of discussion. In this story, the risk
This example is something of an exaggeration, of course. Nevertheless, it is important to note that of losing money due to the failure of a
money grows through time. financial institution is not taken into
consideration. Give the learners a copy of
the material which is included in the
appendix of this teaching guide for their
reference.
241
Differentiate future value and present value
• Future value is the amount to which an investment will grow after earning interest. In our
previous examples, it is the principal plus total interest earned over a stated period. So the
future value of an investment of PHP500,000 yielding an interest of 8% for a 5-year period
compounded annually is PHP734,664.04.
• In contrast, the present value is the amount you have to invest today if you want to have a
certain amount of cash flow in the future. Teacher tip:
Learners have the option to use calculators
• These definitions can better be illustrated in a timeline. or the present value and future value tables
  provided at the end of this module
 
0 1 2 3 4 5
Ini$al'Investment'T=0' Value of investment at

(PV):'PHP500,000' T=5 (FV): PHP734,664.04
Teacher tip:
• The time value of money analysis helps managers and investors compare cash flows today
¬ Usual compounding will make use
versus cash flow in the future. It answers questions such as what amount in the future is equal of annual compounding. This simplifies the
to PHP500,000 today or what amount today is equivalent to PHP734,664.04 in the future.   formula to:
The future value is computed using compounding while the present value is computed using
discounting. In practice, when making investment decisions, investors usually adopt the Interest = P x (1+r) T – P
present value approach.
Differentiate the basic patterns of cash flow
242
• Single amount (Lump sum): a single cash outflow is made and the total receipts will be at a
single future date.
• Annuity: periodic stream of equal cash flow at equal time intervals (annually, monthly, etc.). For
example, payment for a certain item shall be for 12 equal monthly instalments of PHP1,000.
• Mixed stream: Unequal periodic cash flows that reflect no particular pattern. For example,
payments made by a customer are in 3 unequal instalments.
Time Amount
Year 1 1,500
Year 2 3,000
Year 3 2,500
Ask the learners to compute for the amount they will receive (what is the future value?) if PHP150,000 is
invested at 6% per annum compounded semi-annually for 3 years.
Answer: Teacher tip:

Interest rates when quoted without any
qualification is assumed to be an annual
Reminder: Future value is simply the principal multiplied by the FV factor. rate.

Discuss the present value of a single amount. income can be higher as shown in the
illustrative example. Banks offer time
compounding, thus affecting the interest to
be earned.
• Present value answers the question how much must be invested today to produce a certain amount in
the future. Since future value is calculated by multiplying the present investment by 1 + interest rate
compounded by the number of periods, we shall just reverse the process. This method is called
discounting
243
• Illustration: You need PHP25,000 to buy a laptop when you enter college 2 years from now.
How much must you invest now if the interest rate is at 6% per annum
PV = 25,000/(1.062) = PHP22,249.91
You need to invest PHP22,249.91 to have PHP25,000 by the end of 2 years.
• Illustrate how to calculate future value and present value of mixed streams of cash flows.
(Future Value) Suppose that you choose to put your savings annually in MRI bank at 8% per annum. For
the today, you put PHP1,200; second year PHP1,400, and PHP1,000 for the third year. How much will you
have available at the end of three years?
Factor multiplied by the Amount Deposited Future Value
(1.08)3 = 1.2597 PHP1,200 1,511.65 Teacher tip:

Interest rates when quoted without any
(1.08)2 = 1.1664 PHP1,400 1,632.96 qualification is assumed to be an annual
rate.
(1.08)1 = 1.08 PHP1,000 1,080.00
Total FV P4,224.61
income can be higher as shown in the
illustrative example. Banks offer time
• The FV factor can either be computed or looked up in the FV table. compounding, thus affecting the interest to
• This timeline illustrates the timing of cash flows: be earned.
244
0 1 2 3
-1,200 -1,400 -1,000 4,224.61
• (Present Value) Suppose that you can buy a phone for PHP8,000 down payment with 4,000 for
each of the next two years or pay PHP15,500 cash today. Given an interest rate of 8%, which is a
cheaper alternative?
Present Value
PHP8,000 8,000.00
PHP4,000/(1.081) 3,703.70
PHP4,000/(1.082) 3,429.36
Total PV PHP15,133.06
-8,000 -4,000 -4000

Teacher Tip
PV = 15, 133.06
It shows that the installment plan is cheaper. The present value of a stream of future cash flows is the
amount you have to invest today to generate the stream.
245
Discuss how to compute for present value and future value of annuity payments. Illustrate how the
present and future values are used.
An annuity is a stream of equal periodic cash flows over a specified period. First, you have to
distinguish between ordinary annuity and annuity due. Ordinary annuity payments are made at the end
of each period (usually annually), while for annuity due, the cash flow occurs at the beginning of each
period. We shall first illustrate ordinary annuities.
(Future Value of an Ordinary Annuity) The formula for computing the future value of an ordinary
Cash flow x {[(1+r)t - 1)]/r}

or
Cash flow multiplied by the FV factor seen on the table
To use the table provided, look for the rate of interest at the uppermost row and the number of periods
on the on the first column (leftmost). The intersection will be the factor to be multiplied to the cash
flow.
Illustration:
Mr. Mendoza wishes to determine how much will be the value of his savings in 5 years if he will put
PHP1,000 per year in a bank which provides 7% interest per annum.
Teacher Tip
FV = 1,000 x (FVA factor: 5.7507 period=5, rate=7%) = PHP5,750.70 Walkthrough the process of getting each
(Present Value of an Ordinary Annuity). The formula for computing the present value of an ordinary
'''''''''''''''''''''''''''''''''''Cash'ﬂow'mul$plied'by'the'PV'factor'seen'on'the'table'
246
Illustration:
Mr. Yusoph wants to buy a pair of shoes worth P10,500. He has the option of paying it today for
PHP10,500 or buying in instalment where he has to pay a down payment of PHP4,000 today, and the
balance will be paid in two equal payments of PHP4,000 each for the next two years. Given an interest
rate of 10%, which is the better option?
PV = 4,000 + 4000 x (PVA factor: 1.7355 period=2, rate=10%) = PHP10,932.00 for buying on
installment vs. PV PHP10,500 for buying today.
The 4,000 down payment is not multiplied by the annuity factor because it is paid today.
Since buying on instalment would be more expensive, Mr. Yusoph should buy the pair of shoes today.
Teacher Tip
247
Basic Long-term Financial Concepts Pt.

3 LESSON OUTLINE
Content Standards Practice Exercises regarding solving for the 25
Basic concepts of risk and return, and the time value of money.
present value.
Enrichment Short case regarding which payment 25
methods to choose in optimizing
The learners shall be able:
receipts using concepts learned in
• Distinguish simple and compound interest present value and future value
• Solve exercises and problems in computing for time value of money with
Materials projector, of available; if projector not
the aid of present and future value tables
available, board and markers will suffice;
Resources
The learners:
(1) Fundamentals of Corporate Finance by Brealey, Marcus and Myers,
• Calculate future value and present value of money (ABM_BF12-IIIg-h-18) Management Advisory Services by Rodelio S. Roque, Principles of
• Compute for the effective annual rate (ABM_BF12-IIIg-h-19) Managerial Finance by Lawrence J. Gitman
(2) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City.
Rex Bookstore.
• Define the concepts regarding the time value of money;
• Compute the present value and future values with the aid of formulas and tables; and
248
PRACTICE (25 MINS)
Give these questions to students in a form of a graded quiz/exercise.
(EASY)
• You deposited PHP1,500 in a bank with an interest rate of 5% for 1 year. What is the future value
of your deposit?
Answer:
FV = 1,500 x (1+0.05) = 1,575
• You need to save up for P1,500 in 1 year. How much should you save now if the bank offers a
rate of 5%? (Find the present value)
Answer:
PV = 1,500/(1+0.05) = 1,428.57
• FNB pays 6% interest compounded semi-annually. SNB pays 6% compounded monthly. Which bank
offers the higher effective annual rate?
Answer:
FNB = (1+(0.06/2))2 - 1 = 6.090%
SNB = (1+(0.06/12))12 = 6.168% (Therefore, SNB offers the higher effective annual rate. For equal rates,
the more compounding the better)
• Compute the present value and future value of P100 cash flow for the following combination of
discount rates and times:
249
A. r = 8%, t = 5 years
B. r = 8%, t = 10years
C. r = 5%, t = 5years
D. r = 5%, t = 10 years
Answer:
r t PV FV
0.08 5 68.05832 146.9328
0.08 10 46.31935 215.8925
0.05 5 78.35262 127.6282
0.05 10 61.39133 162.8895
• You deposit PHP1,000 in your bank account. If the bank pays 4% simple interest, how much interest
will you accumulate in your account after 10 years? What if the bank pays compound interest?
Answer:
Simple Interest = 1000 x .04 x 10 = 400

Compound Interest = 1000 x (1.0410) – 1000 = 480.24
• Mario will be making a lump sum payment of PHP1.6 million on the condominium he is buying two
years from now. If he wants to set aside funds from now and invest it that will earn interest of 3%, net
of taxes every year and this amount is compounded annually, how much does he need to invest
today? What if the interest is compounded semi-annually, how much does he need to invest today?
Answer:
i. PHP1,600,000/(1.03)2 = 1,508,153.45
ii. PHP1,600,000/(1.015)4 = 1,507,494.77
250
• What is the present value of the following cash flow stream if the interest is 6%?
Time Amount
Year 1 300
Year 2 400
Year 3 500
Answer:
PV = 300/1.06 + 400/(1.062) + 500/(1.063) = 1,059.827
• What is the present value of a 3 year annuity of P100 if the discount rate is 6 percent?
Answer:
PVA = 100 x PVA factor(2.673) = 267.3
• What is the present value of a 5 year annuity payment of P1000 with a discount rate of 5% if the first
payment will be made today?
Answer:
PVA = (1000 x PVA factor(4.329))/1.05 = 4122.87
251
ENRICHMENT (25 MINS) (DIFFICULT) Teacher tip:
Give this exercise if the time permits. This
Discuss the following scenario: medium length problem shows the
importance of compounding and future
value. Have the learners answer in groups
Mr. Sotto won PHP10 million in the lottery. He was very excited to collect his winnings and had several on their best option. This will allow them to
discuss among them and develop their
plans for his PHP10 million. He would buy his dream house, car, and a lot more. However, he was very
understanding on time value.
disappointed when the officers from PCSO said that he will not get his PHP10 million pesos upfront. He,
however, has the following options:
• Get 8.1 million upfront
• Receive 1 million every year for 10 years
• Receive 1.8 million every year for 5 years
The current government bonds have a yield of 5% per annum. Which is the best option?
Answer:
Option 1 = PV is 8.1 million
Option 2 = PV = 1 million x PV factor (7.721) = 7.721 million
Option 3 = PV = 1.8 million x PV factor (4.329) = 7.792 million
Option 1 is the best option.
252
http://www.accountingexplanation.com/present_value_ordinary_annuity_table.PNG
253
http://www.principlesofaccounting.com/ART/fv.pv.tables/futurevalueofordinaryannuity.PNG
254
Basic Long-term Financial

Concepts Pt. 4 LESSON OUTLINE
Introduction Communicate the learning objectives. 10
Content Standard
The learners demonstrate an understanding of the basic concepts of risk and Motivation Sharing of an article regarding bond 10
return, and the time value of money. issuance; connecting to real-life situations
Instruction/ Discussion proper 50
Delivery
Performance Standard
The learners shall be able to prepare loan/bond amortization tables Practice Research/Interview homework 30
Enrichment Quiz on preparation of amortization 20
Learning Competency schedules
The learners compute loan amortization using mathematical concepts and the Materials projector, if available; if projector not
present value tables (ABM_BF12-IIIg-h-20) available, board and markers will suffice;
calculators; PV Tables
Specific Learning Outcomes Resources
At the end of the unit lesson, the learners shall be able to: (1) Accounting Principles by Jerry J. Weygandt, Paul D. Kimmel, & Donald
E. Kieso; Financial Accounting Vol. 2 by Conrado T. Valix, Peralta, Valix
• Define the relationship of present value and future value in loan/bond
pricing; and,
• Prepare amortization schedules.
255
INTRODUCTION (10 MINS) Teacher Tip
These terms will be relevant in loan/bond
pricing so it is best to recall the definitions
Communicate the learning objectives. and formulas of present and future value.
Recall the definition of present value, future value, and the importance of the time value of money from
the previous lesson. Have the learners define the terms mentioned. Give the learners a copy of the article.

Ask the learners read the following article: (APPENDIX A)
http://www.abs-cbnnews.com/business/08/19/15/ictsi-raise-450-m-bonds
ICTSI to raise $450-M via bonds

Reuters
Posted at 08/19/2015 10:05 AM
MANILA - Philippines port operator International Container Terminal Services Inc. (ICTSI) said on
Wednesday it is raising $450 million through a bond issue.
In a disclosure to the local stock exchange, ICTSI said its board of directors approved on Tuesday night
the offering of new senior perpetual capital securities through subsidiary Royal Capital BV.
The corporate bonds would yield 5.5 percent per annum and would be guaranteed by ICTSI.
Citigroup Global Markets Ltd, Credit Suisse Securities (Europe) Ltd and Standard Chartered Bank were
the joint lead managers and bookrunners.
ICTSI, owned by the Philippines' third richest man, Enrique Razon, is into 30 terminal concessions and
port development projects in 20 countries.
Define what a bond/loan is.

A loan is money lent at an interest rate for a certain period of time. Loans are normally secured from
different financial institutions, the most common of which, are banks..
A bond is also a form of loan, but can be traded through Philippine Dealing and Exchange (PDEX) System.
256
Teacher tip
Ask the learners whether they have experienced applying for loan from a bank, or have witnessed someone Refer back to lessons on loan discussed
from their family apply for one. Inquire whether they have seen an amortization schedule and are familiar under Sources and Uses of Cash
with the features of the loan (interest rates, term of payment, etc.)

Show the class a sample loan amortization (provided at the end of this teaching guide)
• Enumerate the contents of a loan agreement:
• Amount of principal
Teacher tip
• Maturity date and provision for repayment
Grace period is a provision in most loan and
• Term of the loan (lump sum, monthly, etc.) insurance contracts which allows payment
to be received for a certain period of time
• Grace period, if applicable
after the actual due date. During this period
• Interest rates no late fees will be charged, and the late
payment will not result in default or
• Loan/bond covenants (i.e. required ratios to be maintained)
cancellation of the loan.
• Penalties for default
(http://www.investopedia.com/terms/g/
• Collateral documents, if applicable
grace_period.asp#ixzz408xF58xx)
It is best to draw diagrams to demonstrate

Discuss the relationship of time value of money in loan/bond pricing.
the importance of present value in loan/
• Present Value bond pricing.
• To get the present value of a bond maturing a year from now, let us illustrate what we
have learned in the previous module regarding present value. The discussion follows the
viewpoint of the lender. Pricing for the loan/bond, will, nevertheless, be the same. Let’s
say that you are willing to invest a sum of money that will yield PHP100,000 at the end of
year 1, what amount should you invest today? If the investment earns 10%, then the
amount to be invested or the present value should be equal to PHP100,000 x (1/(1.101))
= PHP90,909.09
257
• If this amount will be received in 2 years, then the present value is equal to P100,000
x (1/(1.10)2) = P82,644.63. We may also use the present value table.
• Present Value of interest payments (annuities)
• In addition to receiving the face value at maturity, the investor/lender also receives
periodic interest payments over the life of the bond. These periodic payments, as
mentioned in the previous module, are called annuities. To illustrate, assume that you
will receive P10,000 annually for 3 years and the interest rate is 10%.
Teacher tip
• From the table (or by using the formula provided in the earlier module), we get that Take note of the frequency of
compounding. It matters for both the
the present value of annuity factor for 3 periods using 10% interest is 2.4869. interest payments and face value
Multiplying this factor by PHP10,000 provides a present value of interest payments of discounting.
PHP24,868.6.
• Present Value of a bond
• To calculate the present value or the price of a bond, we need to combine both the
present values of the face value and the annuity payments. In our previous example,
suppose that a bond with face value of PHP100,000 pays interest of 10% annually
and matures in 3 years. What is the price of the bond?
• First, we find the present value of the face value of the bond. That is equal to
PHP100,000 x (1/(1.10)3) = PHP75,131.40.
• Next we compute for the present value of annuity payments of P10,000 annual
interest (100,000 x .1). This was computed earlier in our example, PHP24,868.6.
258
• Therefore, the price of the bond is:
PHP100,000 Face Value at 10% for 3 years 75,131.40
PHP10,000 interest for 3 years 24,868.60
Price of the Bond 100,000.00
• Take note that interest payments may be made semi-annually, or even monthly. In
this case, we need to adjust the interest rates and time periods accordingly.
Differentiate discount from premium bond pricing.
• Bonds issued at a discount

• When bonds are issued below the face or par value, they are said to be issued at a
discount. A discount occurs when the required rate of return is greater than the
nominal rate of return. For example, let’s say we have a PHP100,000 bond with a
stated rate of 10% and effective rate (required rate of return) of 12%, that pays
interest semi-annually and has a maturity of 3 years. At what price should the bond
be issued?
• First, we need to compute for the amount of interest payment per semi-annual
period which is equal to 100,000 x 10% x 6/12 = 5,000. The total period is 6 (3 years
x 2) and the discount rate to be used is 6% (12%/2).
• The price of the bond is as follows:
P100,000 Face Value at 6% for 6 periods 70,496.05
P5,000 interest for 6 periods 24,568.62
• Bonds issued at a premium
259
• When bonds are issued above par, they are said to be issued at a premium. It occurs
when the required rate (effective rate) is below the stated or nominal rate. Let us
recall our previous example but use 8% effective rate instead of 12%. It will result in
the following bond price:
PHP100,000 Face Value at 4% for 6 periods 79,031.45
PHP5,000 interest for 6 periods 26,210.68
• Illustrate and define effective interest amortization.

• The effective interest method distinguishes two types of interest rate, the nominal
rate or the stated rate and effective rate or the market rate. When the bond is sold at
a discount, the effective rate is higher than the nominal rate. On the other hand,
when the bond is sold at a premium, the effective rate is lower than the nominal rate.
Using this method, the amortization of bond discount or premium results in periodic
interest expense equal to a constant percentage of the carrying amount of the
bonds.
• The following steps are required under the effective interest method.
1. Calculate the bond interest expense by multiplying the carrying amount of Teacher Tip:
the bonds at the beginning of the interest period by the effective interest Best to discuss by showing the amortization
table and how it is computed line by line as
rate.
stated in the tip below.
2. Calculate the bond interest paid (or accrued) by multiplying the face value of
the bonds by the contractual interest rate.
3. Calculate the amortization amount by determining the difference of (1) and
(2).
• Amortization of bonds issued at a discount
• Let us use the previous example of a bond issued at a discount.
260
Period: 6 semi-annual periods (3 years)
Effective interest: 12%
Stated rate: 10%
Face Value: 100,000
Issue Price: 95,082.68
Period Interest to be paid  Interest Expense   Amortization of Carrying Balance

=100,000 x 5% =carrying amount x 6% Discount 
Teacher Tip:
=Int exp. - Int paid
Show the preparation of the amortization
95,082.68 schedules step by step, beginning with
taking note of the given data. Ensure that
1 5,000.00 5,704.96 704.96 95,787.64 the frequency of compounding is reflected
in both effective and nominal rates.
2 5,000.00 5,747.26 747.26 96,534.90
3 5,000.00 5,792.09 792.09 97,326.99
4 5,000.00 5,839.62 839.62 98,166.61
5 5,000.00 5,890.00 890.00 99,056.61
6 5,000.00 5,943.40 943.40 100,000.00
• Amortization of bonds issued at a discount

• Let us use the previous example of a bond issued at a premium.
Period: 6 semi-annual periods (3 years)

Effective interest: 8%
Stated rate: 10%
Face Value: 100,000
Issue Price: 105,242.14
261
Period Interest to be paid  Interest Expense   Amortization of Carrying Balance
=100,000 x 5% =carrying amount x 4% Premium 
=Int exp. - Int paid
105,242.14
1 5,000.00 4,209.69 (790.31) 104,451.83
2 5,000.00 4,178.07 (821.93) 103,629.90
3 5,000.00 4,145.20 (854.80) 102,775.09
4 5,000.00 4,111.00 (889.00) 101,886.10
5 5,000.00 4,075.44 (924.56) 100,961.54
6 5,000.00 4,038.46 (961.54) 100,000.00
Teacher Tip:
• Amortization of the discount or premium brings the carrying value/balance to equal the face Emphasize that the amortization of the
value of the bond upon maturity. discount or premium brings the carrying
• Bond issue costs (direct loan expenses) are either added to the carrying value of the bond/ value/balance to equal the face value of the
bond upon maturity. It can be a way for the
loan in case of a premium or subtracted from the carrying value of the bond/loan in case of learners to check if what they are doing is
a discount. correct.
Briefly discuss straight line amortization

This method is not allowed in our country’s accounting standards but is allowed in other
countries. The straight line method provides for an equal amortization of bond premium of discount.
The procedure is simply to divide the amount of the bond premium of bond discount by the life of the
bonds to arrive at the periodic amortization.
262
PRACTICE (30 MINS)
Ask the learners answer the following as exercises/quiz.
(EASY)
1. Ms. Rodriguez invested in a PHP2,000 bond with a coupon rate and effective rate of 5%. How much
is the issue price?
2. You have a one year PHP1,000 bond with a coupon rate of 5% and was offered at an effective rate
of 6%. How much is the issue price?
3. Mr. Garcia invested in a P1,000 bond for one year with a coupon rate of 7% and was offered at an
effective rate of 5%. How much should he pay upfront? (Issue price)
(DIFFICULT)
4. On January 1, 2015, Mac Inc. issued 3,000,000 bonds with a coupon rate of 8% maturing in 4 years.
The interest is paid annually, and the market interest rate at the date of issue was 11%. What is the
issue price of the bond? Prepare the 4 year amortization schedule for the bond.
5. On January 1, 2014, Sonic Co. issued 4,000,000 12% bonds maturing in 5 years. The bonds pay
interest semi-annually. The market rate of interest as of the date of issuance is 10%. What is the
issue price of the bond? Prepare the 5 year amortization schedule for the bond.
Answer Key:
1. Since the coupon and effective rate are the same, the issue price stays at PHP2,000.
2. Issue price = (1,000 + 50 coupon)/1.06 = 990.56
3. Issue price = (1000 + 70 coupon)/1.05 = 1,019.05
4. Issue price: PHP2,720,779.89
Principal 1,976,192.92
Interest 744,586.97
2,720,779.89
263
Period Interest to be paid  Interest Expense   Amortization of Discount  Carrying Balance
=3M x 8% =carrying amount x 11% =Int exp. - Int paid
2,720,779.89
1 240,000.00 299,285.79 59,285.79 2,780,065.68
2 240,000.00 305,807.22 65,807.22 2,845,872.90
3 240,000.00 313,046.02 73,046.02 2,918,918.92
4 240,000.00 321,081.08 81,081.08 3,000,000.00

5. Issue price: PHP4,308,869.40
Principal 2,455,653.01
Interest 1,853,216.39
4,308,869.40
Period Interest to be paid  Interest Expense   Amortization of Discount  Carrying Balance

=4M x 6% =carrying amount x 5% =Int exp. - Int paid
4,308,869.40
1 240,000.00 215,443.47 (24,556.53) 4,284,312.87
2 240,000.00 214,215.64 (25,784.36) 4,258,528.51
3 240,000.00 212,926.43 (27,073.57) 4,231,454.94
4 240,000.00 211,572.75 (28,427.25) 4,203,027.68
5 240,000.00 210,151.38 (29,848.62) 4,173,179.07
6 240,000.00 208,658.95 (31,341.05) 4,141,838.02
7 240,000.00 207,091.90 (32,908.10) 4,108,929.92
8 240,000.00 205,446.50 (34,553.50) 4,074,376.42
9 240,000.00 203,718.82 (36,281.18) 4,038,095.24
10 240,000.00 201,904.76 (38,095.24) 4,000,000.00

264
ENRICHMENT (20 MINS) Teacher tip
This is an optional activity, but can be a very
useful tool for the learners’ appreciation of
Have the learners visit a bank or any other financial institution and get a sample quotation for a certain the learning competency. Should time not
type of loans (Auto-loan, Housing Loan, Working Capital Loan, etc.) to be assigned to a group. It is permit it, increase the time allotted for the
best to divide the class in groups of 5 members. Learners may also utilize amortization schedules of practice exercises.
those who are in the business of selling apartments/condominiums. Have them discuss the specifics of Give the learners ample time beforehand to
the loan in class, and have them validate the accuracy of the amortization schedules provided to them be able to collect the necessary information.
by showing their own solutions. The purpose of this activity is to show the
learners of the actual use of amortization
schedules.
265
APPENDIX A
ICTSI to raise $450-M via bonds

Reuters
Posted at 08/19/2015 10:05 AM
MANILA - Philippines port operator International Container Terminal Services Inc. (ICTSI) said on Wednesday it is raising $450 million through a
bond issue.
In a disclosure to the local stock exchange, ICTSI said its board of directors approved on Tuesday night the offering of new senior perpetual
capital securities through subsidiary Royal Capital BV.
The corporate bonds would yield 5.5 percent per annum and would be guaranteed by ICTSI.
Citigroup Global Markets Ltd, Credit Suisse Securities (Europe) Ltd and Standard Chartered Bank were the joint lead managers and
bookrunners.
ICTSI, owned by the Philippines' third richest man, Enrique Razon, is into 30 terminal concessions and port development projects in 20
countries.
266
APPENDIX B
Sample Loan Amortization Schedule
267
Basic Long-term
Financial Concepts Introduction
LESSON OUTLINE
Communicate the learning objectives. 15
Pt. 5 Motivation Share an article related to capital 15

Content Standards expenditure or business expansion; ask the
learners of possible means to evaluate the
The learners demonstrate an understanding of the basic concepts of risk and
viability of projects.
return, and the time value of money.
Instruction/ Discussion proper 75
The learners shall be able:
Practice Exercise on investment problems. 30
• Compute for the net present value of a project with a conventional cash-
flow pattern. Enrichment Short case on making investment decisions 45
• Describe the risk-return trade-off.
The learners:
calculators; PV Tables
• Apply mathematical concepts and tools in computing for finance and
Resources
investment problems. (ABM_BF12-IIIg-h-21) (1) Brealey, R., Myers, S., & Marcus, A. (2004). Fundamentals of corporate
• Explain the risk-return trade-off. (ABM_BF12-IIIg-h-22) finance. Boston, Mass.: McGraw-Hill Irwin.
Specific Learning Outcomes (2) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex
Bookstore.
(3) Gitman, L. (2009). Principles of managerial finance. Boston: Pearson
• Compute payback period, net present value, and define internal rate of Prentice Hall. <http://sciencenetlinks.com/lessons/cells-2-the-cell-as-a-
return. system/>
• Apply payback period and net present value in making investment
decisions.
• Analyse the risks and returns of long-term investments.
268
Communicate the learning objectives.

• Ask the learners of the importance of interest and the time value of money.
• Introduce the concept of risk. Ask the learners to identify the considerations taken and the risks
involved in venturing into a new business (e.g. restaurant business).
Teacher Tip
• What are the considerations in entering a new business? If the product/service is a basic necessity
• Is there a market for the product/services you want to offer? demand will inelastic which means that
whatever the economic conditions will be,
• Are the products/services you plan to offer basic necessities or not? there will be a minimum demand for the
• Can you identify the players in the industry? product/service.
• What are the salient features/competitive edge of the product/services your plan to offer?
• Do you have the managerial competence and technical expertise to run the business?
• Do you have distribution channels by which you can sell you products/services?
• Do you have the financial resources to start and operate the business?
• In entering a business or making expansion decisions, the question that stands to be answered shall
be, “Will the profits earned from the business for a given amount of time be enough to cover or
even be greater than the amount of capital invested?” The main objective is, of course, to maximize
shareholder’s wealth. This also applies to questions regarding business expansion.
• Ask the learners to read the following scenario to further introduce the topic.
269
Eli Lilly and Company Teacher Tip
The main takeaway from this short story is
Riding the Pipeline
payoff. Provide the class a copy of the story.
by Lawrence J. Gitman
Companies spend money on new investments if they believe that those investments will later generate
enough cash flow to justify the up-front cost. For pharmaceutical companies like Eli Lilly, the average
length of time from the discovery of a new drug until delivery to a patient is 10 to 15 years. After R&D
produces a promising lead, a drug is still a long way from being ready for human testing. Researchers
must probe further to determine what dosage will be required and at what level it might be toxic to the
patient. They also must explore practical issues such as whether Lilly will be able to manufacture the
compound on a large scale. The clinical trials themselves can take years. To help recoup its investment,
a drug manufacturer can get a 20-year patent that grants the company exclusive rights to the new
drug. However, with the lengthy research and approval process, companies may have fewer than 10
years to sell the drug while the patent is in force. Once patent protection expires, generic drug
manufacturers enter the market with low-priced alternatives to the name-brand drug.
For Eli Lilly, the cost of bringing a new drug to market runs from $800 million to $1.2 billion. To keep its
drug pipeline full, Eli Lilly plows some 20 percent of sales back into the R&D programs on which its Teacher Tip
future depends. With large cash expenditures occurring years before any cash return, the time value of You may opt to use a different article as
long as it shows expansion or capital
money is an important factor in calculating the economic viability of a new drug. expenditure. The reading can be shared in
advance and be given as homework.

1. Share an article related to capital expenditure or business expansion. (APPENDIX B)
• Agcaoili, L. (2015). Cebu Pacific buying 16 ATR planes for $673 M. philstar.com. Retrieved
11 April 2016, from http://www.philstar.com:8080/business/2015/06/17/1466623/cebu-
pacific-buying-16-atr-planes-673-m Teacher Tip
• Use the following guide questions: (AVERAGE) The term “capital investment” and “long-
term investment” have the same meaning.
• What was the company’s expansion plan?
• How much was the cost of the long-term investment?
• What were their expected returns on this expansion plan?
270
2. Ask the learners what the company stands to gain in their expansion decision.
Teacher tip
• Sample Answer: Gain in market share, increase in profits, and increase in shareholder value. Gains are expected to be realized if the
3. Ask the learners of possible means to evaluate the viability of the expansion plan. expansion proves successful. But if the
expansion fails, the company can suffer.
• Sample Answer: Market research and feasibility study (on whether the expected capital outlay There are occasions when even a big
can be outweighed by the expected profits from the additional demand the company can cover, company shuts down its entire operations
and whether a demand exists). because of a failed expansion.
INSTRUCTION/PRACTICE (75 MINS)

Long-term investments need significant capital outlay thus careful analysis should be done. A company
needs tools that can be used in evaluating which investments to take, and which to forego. This introduces
us to our topic on Capital Budgeting.
Teacher tip
Define Capital Budgeting “Shareholder’s wealth” is applicable to
Corporations and “Owner’s wealth” is
• It is the process of evaluating and selecting long-term investments that are consistent with the firm’s
applicable to Single Proprietorships and
goal of maximizing owners’ wealth. Partnerships.
Capital expenditure pertains to long-term

Differentiate long-term investment from operating expenses.
investments.
• Long-term investment results in benefits to accrue to the company in excess of one year while
operating expenses benefits the company only within the operating period.
Enumerate examples of capital expenditure.

• Expand or enter into a new line of business
• Replace or renew fixed assets
• Construct new premises
• Opening a new branch
• Acquisition of machineries and equipment
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Discuss the steps in Capital Budgeting.
1. Investment Proposal. Proposals for capital expenditure come from different levels within a business
organization. These are submitted to the finance team for thorough analysis.
2. Review and Analysis. Financial personnel perform formal review and analysis to assess the benefits
and cost of the investment proposals. These personnel make use of several financial tools which they
see fit in evaluating the project.
3. Decision Making. Companies usually delegate capital expenditure decisions on the basis of value
limits. The analysis is presented to the proper approving body who will in turn make the decision on
whether to push through with the project or not.
4. Implementation. Release of funds and start of the project occurs after approval. Large expenditures
are usually released in phases.
5. Monitoring. Results are monitored and actual cost and benefits are compared with those that were
expected. Action may be required if deviations from the plan are significant in amount.
Teacher tip
Explain the risk and return trade-off. You may share cases in investment scams
(i.e. pyramiding) showing that high short
• In making investment decisions, financial managers take note of the risk and returns of the projects
term profit is usually accompanied by high
they are entering. risks. Whereas long term, hard-earned
• Recall the story of Jack and the Beanstalk. In the story, Jack trades his cow for three magic beans. This income is less susceptible to loss.
is a very risky move for Jack since these beans may be fake and therefore, worthless. Luckily those
magic beans grew into beanstalk that gave Jack the opportunity to gather riches beyond his wildest
dreams, while fighting with a giant along the way. Jack gambled in this transaction. Should Jack
decide not to sell the cow for magic beans and instead sold it at the current market value, the story
would be different. As we can see, the higher the risk, the higher the returns, but of course, if turned
sour, the higher the losses as well.
• This situation is also true for making financial decisions. Taking a higher risk gives you the opportunity
to earn higher returns. Low risk investments like treasury notes, also called risk-free instruments, earn a
low and steady income flow. In making investment decisions, financial managers ensure that the
proposed business will earn more than the risk-free rate since they need to compensate for the risk
the investment will entail. This introduces us to the Required Rate of Return. It is the minimum
expected yield investors require in order to select a particular investment.
Ask learners on how the risk and return trade-off can be applied in real life.
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• Sample Answers
• Fixed income vs. commission based income
• Earning interest from time deposits vs. earning from stocks
• Entering in a business with steady income vs. entering into seasonal high profit business
• Investing in preferred vs. common stock
Enumerate and discuss the basic terminologies related to capital budgeting.

• Independent vs. Mutually Exclusive Investments Teacher Tip
Example of an independent project: Refer
• Independent Projects are those whose cash flows are independent of one another. The
to the PHP 8 million new restaurant outlet. If
acceptance of one project does not eliminate the others from further consideration. opportunities arise and financial resources
Mutually exclusive projects, on the other hand, are projects which serve the same function permit, the company can open more outlets
and therefore compete with one another. The acceptance of one eliminates all other in other geographical areas. All of these
new outlets can be considered independent
proposals that serve a similar function from further consideration.
projects.
• Unlimited Funds vs. Capital Rationing
Example of a mutually exclusive projects: A
• The amount and availability of funds affects the company’s decisions in capital outlays. If the
big manufacturing company is
company has unlimited funds, then all projects which pass the risk-return criteria will be contemplating on providing its own energy
accepted and implemented. Otherwise, firms will operate under capital rationing and will requirements. They are evaluating two
accept only projects which provide the best opportunity to increase shareholder wealth. investment proposals: 1) Oil-fired power
generation plant or 2) Solar panels. Only
• Accept-Reject vs. Ranking Approaches one alternative can be considered because
• The Accept-Reject approach is usually done for mutually exclusive projects where one both plans will perform the same function.
project is favoured over the others. The approach accepts projects which pass a certain
criteria. Ranking is done when there are several projects passing the criteria and the
company is only able to fund so much. The highest ranking projects will be selected for
implementation.
Introduce and explain the different techniques in capital budgeting

• Before proceeding with discussion of techniques, let us first introduce the concept of
relevant cash flows. Relevant cash flows include the initial investment, cash inflows from
income from the project, and the expected terminal value of the project, if any. These are
the cash flows considered in analysing whether an investment adds value to the firm. Cash
flows should be net of tax. However, to simplify our discussion, we shall not include tax in
273
our consideration.
• For example, Mr. Alfonse is deciding on which of the 2 mutually exclusive projects he should
accept. Project A requires an initial outlay of PHP72,000 and is expected to receive
PHP17,000 annually for the next 5 years. Project B, on the other hand, requires an
investment of PHP80,000 but will earn PHP21,000 annually for the next 5 years. In this
example, we can see that the relevant cash flows are the upfront investment and the annual
income from investment.
Teacher Tip:
Draw the timelines on the board to better
(72,000) 17,000 17,000 17,000 17,000 17,000
explain the concept. Show the learners the

solutions to the problems.
Terminal value is the expected value of the
asset/project at the end of its economic
useful life.
(80,000) (21,000) (21,000) (21,000) (21,000) (21,000)
• Payback Method
• This is the simplest method used in capital budgeting. It measures the amount of time,
usually in years, to recover the initial investment. To illustrate this method, let us use our Teacher Tip:
previous examples for relevant cash flows. Computation of the PHP 4,000
Initial Cash Flow 72,000.00
Less: Annual Cash
• For Project A, the initial cash flow is PHP72,000. In 4 years, Mr. Alfonse would have Flow (17,000 x 4) 68,000.00
generated a total cash flow of PHP68,000. To get the actual time period, let us divide the 4,000.00
remaining amount (4,000)* and divide it by the cash flow for year 5. We get .24, so the total
payback period for Project A is 4 + .24 = 4.24 years. Conversely, if the cash flows are equal,
you may derive the answer by dividing the initial cash flow by the annuity, 72,000/17,000 =
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4.24 years. Using this method for Project B, we get the payback period of 80,000/21,000 =
3.81 years.
• Let us also illustrate an example of computing the payback period for uneven cash flows.
Initial Investment = 15,000

Year 1 = 7,000
Year 2 = 4,000
Year 3 = 6,000
Year 4 = 3,000
For years 1 and 2, we have already recovered 11,000 of our investment. We need 4,000 more to
reach 15,000 thus for the third year, we have 4,000/6,000 = 0.67. The payback period is 2.67 years.
Notice that the cash flow for year 4 is already ignored.
• Managers usually set an acceptable payback period for projects. For making accept-reject
decisions, projects which meet the set acceptable payback period shall be accepted and
those which not are discarded. It is a popular method used especially for small projects due
to its simplicity and consideration for the timing of cash flows. The criticism of this method,
however, it that it does not consider the time value of money. Also, it fails to consider the
cash flows after the payback period. For instance, in our previous example, we can see that
Project B is better compared to Project A due to the quick recovery of the investment. If
Project A has a cash flow of, let’s say PHP50,000 at year 5, we can easily deduce that Project Teacher Tip:
A is more profitable. However, the payback method only recognizes the gains during the
payback period. Ask the learners recall their lessons in
computing the present value since the NPV
uses the same concept. Have their PV tables
• Net Present Value (NPV) ready.
• This method is more sophisticated than the payback method since it considers the time
value of money and it considers all the cash flows during the life of the project including the
terminal value. The NPV can be computed by comparing the present value of cash inflows
against the present value of cash outflows. Cash flows are discounted using the firm’s cost of
275
capital (cost of acquiring funding needs) to get the present values.
NPV = Present value of cash inflows – present value of cash outflows
• If the NPV of a project is zero or positive, it should be accepted. In finance, if these projected cash flows are realized, the NPV of the
project should be equivalent to the increase in total shareholder’s value.
• Assuming that the cost of capital is 8%, let us compute the NPV for our previous example.
Project A = 17,000 x PVAF(3.993) – 72,000 = 67,881 – 72,000 = (4,119)
Ask the learners to compute for the NPV of Project B.
Project B = 21,000 x PVAF(3.993) – 80,000 = 83,853 – 80,000 = 3,853
We can see that Project A’s NPV is negative and Project B’s NPV is positive, thus, we only accept project B.
• Internal Rate of Return (IRR)

• The IRR is one of the most widely used techniques in capital budgeting. It is defined as the discount rate that equates the NPV of an
investment to zero. If this method is used for capital budgeting analysis, the project’s IRR is compared to the company’s cost of
capital. If the IRR is greater than the cost of capital, the project should be accepted otherwise, it should be rejected. Manual
computation of the IRR involves trial and error, however, this IRR computation is a lot easier using computation applications like MS
Excel.
• For example, you are planning to build a branch for your business at PHP350,000 and expect to receive PHP400,000 in 1 year. First,
compute for the rate of return (profit/investment).
Rate of return = 50,000/350,000 = 14.3%
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• We compute for the rate of return because the NPV of a project with cost of capital equal to
the rate of return is equal to zero. To illustrate:
NPV = 400,000/(1+0.143) – 350,000 = 0
• The IRR can easily be computed using MS Excel using the IRR function.
• The NPV and IRR are interrelated techniques. An IRR greater than the cost of capital equates
to a positive NPV and vice versa. On a purely theoretical view, NPV is the better measure
since it measures the actual cash value a project creates for shareholders. However, IRR is
also a widely used tool since financial managers usually like to think in terms of ratios and
percentages.
PRACTICE (30 MINS)
Ask the learners to answer the following exercise. This can be given as a short quiz at your discretion.
Teacher tip
(EASY)
Notice that Payback period does not
change even if cash flows are added.
Year Project Pizza
0 (100,000)
1 50,000
2 50,000
1. Given the cash flows above and a discount rate of 5%, compute the payback period and NPV of
Project Pizza.
2. If PHP50,000 is earned on the 3rd year of the project, what is the new NPV of the project? What is
the payback period?
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Answers Key:
1. NPV = (100,000) + 50,000/(1.05) + 50,000/(1.052) = PHP (7,029.48; Payback Period = 2 years
2. NPV = (100,000) + 50,000/(1.05) + 50,000/(1.052) + 50,000/(1.053) = PHP36,162.40; Payback Period =
2 years
Year Project A Project B
0 (200,000) (200,000)
1 80,000 100,000
2 80,000 100,000
3 80,000 100,000
4 80,000
3. If the opportunity cost of capital is 11%, which of these projects is worth pursuing? Find the NPV of both
projects.
4. Suppose that you can only choose one of these projects. Which is more favourable to the firm given that
the discount rate remains at 11%? (Which has the higher NPV)
5. Which project would you choose if the opportunity cost of capital were 16%? (NPV/IRR)
6. What is the payback period for each project?
Answers Key:
3. Both. NPV is computed as follows.
278
Year Project A NPV Project B NPV
0 (200,000) (200,000.00) (200,000) (200,000.00)
1 80,000 72,072.07 100,000 90,090.09
2 80,000 64,929.79 100,000 81,162.24
3 80,000 58,495.31 100,000 73,119.14
4 80,000 52,698.48
Total 48,195.66 44,371.47
4. Project A, since it has a higher NPV.
5. Project B. NPV is computed as follows.
Year Project A NPV Project B NPV
0 (200,000) (200,000.00) (200,000) (200,000.00)
1 80,000 68,965.52 100,000 86,206.90
2 80,000 59,453.03 100,000 74,316.29
3 80,000 51,252.61 100,000 64,065.77
4 80,000 44,183.29
Total 23,854.45 24,588.95
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6. Payback is computed as follows: Teacher Tip:
The best way to appreciate this topic is

Year Project A Cumulative Project B Cumulative through the use of several exercises. This
activity allows the learners to discuss among
0 (200,000) (200,000.00) (200,000) (200,000.00) themselves. The case integrates what they
have learned in present value and payoff
1 80,000 (120,000.00) 100,000 (100,000.00)
2 80,000 (40,000.00) 100,000 -
3 80,000 40,000.00 100,000 100,000.00
4 80,000 120,000.00
Project A = 2 years + 40,000/80,000 = 2.5 years or 200,000/80,000

Project B = 2 years or 200,000/100,000
ENRICHMENT (45 MIN) (DIFFICULT)

Divide the class into groups with not more than six people each. Let them read and discuss the
following case amongst themselves then discuss their answers in class. You can pick at least two groups
to discuss their answers. Give them at most 30 minutes to prepare and discuss amongst them before
discussing the correct answer in class.
• You are the investment manager of an appliance company. The industry is currently in the expansion
face and the CEO would like to capture as much of the market share as possible. You asked your
analysts to submit project proposals as summarized below.
Project Discount Rate Investment Annual Cash Flow Project Life (Years)
A 10 3M 1M 5
B 12 4M 1M 8
C 8 5M 2M 4
D 8 3M 1.5M 3
E 12 3M 1M 6
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Which projects should the manager choose? If you were given unlimited capital, which projects should be implemented?
Answer key:
Project Life
Project Discount Rate Investment Annual Cash Flow NPV Rank
(Years)
A 10% 3,000,000 1,000,000 5 790,786.77 5

B 12% 4,000,000 1,000,000 8 967,639.77 3
C 8% 5,000,000 2,000,000 4 1,624,253.68 1
D 8% 3,000,000 1,500,000 3 865,645.48 4
E 12% 3,000,000 1,000,000 6 1,111,407.32 2
If there is no budget constraint, all projects can push through since the NPV of all projects is positive. However, if there are budget constraints,
projects will be chosen based on the highest NPVs in which case Projects C & E should be considered if you’re asked to choose two.
281
APPENDIX A
Eli Lilly and Company

Riding the Pipeline (Lawrence J. Gitman)
Gitman, L. (2009). Principles of managerial finance. Boston: Pearson Prentice Hall.
Companies spend money on new investments if they believe that those investments will later generate enough cash flow to justify the up-front
cost. For pharmaceutical companies like Eli Lilly, the average length of time from the discovery of a new drug until delivery to a patient is 10 to
15 years. After R&D produces a promising lead, a drug is still a long way from being ready for human testing. Researchers must probe further to
determine what dosage will be required and at what level it might be toxic to the patient. They also must explore practical issues such as
whether Lilly will be able to manufacture the compound on a large scale. The clinical trials themselves can take years. To help recoup its
investment, a drug manufacturer can get a 20-year patent that grants the company exclusive rights to the new drug. However, with the lengthy
research and approval process, companies may have fewer than 10 years to sell the drug while the patent is in force. Once patent protection
expires, generic drug manufacturers enter the market with low-priced alternatives to the name-brand drug.
For Eli Lilly, the cost of bringing a new drug to market runs from $800 million to $1.2 billion. To keep its drug pipeline full, Eli Lilly plows some
20 percent of sales back into the R&D programs on which its future depends. With large cash expenditures occurring years before any cash
return, the time value of money is an important factor in calculating the economic viability of a new drug.
282
APPENDIX B
Cebu Pacific buying 16 ATR planes for $673 M

By Lawrence Agcaoili (The Philippine Star)
Agcaoili, L. (2015). Cebu Pacific buying 16 ATR planes for $673 M. philstar.com. Retrieved 11 April 2016, from http://www.philstar.com:8080/
business/2015/06/17/1466623/cebu-pacific-buying-16-atr-planes-673-m
MANILA, Philippines - Budget airline Cebu Air Inc. (Cebu Pacific) of taipan John Gokongwei is spending $673 million to acquire 16 more brand
new aircraft from Toulouse-based turboprop aircraft maker ATR to meet the growing demand for inter-island services in the Philippines.
Lance Gokongwei, president and chief executive officer of Cebu Pacific, said the acquisition of 16 ATR72-600 is in line with the low cost carrier’s
vision of providing affordable air travel.
”This order is an affirmation of our commitment to extend the convenience of affordable air travel to even more communities. We are very
pleased to be the launch customer of this new configuration of the ATR 72-600, as this will allow us to offer our customers more seats at even
lower fares,” he said.
He pointed out Cebu Pacific has been operating ATR aircraft since 2008 enabling the budget airline to bring safe, reliable, and affordable air
transport to smaller cities and islands throughout the Philippines.
According to Cebu Pacific, the transaction would double the airline’s turboprop fleet size. It currently operates a fleet of eight ATR 72-500
aircraft that would be retired as the new aircraft enter service.
Gokongwei said the entry into service of the ATR 72-600 would see Cebu Pacific with new generation aircraft to meet a growing demand in the
Philippines for inter-island services.
The aircraft were ordered from European turboprop aircraft maker ATR at the Paris Air Show.
The deal also includes options to acquire an additional 10 ATR72-600. The aircraft is equipped with the high density Armonia cabin, the widest
cabin in the turboprop market.
283
The aircraft features 78 slim-line seats and wider overhead bins with 30 percent more stowage space. These new technological innovations
further enhance space and comfort for passengers.
ATR aircraft enjoy a high reputation not only for versatility, but also for their ability to operate on short runways allowing Cebu Pacific to expand
its operations not only on main airports but also to several other airports around the country.
About 330 ATRs are currently operated by 55 airlines in the Asia-Pacific region. The ATR 72-600 has the lowest cost per seat mile in the 70-seat
segment, with significantly lower fuel and maintenance costs compared to similar class aircraft.
ATR chief executive officer Patrick de Castelbajac said the aircraft manufacturer is ”very happy to continue our partnership with one of the
leading airlines in Southeast Asia and to contribute to the expansion of its network throughout the islands of the archipelago.
”Cebu Pacific will also be able to benefit from the vast support network for ATR operators in Asia. When their first ATR 72-600 arrives, there will
be five ATR pilot training centers in the region,” he said.
Cebu Pacific is undertaking a $4-billion fleet renewal program. It is scheduled to take delivery of seven more Airbus A320 and 30 A321neo
between this year and 2021. It has a fleet of 55 aircraft composed of 10 A319, 31 A320, six Airbus A330, and eight ATR-72 500 aircraft.
Meanwhile, the low cost carrier arm of national flag carrier Philippine Airlines Inc. (PAL) of taipan Lucio Tan is set to fly to Saipan in Northern
Marianas two times a week using the 156-seater Airbus A320 aircraft.
PAL Express said it intends to attract Saipan residents to fly to Manila and interconnect to any of the PAL Group;s domestic and international
destinations. There are about 19,000 Filipinos living and working in Saipan.
”Our goal is to address the clamor for new routes in order to best serve the needs of the market. As we tap new markets and build on existing
ones, we aim to ensure connectivity across the route network of the PAL Group by providing the required flight frequencies and schedules,” the
airline said.
284
Introduction to Investment pt.1

Content Standards
The learner demonstrates an understanding of the definition, purpose, kinds, LESSON OUTLINE
advantages and disadvantages, and the risks of investment. Introduction Identify essential questions and 15
communicate learning competencies
and objectives.
Motivation 15
The learners shall be able to: Present historical returns of different types of
investments and how much the learners’
• Identify the types of investments particularly bank deposits, insurance, real
savings could have become
estate, hard assets, mutual funds, and stocks and bonds.
• Indicate the advantages and disadvantages of each type of investment. Instruction/ Give a lecture on the different types of 120
Delivery
• Explain the risks inherent in each type of investment. investments and their advantages/
disadvantages
Practice Group portfolio management exercise 30
The learners will be able to: Enrichment Tell stories of people who became rich 30
• Compare and contrast the different types of investments. (ABM_BF12- through investing
IVm-n-23) Evaluation Quiz 30
• Classify investments according to its type, features, and advantages and
disadvantages. (ABM_BF12-IVm-n-24)
Specific Learning Outcomes Resources
At the end of the unit lesson, the learners shall be able to: (1) Finance Websites
• Describe how they want to allocate their savings on different types of (2) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City.
investments. Rex Bookstore.
• Explain why they want such investment allocation based on the advantages
and disadvantages of each chosen investment type.
285
1. Identify the essential questions:

Teacher Tip
• Ask the learners if they have savings
• Emphasize that the discussion offers a
• Why do they save? change in perspective. During the 3rd
quarter, the learners took on the
• Where will they put their savings?
perspective of a borrower. For the 4th
• Supposing they have PHP1 million, where will they put it? quarter, the learners will take on the
perspective of a lender or investor.
• Are they aware of alternative investment options (stocks, bonds, mutual funds, etc.)?
• On the essential questions, try to get as
• Are they familiar with investment scams (double-your-money, high-yield investments, etc.)? many insights from the learners as
possible.
2. Transition by saying that these questions will be answered by meeting the following objectives
• On question 6, say that investment scams
throughout the discussion. normally offer returns too good to be
3. Communicate learning competencies and objectives true.
• Enumerate the learning competencies.

• Identify the types of investments particularly bank deposits, insurance, real estate,
hard assets, mutual funds, and stocks and bonds.
• Indicate the advantages and disadvantages of each type of investment.
• Explain the risks inherent in each type of investment.
• Enumerate the specific learning outcomes.
• Describe how they want to allocate their savings on different types of investments.
• Explain why they want such investment allocation based on the advantages and
disadvantages of each chosen investment type.
Teacher Tip
Make the students appreciate the difference
between investing in assets that appreciate
versus things that depreciate in value over
time.
286
Investment Type Holding Value of PHP 10,000 % Return
Period Today
Bank (Time deposit) 10 years PHP14,000 40%
Stocks (Universal Robina Corporation “URC”) 10 years PHP140,500 1,305%
Stocks (DMCI Holdings, Inc. “DMC”) 12 years PHP3,204,878 31,949%
Mutual funds (Philequity PSE Index Fund) 5 years PHP23,426 134%
Mutual funds (Sunlife Prosperity Philippine Equity 5 years PHP20,805 108%

Fund)
1. Show how the learners’ savings (i.e. PHP10,000) could have grown under different types of investments.
Table 1: Comparison of Investment Types Over Time with Sample Results
Sources:
(1) Funds, M. & Tour, A. (2016). Philpad - Your pad on anything Filipino.... Philpad. Retrieved 2 May 2016, from http://philpad.com; (2) Home |
Thomson Reuters. (2016). Thomsonreuters.com. Retrieved 2 May 2016, from http://thomsonreuters.com/en.html; (3) Welcome to the Bangko
Sentral ng Pilipinas Website!. (2010). Banko Sentral ng Pilipinas. Retrieved 2 May 2016, from http://www.bsp.gov.ph/; (4) Writer Estimates
287
Bank (Time Deposit)
Stocks (Universal Robina Corporation “URC”)
288
Stocks (DMCI Holdings, Inc. “DMC”)
Mutual funds (Philequity PSE Index Fund and Sunlife Prosperity Philippine Equity Fund)
Teacher Tip
If you are successful in motivating them, you
should get more students raising their
hands to volunteer their answers for assets
that grow their money over those which
lose their value.
289
2. Describe how money loses value in buying material things such as toys, gadgets, etc.
Item Purchase Price Holding Period Value Today % Return
iPhone 4 32gb PHP29,200 (October 2011) 3.5 years PHP8,900 -70% return
PlayStation 4 PHP22,500 (November 2013) 1.5 years PHP18,000 –20% return
Toyota Vios PHP850,000 (December 2007) 7.5 years PHP300,000 -65% return
Definitions:
Table 2: The Decline of the Monetary Value of Material Items Settlement Risk – risk that the bank may
not be able to give back their deposit.
Sources:
Philippine banks are normally insured by the
(1) Business 2 Community - Top Trends, News & Expert Analysis. (2016). Business 2 Community. Philippine Deposit Insurance Corporation
Retrieved 2 May 2016, from http://www.business2community.com/#MBqWp2Ki7czkuqWl.97; (2) (PDIC). Depositors may recover up to
PHP500,000 per depositor from PDIC in
GSMArena.com - GSM phone reviews, news, opinions, votes, manuals and more.... (2016).
case of bank default/bankruptcy.
Gsmarena.com. Retrieved 2 May 2016, from http://gsmarena.com ; (3) OS X Daily - News and Tips for
Mac, iPhone, iPad, and Everything Apple. (2016). Osxdaily.com. Retrieved 2 May 2016, from http://
osxdaily.com; (4) Writer Interviews Misconceptions:
Emphasize to the students that it is a
common misconception that all of these
3. Ask the learners which would they prefer, those which grow their money or those which lose value? investments will earn for certain. Clarify that
Survey the students by asking them to raise their hands on the option they prefer. each investment type has inherent risks
involved, which nevertheless can be
mitigated.
1. Introduction
Say that for the discussion, the different types of investments will be grouped into three: (1) fixed
income and equities, (2) alternatives to fixed income and equities, (3) other investment assets
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2. Fixed Income and Equities
Investment Type Advantages Disadvantages
Stocks (Equity) • Unlimited Upside • No guaranteed returns.

“Type of security that signifies • Riskiest of all assets (can lose even
ownership in a corporation and more than 50% of their money in one
represents a claim on part of the day)
corporation's assets and earnings”
Bank Deposits (Fixed Income) • Known income based on • Lower interest income vs. bonds
“Money placed into a banking outstanding principal • Settlement risk if the bank closes
institution for safekeeping” and current interest rate
• Shorter, if any, holding
period vs. bonds
Bonds (Fixed iIcome) • Known periodic • If not held until maturity and pre-
“Debt investments where an investor payments for a certain terminated, investor can gain or lose
loans money to an entity which period of time depending on the prevailing interest
borrows the funds for a defined • Can’t lose money if rates at the time of pre-termination. If
period of time at a variable or bond investment is held interest rates are higher, investor in
commonly, fixed interest rate” until maturity bonds can lose in the pre-termination
Table 3: Advantages and Disadvantages of Fixed Income and Equities
Sources:
(1) Investopedia - Sharper Insight. Smarter Investing.. (2016). Investopedia. Retrieved 2 May 2016, from http://investopedia.com;
(2) Writer Inputs
• Ask the learners which would they prefer, equity or fixed income?
• Supposing they have PHP1 million, how will they allocate it?
• Explain how they can access these investment assets through the following:
• Stocks
• Go to a stock brokerage firm (i.e. COL Financial, AB Capital Securities, etc.) or a bank with a stock brokerage arm (i.e. BPI Trade, First
Metro Securities, etc.) and open a stock market account by signing the necessary account opening forms.
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• Minimum capital amount, depending on the broker, will be required to be deposited to
successfully open the account (i.e. PHP5,000 for BPI Trade, PHP10,000 for AB Capital Securities,
etc.).
• Most of these stock brokerage firms now provide online access to their client’s stocks account
(i.e. www.colfinancial.com, www.bpitrade.com, www.abcapitalsecurities.com.ph, etc.).
• Bank Deposits
• Go to a bank (BDO, BPI, Metrobank, etc.) and open a bank account (savings, time deposit, etc.)
by signing the necessary account opening forms.
• Minimum amounts will also be required depending on which bank and the type of bank deposit
they want to open.
• Some banks also now offer online access to their client’s bank accounts (i.e.
www.bpiexpressonline.com, www.bdo.com.ph, www.lbpiacces.com, etc.) where they can
monitor their account, pay bills, transfer funds, etc. via internet.
• Bonds
• Same as bank deposits, go to a bank and sign the necessary bond acquisition forms.
• Minimum purchase of bonds is normally higher relative to stocks and bank deposits.
• Clients may also view their bond’s performance online depending from which bank they bought
it from.
3. Alternatives to fixed income and equities (25 minutes) Definitions:

• Management Fee – the amount clients
Investment Type Advantages Disadvantages pay to the professionals who manage their
mutual funds, normally a certain
Mutual funds “Give small investors access to professionally • Pay management
percentage of portfolio value.
“An investment that is made up managed, diversified portfolios of equities, fees
• Dividends – distribution of the company’s
of a pool of funds collected from bonds and other securities, which would be • Values can also income to its shareholders.
many investors for the purpose of quite difficult (if not impossible) to create with a fluctuate just like the • Voting Rights – right to be heard on
investing in stocks, bonds, and small amount of capital” stock market certain policies that the company wants to
similar assets” implement.
Unit investment trust fund (UITF) • Same as mutual funds. No shareholder rights
Similar to a mutual fund but is • Easier access because clients can open an for investors such as
managed by banks. account in any branch of the bank near them. dividends and voting
• No entry and management fees. rights.
Table 4: Advantages and Disadvantages of Alternative Investments

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Sources:
(1) Funds, M. & Tour, A. (2016). Philpad - Your pad on anything Filipino.... Philpad. Retrieved 2 May 2016, from http://philpad.com; (2)
Investopedia - Sharper Insight. Smarter Investing.. (2016). Investopedia. Retrieved 2 May 2016, from http://investopedia.com; (3) Writer Inputs
• Ask the learners if they would prefer these alternatives over equity or fixed income and why.
• Would they prefer experts managing their money for them for a fee over investing on their own?
• Mutual funds
• Go to an insurance company or a financial institution that offers mutual funds (i.e. Philequity, Sunlife, Manulife, etc.) and sign the necessary
account opening forms.
• As with stocks, minimum amounts will be required to successfully open the account.
• Some of these financial institutions also provide online access to monitor their mutual fund performance.
• Unit Investment Trust Fund
• Same procedures as a mutual fund except that UITF’s are accessed through banks.
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4. Other investment assets
MUST READ FIRST
Investment Type Advantages Disadvantages Definitions:
Currencies • Largest market in the world in terms of • Volatile and trades 24-hours a day • Liquidity – ability to be converted into
cash, the higher the liquidity the better.
“Generally accepted form of trading volume, so much liquidity (must be closely monitored)
• Margin Trading – allows clients to trade
money, including coins and • Unlike stocks, commodities, etc., • Generally uses margin trading more than their capital. It can magnify
paper notes, which is issued currency asset itself is a medium of which allows clients to bet more both earnings and losses.
by a government and exchange which people can use to than their capital (may also be an • Inflation – general increase in prices.
circulated within an economy” transact advantage) • Hedge – investment that reduces the risk
(i.e. USD, EUR, JPY) of adverse price movements in an asset.
• Diversification – process of investing in
Commodities • Natural hedge against inflation • Same as currencies different kinds of assets to lessen
“A basic good used in • Negatively correlated with equities • Impractical to invest directly exposure in market/price volatility.
commerce that is and bonds (may be used for considering storage, transportation • Geopolitical risks – “risks of one
country's foreign policy influencing or
interchangeable with other diversification) and insurance costs involved upsetting domestic, political, and social
commodities of the same • Hedge against geopolitical risks policy in another country or
type” (i.e. gold, nickel, oil) region” (Source: Columbia Threadneedle
Blog. (2016). Columbia Threadneedle
Real Estate • Generally appreciates over time • Huge capital needed, financing Blog. Retrieved 2 May 2016, from http://
“Land and any improvements because land gets scarce can be difficult blog.columbiathreadneedleus.com)
on it” (i.e. land, house and lot, • Have relatively low correlations with • Maintenance of the property • Correlation – how price of an asset moves
condominiums) other asset classes (may be used for needed to preserve its value with respect to another asset (i.e. positive
correlation if both assets move in the
diversification) • Illiquid or difficult to sell
same direction, negative correlation if
• Can be a source of recurring rental both assets move in the opposite
income direction)
• May also be a hedge against inflation • Escalation Clause – agreement to raise
because of inflation-linked rent prices in the future depending on certain
escalation clauses circumstances (i.e. increase in inflation
leading to higher rental rates).
Insurance • Gives the insured individual/entity the • Insurance premiums may be costly • Insurance Premium – the amount paid on
“A contract (policy) in which cash/capital to deal with unforeseen a regular basis to the insurance company
• On some of traditional insurance
in return for the insurance/protection
an individual or entity receives adverse financial consequences plans, no sickness/death until a
provided.
financial protection or • May provide certain tax benefits (i.e. certain age may mean not getting • VUL – Variable Universal Life insurance or
reimbursement against losses tax deductibility, tax-free provisions) any benefits at all (that’s why VUL’s a life insurance that offers both death
from an insurance are now very prevalent) benefit and investment features.
company” (i.e. life insurance, • Some insurance companies can go
educational plans, VUL) bankrupt (i.e. College Assurance
Plan) if companies fail to factor
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significantly adverse unforeseen
circumstances
Table 5: Advantages and Disadvantages of Other Investment Types
Sources:
(1) Gateway Financial | Gateway Financial. (2016). Gatewayfinancial.biz. Retrieved 2 May 2016, from
http://gatewayfinancial.biz; (2) Home Guides | SF Gate. (2016). Homeguides.sfgate.com. Retrieved 2
May 2016, from http://homeguides.sfgate.com; (3) Investopedia - Sharper Insight. Smarter Investing..
(2016). Investopedia. Retrieved 2 May 2016, from http://investopedia.com; (4) Saad, Y. & Slachevsky, A.
(2016). From The Markets - eToro Blog. eToro Blog. Retrieved 2 May 2016, from http://etoro.com/blog/
markets; (5) Writer Inputs
• Ask the learners which among these investment assets would they consider and why.
• Currencies and Commodities
• Open a foreign currency/forex account (i.e. oanda, fxcm, cboe, etc.) online.
• Minimum amount required for forex accounts vary and are usually higher vs. stocks and usually in
USD.
• Investments may also be monitored online. Teacher Tip:
• Real Estate Emphasize the importance of contacting
• Contact/visit real estate companies directly (i.e. Ayala Land, Megaworld, SM Prime, etc.). licensed real estate brokers and insurance
agents.
• Contact real estate brokers.
• Insurance
• Contact/visit insurance companies directly (i.e. Sunlife, Prulife, Manulife, etc.).
• Contact insurance agents.
Teacher Tip:
5. Investment Scams (10 minutes)
Show samples of investment scams like e-
• Tell the learners the following characteristics of investment scams (Source: financialmentor.com): mail scam or even text scams. You may visit
• Unexpected and unsolicited phone calls, emails, letters, or personal visits from strangers who are this website for an example: > http://
offering investments www.motherjones.com/politics/2014/03/
what-i-learned-from-nigerian-scammers.
• Above market returns
• Low risk, no risk, or a guarantee
• Giving custody and possession of invested capital to the investment manager
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• Aggregating assets into a pool with other investors
• Investing on the spot
• Special connections, secrets, or inside information not available to the public
• Invitations to join exclusive investment organizations
• Opportunities for the “next big thing” or a “once in a lifetime” deal
• Sophisticated terminologies
• Investments offered from overseas
• No prospectus/offering memorandum
• Investments that cannot be verified
• Sold by unlicensed/unregistered people
• Troubles cashing out of the investment
• Salespeople discouraging second opinion
• Salespeople encouraging investing on the basis of trust
• Salespeople asking potential clients to put their life savings into a single investment
• Salespeople encouraging potential clients to borrow money for it
• Salespeople requesting for the client’s bank account details
• Ask how they can prevent themselves from becoming victims to investment scams
Teacher Tip
The objective of this activity is to make the
PRACTICE (30 MINUTES) learners rationalize the composition of their
(AVERAGE) chosen portfolio.
Updated prices of the investment options

Group portfolio management exercise. can be taken from the following websites:
1. Group the students into teams of four to five. • For URC, DMC and PSEi-linked mutual
fund, www.pse.com.ph
2. Provide the students with investment options based on current market prices (sample presented • For time deposit, it should be the same
below). for the next 2-3 weeks
3. Ask each group to allocate a fund of PHP1,000,000 among the different investment options • For gold, www.kitco.com
provided and why.

4. (Optional) Tell the students that each group’s fund will be evaluated after 2-3 weeks based on the
funds’ updated market value.
5. (Optional) Give a prize or grade incentive to the team with the highest portfolio value.
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Sample Investment Options Sheet
Instructions: Allocate your PHP1,000,000 among the following investment alternatives (in multiples of 10% i.e. 10%, 20%, 30%, etc.). Allocations
Allocation Investment Asset Market Price 5-Year Average Annual

(September 17, 2015) Return
___% URC (Stocks) PHP191.0 68.6%
___% DMC (Stocks) PHP12.9 36.1%
___% Time deposit 1.18% 2.3%
___% PSEi-linked mutual fund 7,123.99 17.3%
___% Gold (Commodity) $1,118.6 -59.3%
should total 100%. Below the table, justify your chosen allocations.
Source:
(1) Home | Thomson Reuters. (2016). Thomsonreuters.com. Retrieved 2 May 2016, from http://thomsonreuters.com/en.html; (2) Kitco: Live Gold
Prices | Gold News | Gold Market Insights. (2016). Kitco.com. Retrieved 2 May 2016, from http://kitco.com; (3) THE PHILIPPINE STOCK
EXCHANGE, INC.. (2016). Pse.com.ph. Retrieved 2 May 2016, from http://pse.com.ph; (4) Welcome to the Bangko Sentral ng Pilipinas
Website!. (2010). Banko Sentral ng Pilipinas. Retrieved 2 May 2016, from http://www.bsp.gov.ph/
1. Share the story of Warren Buffett through a biography video (Warren Buffett: Bio of the World's Greatest Businessman. (2016). YouTube.
Retrieved 2 May 2016, from https://www.youtube.com/watch?v=yUfUMymDVyo)
2. Emphasize to the learners that at their age, they have the most valuable asset in investing – time (cite Warren Buffet who started investing at
the age of nine, and felt it was even too late. He is now one of the richest men in the world.)
3. Ask them if they want to be like Warren Buffett.
4. Encourage them to invest as early as now.
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QUIZ
Teacher Tip
Depending on the reception of the students
1. (EASY) Match the investment asset in column A with its description in column B by writing the capital of the lesson, essay questions may be given
letter on the left side of column A. instead of multiple choice.
Sample Matching Type Quiz

Answer Key
(A) Investment Asset (B) Description If Matching Type
Part 1: C, E, A, B, D
___1 Stocks (Equity) A. An investment that is made up of a pool of funds collected from Part 2: D, B, E, C, A
many investors for the purpose of investing in stocks, bonds, and
similar assets.
___2 Bank Deposits (Fixed B. Land and any improvements on it.

Income)
___3 Mutual Funds C. Type of security that signifies ownership in a corporation and
represents a claim on part of the corporation's assets and earnings.
___4 Real Estate D. A contract (policy) in which an individual or entity receives financial
protection or reimbursement against losses from an insurance
company.
___5 Insurance E. Money placed into a banking institution for safekeeping
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2. (EASY) Match the investment asset in column A with its advantage/disadvantage in column B by
Answer Key
writing the capital letter on the left side of column A.
If Essay (Suggested Answers)
1. Equities are the riskiest of all assets
Sample Matching Type Quiz because of their price volatility. In the
Philippine Stocks Exchange, clients can lose
(A) Investment Asset (B) Advantage/Disadvantage as much as 50% on a stock in one day.
Reasons why stock prices are volatile
___1 Stocks (Equity) A. Disadvantage: On some of traditional plans, no sickness/death until include uncertainties in company’s earnings,
a certain age may mean not getting any benefits at all negative or positive market sentiment of
investors, etc. And with these great risks
___2 Bank Deposits (Fixed B. Advantage: Shorter, if any, holding period vs. bonds comes the potential for great upside for the
Income) risk-taker investor.
___3 Mutual Funds C. Advantage: Can be a source of recurring rental income 2. Fixed income assets are low-risk
investments. Even if potential returns are
___4 Real Estate D. Disadvantage: Riskiest of all assets (can lose as much as 50% of low relative to equities, it gives the risk-
their money in one day) averse investor known income/periodic
payments. Note however that this is only
___5 Insurance E. Disadvantage: Pay management fees true if the security is held until maturity.
Default risk, which is the risk of the
counterparty not fulfilling his obligation is
3. (Optional) Essay also present in fixed income assets.
Therefore, an investor must carefully analyze
the issuer and must be convinced about its
(DIFFICULT) financial stability before buying its debt
security.
Sample Essay Questions 3. Mutual funds are offered by non-bank

institutions while UITFs are offered by
1. Why would a risk-taker (likes to take risks) type of investor prefer equities over fixed income? banks. Given that UITFs are offered by
2. Why would a risk-averse (likes to avoid risks) type of investor prefer fixed income over equities? banks, they are more accessible than mutual
funds. Mutual funds on the other hand
3. How do mutual funds differ from UITFs? require management fees but provide the
4. If let’s say you have PHP1,000,000 today which you can invest for the next 10 years, where will you investors with shareholder rights such as
dividends and voting rights. Since the
put it and why?
underlying asset of mutual funds can also
be equity, returns are not guaranteed and
an investor can also lose.
4. Note to teacher: They can put it in one

investment instrument or it can be a
portfolio. Whatever the answer is, there has
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to be an explanation.
Introduction to Investment
Content Standards
The learners demonstrate an understanding of the definition, purpose, kinds, LESSON OUTLINE
advantages and disadvantages, and the risks of investment. Introduction Identify essential questions and 10
communicate learning competencies and
Performance Standards objectives
The learners will be able to: Motivation Present how volatile some investments can 10
• Identify the types of investments particularly bank deposits, insurance, real become and ask learners if they are willing to
estate, hard assets, mutual funds, and stocks and bonds. take such risk on their money
• Indicate the advantages and disadvantages of each type of investment. Instruction/ Give a lecture on the different ways on 60
• Explain the risks inherent in each type of investment. Delivery
quantifying investment risk and how to
reduce it
Learning Competency Enrichment Share accounts of erroneously quantified 10

The learners shall be able to measure and list ways to minimize or reduce risks and how terrible the effects can be
investment risks in simple exercises. (ABM_BF12-IVm-n-25) Evaluation Quiz 30
Specific Learning Outcomes Materials • LCD projector

• Laptop with Microsoft Office Powerpoint or
• Measure the risk of different types of investments • Overhead Projector
• Identify ways on how to reduce investment risk and define how risk is • Acetates
lessened Resources
(2) Finance Books and Websites
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INTRODUCTION (10 MINS) Teacher Tips:
On the essential questions, try to get as
1. Identify the essential questions much insights from the learners as possible
• Ask the learners what are the different types of investments that they have learned (this will also
The previous module recognized the
serve as a review).
rewards/returns of the various investments.
• Do they understand the risks of each investment? Emphasize that this module will focus on
• Do they know how to measure these risks? the risks particularly on equity investments.
• Which will they choose, a stock which they can expect to go up by 25% in one year, or a 1-year
treasury bill which will give them 1.5% return? Note that if the economy turns bad, they can lose
10% on the stock.
• If there is a way to minimize these risks, will that help them in investing?
throughout the discussion.
3. Communicate learning competencies and objectives.

• Explain that the learning competencies will be the same as the previous module but this module
will focus more on the quantification of risks in each investment.
- Measure the risks of different types of investments.
- Identify ways on how to reduce investment risks and define how risk is lessened.
MOTIVATION (10 MINUTES) Teacher Tips:

Let the students appreciate the difference
1. Show how the learners’ savings (i.e. PHP10,000) could have changed value over time if placed in a between low-risk low-return investments
and high-risk high-return investments.
bank time deposit and an equity investment.
The PSEi is composed of the 30 biggest
companies in the Philippines. These
companies are as follows (Source: The
Philippine Stock Exchange, Inc.. (2012). The
Philippine Stock Exchange, Inc.. Retrieved 8
May 2016, from http://www.pse.com.ph/
stockMarket/home.html):
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Bank (Time Deposit)
1. Ayala Corp. (AC)
2. Aboitiz Equity Ventures, Inc. (AEV)
3. Alliance Global Group, Inc. (AGI)
4. Ayala Land, Inc. (ALI)
5. Aboitiz Power Corp. (AP)
6. BDO Unibank, Inc. (BDO)
7. Bloomberry Resorts Corp. (BLOOM)
8. Bank of the Philippine Islands (BPI)
9. DMCI Holdings, Inc. (DMC)
10. Energy Development Corp. (EDC)
11. Emperador Inc. (EMP)
12. First Gen Corp. (FGEN)
13. Globe Telecom, Inc. (GLO)
14. GT Capital Holdings, Inc. (GTCAP)
15. International Container Terminal
Services, Inc. (ICT)
16. Jollibee Foods Corp. (JFC)
17. JG Summit Holdings, Inc. (JGS)
18. LT Group, Inc. (LTG)
Table 1: Sample Performance of PHP 10,000 in Time Deposit 19. Metropolitan Bank & Trust Company
(MBT)
Stocks/Equities (Philippine Stock Exchange Index “PSEi”) 20. Megaworld Corp. (MEG)
21. Manila Electric Company (MER)
22. Metro Pacific Investments Corp. (MPI)
23. Petron Corp. (PCOR)
24. Robinsons Land Corp. (RLC)
25. Semirara Mining and Power Corp. (SCC)
26. SM Investments Corp. (SM)
27. San Miguel Corp. (SMC)
28. SM Prime Holdings, Inc. (SMPH)
29. PLDT (TEL)
30. Universal Robina Corp. (URC)
Table 2: Sample Performance of PHP 10,000 in Stocks/Equities

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2. Explain the concept of risk and return.
Teacher Tips:
• Investments follow a high-risk, high-return principle.
Optional: Illustrate how the learners’
• Inform the learners that stocks are volatile and that they can lose significantly from their investments PHP10,000 could have changed value over
especially if their investment timeframe is short. time if placed in Jollibee Foods Corp.
• If the stock investments of a good company is invested over a much longer period of time however, (“JFC”) and Philex Mining Corporation
stock investments can be financially rewarding as shown in the PSEi returns. (“PX”).
• The value of a bank investment on the other hand, follows a relatively straight upward line, but only
gives low returns (CAGR of 3.4% for the period 2004-2014) due to the low risk taken by the investor.
3. Discuss that some will choose bank time deposit and others will prefer stocks. Emphasize that there
is no right or wrong answer because the choice of an investor depends not just on returns but also
on his/her risk appetite.
4. Ask the learners: If they have savings, would they put it in stocks or in a time deposit? Survey the
students by asking them to raise their hands on the option they prefer.
5. Ask the learners: If there is a way to measure the risk, will it help them decide whether to place their
money in an investment or not?
Company description: JFC is a multinational

chain of fast food restaurants famous for its
Chickenjoy, Jolly Spaghetti, and Peach
Mango Pie. PX on the other hand, is the
largest mining company in the Philippines
with gold and copper mining properties in
Benguet and Surigao.
It is advisable for the teacher to read more

about risk.
If the learners are motivated, they should be

curious about how to quantify risk.
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Teacher Tips:
1. Definition of risk.
Explain that there are other ways of
• “Risk is the chance that an investment’s actual return will be different than expected. Risk includes measuring risk but focus will be on standard
the possibility of losing some or all of the original investment.” (Source: Investopedia - Sharper deviation and beta.
Insight. Smarter Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://
investopedia.com)
2. Systematic and Non-Systematic Risk (10 minutes)

Teacher Tips:
Emphasize that systematic risk is non-
Risk Definition Also Known As Examples Measurement
diversifiable while non-systematic risk is
Systematic Uncertainty inherent Market risk, Changes in interest Beta (β) diversifiable.
to the entire market undiversifiable risk rates, recession,
Note that total risk = systematic + non-
wars systematic risk.
Non-systematic Uncertainty that Specific risk, Rumors of a Standard deviation
comes with the diversifiable risk, potential default, (σ) less beta
company or industry residual risk labor strikes,
landslide in a mining
company that
disrupted the
operations
Table 3: Differentiating Risks

Source: Investment Strategies, Education & News | InvestingAnswers. (2016). Investinganswers.com.
Retrieved 8 May 2016, from http://investinganswers.com; Investopedia - Sharper Insight. Smarter
Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com
304
3. Measuring Systematic and Non-Systematic Risk (40 minutes)
Measurement Risk it Definition Formula Teacher Tips:

Measures Note: Guide on β interpretation below:
• =1 – investment’s price will have the same
Beta (β) Systematic risk • Measure of the systematic risk volatility as the PSEi
of an investment or portfolio • >1 – investment’s price will be more
vs. the market as a whole. volatile than the PSEi
• Tendency of an investment's • <1 – investment’s price will be less volatile
than the PSEi
returns to respond to swings
in the market. Example: A company with a β of 1.3 means
that if the PSEi goes up by 10%, this
Standard deviation (σ) Total risk • Sum of systematic and non-
company’s stock price, on the average, will
systematic risk. go up by 13%. The reverse is true which
• Total volatility of an means that if the PSEi goes down by 10%,
investment. this company’s stock price, on the average,
will go down by 13%.
Based on the example, it is illustrated that a

company with higher beta is more volatile
and a company with lower beta is less
volatile.
Table 4: Measuring Risks
Source: Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com Clarify to the learners that the β computed
using the formula given on the table may
not be reliable if data points used are for a
• Explain that the formula for beta is the covariance of the investment asset’s returns with the returns of
short period of time only. Using data
the market divided by the variance of the market. Beta can be easily computed through Microsoft covering five to ten years is suggested
Office Excel but due to the complexity of the formula in terms of manually computing beta, sources because such period will often cover the
will be cited instead on where beta can be found. booms and busts of an economic cycle.
• Emphasize that in getting an estimate of the non-systematic risk, the total risk will be computed first
then from this, the systematic risk will be deducted.
• Clarify the components of the σ formula:
- xi – return
- x̄ – average of returns
- n – no. of data points
• EASY for xi and x̄, AVERAGE for (xi-x̄)2, DIFFICULT for σ: Practice by computing the volatility (σ) of
the following stocks (equity investments):
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JFC GLO
Teacher Tips:
Year Stock Return xi x̄ (xi-x̄)2 Year Stock Return xi x̄ (xi-x̄)2 Note: Beta of investments assets,
Price Price particularly of stocks, can be found on
research engines such as Bloomberg and
30/1/2014 152.00 30/1/2014 1,710.00 Thomson Reuters and studies of finance
professors such as Aswath Damodaran of
28/2/2014 171.00 28/2/2014 1,700.00 the NYU Stern School of Business.
31/3/2014 171.00 31/3/2014 1,664.00 Solutions are given in a separate

spreadsheet included in this pack.
30/4/2014 172.00 30/4/2014 1,657.00
Company Description: Globe Telecoms
30/5/2014 179.10 30/5/2014 1,690.00 (“GLO”) is the telecommunications
company of the Ayala group with products
30/6/2014 176.00 30/6/2014 1,600.00
such as Globe Tattoo and promos such as
31/7/2014 176.80 31/7/2014 1,735.00 Unli-text and Unli-surf. Universal Robina
Corporation (“URC”) is the retail/consumer
29/8/2014 180.00 29/8/2014 1,800.00 goods company of the Gokongwei group,
famous for Jack and Jill chips and C2 green
30/9/2014 196.00 30/9/2014 1,623.00 tea. DMCI Holdings (“DMC”) is the largest
construction company in the Philippines
31/10/2014 196.00 31/10/2014 1,685.00 owned by the Consunji family. It also has
businesses in coal mining and power
28/11/2014 207.00 28/11/2014 1,750.00 generation, property development, and
nickel mining. Petron Corporation (“PCOR”)
29/12/2014 215.00 29/12/2014 1,730.00 is the biggest oil refinery in the country
σ σ owned by the Ang group. Some of its

gasoline products include Petron Blaze and
Petron Diesel Max.
Emphasize that σ computed represents

total risk.
Note that formula for return should be:

stock price current divided by stock price
previous less 1.
Clarify that n-1 is used as divisor because

only a sample of data is used.
While total risk can be broken down to

systematic and non-systematic risk, the
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breakdown formula is beyond the scope or
coverage of this course.
URC DMC
Year Stock Return xi x̄ (xi-x̄)2 Year Stock Return xi x̄ (xi-x̄)2

Price Price
30/1/2014 116.000 30/1/2014 11.768
28/2/2014 139.000 28/2/2014 13.657
31/3/2014 141.000 31/3/2014 13.775
30/4/2014 145.000 30/4/2014 14.129
30/5/2014 148.000 30/5/2014 14.021
30/6/2014 153.000 30/6/2014 14.562
31/7/2014 161.000 31/7/2014 14.375
29/8/2014 161.000 29/8/2014 15.743
30/9/2014 186.000 30/9/2014 15.536
31/10/2014 185.000 31/10/2014 15.939
28/11/2014 194.000 28/11/2014 16.038
29/12/2014 195.000 29/12/2014 15.447
σ σ
307
PCOR
Teacher Tips:
Year Stock Return xi x̄ (xi-x̄)2 Alternative Presentation: Show the 3 sample
Price portfolios and ask the learners to compare
σ and allow them to discuss what it means.
30/1/2014 13.98 Emphasize the effect of diversification.
28/2/2014 13.74
31/3/2014 11.74
30/4/2014 12.28
30/5/2014 11.98
30/6/2014 12.74
31/7/2014 12.32
29/8/2014 11.66
30/9/2014 11.78
31/10/2014 11.82
28/11/2014 11.10
29/12/2014 10.60
σ
4. Diversification (10 minutes)

• To minimize investment risk, an investor has to have a diversified portfolio. The composition of the
portfolio depends on the risk appetite of the investor. A more conservative investor (i.e. investor
who has less appetite for risk) may have a portfolio which is more skewed to fixed income
instruments like time deposits. On the other hand, an investor who has a higher appetite for risk
(i.e. an investor who is more willing to take risk) may have a portfolio which is more skewed to
equity investments.
• Define diversification.
308
Diversification is a risk management technique that combines a wide variety of investments within a portfolio to reduce risk. A well-
diversified portfolio can eliminate non-systematic risk.
• Cite examples of how a more diversified portfolio can reduce the standard deviation of the portfolio:
Five-Stock PHP 10,000 Portfolio (JFC, GLO, URC,

Two-Stock PHP 10,000 Portfolio (JFC and DMC) DMC, and PCOR)
Year Portfolio Return x̄ (xi-x̄)2 Year Portfolio Return x̄ (xi-x̄)2
Value xi Value xi
30/1/2014 10,000.00 30/1/2014 10,000.00
28/2/2014 11,427.60 14.3% 2.9% 1.3% 28/2/2014 10,921.56 9.2% 2.9% 0.4%
31/3/2014 11,477.74 0.4% 2.9% 0.1% 31/3/2014 10,647.87 -2.5% 2.9% 0.3%
30/4/2014 11,661.04 1.6% 2.9% 0.0% 30/4/2014 10,859.22 2.0% 2.9% 0.0%
30/5/2014 11,848.70 1.6% 2.9% 0.0% 30/5/2014 10,981.69 1.1% 2.9% 0.0%
30/6/2014 11,976.59 1.1% 2.9% 0.0% 30/6/2014 11,122.52 1.3% 2.9% 0.0%
31/7/2014 11,923.45 -0.4% 2.9% 0.1% 31/7/2014 11,337.00 1.9% 2.9% 0.0%
29/8/2014 12,609.95 5.8% 2.9% 0.1% 29/8/2014 11,593.20 2.3% 2.9% 0.0%
30/9/2014 13,048.32 3.5% 2.9% 0.0% 30/9/2014 12,009.73 3.6% 2.9% 0.0%
31/10/2014 13,219.55 1.3% 2.9% 0.0% 31/10/2014 12,139.22 1.1% 2.9% 0.0%
28/11/2014 13,623.45 3.1% 2.9% 0.0% 28/11/2014 12,428.98 2.4% 2.9% 0.0%
29/12/2014 13,635.51 0.1% 2.9% 0.1% 29/12/2014 12,356.12 -0.6% 2.9% 0.1%
1.7% 0.9%
σ 4.2% σ 3.1%
309
PSEi-invested PHP 10,000 Portfolio
Year Value Return x̄ (xi-x̄)2

xi
30/1/2014 10,000.00
28/2/2014 10,635.31 6.4% 1.7% 0.2%
31/3/2014 10,641.46 0.1% 1.7% 0.0%
30/4/2014 11,103.62 4.3% 1.7% 0.1%
30/5/2014 11,003.88 -0.9% 1.7% 0.1%
30/6/2014 11,329.41 3.0% 1.7% 0.0%
31/7/2014 11,363.36 0.3% 1.7% 0.0%
29/8/2014 11,671.36 2.7% 1.7% 0.0%
30/9/2014 12,055.69 3.3% 1.7% 0.0%
31/10/2014 11,944.22 -0.9% 1.7% 0.1%
28/11/2014 12,074.41 1.1% 1.7% 0.0%
29/12/2014 11,968.78 -0.9% 1.7% 0.1%
0.6%
σ 2.4%
• Show that the standard deviation computed for a portfolio goes down as the component stocks increase in number. Notice that the PSEi has
the least volatility because it is composed of 30 stocks.
1. Describe investment risk through this video (https://www.youtube.com/watch?v=3qv7E2yIiw4).

2. Emphasize that volatility can also be an opportunity.
310
3. Explain the value of properly understanding the risk of the product they are investing in.
Quiz: Compute the standard deviation of the following stocks and the PSEi. Teacher Tips:
(EASY) For xi and x̄ (AVERAGE) for (xi-x̄)2 (DIFFICULT) for σ Solutions are given in a separate
spreadsheet included in this pack.
Sample Quiz
The list can be modified depending on the
preference of the teacher. Historical stock
prices can be found on www.pse.com.ph.
AC JGS

Price Price
30/1/2014 524.00 30/1/2014 39.400
28/2/2014 575.50 28/2/2014 46.900
31/3/2014 578.00 31/3/2014 49.500
30/4/2014 624.00 30/4/2014 50.600
30/5/2014 618.00 30/5/2014 49.300
30/6/2014 647.50 30/6/2014 51.250
31/7/2014 658.00 31/7/2014 53.000
29/8/2014 700.50 29/8/2014 51.450
30/9/2014 740.00 30/9/2014 57.900
31/10/2014 690.00 31/10/2014 63.800
28/11/2014 694.00 28/11/2014 61.650
29/12/2014 694.00 29/12/2014 66.000
σ σ 311

AGI SM

Price Price
30/1/2014 27.100 30/1/2014 704.500
28/2/2014 30.000 28/2/2014 694.000
31/3/2014 28.500 31/3/2014 705.000
30/4/2014 31.150 30/4/2014 725.000
30/5/2014 29.650 30/5/2014 786.000
30/6/2014 29.100 30/6/2014 816.000
31/7/2014 26.350 31/7/2014 797.000
29/8/2014 24.600 29/8/2014 772.000
30/9/2014 26.000 30/9/2014 803.500
31/10/2014 25.300 31/10/2014 783.500
28/11/2014 24.800 28/11/2014 804.500
29/12/2014 22.550 29/12/2014 815.000
σ σ
312
PSEi
Year Stock Return xi x̄ (xi-x̄)2

Price
30/1/2014 6,041.19
28/2/2014 6,424.99
31/3/2014 6,428.71
30/4/2014 6,707.91
30/5/2014 6,647.65
30/6/2014 6,844.31
31/7/2014 6,864.82
29/8/2014 7,050.89
30/9/2014 7,283.07
31/10/2014 7,215.73
28/11/2014 7,294.38
29/12/2014 7,230.57
σ
313
Managing Personal Finance

Content Standards
The learners demonstrate an understanding of the philosophy and practices in LESSON OUTLINE
personal finance. Introduction Identify essential questions and 10
communicate learning competencies
and objectives.
Motivation 10
The learners will be able to: Present how famous personalities became
bankrupt because of overspending.
• Identify money management philosophy
• Apply basic personal finance principles and practices in earning, spending, Instruction/ Give a lecture on personal finance, the 60
Delivery
saving, and investing money personal financial planning process, and its
six key areas.
Enrichment Share the four simple habits for personal 10
The learners shall be able to enumerate money management philosophies. finance success.
(ABM_BF12-IVo-p-26) Evaluation Quiz 30
Specific Learning Outcomes Materials • LCD Projector

At the end of the unit lesson, the learners will be able to: • Laptop with Microsoft Office Powerpoint
OR
• Define personal finance
• Overhead Projector
• Enumerate and define the personal financial planning process
• Acetates
• Describe the six key areas of personal financial planning
Resources
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City.
Rex Bookstore.
(2) Finance websites
314
INTRODUCTION (10 MINS) Teacher Tip
On the essential questions, try to get as
1. Identify the essential questions: much insights from the learners as possible.
• Ask the learners how much they spend every day. Ask them also what do they spend it for.
• How much is their daily allowance from parents?
• Make them compute: daily allowance from parents less daily expenses
• Are they able to save from their allowance?
• If yes, what do they do with their savings? Which investments can they put
their savings into?
• If no, how do they address the deficit? Do they ask from their parents? Is this
a good practice?
throughout the discussion.
3. Communicate learning competencies and objectives

• Enumerate the learning competencies.
• Enumerate money management philosophies.
• Define personal finance
• Enumerate and define the personal financial planning process.
• Describe the six key areas of personal financial planning.
1. Share the story of top celebrities who went broke through a video: Top 10 Celebrities Who Went Teacher Tip
Broke. (2015). YouTube. Retrieved 8 May 2016, from https://www.youtube.com/watch? Let the learners appreciate that even some
of the biggest and richest celebrities can
v=eh3TgZ_V_S8 still go bankrupt if they have poor money
management practices.
2. Emphasize to the learners that these people have successfully reached career peaks accompanied If you can’t access the video, refer to the list
below:
315
by huge fortune. However, because of poor personal financial planning, they still went broke due to 1. Toni Braxton – earned approximately
USD170 million. He was a shopaholic,
overspending practices and lack of appropriate investments.
diagnosed with Angina and Lupus, and
filed for bankruptcy twice.
2. Nicolas Cage – one of the highest paid
3. Ask them if they want to be like these celebrities.
actors in Hollywood, made bizarre
purchases such as castles, islands, and
dinosaur skulls. He ended up with a
4. Encourage them to appreciate the value of financial planning as early as now so they are able to
USD14 million debt to the Internal
internalize it and make it part of their system so that, when it’s their turn to reach fame and fortune, Revenue Service (IRS).
they will know how to manage their finances well and not go broke. 3. Mike Tyson – earned approximately
USD300 million over his entire boxing
career but got into a divorce and various
addictions, squandered his money on
homes, cars, parties, and tigers, and
filed for bankruptcy in 2003.
If the learners are successfully motivated,

they will be more curious about what
personal finance is.
1. Personal Finance.
• Define Personal Finance. (Source: Investopedia - Sharper Insight. Smarter Investing. | Investopedia.
(2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com)
• Personal finance includes all financial decisions and activities of an individual including budgeting,
insurance, mortgage planning, savings, and retirement planning.
• It involves analyzing current financial positions, projecting short-term and long-term funding needs,
and executing a plan to fulfil those needs considering individual financial constraints.
• It is primarily dependent on one’s earnings, cost of living, and personal goals and wants.
• Encourage participation through posing the following questions to the learners:
• Who of them has done or does personal budgeting? How did/do they do it?
• What are their personal goals and wants at their age? Do they have the financial capacity to fulfil
them?
316
2. Personal financial planning process.
• Show the chart below. (Source: Private Financial Design. (2016). Privatefinancialdesign.com. Retrieved
8 May 2016, from http://privatefinancialdesign.com)
Teacher Tips:
• Explain each step of the personal financial planning process. (Source: Private Financial Design. (2016). Examples:
Privatefinancialdesign.com. Retrieved 8 May 2016, from http://privatefinancialdesign.com) • Objective Setting – A mom wants to have
PHP1 million after 10 years for her
daughter’s education.
A. Objective Setting • Data Gathering – Interview the mom to
• Quantify monetary objectives with definite time frames. know how much savings she has and her
• Prioritize objectives. current sources of income.
• Data Analysis – Map the mom’s net cash
• Examine these objectives with an individual’s resources and limitations.
flows and compute her required return to
reach her target of PHP1 million after 10
B. Data gathering years.
• Use surveys, questionnaires, and interviews to gather quantitative and qualitative information from • Financial Plan Recommendation – Identify
the individual. stocks, mutual funds or other assets which
can generate the mom’s required return.
• Quantitative – for assessing financial status (i.e. investments, cash flow, liabilities, etc.) • Plan Implementation – Help the mom
• Qualitative – to identify individual’s goals and objectives, lifestyle, risk-tolerance, etc. open an account so she can invest in the
recommended financial plan.
C. Data Analysis • Plan Monitoring – Check regularly
whether the fund is growing as planned.
• Analyze the individual’s financial position and cash flows. Consider other alternative assets if
317 performance is not good.
• Review legal papers (i.e. insurance policies, trust agreements, wills, etc.).
• Evaluate objectives vis-à-vis the individual’s resources and economic conditions.
D. Financial Plan Recommendation

• Propose financial products.
• At this point, the individual can comment on the proposed solutions.
E. Plan Implementation
• Assist the individual in the execution of the recommended financial plan.
• Implementation may involve other entities so assist the individual in dealing with the parties involved in the execution of the financial plan.
F. Plan Monitoring
• Review the financial plan periodically to evaluate changing market conditions (i.e. economic conditions, taxes, interest rates, etc.).
• Evaluate the financial plan regularly to see if it effectively meets the individual’s goals and objectives.
3. Six Key Areas of Personal Financial Planning.

• Show chart below (Source: World’s Largest Professional Network | LinkedIn. (2016). Linkedin.com. Retrieved 8 May 2016, from https://
www.linkedin.com/)
(a) Financial (b) Adequate

(c) Tax Planning
Position Protection
(d) Investment
(e) Retirement
and Accumulation (f) Estate Planning
Planning
Goals
• Explain each key area of personal financial planning (Source: AdvisorNet Financial — Index. (2016). Advisornet.com. Retrieved 8 May 2016,
from http://www.advisornet.com/; World’s Largest Professional Network | LinkedIn. (2016). Linkedin.com. Retrieved 8 May 2016, from https://
www.linkedin.com/)
A. Financial Position
318
• Understanding of personal resources by checking an individual’s net worth and cash flow.
• Net worth = assets less liabilities at a point in time
• Cash flow = expected sources of income less expected expenses within a period (i.e. year)
• Helps in determining the time frame to which personal goals can realistically be met.
• May need to answer the following questions:
• Do they have a clear understanding of their goals?
• How do they track their income, expenses, and net worth?
• What financial benefits do they get from their employer?
B. Adequate Protection
• Analysis of protection needed for unforeseen risks.
• Includes risks of liability, property, death, disability, health, and long-term care.
• Some insurance plans enjoy some tax benefits.
• What things can they not afford to lose?
• How will they take care of their dependents?
• How have they planned for financial risks such as disability, illness, long-term care, and death?
C. Tax Planning
• Management of when and how much taxes will be paid.
• Understanding possible tax incentives, deductions, rebates, etc. can have a significant impact on managing personal finances given the
magnitude of taxes paid by an individual.
• How do they manage their taxes?
• How do they plan the timing of income and deductions for tax purposes?
• Are they comfortable with the tax environment applicable to them?
D. Investment and Accumulation Goals

• Planning on wealth accumulation for large purchases such as house, educational expenses, investments for retirement, etc.
• What are their goals for wealth accumulation? (i.e. education, home, business, retirement comfort, etc.)
• How are their current investments performing to meet their goals?
• How much will they need? When will they need it?
319
E. Retirement Planning
• Understanding the cost of retirement.
• Analysis of cash flows to come up with investment plans that will meet the costs of retirement in the
future.
• How are they preparing for their retirement?
• How are their liabilities affecting their retirement objectives?
• Do they think they can maintain their standard of living during their retirement?
F. Estate Planning
• Planning for disposition of one’s assets after death.
• Estate taxes paid to the government are huge, so avoiding these taxes can significantly impact
one’s personal finances.
• How should their assets be distributed upon death?
• How will their intentions be carried out? (i.e. will, trust, power of attorney, etc.)
ENRICHMENT (10 MINUTES) Teacher Tips:

If you can’t access the video, refer to the list
A. Share the four simple habits for personal finance success through this video: “Four Simple Habits below:
1. Save money – spend less than what they
for Personal Finance Success” (Patzer, A. (2009). Four Simple Habits for Personal Finance Success -- earn.
Mint Featured on ABC News Money Matters. YouTube. Retrieved 8 May 2016, from https:// 2. Avoid debt – manage their credit and
www.youtube.com/watch?v=R0TznyjIZxA) debt wisely.
3. Invest – invest what they save.
B. Emphasize to the learners that at their age, they should start internalizing these habits to imbibe in 4. Don’t lose it – protect their downside by
them the good practices of personal finance. This will greatly help them avoid going broke. diversification or insurance.
C. Ask the learners to enumerate the four simple habits for personal finance success.
D. Encourage them to make these their habits as well.
320
Answer Key:
QUIZ
Part 1: C, E, A, B, D
Part 2: D, B, E, C, A
1. (EASY) Match the step in the personal financial planning process in column A with its description in
column B by writing the capital letter on the left side of column A (Source: Private Financial Design.
(2016). Privatefinancialdesign.com. Retrieved 8 May 2016, from http://privatefinancialdesign.com.)
(A) Personal Financial Planning Process Step (B) Description
___1 Data Gathering A. Periodic review of the financial plan to evaluate

changing market conditions (i.e. economic
conditions, taxes, interest rates, etc.).
___2 Financial Plan Recommendation B. Quantifying monetary objectives with definite

time frames. Prioritizing objectives.
___3 Plan Monitoring C. Using surveys, questionnaires and interviews to

gather quantitative and qualitative information from
the individual.
___4 Objective Setting D. Analysis of the individual’s financial position and

cash flows. Review of legal papers. Evaluation of
objectives vis-à-vis the client’s resources and
economic conditions.
___5 Data Analysis E. Financial products will be proposed. At this point,

the individual can comment on the solutions
proposed.
321
2. (AVERAGE) Match the key area of personal financial planning in column A with its description in column B by writing the capital letter on the
left side of column A (Source: World’s Largest Professional Network | LinkedIn. (2016). Linkedin.com. Retrieved 8 May 2016, from https://
www.linkedin.com/).
(A) Key Area of Personal Financial Planning (B) Description
___1 Financial Position A. Planning on wealth accumulation for large

purchases such as house, educational expenses,
investments for retirement, etc.
___2 Tax Planning B. Management of when and how much taxes will
be paid.
___3 Retirement Planning C. Analysis of protection needed for unforeseen

risks.
___4 Adequate Protection D. Understanding of personal resources by checking

an individual’s net worth and cash flow.
___5 Investment and Accumulation Goals E. Understanding the cost of retirement. Analysis of
cash flows to come up with investment plans that
will meet the costs of retirement in the future.
3. Essay: (DIFFICULT) Assume you are 18 years old and you were able to save PHP50,000. Given what you’ve learned on portfolio
diversification, how will you allocate your savings to bank time deposit and stocks (i.e. 100%-0%, 50%-50%, etc.)? Explain your answer.
322
Biographical Notes
ARTHUR S. CAYANAN, PH.D JERELLEEN A. RODRIGUEZ
Team Leader Writer
Dr. Arthur Cayanan is presently a Professor at the Virata Ms. Rodriguez is an Instructor IV at the Virata School of
School of Business, University of the Philippines - Diliman. He is Business in the University of the Philippines - Diliman, teaching
also designed as an Investment Officer under the UP Business Public Accounting Practice and Advanced Accounting. She
Research Foundation, Inc. He received his doctorate degree in graduated cum laude with a degree in Bachelor of Science in
Business Administration and master’s degree in Economics at UP Business Administration and Accountancy from UP Diliman and is
Diliman, in addition to completing his bachelor’s degree (cum an awardee of the Ester Tanco Scholarship. Ms. Rodriguez
laude) in BS Business Administration and Accountancy. He also garnered 6th place in the October 2013 CPA Licensure
garnered 7th place in the licensure examination for Certified Examination given by the Professional Regulation Commission.
Public Accountants. He has been teaching Accounting for Non- Prior to her teaching position, she was a Tax Associate for Sycip,
Accountants, Capital Budgeting, and Financial Statement Gorres, Velayo, and Co, primarily responsible for handling tax
Analysis for many years. engagements involving various industries as part of the Global
Compliance and Reporting group of the largest auditing firm.
Dr. Cayanan has provided lectures to multiple institutions
in the Philippines. He is a lecturer, course developer, and ARTHUR P. BARRIDO, JR.
program designer for both public and private companies around Writer
the country such as the Security and Exchange Commission Prof. Arthur Barrido works as a professor of Accounting
(SEC), L’oreal Philippines, Inc., Nestle Philippine, San Miguel and Finance at the College of Management in the University of
Corporation, Petron Corporation, and Bank of the Philippine the Philippines Visayas. His areas of expertise include Financial
Islands, to name a few. Furthermore, he has accomplished Accounting/Management Accounting, and Financial
various research works and projects such as The Impact of Management/Investment Management. Prof. Barrido graduated
Deregulation on the Financial Performance of PLDT (2012), from UP Visayas with a Bachelor of Science in Business
Pricing in Regulated Industries: The Telecommunications Sector, Administration major in Accounting and Master of Management
2012-13 (with Dr. Ivy Suan), and Analysis and Review of Financial Business Management. In addition, he became a Certificate
Statements of Public Corporations, Securities and Exchange Public Accountant in 1988. He has been an integral member of
Commission (July 2002 – 2009). UP Visayas as a Faculty since 1993, Investment Officer since
2001, and Chairperson (Department of Accounting) since 2009.
323
AL-HABBYEL YUSOPH DIOGENES C. DY
Writer Writer
Mr. Al-Habbyel Yusoph is an instructor for Financial Mr. Diogenes Dy currently teaches Accounting and
Accounting and Business Feasibility courses at the Virata School Finance courses at the Virata School of Business in the University
of Business in the University of the Philippines - Diliman. Aside of the Philippines - Diliman. Aside from the instructor role, he is
from his position as an instructor, he is presently a part-time also the designated coach of the UP Diliman team for the
associate for Future Value Consulting and a Business Analyst for Chartered Financial Analyst Institute (CFA) Global Investment
Mitchell Madison Group Management Consulting. He graduated Research Challenge competition. Mr. Dy graduated Magna Cum
Magna Cum Laude in BS Business Administration and Laude in BS Business Administration and Accountancy at UP
Accountancy in UP Diliman. In addition, he also ranked 12th in Diliman. After graduation, he passed the Board Licensure
the Board Licensure Examination for Certified Public Accountants Examination for Certified Public Accountants on October 2011.
(October 2014) and Champion in the 15th FINEX-JP Morgan Prior to his current work, he was a Financial Analyst for Philex
Chase Inter-Collegiate Finance Competition. Mining Corporation and Analyst for Credit Suisse.
RACHELLEEN RODRIGUEZ PAMELA LLOREN

Writer Technical Editor
Ms. Racheleen Rodriguez is a part-time instructor in Ms. Pamela Lloren is a lecturer handling Auditing and Accounting
teaching Fundamentals of Derivative Securities in the University subjects in the undergraduate level of the UP Cesar E.A. Virata
of the Philippines Diliman. She is also a full-time Supervision and School of Business at the University of the Philippines - Diliman.
Examination Specialist II for Bangko Sentral of the Philippines. She is also Treasurer for Gandang Kalikasan, Inc., a social
Ms. Rodriguez graduated Cum Laude in BS Business enterprise that promotes the Human Nature product line, a
Administration and Accountancy from UP Diliman. In addition, personal care brand that is pro-Philippines, pro-poor, and pro-
she was a consistent university and college scholar, being an environment. Ms. Lloren graduated Cum Laude in BS Business
awardee of Posco Asia Foundation Scholarship which grants Administration and Accountancy at UP Diliman. She then passed
tuition privileges. Her other achievements include having passed the Board Licensure Examination for Certified Public Accountants
the RA 1080 Philippine CPA Boards, awarded the Certified on October 2005.
Internal Auditor (CIA) designation, and passed the CFA Level 1
examination.
324
MA. ANDREA ANTONINO-BALCE
Technical Editor
Ms. Andrea Balce currently works as an Instructor VII
under the Cesar E.A. Virata School of Business Finance at the
University of the Philippines - Diliman. She also works an
Associate Director for FTI Consulting Administrative Services, Inc.
Ms. Balce graduated Magna Cum Laude from UP Diliman with a
degree in BS Business Administration and Accountancy. She is
also awarded a Gold Medal for Excellence in Finance, awarded
by the Institute of the Philippines, and a University Scholarship by
the Bank of Tokyo-Mitsubishi. Apart from her academic
achievements, she has attended multiple training workshops and
seminars regarding Merger Modeling, Financial Modeling,
Advanced Microsoft Excel, and Microsoft Access.
PATRICIA CARMELA I. LUMANLAN

Copyreader
Ms. Patricia Lumanlan primarily works as a copywriter for
Campaigns & Grey Inc., handling multiple clients such as Sun
Cellular, Rockwell Land, Universal Robina Corporation, and
Lamoiyan in planning, developing, and executing various
marketing and advertising campaigns. Through her primary
occupation, she has garnered an Award for Excellence and an
Award for Merit presented at the Philippine Quill Awards 2014
for exemplary and notable work under Sun Cellular’s Project
Evolver. Moreover, she has been a freelance for almost ten years,
acting as art director, graphic designer, and copywriter in
developing creative materials for various independent clients.
Ms. Lumanlan graduated with a degree in Bachelor of Fine Arts,
Major in Information Design and Minor in Japanese Studies, at
the Ateneo de Manila University.
325

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The Commission on Higher Education

in collaboration with the Philippine Normal University

Teaching Guide for Senior High School

Part 1 1 Part 4 184

Part 2 10 Sources and Uses of Short-Term and Long-Term Funds

Part 3 19 Part 1 201

Review of Financial Statement Preparation, Analysis, and

Part 1 37 Basic Long-term Financial Concepts

Part 2 54 Part 1 222

Part 3 60 Part 2 240

Part 4 68 Part 3 248

Part 5 76 Part 4 255

Part 6 87 Part 5 268

Part 7 94 Introduction to Investment

Part 8 99 Part 1 285

Financial Planning Tools and Concepts Part 2 300

Part 1 119 Managing Personal Finance 314

Part 2 139 Biographical Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323

College Readiness Standards Foundational Skills DepEd Functional Skills

Global awareness, scientific and economic literacy, curiosity,

Global awareness, media literacy, technological literacy,

Global awareness, multicultural literacy, collaboration and

CONTENT CONTENT STANDARD PERFORMANCE STANDARD LEARNING COMPETENCIES CODE

4. compare and contrast the

5. explain the flow of funds

CONTENT CONTENT STANDARD PERFORMANCE STANDARD LEARNING COMPETENCIES CODE

2. Review of Financial the process of preparing solve exercises and problems

2. define the measurement

3. perform vertical and

4. compute, analyze, and

CONTENT CONTENT STANDARD PERFORMANCE STANDARD LEARNING COMPETENCIES CODE

CONTENT CONTENT STANDARD PERFORMANCE STANDARD LEARNING COMPETENCIES CODE

5. describe the risk-return 4. apply mathematical

5. explain the risk-return

CONTENT CONTENT STANDARD PERFORMANCE STANDARD LEARNING COMPETENCIES CODE

6. Introduction to investment the definition, purpose, kinds, 1. identify the types of

3. measure and list ways to

7. Managing Personal Finance the philosophy and practices in 1. identify money

CODE BOOK LEGEND

SAMPLE CODE: ABM_BF12-IIIa-1

First Entry ABM_BF12

explain the major role of financial

Cabrera, Elenita B. Management Advisory Services. Manila: Conanan, 2015.

Cabrera, Elenita B. Management Consulting. Manila: Conanan, 2015.

Gitman, Lawrence J. Principles of Financial Management. New York: Pearson 2014

Introduction to Financial Management

Enrichment Integration of learning 5

1. Distribute the Course Outline/Curriculum and read the subject description.

2. Go through the various topics and highlight the following:

4. Homework for next session:

INTRODUCTION/MOTIVATION (40 MINS)

1. Finance in Everyday Life

2. Present Relevant Vocabulary

• Explain that the activity they did is called budgeting.

• Continue to recall from ABM 1 the forms of business organizations:

• Ask how and where can they buy stocks?

4. Knowing the Shareholder

INSTRUCTION (45 MINS)

1. Measurement of the shareholder’s wealth Teacher Tips:

• profitability • macroeconomic conditions

• Discuss how each factor influences market price

Income Statement Cash Flows Income Statement Cash Flows

Income Statement Cash Flows