Business Finance Weeks 1 To 4

Business Finance
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
section 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.
Digital Communication and Technological College Inc.

Business Finance
Prepared by: Ms. Marjorie A. Manukay, LPT
1
BUSINESS FINANCE
WEEK 1 - 2
Introduction to Financial Management
Performance Standard
1. Define Finance
2. Describe who are responsible for financial

management within an organization.
3. Describe the primary activities of the financial

manager
4. Describe how financial manager helps achieving the

goal of the organization
5. Describe the role of financial institutions and markets.

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Define Finance:
 Finance can be defined as the science and art of managing money. (Gitman
& Zutter, 2012)
 Finance is a broad term that describes activities associated with banking,

leverage or debt, credit, capital markets, money, and investments. Basically,
finance represents money management and the process of acquiring needed
funds. Finance also encompasses the oversight, creation, and study of
money, banking, credit, investments, assets, and liabilities that make up
financial systems.
Types of Finance
Since individuals, businesses, and government entities all need funding to operate, the
finance field includes three main subcategories: personal finance, corporate finance, and
public (government) finance.
Personal Finance
Financial planning involves analyzing the current financial position of individuals to formulate
strategies for future needs within financial constraints. Personal finance is specific to every
individual's situation and activity; therefore, financial strategies depend largely on the
person's earnings, living requirements, goals, and desires. Individuals must save
for retirement, for example, which requires saving or investing enough money during their
working lives to fund their long-term plans. This type of financial management decision falls
under personal finance.
Personal finance includes the purchasing of financial products such as credit

cards, insurance, mortgages, and various types of investments. Banking is also considered a
component of personal finance since individuals use checking and savings accounts, and
online or mobile payment services such as PayPal and Venmo.
Corporate Finance
Corporate finance refers to the financial activities related to running a corporation, usually
with a division or department set up to oversee those financial activities. One example of
corporate finance: A large company may have to decide whether to raise additional funds
through a bond issue or stock offering. Investment banks may advise the firm on such
considerations and help them market the securities. Startups may receive capital from angel
investors or venture capitalists in exchange for a percentage of ownership. If a company
thrives and decides to go public, it will issue shares on a stock exchange through an initial
public offering (IPO) to raise cash.In other cases, a company might be trying to budget its
capital and decide which projects to finance and which to put on hold in order to grow the
company. All of these types of decisions fall under corporate finance.
Public Finance

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Public finance includes tax, spending, budgeting, and debt issuance policies that affect how
a government pays for the services it provides to the public. The federal government helps
prevent market failure by overseeing the allocation of resources, distribution of income, and
economic stability. Regular funding is secured mostly through taxation. Borrowing from
banks, insurance companies, and other nations also help finance government spending.
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)
Financial management and Managers
 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.
The Corporate organization Structure

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 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
• 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.
Determine from the list of roles and 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)
• 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)

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• 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).
Financial System
A financial system is a set of institutions, such as banks, insurance companies, and stock
exchanges, that permit the exchange of funds. Financial systems exist on firm, regional, and
global levels
Financial Markets – organized forums in which the suppliers and users of various types of
funds can make transactions directly
Financial Institutions – intermediaries that channel the savings of individuals, businesses,

and governments into loans or investments.
Private Placements - the sale of a new security directly to an investor or group of investors.

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Public Offering - The sale of either bonds or stocks to the general public.
Financial Instruments – is a real or a virtual document representing a legal agreement

involving some sort-of monetary value (Source: Investopedia - Sharper Insight. Smarter
Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from
http://investopedia.com). These can be debt securities like corporate bonds or equity like
shares of stock.
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
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.

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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.
Classification Financial Markets into comparative groups:
Primary vs. Secondary Markets
• To raise money, users of funds will go to a primary market to issue new

securities (either debt or 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 offering of stock is called an initial public offering.
The sale of new securities to one investor or a 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 have previously been purchased. The sale of
previously owned securities takes place in secondary markets.
• The Philippine Stock Exchange (PSE) is both a primary and secondary

market.
Money Markets vs. Capital Markets
• Money markets are a venue wherein securities with short-term maturities (1 year
or less) are sold. They are created because some individuals, businesses,
governments, and financial institutions have temporarily idle funds that they wish to
invest in a relatively safe, interest-bearing asset. At the same time, other
individuals, businesses, governments, and financial institutions find themselves in
need of seasonal or temporary financing.

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• 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).
Financial Institutions
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 Terms Defined Public offering -
The sale of either bonds or stocks to the general public. Private placement - The sale
of a new security directly to an investor or group of investors. Secondary market -
Financial market in which preowned securities (those that are not new issues) are
traded. Money market - A financial relationship created between suppliers and users
of short-term funds. Capital market - A market that enables suppliers and users of
long-term funds to make transactions. 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.

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WEEK 1 AND 2
ACTIVITY SHEET 1
Name: _____________________________ Date: ____________

Grade & Track: _______________________ Teacher:________________
Exercises I ( 10 points)
1.) Explain why shareholder wealth maximization should be the overriding objective of
management.
2.) What other positions can you think of that are related to financial management?
Exercises II ( 1 point each )

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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.
_________2. Dividend payments change directly with changes in earnings per share.
_________3. The wealth of corporate owners is measured by the share price of the stock.
_________4. Financial markets are intermediaries that channel the savings of individuals,
businesses, and government into loans or investments.
_________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.
Exercises III. Multiple Choice ( 1 point each )
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.
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Based on the profit maximization goal, the financial manager would choose _____.
A. Asset 1.
B. Asset 2.
C. Asset 3.
D. Asset 4.
Exercises IV (1 point each)

True/False
________1. High cash flow is generally associated with a higher share price whereas higher
risk tends to result in a lower share price.
________2. When considering each financial decision alternative or possible action in terms
of its impact on the share price of the firm's stock, financial managers should accept only
those actions that are expected to increase the firm's profitability.
________3. 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.
________4. Dividend payments change directly with changes in earnings per share.
________5. The wealth of corporate owners is measured by the share price of the stock.
________6. Risk and the magnitude and timing of cash flows are the key determinants of
share price, which represents the wealth of the owners in the firm.
________7. When considering each financial decision alternative or possible action in terms
of its impact on the share price of the firm's stock, financial managers should accept only
those actions that are expected to maximize shareholder value.
________8. An increase in firm risk tends to result in a higher share price since the
stockholder must be compensated for the greater risk.
________9. Stockholders expect to earn higher rates of return on investments of lower risk
and lower rates of return on investments of higher risk.

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BUSINESS FINANCE
WEEK 3 - 4
Review of Financial Statement Preparation,

Analysis, and Interpretation
Performance Standard
1. To solve exercises and problems that require financial statement

preparation, analysis, and interpretation using horizontal and
vertical analyses, and various financial ratios.
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)

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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.
ASSETS = LIABILITIES + OWNER’S EQUITY

P 500.00 P 500.00
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.

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• 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 is 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.
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.
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.
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- 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.
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.
If journalized:

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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, revenue, an
expense, or a drawing account is affected.
B. For each account affected by the transaction, determines

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.
• 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.
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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

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ledgers must total the general ledger or else there must be an investigation to
identify the source of discrepancies.
Subsidiary Ledgers
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.

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• 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.
• 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.
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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.
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.
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.
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• 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.
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.

Business Finance
22
d. Statement of Cash Flows
• The statement of cash flows reports a company’s cash inflows and

outflows for a period.
• 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.

Business Finance
23
WEEK 3 and 4
ACTIVITY SHEET 2
Review of Financial Statement Preparation, Analysis, and Interpretation
Name: _____________________________ Date: ____________

Grade & Track: _______________________ Teacher: ________________
Exercises I. (20 points)
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.

Business Finance
24
2. Prepare a multi-step income statement for the retail company, ABC, for the year ending
December 31, 2014 given the information below:
Exercises II (1point each)
1. Indicate whether the following items would appear on the income statement (IS), or
balance sheet (BS).
A. ________ Office Supplies

B. ________ Accounts Payable
C. ________ Computer Equipment
D. ________ Commission Fees Earned
E. ________ Salaries Expense
F. ________ B. So, Capital
G. ________ Accounts Receivable

Business Finance
25

Business Finance Weeks 1 To 4

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Business Finance

Digital Communication and Technological College Inc.

Introduction to Financial Management

2. Describe who are responsible for financial

3. Describe the primary activities of the financial

4. Describe how financial manager helps achieving the

5. Describe the role of financial institutions and markets.

Digital Communication and Technological College Inc.

 Finance is a broad term that describes activities associated with banking,

Personal finance includes the purchasing of financial products such as credit

Digital Communication and Technological College Inc.

Finance is concerned with decisions about:

- How much of their earnings they spend

- How much they save or how much they need

Financial management and Managers

The Corporate organization Structure

Digital Communication and Technological College Inc.

 Formulating marketing strategies and plans.

 Ensuring production meets customer demands.

Digital Communication and Technological College Inc.

 Coordinating the functions of administration, finance, and marketing

Financial Institutions – intermediaries that channel the savings of individuals, businesses,

Digital Communication and Technological College Inc.

Financial Instruments – is a real or a virtual document representing a legal agreement

A Financial Asset is any asset that is:

A Financial Liability is any liability that is a contractual obligation:

 To deliver cash or other financial instrument to another entity.

 Examples: Ordinary Share Capital, Preference Share Capital

Debt and Equity Instruments

• Treasury Bonds and Treasury Bills are issued by the Philippine

• Corporate Bonds are issued by publicly listed companies. These bonds

Digital Communication and Technological College Inc.

• Preferred Stock has priority over a common stock in terms of claims

Classification Financial Markets into comparative groups:

Primary vs. Secondary Markets

• To raise money, users of funds will go to a primary market to issue new

• The sale of new securities to the general public is referred to as a public

• However, suppliers of funds or the holders of the securities may decide

• The Philippine Stock Exchange (PSE) is both a primary and secondary

Money Markets vs. Capital Markets

Digital Communication and Technological College Inc.

Identify examples of financial institutions:

 Insurance Companies - Individuals purchase insurance (life, property and casualty,

 Other financial institutions include pension funds like Government Service

Digital Communication and Technological College Inc.

Introduction to Financial Management

Name: _____________________________ Date: ____________

Exercises II ( 1 point each )

Exercises III. Multiple Choice ( 1 point each )

3. The major securities traded in the capital markets are ____.

4. The primary goal of the financial manager is _____.

Exercises IV (1 point each)

Digital Communication and Technological College Inc.

Review of Financial Statement Preparation,

1. To solve exercises and problems that require financial statement

Accounting is the systematic and comprehensive recording of financial transactions

Digital Communication and Technological College Inc.

ASSETS = LIABILITIES + OWNER’S EQUITY

• For example, if we were to increase cash (an asset) we might have to

ASSETS = LIABILITIES + OWNER’S EQUITY

• There is also a concept of normal balances. A normal balance,

• In the accounting equation, asset is on the left side, while liabilities

• On the other hand, liabilities and owners’ equity have a credit

Name: _________________ Date:

Name: _________________ Date: