Learning Module for Business Finance

Republic of the Philippines

Department of Education
National Capital Region
DIVISION OF CITY SCHOOLS – MANILA
Manila Education Center Arroceros Forest Park
Antonio J. Villegas St. Ermita, Manila

BUSINESS FINANCE
The Flow of Funds within an Organization-
through and from the Enterprise

Quarter 1 Week 3 Module 3

Learning Competencies:
 Enumerate the varied financial institutions and their
 corresponding services. (ABM_BF12-IIIa-3)
 Compare and contrast the varied financial Instruments
 (ABM_BF12-IIIa-4)
 Explain the flow of funds within an organization through and
from enterprise—and the role of the financial manager.

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 Learning Module for Business Finance

HOW TO USE THIS MODULE?

Before starting the module, I want you to set aside other task/s that
may disturb you while enjoying the lessons. Read the simple instructions
below to successfully enjoy the objectives of this kit. Have fun!

Follow carefully all the contents and instructions indicated in

every page of this module.
Write on your notebook the concepts about the lessons. Writing
enhances learning, which is important to develop and keep in
mind.
Perform all the provided activities in the module.
Let your facilitator/guardian assess your answers using the
answer key card.
Analyze conceptually the posttest and apply what you have
learned.
Enjoy studying!

PARTS OF THE MODULE

 Expectations - These are what you will be able to know after completing
the lessons in the module.

 Pre-test - This will measure your prior knowledge and the concepts to be
mastered throughout the lesson.

 Looking Back to your Lesson - This section will measure what learnings and
skills did you understand from the previous lesson.
 Brief Introduction- This section will give you an overview of the lesson.

 Activities - This is a set of activities you will perform with a partner.

 Remember - This section summarizes the concepts and applications of
the lessons.

 Check your Understanding - It will verify how you learned from the lesson.

 Post-test - This will measure how much you have learned from the entire module

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 Learning Module for Business Finance

LESSON
The Flow Of Funds Within An Organization-
1
Through And From The Enterprise

EXPECTATIONS

When you finish this module, you should be able to:

  enumerate the varied financial institutions and their corresponding services
  compare and contrast the varied financial instruments
 explain the flow of funds within an organization – through and from the
enterprise—and the roles of a financial manager
Specifically, this module will help you to:



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

Let us start your journey in learning more on

the the Flow of Funds within an organization-
through and from the Enterprise. I am sure
PRETEST you are ready and excited to answer the
Pretest. Smile and Enjoy!

MULTIPLE CHOICE QUESTIONS

Directions: Choose the letter corresponding to the correct answer for each of
the questions provided below. Encircle your answer.
1. The ___________ is created by a financial relationship between suppliers and
users of short-term funds.

A. financial market C. Stock Market

B. money market D. capital market

2. Firms that require funds from external sources can obtain them from
______________________.

A. financial market C. financial institutions

B. private placement. D. all of the above

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 Learning Module for Business Finance

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 each asset costs Php35,000.00 and is expected to provide
earnings over a three-year period as described below.

Year 1 Year 2 Year 3

1. ₱ 2,100,000.00 ₱ 1,500,000.00 ₱ 600,000.00

2. ₱ 900,000.00 ₱ 1,500,000.00 ₱ 2,100,000.00

3. ₱ 300,000.00 ₱ 200,000.00 ₱ 1,900,000.00

4. ₱ 600,000.00 ₱ 1,200,000.00 ₱ 1,200,000.00

Based on the profit maximization goal, the financial manager would

choose _________________.

A. Asset 1. B. Asset 2. C. Asset 3. D. Asset 4.

II. TRUE or FALSE

Directions: Before each statement on the space provided, write TRUE if the
statement is correct or FALSE if the statement is incorrect.
_____________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.

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 Learning Module for Business Finance

______________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.

Great, you finished answering

the questions. You may request your
LOOKING BACK TO YOUR LESSON facilitator to check your work.
Congratulations and keep on
learning!

Recall from the previous discussions, that one of the functions of a

financial manager is financing and investing of funds. Now, if you are going to
save the money, where would you keep it? Maybe, you will place it in Banks,
Piggy bank, Investments – stocks, mutual funds, insurance, etc.

Activity I. If you place your money in a business opportunity, what business

industry you would like to try and why? You may write your answers on the box.

Activity 2. Now, that you have a business running and profitable, you decide to
expand but do not have enough cash to pay for the expansion. Where can you get
the additional funding?

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 Learning Module for Business Finance

It maybe from your parents, ask or lend from friends, banks, or

lending institutions. The 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?

You will not be able to find someone to invest your money to get
funds to start your expansion. Here is where the Financial System comes
in. But before we go further with our topic on Financial System, let us
asses your in-depth knowledge on it.

Part I. TRUE OR FALSE

Directions: Before each statement, write TRUE if the statement is correct or
FALSE if the statement is incorrect. Write your answer on the space provided
before each number.

______________1. The wealth of corporate owners is measured by the share price of

the stock.
______________2. Risk and the timing of cash flows are the key
determinants of share price, which represents the wealth of the
owners in the firm.
______________3. 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.
______________4. An increase in firm risk tends to result in a higher share price
since the stockholder must be compensated for the greater risk.
______________5. Stockholders expect to earn higher rates of return on
investments of lower risk and lower rates of return on
investments of higher risk.

BRIEF INTRODUCTION
Let us analyse the situation so you can understand easily the next topic. If
Company A knows that Company B is in need of funds, or if Company B knows
that Company A is willing to invest funds, Company A and B may agree to make
a private placement. However, if these facts are unknown to them, Companies A
and B can go to a Financial Market which is an organized forum that lets A,
along with other suppliers of funds, and B, along with other users of funds, meet
and make transactions. Once A and B have met in the Financial Market, they can
now agree to make a private placement.

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 Learning Module for Business Finance

If the two companies do not want to make an effort to find counterparty in

the Financial Markets, they may go to a Financial Institution. Financial
Institutions serve as an intermediary to the suppliers and users of funds.
Moreover, financial institutions actively participate in the financial markets as
both suppliers and users of funds.

Financial System
This is a diagram of a Financial System. 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.

Source:TeachingGuideforSeniorHighSchool,BusinessFinance,Pu
blishedbytheCommissiononHigherEducation,2016

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? You may write your answers
on the box.

Due to the increased need for security for the performance of obligations
arising from these transactions, the transfers of funds from one party to another
are made through Financial Instruments.

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 your ABM class the following definitions:

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 Learning Module for Business Finance

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.

Who are the holders of Financial Assets? Who are the makers of Financial
Liabilities and Equity instruments? Do you have any idea? Please write on the
box your answers.

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.

Note: Suppliers of Funds are the holders of financial assets. The users of funds
are the makers of financial liabilities and equity instruments.

Common examples of Debt and Equity Instruments

Debt Instruments have fixed returns due to fixed interest rates.

Examples of debt instruments are as follows:

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 Learning Module for Business Finance

• Treasury Bonds and Treasury Bills are sued 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. 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, A. 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.

Which of the financial instruments presented to you find the most

appealing to you? Please on the box your answers.




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 Learning Module for Business Finance

Financial Markets

Let us now classify 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. The sale of previously owned
securities takes place in secondary markets. The Philippine Stock Exchange
(PSE) is both a primary and secondary market. Gitman, L. J. & Zutter C. J.
(2012) & (Cayanan, A. 2015).

Money Markets vs. Capital Markets

Money markets are a venue wherein securities with short-term
maturities 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.

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 (Gitman, L. J. & Zutter C. J. 2012) &
(Cayanan, A. 2015).

Financial Institutions: Roles and Purposes

The following are 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 influence
the management of the firm to improve the firm’s performance, and ultimately,
the performance of the securities they own.

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 Learning Module for Business Finance

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.

Pension Funds – these are 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.

ACTIVITIES

Let us check your understanding of the topic.

Activity 1 Financial Institutions

Directions: Complete the chart. Identify the roles of the following financial
institutions

FINANCIAL INSTITUTIONS ROLES/PURPOSES

Commercial banks
Insurance Companies
Mutual funds
Pension Funds
Other Financial Institutions

Activity 2
Question for reflection: How would you relate the role of financial managers,
role of financial markets and role of investors?

Take the
Challenge

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 Learning Module for Business Finance

Activity 3 TRUE or FALSE

Direction: Before each statement on the space provided, write TRUE if the
statement is correct or FALSE if the statement is incorrect.
___________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.
___________10. The key capital market securities are bonds (long-term debt) and
both common stock and preferred stock (equity, or ownership).

REMEMBER

 The financial institutions serve as an intermediary to the suppliers and

users of funds and actively participate in the financial markets as both
 suppliers and users of funds.
 Financial Instruments are the transfers of funds from one party to
 another.
 Financial Asset is any asset that is in the form of Cash, an equity
instrument of another entity, a contractual right to receive cash or
another financial asset from another entity.


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 Learning Module for Business Finance

 Equity Instrument is any contract that evidences a residual interest in the

 assets of an entity after deducting all liabilities.
 Debt Instruments generally have fixed returns due to fixed interest rates.
 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.
 Common debt instruments are Treasury Bonds, Treasury Bills and
 Corporate Bonds
 Types of equity instruments are Preferred Stock and Common Stock.

 Primary market issues new securities, either debt or equity through a
 public offering or a private placement.
 Money markets are a venue wherein securities with short-term maturities
 (1 year or less) are sold.
 Capital markets are securities sold with longer-term maturities.
 Examples of financial institutions are: Commercial Banks, Insurance
Companies, Mutual Funds, Pension Funds and other financial institutions.

CHECK YOUR UNDERSTANDING

Activity 1. TRUE or FALSE

Directions: Before each statement on the space provided, write TRUE if the
statement is correct or FALSE if the statement is incorrect.

_____________1. Primary and secondary markets are markets for short-term and
long-term securities, respectively.
_____________2. Financial markets are intermediaries that channel the
savings of individuals, businesses, and government into loans
or investments.
_____________3. 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.
_____________4. Holders of equity have claims on both income and assets
that are secondary to the claims of creditors.
_____________5. Preferred stock is a special form of stock having a fixed
periodic dividend that must be paid prior to payment of any
interest to outstanding bonds.

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 Learning Module for Business Finance

Activity 2 MULTIPLE CHOICE

Direction: Choose the letter corresponding to the correct answer for each of the
questions provided below.
1. Corporate owners 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.

2. The wealth of the owners of a corporation is represented by

A. profits.
B. earnings per share.
C. share value.
D. cash flow.

3. 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

4. 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

5. Profit maximization, as a goal, is not ideal because it does NOT consider

A. risk and cash flow.
B. cash flow and stock price.
C. risk and EPS.
D. EPS and stock price.

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 Learning Module for Business Finance

I. POSTTEST

MULTIPLE CHOICE
Directions: Choose the letter corresponding to the correct answer for each
of the questions provided below. Encircle the letter of the correct answer.

1. A ______________________is one financial intermediary handling individual

savings and receives premium payments that are placed in loans.
A. life insurance company
B. commercial bank
C. savings bank
D. credit union

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.

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 Learning Module for Business Finance

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

REFLECTIVE LEARNING SHEET

-SITES

To further explore the concept learned today and if it possible to

connect the internet, you may visit the following link:

How the key financial institutions serve intermediaries

for suppliers and of funds? Which type of financial institution do
you think is most critical for firms?
______________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
___________________________________________________

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 Learning Module for Business Finance

WEBSITES:

To further explore the topic, you may visit the link:

https://www.suomenpankki.fi/en/financial-stability/the-financial-system-in-
brief/

Books
Cayanan, A. & Borja (forthcoming). Business Finance.
Quezon City. Rex Bookstore.
Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial Finance (13th Ed), USA:
Prentice-Hall
Teaching Guide for Senior High School, Business Finance, Published by the
Commission on Higher Education, 2016

Websites

https://www.suomenpankki.fi/en/financial-stability/the-financial-system-in-
brief/, Retrieved June 19, 2020
https://www.yourarticlelibrary.com/macro-economics/national-income-
macro-economics/flow-of-funds-accounts-meaning-limitation-and-
importance/30779, Retrieved June 19, 2020
https://en.wikipedia.org/wiki/Flow_of_funds, Retrieved June 19, 2020
https://www.researchgate.net/publication/242549124_Using_Flow_of_Funds_to
_Explain_the_Financial_Markets_Crisis, Retrieved June 19, 2020
https://www.suomenpankki.fi/en/financial-stability/the-financial-system-in-brief/

Acknowledgment
Writer: Edna B. Waje, DEM
Editor: Isabel A. Gumaru, DBA
Evaluator: Ellaine I. Dela Cruz, DBA
Reviewers: Remylinda T. Soriano, EPS, Math
Angelita Z. Modesto, PSDS
George B. Borromeo, PSDS
Management Team:
Maria Magdalena M. Lim, CESO V, Schools Division Superintendent
Aida H. Rondilla, CID Chief
Lucky S. Carpio, EPS In-Charge of LRMDS
Lady Hannah C. Gillo, Librarian II, LRMDs

ANSWER KEY

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 Learning Module for Business Finance

ANSWER KEY:
PRETEST:

I. MULTIPLE CHOICE
1. B 3. A 5. B
2. D 4. C
II. TRUE or FALSE
1. T 3. T 5. T
2. F 4. F

LOOKING BACK TO YOUR LESSON

1. T 3. T 5. F
2. T 4. F
Take the Challenge
Role of Financial Role of Financial Markets Role of Investors
Managers
The financial markets provide
Financial managers make a forum in which firms can Investors provide the
financing decisions that issue securities to obtain the funds that are to be used
require funding from funds that they need and in by financial managers to
investors in the financial which investors can purchase finance corporate
markets. securities to invest their growth.
funds.

ACTIVITIES
Activity 1. TRUE or FALSE
1. T 5. T 9. F
2. F 6. T 10. T
3. T 7. T
4. F 8. F
CHECK YOUR UNDERSTANDING

Activity 1. TRUE or FALSE

1. F 3. T 5. F
2. F 4. T
MULTIPLE CHOICE
1. B 3. D 5. A
2. C 4. C
POSTTEST

I. MULTIPLE CHOICE
1. A 6. C 3. B 8. D 5. A 10. B
2. A 7. A 4. B 9. D

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