INTRODUCTION TO FINANCE

Finance: Definition

(n) management of money, the monetary support for an enterprise, or the resources of a government, company, or
person.

(v) to provide capital for a person or enterprise.

The word finance is derived from the Latin word “finer” meaning “to end” or “to pay”. When a person pays his bill, the
financial matter is ended.

Finance is a function of:

1. Allocating available funds;

2. Acquiring needed funds; and
3. Utilizing these funds to achieve set goals

Allocation means determining where to use funds currently available to the firm. Acquisition means obtaining funds
from the right sources at the right time. Utilization means using the funds. This definition will apply to persons and
entities whether they are aiming for profit or not. Funds are needed to finance operations of people and organizations.

Classification of Finance

A. As to Form of Negotiation
a. Direct Finance: finance involved in direct borrowing. The security acquired (called direct security) by the
surplus unit (lender) is the same security issued by the deficit unit (borrower). A direct security is a
financial instrument a deficit unit issues and sells to a surplus unit with or without the help of a market
specialist like financial intermediaries.
b. Indirect Finance: involves financial intermediaries which act as middlemen when they buy securities for
resale or simply facilitate the sale from the original issuers to the final buyers.
Financial intermediaries buy securities for resale to other investors or saving units. This transaction is an
indirect finance transaction with the security being resold by the financial intermediary termed as
secondary security. When a company issues bonds or stocks to increase its capital, it goes to an
investment banker (a financial intermediary), who usually underwrites (sells) the issue. Here, the
transaction is an indirect finance transaction. Insurance companies issue mortgage-backed securities
(securities collateralized by mortgages they own that they sell to investors. The transaction is called
financial intermediation. The market where indirect finance happens is termed intermediation market.
B. As to User
a. Public Finance: deals with the revenue and expenditure patterns of the government. It is concerned with
government affairs. Government spending and government borrowing are all public finance.
b. Private Finance: all other finance other than public finance in private finance. Classifications of Private
Finance:
i. Personal Finance: finance conducted by individuals/consumers.
ii. Finance of non-profit organizations: finance conducted by charitable, civic, religious
organizations, among others. They spend for their operations and buy long-term assets and
invest any extra money that they have.
iii. Business finance: deals with financing for business firms or for commercial use. The goal of
which is to make a profit.

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Finance in the Business World

Business is any lawful economic activity that involves rendering service; buying and selling goods; converting raw
materials into finished products and selling the same; extracting mineral resources; constructing buildings, road and
infrastructure; providing insurance for a sense of peace; and serving the public like public utilities, transportation and
communication entities. In all of these activities, effectively and efficiently acquiring and utilizing funds make the
difference and that is what business finance is all about.

Efficiency is all about saving time, money or effort. It is the relationship between input and output. Effectiveness is a
measure of quality. It is at times used interchangeably with efficacy. Effectiveness is doing the right things and efficiency
is doing things right. If we combine efficiency and effectiveness, we obtain productivity.

Types of Business Organizations

A. As to Nature or Purpose:
a. Service
b. Trading or Merchandising
c. Manufacturing
d. Banking and Finance
e. Mining or Extractive Industry
f. Construction
g. Genetic Industries (agriculture, forestry, fishing)

B. As to Ownership:
a. Sole proprietorship: owned and controlled by a single individual. The business and the owner are
essentially one.

Advantages of a Sole Proprietorship:

1. Ease of formation
2. Needs only minimum capitalization
3. Sole decision maker
4. Easy to terminate

Disadvantages of a Sole Proprietorship:

1. Unlimited liability
2. Limited access to capital
3. Limited skills, talents and capabilities
4. Inability to attract or retain good employees
5. Limited term of existence
6. Difficulty in measuring success
7. Personal problems may hinder operations or success.

b. Partnership: an association of two or more persons who have agreed to contribute money, property, or
industry to a common fund with the intention of dividing the profits among themselves. The owners of a
partnership are called partners.
In a partnership, there is another concept that equally applies from the business entity concept
pertaining to the relationship of the partners to the partnership. It is the aggregate concept, which
views the partnership as a collection of rights and responsibilities of the individual partners, inasmuch as
the individual partners are jointly liable for all the debts and obligations of the partnership. Each partner
is an agent of the partnership. All actions of each individual partner, so long as they are within the scope
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of the partnership business, bind the partnership, making the partnership liable for whatever
consequences that partner’s action may bring about.

Nature of a Partnership
Partnership allows the pooling of resources for some common purposes. It is contractual in nature
because it is formed through a contract between or among the partners. The partnership can be formed
by either an oral contract/agreement or by a written contract/agreement. All that is needed is that the
partners agreed to form the partnership and are amenable to the terms of the agreement.

Essential Requisites of a Partnership:

1. A contract of partnership which may be oral or written, expressed or implied, subject to the
rules contained in Articles 1771 to 1773 of the New Civil Code.
2. Two or more persons who have the legal capacity to enter into the contract of partnership.
3. Valuable contribution to a common fund which may consist of money, property or industry.
4. An intention to divide the profits between or among the partners.
5. Lawful purposes.

Characteristics of a Partnership

1. Mutual agency
2. Voluntary association
3. Based on Contract
4. Limited life
5. Unlimited liability
6. Division of profit
7. Co-ownership of contributed assets

Advantages of a Partnership

1. Ease of formation
2. Allows pooling of financial resources
3. Allows pooling of skills, expertise, and experience of partners
4. Less government control, supervision and intervention

Disadvantages of a Partnership

1. Limited life
Dissolution is the termination of the life of the partnership but that does not mean that the
partnership will cease operation. It may lead to liquidation (the cessation of operations) or
not, because the remaining partners may decide to continue operation.
2. Unlimited Liability
3. Mutual agency

Organizing a Partnership

A partnership may be constituted in any form except:

1. Where the capital of the partnership is three thousand pesos or more, in which case the contract of
partnership shall appear in a public instrument which must be recorded in the Office of the
Securities and Exchange Commission (SEC).

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2. Where immovable or real rights are contributed into the partnership, in which case a public
instrument shall be necessary.
3. A limited partnership, which must be registered with the Securities and Exchange Commission (SEC).

Registration with the SEC

1. Filing of business name with the SEC for verification. This is to ensure that no two businesses have
exactly the same name.
2. Submission of the following to the SEC:
a. Articles of Co-partnership
b. Verification slip for the business name
c. Written undertaking to change business name if required
d. TIN of each partner and/or that of the partnership
e. Registration data sheet for partnership duly accomplished in six copies
f. Other documents that may be required
3. Pay the registration/filing and miscellaneous fees.
4. Forward documents to the SEC Commissioner for signature.

Contents of the Articles of Co-Partnership

The Articles of Co-Partnership must contain, among others, the following:

1. Name, nature, purpose and location of business.

2. Names of the partners, indicating whether they are general partners or limited partners and their
corresponding addresses and citizenship.
3. Amount of cash, a description and the agreed value of any other property to be originally
contributed by each partner, and any additional contribution that may be made by partners.
4. Term or duration of the partnership; date the partnership should commence or end.
5. Duties, rights and powers of each partner.
6. Manner of dividing profits or losses among the partners.
7. Conditions under which the partners may withdraw money or other assets for personal use.
8. Provision as to whether salaries and/or interest on partners’ capital shall be allowed or not.
9. Manner of keeping the books of accounts, the length of the accounting period, and the date it
should commence or end.
10. Provisions pertinent to dissolution
11. Provisions pertinent to liquidation
12. Other special provisions and stipulations

Types of Partnerships as to Liability of Partners

1. General Partnership: one in which all of the partners are general partners. All partners are
personally liable for partnership debts.
2. Limited Partnership: there is at least one, but not all, limited partner.

Types of Partners

A. As to Liability
a. General Partner: one who has unlimited liability (his liability extends to his personal
assets after partnership debts had been partially paid by the partnership in case of
partnership bankruptcy).

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 b. Limited Partner: one who has limited liability (his liability extends only up to his
interest in the partnership). Interest in the partnership means his capital investment
and any profit due him.
B. As to Investments in the Partnership
a. Capitalist Partner: contributes money and/or assets other than cash.
b. Industrial Partner: contributes knowledge or personal service.
c. Capitalist-Industrial Partner: contributes cash and/or other assets and knowledge or
personal service.

c. Corporation: artificial body or being organized in accordance with the provision of law in which
ownership is divided into shares of stocks.
The Corporation Code of the Philippines defines corporation as an artificial being created by operation
of law, having the right of succession and the powers, attributes, and properties expressly authorized by
law or incident to its existence. Five or more persons are required to organize a corporation called
incorporators. The owners of a corporation are called shareholders or stockholders. The stock
certificates are the written evidence representing ownership in a corporation.

Characteristics of a Corporation:
1. Separate legal existence.
2. Created by operation of law.
3. Transferable units of ownership.
4. Limited liability of stockholders.
5. Continuity of existence.
6. Centralized Management by the Board of Directors.

Advantages of a Corporation
1. Legal capacity to act as a legal entity.
2. Limited liability of shareholders.
3. Transferability of shares.
4. Continuity of life of the corporation.
5. Greater ability to acquire funding.
6. Greater ability to acquire talents, skills and expertise.

Parties to a Corporation

1. Corporators: those who compose the corporation whether they are stockholders or members.
2. Incorporators: the founders of the corporation. They should be at least five, but not more than
fifteen. They need to be all natural persons. They need to own at least one share of stock and
majority of them should be residents and citizens of the Philippines.
3. Stockholders/ Shareholders: owners of shares of stock.
4. Members: corporators of a non-stock corporation.
5. Promoters: promote or find potential incorporators or shareholders who may be interested in
the formation of the corporation.
6. Board of Directors: shall not be less than five nor more than fifteen members. They are
responsible for the formulation of the overall policies for the corporation and for the exercise of
corporate powers.
7. Corporate Officers: officials of the corporation and are considered as employees of the
corporation.

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Incorporation and Organization of a Corporation

1. Promotion: bringing together of the incorporators and persons interested in forming a

corporation and procuring subscriptions or capital for the corporation.
2. Incorporation: the process of formally organizing the corporation.
a. Registration of Business name with the SEC.
b. Drafting and execution of the Articles of Incorporation by the incorporators.
c. Execution of sworn affidavits and Bank Deposit Certificate.
d. Filing of the Articles of Incorporation with the SEC.
e. Issuance by the SEC of the Certificate of Incorporation.
3. Formal Organization and Commencement of Business Operations.
a. Adoption of By-laws
b. Election of the Board of Directors
c. Election of Officers
d. Commencement of business operations

The Articles of Incorporation

The Articles of Incorporation must substantially contain the following matters required by Section 14 of
the Corporation Code of the Philippines:

1. Name of the Corporation

2. Specific purpose or purposes for which the corporation is formed.
3. Location or principal place of business which should be in the Philippines.
4. Term for which the corporation is to exist, nit exceeding fifty years.
5. Names, nationalities, and residences of incorporators.
6. Names, nationalities, and residences of the persons who shall act as directors or trustees until
the first regular directors or trustees are duly elected and qualified in accordance with the Code.
7. In case of stock corporations, the amount of its authorized capital stock, the number of shares
into which it is divided, and the par value of each share (in case of par value shares).
8. In case of stock corporations, the names, nationalities, and residences of the original subscribers
and the amount subscribed and paid by each on his subscription.
9. In case of stock corporations whose shares are no par value shares the authorized capital stock
amount and the number of shares into which share capital is divided.
10. In case of non-stock corporations, the amount of its capital, the names, nationalities and
residences of the contributors and the amount contributed by each.
11. Such other matters as are not inconsistent with law and which the incorporators may deem
necessary and convenient.

The By-laws

By-laws refer to the rules of action adopted by the corporation for its internal government and for the
government of its officers, stockholders, and members. It should be adopted by and filed with the SEC
within one month from the date of incorporation. Section 47 of the Corporation Code suggests the
inclusion of the following matters in the by-laws of a corporation:

1. Time, place and manner of calling and conducting regular or special meetings of directors or
trustees.
2. Time and manner of calling and conducting regular or special meetings of stockholders or
members.

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 3. Required quorum in meetings of stockholders or members and the manner of voting thereto.
4. Form for proxies of stockholders and members and the manner of voting them.
5. Qualifications, duties, and compensation of directors, trustees, officers and employees.
6. Time for holding the annual election of directors or trustees and the mode or manner of giving
notice thereof.
7. Manner of election or appointment and the term of office of all officers other than directors or
trustees.
8. Penalties for the violation of by-laws.
9. In case of stock corporations, the manner of issuing certificates.
10. Such other matters may be necessary for the proper or convenient transaction of its corporate
business and affairs.

Classification of Corporations

1. Public Corporations: formed or organized for the government of a portion of the state, that is,
for political or public purpose connected with the administration of the government. They are
also called municipal corporations or local governments.
2. Private Corporations: formed other than for the government portion of the state. These are
generally classified as:
A. As to Purpose
a. For profit
b. Non-profit
c. Charitable
i. Ecclesiastical/Religious
ii. Eleemosynary/Public Charity
d. Foundation
A foundation is a non-profit organization that donates funds and gives support to
other organizations, or provides the source of funding for its own charitable
purposes.
Contents of the document for establishment of a foundation generally include its
purpose, its activities, the agenda it will engage in, details on supervision and
management of the of the foundation, accounting systems and books to be used
by the foundation, provisions for the dissolution of the foundation, tax status of
its donors both private and corporate, and the tax status of the foundation.
Foundations have no shareholders, although they may have a board, an assembly
and voting members. A foundation may hold assets in its own name for the
purposes set out in its constitutive documents, and its administration and
operation are carried out in accordance with its Articles of Association.

Other private corporations are:

a. Quasi-public corporations: also known as public utilities or public service

corporations, they are private corporations, which, in addition to their private
aim, render public service such as transportation, light, water, telephone and
telegraph communications.
b. Government-owned or controlled corporations: private corporations created or
organized by the government, or of which the government is the majority
stockholder.

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 c. Wasting assets corporations: those engaged in the extraction of mineral or natural
resources.

B. As to How Membership is Represented

a. Stock Corporations: membership is represented by shares of stock. They issue
stock and are authorized to distribute to the holders of such dividends or
allotments of the surplus profits on the basis of the shares held.
i. Open Corporations: Stocks are available for purchase by the general
public.
ii. Closed Corporations: ownership is limited to selected persons or
members.
b. Non-stock Corporations: They do not issue stock and are not created for profit but
for the public good and welfare.

C. As to the State of Incorporation

a. Domestic Corporation: A corporation is considered domestic in the state/country
from which it obtains its charter.
b. Foreign Corporation: A corporation is considered foreign in all countries other
than the one from which it obtains its charter.
A foreign corporation may be either of the following:
i. Resident Foreign Corporation: a foreign corporation which establishes a
branch or office in the Philippines and operates in the Philippines.
ii. Non-resident Foreign Corporation: foreign corporation deriving income
from the Philippines in the form of rent, interest and dividend without
establishing an office or branch in the Philippines.
c. Multinational Corporation: extend their operations in other countries.
D. As to the Number of Persons Composing the Corporation
a. Corporation Sole: There is only one member. This is only applicable to the Church.
It is the bishop or the diocese to which the bishop belongs.
b. Corporation Aggregate: There are several stockholders.

E. As to Legal Right to Corporate Existence

a. De jure Corporation: existing in fact and in law. It is strictly organized in
conformity with the law and recognized by the government.
b. De facto Corporation: a corporation in fact but not in law. It operates as a
corporation but may have not been legally organized.

F. As to Relation to Other Corporations

a. Parent or Holding Corporation: the original corporation from which other
corporations, called subsidiary or sister company emanates. It owns majority of
the shares of the subsidiary company and has the power to directly or indirectly
elect the directors of the subsidiary company.
b. Subsidiary or Sister Corporation: the corporation whose shares of stock are owned
in majority by the partner or holding company. These companies usually pay
management fees to the parent company, aside from the dividends that the
parent company receives as dividends on the stocks of the subsidiary company
that the parent company owns.

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Corporate Capital

Ownership in a corporation is represented by its capital stock. Capital stock is divided into units to
facilitate the transfer of ownership and distribution of profits. A stockholder acquires an interest in the
corporation by buying shares of stock, and his proportionate interest in the assets and profits of the
corporation are determined by the number of shares of stock he owns. Inasmuch as the shares of stocks
represents a right or interest, it is intangible. To evidence such right, the corporation issues stock
certificate. A stock certificate is the tangible written document evidencing ownership in a corporation. In
other words, it is the tangible evidence of an intangible right of ownership in a corporation represented
by the share of stock.

Classes of Shares/Kinds of Stock

1. Value on the stock certificate

a. Par value shares: shares of which the specific money value is shown on the face of the
stock certificate and fixed in the Articles of Incorporation. The primary purpose of par
value is to fix the minimum issue price of the shares. While par value shares may be issued
at a premium, they may not be sold at a discount.
b. No-par value shares: shares without any money value appearing on the face of the stock
certificate. The Corporation Code provides that no-oar value shares may not be issued for
less than five pesos per share.
1) With stated value: No-par value shares may be assigned a stated value in the
Articles of Incorporation or in a Board Resolution made by the Board of Directors
if authorized, or by a majority of the stockholders at a meeting called for that
purpose.
2) Without stated value: True no-par value shares do not have a stated value.
2. Rights to dividends
a. Common shares: entitles the holder to an equal pro rata division of profits without any
preference or advantage over any other stockholder or class of stockholders. It has a
residual interest in the corporation because it receives its interest after preferred
stockholders are given theirs.
b. Preferred shares: one with preferential rights over the common stock.
1) As to assets: such shares will be given preference over common shares in the
distribution of the assets of a corporation in case of liquidation.
2) As to dividends: such shares with preferential rights to share in the earnings of the
corporation.
a)Cumulative: entitled to receive all passes dividends in arrears. The
authority to declare dividends rests with the BOD. All dividends not
declared by the BOD are called passed dividends. Unpaid dividends are
called dividends in arrears.
b) Noncumulative: not entitled to passed dividends.
c)Participating: entitled not only to stipulated dividend but they also share
with the common stock in the dividends that may remain after the
common shares have received dividends at the same rate as the
preferred.
d) Non-participating: entitled to a fixed amount or rate of dividend only.
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 Organization Expense

Under the Philippine Accounting Standards 38, pre-operating expenses do not fall under the definition
of an intangible asset. As such, it should no longer be reported as a deferred asset subject to
amortization. Theoretically, they are now immediately expensed as period costs. However, the BIR, for
tax purposes, still continue to regard them as amortizable.

d. Cooperative: Organizations established by individuals, called members, to provide themselves with good
services, or to produce and dispose of the products of their labor. These individuals have voluntarily
joined together to achieve a common goal through the cooperative created. A patronage refund is the
profit of the cooperative or credit union that is given back to the members in proportion to the amount
of business they do with the cooperative or credit union which is given in relation to the amount of
business a member does with his cooperative. Voting in cooperatives is strictly on a one-man-one-vote
basis. Cooperatives are registered with the Cooperative Development Authority which promulgates
rules and regulations to govern the promotion, organization, registration and supervision of all types of
cooperatives.

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