INTRODUCTION TO FINANCIAL MANAGEMENT

CHAPTER 1
INTRODUCTION TO
FINANCIAL MANAGEMENT
It is a well-known fact that engaging in business is like
gambling, it is too risky. There are possibilities that your
investments will gain profits but there are also chances that
you will end up losing.

There is a need to have enough capital in putting up a business

to be used for operations and investments. The business may
be in the form of sole proprietorship, partnership or
corporation. In addition, these capital or funds must be
managed properly in order to attain the operating and
financial objectives of the business. In a corporate form of
business, there is a need to employ separate managers who
will govern the business in behalf of the owners, known as
shareholders. These managers, as agents, are given the power
to decide on the investments, finance and operations of the
corporation.

In this chapter, we will introduce financial management by

discussing the following:
 The kinds of business organization and their goals
 Different characteristics of these business
organizations
 Different kinds of corporations that are acceptable
and not acceptable under Philippines laws
 Who are the financial managers and what are their
roles in the company
 What is agency conflict and the how such conflicts be
resolved
 Priority between ethics and profit goals

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Financial Management is the process of planning, directing,

organizing, controlling and monitoring of the monetary
resources in order to achieve objectives and goals of the
business. The financial managers are responsible for the
management of these monetary resources of the business.

I. Kinds of Business Organizations:

A. Sole Proprietorship is regarded as the simplest form of

business organization. This is owned by an individual,
known as the sole proprietor, who has the full authority
in managing the assets of the business. This kind of
business organization is subject to fewer government
regulations as compared to partnership and
corporation. Thus, the registration is only through the
Department of Trade and Industry (DTI) and the
business income is not subject to separate taxation.

However there are disadvantages of forming a sole

proprietorship. One of which is the unlimited liability of
a sole proprietor. In this case, the debts and losses of
the business shall be borne by the personal assets of the
owner in time of bankruptcy. Another disadvantage is
the limited life of the business because the death of the
sole proprietor leads to termination of the
proprietorship. Lastly, the amount of capital raised is
significantly limited since the source of the funds of the
business is limited only the sole proprietor unlike in the
case of partnership and corporation.

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B. Partnership, as provided by the New Civil Code (NCC) of

the Philippines, is a contract of two or more persons
who bind themselves to contribute money, property or
industry to a common fund, with the intention of
dividing the profits among themselves. Two or more
persons may also form a partnership for the exercise of
profession. More so, the partnership has a juridical
personality separate and distinct from that of each
partners (Article 1767-1768 of NCC)

A partnership may be constituted in any form, whether

oral or written, except where immovable property or
real rights are contributed thereto, in which case a
public instrument shall be necessary. In addition, the
contract of partnership having a capital of Three
Thousand Pesos (P3,000) or more, in money or
property, is required to be:

1) In public instrument and

2) Recorded in the Office of the Securities and Exchange
Commission (SEC).

However, the failure to comply with the above

requirements shall not affect the liability of the
partnership and the members thereof to third persons.
(Article 1771-1772 of NCC)

Partnership may be classified as General or Limited

partnership. In a general partnership, all the partners
have unlimited liability like the sole proprietor, wherein
creditors of the partnership may have claim against the
separate assets of the partners for payment of debt in
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case of bankruptcy. However in a limited partnership,

there are partners known as limited partners that have
liability to the creditors only up to the extent of their
capital contribution, thus, their separate assets are safe
from the claims of these creditors.

Like Sole Proprietorship, the life of the partnership is

also limited in a sense that death of one of the partners
will result to the dissolution of the partnership.
The following are the usual causes of dissolution of the
partnership:
1. Retirement of a partner/s
2. Admission of a partner/s
3. Incorporation of partnership
4. Death of a partner/s

An advantage of partnership is that there is usually

more capital raised as compared to the sole
proprietorship because of larger number of source of
capital. On the contrary, it has less capital compared to
corporation. Moreover, it is subjected to 30% corporate
income tax since the Tax Code of the Philippines does
not distinguish, for tax purposes only, a partnership
from corporation.

C. Corporation, as provided by the Corporation Code of the

Philippines (CCP), is an artificial being created by the
operation of the law, having the right of succession and
the powers, attributes and properties expressly
authorized by law or incident to its existence. (Section 2

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of CCP) This juridical entity is composed of five (5) or

more natural persons, not exceeding fifteen, who are
called incorporators and it must be also be registered
with the Securities and Exchange Commission (SEC).

Corporation is regarded as the most complex form of

business organization because of its fund raising
capabilities, unlimited life and being subject to stricter
government regulations. The owners are referred as
shareholders of the corporation who have limited
liability. Hence, the claim of the corporate creditors is
only up to the amount of capital investments of these
shareholders and the personal assets of the latter are
not subject to appropriations. These shareholders,
unlike partners, can sell their ownership to existing
shareholders or new investors without the need to
secure the consent of the other shareholders. Thus,
there is an ease of transferring ownership in a
corporate form of business. However, one of the
drawbacks of this form of business is the so called dual
taxation wherein the income of the corporation is
subject to corporate tax while the earnings of the
owners or shareholders are subject to separate
individual income tax.

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FIGURE 1-1: The Characteristic of Business Organizations:

Characteristics Sole Partnership Corporation
of Business Proprietorship
Organization
1. Owner(s) Manager Partners Shareholders
are called
2. Owner and NO NO YES
managers
are
separate
3. Owner’s Unlimited Unlimited Limited**
Liability
4. Separate NO YES* YES
taxation
5. Life of the Limited Limited Unlimited
Business
*Except in General Professional Partnership (GPP), because
this partnership will not be taxed like a corporation. According
to Section 22(B) of the NIRC, “general professional
partnerships are those formed by person for the sole purpose
of exercising their common profession, no part of the income
of which is derived from engaging in any trade or business.
Moreover, for tax purposes, the term “corporation” shall
include partnership, no matter how created or organized, joint-
stock companies, joint venture accounts (cuentas en
participacion), association, or insurance companies but does
not include general professional partnerships and joint
venture or consortium formed for the purpose of undertaking
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 INTRODUCTION TO FINANCIAL MANAGEMENT

construction projects or engaging in petroleum, coal,

geothermal or other energy operations pursuant to an
operating consortium agreement under service contract with
the Government.” Hence, as an exception GPP’s income is not
taxed separately using the 30% corporate income tax.

** Except when the doctrine of piercing the veil of corporate

fiction applies.

- The said doctrine shall disregard the separate

personality of the corporation because the veil of
corporate fiction was used as a shield to perpetuate
fraud, justify wrong, defeat public convenience or
defend crime.

- The effect of this doctrine is to make the directors,

officers and shareholders, involved in fraud or crime,
liable for the obligation of the corporation. (Sundiang-
Aquino, Reviewer on Commercial Law, 2006 ed., pp.236-237).

II. Types of Corporation:

A. As to legal status:
 De Jure Corporation – this is a corporation organized in
accordance with the law. There is a strict or substantial
compliance with the statutory requirements for its
incorporation. Hence, it exists in fact and in law.

 De Facto Corporation – this is a corporation that exists

only in fact but not in law because there is a flaw in its

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incorporation. Hence, it has no legal right to corporate

existence as against the state.

B. As to functions and governing law:

 Public Corporation – these are organized by the state
for the government to promote general welfare of the
public. These are governed by Special laws and the
Local Government Code of the Philippines.

 Private Corporation – these are organized by private

individuals for the purpose of generating profit. These
are governed by the Law on Private Corporation.

C. As to existence of stocks:
 Stock Corporation – A corporation in which capital
stock is divided into shares and is authorized to
distribute to the holders thereof of such shares
dividends or allotments of the surplus profits on the
basis of the shares held. (Sec. 3 of the Corporation Code
of the Philippines). The owners are called as
shareholders or stockholders.

 Non-stock Corporation – A corporation which has no

stocks issuances and no distribution of dividends to its
members. However, a corporation is not automatically
considered as a stock corporation if there is a statement
of capital stock. The Supreme Court ruled that if the
dividends are not supposed to be declared or there is no
distribution of retained earnings, the corporation is still
a non-stock corporation. Moreover, the owners are

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called members. (Sundiang-Aquino, Reviewer on Commercial Law,

2006 ed., pp.243-246).

D. As to shares being traded in stock exchange:

 Publicly listed Company– this is a corporation whose
shares are offered to public or traded in the Philippine
stock exchange. Hence, this corporation undergoes
initial public offering (IPO).

 Privately owned Company – this is a corporation whose

shares are not traded in the stock market. Moreover,
this is a corporation “going private” because it restricts
the stockholders to a certain group, usually, family
member. This is sometimes called a close or closely held
corporation or privately held Corporation.

The following corporations are not acceptable in Philippine

Law:

 Limited Liability Company – this is a business structure

which combines the tax advantage of a partnership
(General Professional Partnership) and limited liability
advantage of a corporation.
 Professional Corporation – this is composed of persons
with same professions such as Doctors, Lawyers or
Certified Public Accountants.

III. Goals of the Corporation:

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People venture into business with the hope of gaining

profits and the fear of incurring losses. It is a fact that all
forms of business organizations whether sole
proprietorship, partnership or corporation has the goal
of maximizing earnings or profits. More so, having big
profit signals good financial and operating performance
of the business. Thus, profit maximization, as a measure
of success of the business, may be the end goal of the
sole proprietor or the partners who personally manage
their business. However, for a corporate form of
business, this profit maximization is just a means to an
ultimate end goal of the corporation.

The shareholders of the corporation will earn income

from their capital investments through dividend yield
and capital gains yield. The former is earned through
dividend declarations approved by the board of
directors (BOD) while the latter is through selling of
stocks or ownership to either prospective investors or
existing stockholders at a gain. This is when the stock
price is higher than the cost of investment. (in depth
discussion on dividend and capital gains yield will be on
Chapter 7 - Stock Valuation)

In connection with this, the ultimate goal of a

corporation is shareholder’s wealth maximization. This
is sometimes referred to as stock price maximization -
the increase in the value of stock price resulting to
capital gains that shareholders will yield on their
investments. This is one of the reasons why

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shareholders want the financial managers to maximize

the market value of the firm and not just to maximize its
profits.

The market value of the firm depends on the good

decision making of the financial managers regarding the
company’s activities such as investment, financing and
operations. Moreover, the condition of the global
economy, inflation rates, taxes and laws imposed upon
the firm and the volatility of the stock market are
factors that significantly affect the said market value.

The goal of maximizing the market value of the corporation is

more important than the goal of maximizing profits because of
the following reasons:

 In maximizing the market value of the corporation,

discount rate which reflects the risks of capitalization
and the time value of money is taken into consideration
while profit maximization does not consider such.

 In maximizing future profits, the company may opt to

decrease and postpone its dividend declaration and
instead, it will reinvest the freed up cash. If the
reinvestment is too risky and will not be successful, this
will be detrimental to the shareholders. Thus,
shareholder’s wealth is not maximized.

 The following are the inappropriate ways on how

management maximizes the profit of the corporation:

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a) Management wants to accelerate sales by

materially increasing the selling prices of the goods
offered to the consumers, or
b) Management wants to reduce expenses by
cutting wage rates of the laborers or buying cheaper
materials for production.

These methods of maximizing profits will have a

negative impact on the future earnings of the company
and will result to agency conflicts.

 Stock price or market value per share considers both

cash flows for the current and future years. Profit on the
other hand, may refer to either current year’s profit or
future year’s profit. If the goal is profit maximization,
the question is which year’s profit are we referring to?
For example, the company may maximize current year’s
profit by decreasing advertising and promotion cost.
However, this may decrease the future years’ profit
because sales of new products in the future may be
decreased by these costs cutting done in the current
year.

 The profit computation varies depending on the

purpose. Thus, there are differences in the computation
of profit for tax purposes and profit for accounting
purposes.

IV. Financial Managers of the Corporation:

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Financial managers are employees who are responsible

for managing the monetary resources of the corporation
in order to maximize firm’s value. They are also
responsible for dealing with the different financial
markets such as stock market or bond market; and with
financial institutions like banks. These managers, who
are the agents of the shareholders (owners), are given
the authority to perform investment, financing and
operating decisions that will benefit the corporation.

Generally, the Financial Managers are:

 Board of Directors (B.O.D.) – They are direct owners

and are elected by the shareholders to manage the
corporation. They are charged with ultimate
governance of the corporation. Thus, they have the
ultimate responsibility for deciding on highly important
financial matters of the corporation. Moreover, BOD
decides on when to declare and how much dividends
per share to distribute.

 Chief Financial Officer (C.F.O) – also known as the Vice

President for Finance (VP-Finance), who has
responsibility over financial planning and formulation
of financial corporate strategies. Under his supervision
are the Treasurer and the Controller.

 Treasurer – one who focuses on the financial aspect of

the corporation; wherein he has the responsibility on
raising and managing the capital or funds of the
company. Moreover, he is responsible for transacting

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and maintaining good relationship with various banks;

and the formulation of the company’s credit policies and
collection.

 Controller – One who focuses on the accounting and

budgeting aspect of the corporation; he is responsible
for the custody of financial records, preparation of the
financial statements, and interpretation of financial data.
Moreover, he is responsible for the management of the
budget for the efficient usage of funds.

V. General Role of Financial Manager:

It is noted previously that financial managers are

responsible for managing the monetary resources of the
corporation. Managing these resources means how
much fund should be invested in the acquisition of real
assets, how much fund shall be retained and plowed
back to the corporation or how much shall be paid out
as dividends to the shareholders. Moreover, it is the
responsibility of these financial managers to raise
additional capital or funds to support the investments
and operations of the corporation.

Therefore, the financial managers shall perform these

roles which are geared towards the attainment of the
ultimate goal of the corporation:

 Investing Decision – The investments made by these

financial managers should provide benefit to the

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corporation in the future. This should be the main

consideration of the managers when investing in
tangible assets such as machineries, land or building;
investments in financial assets or investing in the
intangible assets such as patent, trademarks or
copyright. Thus, investing decision, also known as
capital budgeting, answers the question: “what assets
should the corporation acquire in order to provide
better returns in the future”.

In addition, the amount or percentage return as well as

the period when to realize the said return, are
important factors in deciding whether to accept or
reject the investment.

 Financing Decision – There are many investment

opportunities that financial managers may encounter as
they manage the monetary resources of the corporation.
However, one of the main constraints of these managers
is the scarcity of available capital. This normally results
to forgone investment opportunities. Hence, in order to
finance these investments the financial managers
should raise capital or money through its financing
activities. Generally, the financial managers accumulate
funds through the following means:

1.) Performing long term financing through bank

loans if the prevailing interest rate is not high; or
2.) Issuance of financial assets such as share of stocks
(equity security) or bonds (debt security).

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In issuing share of stocks, the company accumulates

fund through selling certificates of ownership of the
corporation to the prospective investors or existing
shareholders. The cash received from these investors
will form part of the capital of the corporation and in
return, the latter will distribute profits to the
shareholders through dividend payments. On the
contrary, the issuance of bonds to the investors known
as bondholders does not indicate selling of ownership
but rather signifies borrowing of funds. These
bondholders are not owners but creditors of the
corporation who receive interest payment instead of
dividends. Hence, financing decision answers the
question: “how to raise funds in order to finance the
investments and operating activities of the firm.”

 Operating Decision – In order to support the daily

transactions or operations of the corporation, these
financial managers should decide on how much funds
should be allocated to each of its operating units. Funds
raised through financing decision are not only used for
the acquisition of real assets or long term investments
but also for operating expenses of the corporations.
These are payments for the salaries and wages of the
employees, overhead costs, acquisition of materials
used for production and etc. Hence, operating decision
answers the question: “how much funds will be
allocated to support the day to day transactions of the
firm.”

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VI. Resolution of Agency Problem:

Agency conflicts are problems between the principal

and agent of the company. The conflicts arise when the
financial managers (agents) prioritize their own
personal interest rather than the best interest of the
shareholders of the company (principal). The existence
of these agency conflicts is detrimental on the part of
the shareholders.

Thus, the following are solutions to mitigate if not to

eliminate conflicts between the managers and the
stockholders:

 Compensation Plans – the compensation plans may

differ among the companies depending on its capacity
in terms of finances. As part of its compensation plan,
the companies would offer incentives to their managers
such as additional bonuses, percentage interest in net
income of the company and stock options. These are on
top of the annual basic salary of the managers. These
incentives are provided in order to motivate these
managers to perform better so that the goal of
maximizing the value of the firm may be achieved.

Say for instance, in comparing the compensation plan of

the Chief Executive Officers (CEO) of the two companies:
X and Y. If the CEO of Company X is given an additional
incentive of 5% of the net income above the normal
profitability of the corporation aside from his basic
salary while the CEO of Company Y is only provided
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with annual salary of similar amount, we can assume

that the former is more driven to improve his
performance than that of the latter.

However, these compensation plans sometimes provide

pressure to the managers wherein it results to the
commission of fraud. Say for example, if the CEO of
Company X prioritizes his personal interest and wants
to gain additional incentives, he can manipulate or
window dress the statement of comprehensive income.
Therefore, these compensation plans, if not taken
appropriately, shall motivate the managers to commit
fraud instead of maximizing the value of the firm.

 Threats as to change in Board of Directors – these

Board of Directors (BOD) who are responsible for the
ultimate governance of the corporation are elected by
the shareholders. They are considered as passive
participants because most of them would only
participate during board meeting and not during
business day of the company. Having a position in the
board is not a permanent. The shareholders have the
power to elect new set of BOD if they are not satisfied
with the performance of the board particularly on how
they manage the business. Threatening the members of
the BOD may motivate them to become active in
governing the corporation.

 Threats as to Management Takeover – the top level

managers who are responsible for the daily governance

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of the corporation are merely appointees of the Board

of Directors (BOD). These managers are employees of
the corporation wherein they can be terminated or
replaced if they fail to deliver what is due to the
corporation. Management takeover indicates that the
old management team is replaced by the new
management. Threatening the old management may
motivate them to improve their poor performance and
drive them to manage the business well.

 Legal and Regulatory requirements – these

requirements imposed upon the corporation, especially
those publicly listed companies, aim to provide security
on the part of the shareholders or investors. Say for
example, one of the regulatory requirements of the
Securities and Exchange Commissions (SEC) upon the
publicly listed corporations is to file an annual audited
Financial Statements. In auditing the Financial
Statements (FS), the external auditors gather
substantial and appropriate data to support the claims
of the management as regards the presentation of the
said Financial Statement. Then, the external auditors
will provide an opinion, qualified or unqualified,
regarding the said financial statement. This
requirement assures that the financial statements
prepared by the management are reliable and that there
is no material misstatements done. Therefore, this will
prevent the management from committing acts that are
against the interest of the owners such as fraud.

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 Specialist Monitoring – It is assumed that employees

will perform their functions well if they are monitored
by their superior. However, monitoring of performance
is not solely within the corporation because the external
parties such as investors or creditors may also examine
the performance of the company.

Say for example, the corporation is in need of funds and

the financial managers opt to apply for a loan in a bank.
Before the application for a loan is granted, the bank
shall initially examine the capacity of the debtor to pay
its debt. Hence, if the bank lends money to the
corporation, this signifies a healthy financial condition
of the company.

VII. Conflicts between Stockholders and Bondholders:

Aside from the conflicts between financial managers

and stockholders, there are also conflicts between the
two sources of funds. The stockholders and
bondholders are investors of the firm’s equity and debt
securities respectively. As regards their conflict, the
stockholders, as owners of the firm, want the financial
managers to invest in risky investments while the
bondholders, as lenders of the firm, oppose to risky
investments. It should be noted that bondholders have
fixed income from interest payments of the firm while
the stockholder’s income depends on the dividend yield
and capital gains yield. The former is more concerned
on the capacity of the firm to pay interest irrespective of
the result of the firm’s operations and investments

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while the latter is concerned on the dividend payments

which is usually dependent on the results of the firm’s
operations and investments.

Say for example, if the financial managers of the firm

have the option to invest its P 100 Million in the
following unit investment trust funds (UITF):
a. 100% equity fund (High Risk)
b. 50% equity or 50% debt (balanced fund)
c. 100% debt fund (Low Risk)

Normally, the stockholders, as risk takers, would want

the P100 Million to be invested in 100% equity fund
because the said fund has the highest risk which will
provide the highest return. Hence, if the result of
investments is positive, the firm will gain high returns
which shows that the expected dividends to be
distributed is also high.

On the other hand, the bondholders want the managers

to invest the P100 Million in a lower risk investment
such as the 100% debt fund or the balanced fund which
provides a lower return. For bondholders, they are
already assured of the fixed interest income as long as
the firm is solvent. Thus, they want the managers to
choose a low risk investment in order to avoid high
losses and still maintain its solvency.

In determining the optimal capital structure, we will

learn that the firm may be classified as unlevered
(without debt) and levered (with debt). More so, the
additional issuances of debt securities in order to

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accumulate more funds make the firm more risky. In

connection with this, another conflict between
bondholders and stockholders may arise. The
Bondholders, as risk averse investor, would protect
their interest by entering into a bond covenant
restricting the firm from issuing additional debt
securities. In addition, they would opt to raise funds
through additional stock issuances in lieu of additional
debt. On the other hand, the stockholders, as risk takers,
would approve the manager’s decision to increase debt
securities rather than stock issuances because the latter
may dilute their stock ownership. (Brigham-Houston,
Fundamental of Financial Management, 13th ed.)

VIII. Ethical Considerations:

It is true that the ultimate goal of the corporation is

maximizing the firm’s market value or the maximization
of the shareholder’s wealth. This goal should be
achieved not through fraudulent acts but in an ethical
manner of doing business. Moreover, the company
should maintain its Corporate Social Responsibility
(CSR) at all times such as avoiding things that has
adverse effects in the society and to the people. Ethics
and the goal of maximizing shareholder wealth
generally lean towards similar ends because ethical
behavior builds good reputation that will benefit the
organization in the long run. However, in case of conflict
between ethics and profit goals, the former shall prevail

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because unethical dealings will provide results that

taint the goodwill of the company.

Say for example in the United States, the WorldCom

bankruptcy in 2002 was marked as one of the top
business scandals wherein the management led by CEO
Bernie Ebbers fraudulently inflated assets by $11 billion
and overstated the income of the company by $3.8
billion. The material misstatement is due to the failure
of the management to report such amount as operating
expenses. Moreover, WorldCom first reported the said
amount as capital expenditures rather than operating
expenses. It is evident that the management of the
company window dressed the financial statements by
presenting a good financial performance but in fact the
business is already bankrupt. Due to this business
scandal, US Congress passed the so called Sarbanes-
Oxley Act which set a more stringent business
regulation.

In the Philippines, there are lots of business scandals

which must be addressed by the government. One of
which is the Globe Asiatique Fund Scam mastermind
allegedly by Mr. Delfin Lee. In this scandal, a developer,
with good track record like Delfin Lee, was allowed by
Pag-ibig to process the loan application of their buyers,
then will forward to Pag-ibig for the release the funds,
thereby making the process faster. However, it turned
out that 60% of the P7 billion Pag-ibig funds for housing
were lent to the fictitious borrowers processed

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fraudulently by Globe Asiatique. Now, irrespective of

the reasons the management have in doing such, may it
be a move to save the company from bankruptcy, they
still committed a fraudulent and unethical act.
Therefore, the end no matter how noble, does not justify
the means. (opinion.inquirer.net/how--globe-asiatique-scam-was-
done by: Neal H. Cruz, March 19, 2014)

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CHAPTER EXERCISES

NAME SCORE:
SECTION: DATE:

TRUE or FALSE: Write X if the statement is true while M if false.

1. Financial Accounting is the process of planning, directing,

organizing, controlling and monitoring the monetary
resources of the company in order to achieve its objectives
or goals.

2. The ultimate goal of the corporation is maximizing its

market value which is the same as shareholder’s wealth
maximization.

3. Profit maximization does not consider the discount rate

which reflects the risks of capitalization and the time value
of money unlike market value maximization.

4. Profit maximization and cost minimization are goals of any

business organization.

5. Profit maximization is the primary goal of all business

organization.

6. Shareholder’s wealth maximization may be obtained

through increase in amounts of dividends declared and
decrease of company’s stock price.

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7. The roles of financial managers are to decide on its

investing, financing and operating activities.

8. The treasurer’s responsibility mainly focuses on the

accounting and budgeting processes.

9. The controller’s responsibility is to raise adequate funds

and maintain control of such funds for the company.

10. The Chief Financial Officer is also known as the Vice

President of Finance Department who supervises the
treasurer not the controller.

11. The board of directors is considered owners who are

responsible for the overall governance of the corporation.

12. Board of directors decides on highly significant financial

matters of the firm while controller is responsible in the
capital budgeting aspect of the firm.

13. The external auditor not the controller has the ultimate
responsibility in preparing the financial statement of the
firm since they will provide an opinion whether qualified or
unqualified.

14. Funds raised through financing decision are not only used
for investments but also for the funding of the operating
expenses of the corporations.

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15. In investing decision, the financial manager answers the

question how much fund must be raised in order to finance
the investing activities.

16. The financial managers decide on the operating activities of

the firm wherein they allocate funds for the acquisition of
non-current assets or real assets.

17. Financing activities focuses on fund raising, an example of

which is through issuance of corporate bonds (equity
security) or share of stocks (debt security).

18. The acquisition of raw materials and equipment is an

example of investing and operating activity, respectively.

19. The sole proprietorship business is subject to lesser

regulations as compared to the Corporation as a business.

20. The amount of capital of the corporation is usually smaller

than that of the partnership as a business.

21. The Corporation is a legal entity created by the state and is

a direct extension of the legal status of its owners and
managers, that is, the owners and managers are the
corporation.

22. De Facto Corporation is a corporation that exists in fact and

in law because there is no flaw in its incorporation.

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23. Even if there is statement of capital stock but the dividends

are not supposed to be declared, the corporation is still a
non-stock corporation.

24. Closed or Private Corporation, Public Corporation and

Professional Corporation are accepted in the Philippines.

25. The partnership form of organization has easy

transferability of ownership as opposed to corporation.

26. One disadvantage of forming a corporation is that

shareholders have limited liability.

27. Partnership must be registered in the Department of Trade

and Industry (DTI) rather than Securities and Exchange
Commission (SEC).

28. The liability of a sole proprietor is unlimited while the

shareholder’s liability is limited only up to the amount of
investment in stocks.

29. The limited liability characteristic of owners of the

corporation is subject to an exception called the doctrine of
piercing the veil of corporate fiction.

30. The life of the corporation is limited only up to 50 years

while the life of a partnership business is unlimited since
the original partners may transfer their ownership to their
heirs through succession.

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31. The actions that maximize a firm’s stock price are

inconsistent with maximizing social welfare.

32. Limited Liability Company (LLC) is a new type of

organization that is hybrid between a partnership and a
corporation. This provides that they are taxed and has a
limited liability like a corporation.

33. The Limited Liability Company is not accepted in the

Philippines while the Limited Partnership is acceptable in
the Philippines.

34. Publicly listed company is a corporation whose shares are

traded in the Philippine stock exchange while privately
owned company’s shares are not offered to the public.

35. Professional corporation, like General professional

partnership, is composed of professionals and is acceptable
business organization in the Philippines.

36. Financial Managers are agents of the Shareholders, the latter

being the real owners of the corporation are principals.

37. If these agents do not prioritize the interest of the principal

owners rather their own interest, agency conflicts may exist.

38. Compensating managers with stock can reduce the agency

problem between stockholders and managers.

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39. Paying these managers with large fixed salaries rather than
increasing the threat as to takeover can mitigate the agency
conflicts between stockholders and managers.
40. Threatening the old management may motivate them to
rectify their poor performance and drive them to manage
the business well.

41. There is a conflict between stockholders and bondholder

wherein the former wants the management to take risky
investments while the latter wants the less risky
investments.

42. Bondholders are providers of funds since they invested in

the debt security issued by the firm, hence they are also
deemed as owners of the firm.
43. Good reputation may be attained through ethical business
practices and is considered as the best advertisement.

44. The firm should always consider their corporate social

responsibility in doing business.

45. Unethical behavior will eventually lead to failure of

achieving the organizations goals as mirrored by the results
of this behavior on Enron and WorldCom.

46. Ethics and the goal of maximizing shareholder wealth

generally lean towards of opposite ends since managers of
an organization would not profit from ethical behavior.

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47. If there are conflict between profit maximization and

ethical consideration, the latter must prevail.

48. If there are conflict between shareholder’s wealth

maximization and ethical consideration, the former should
prevail.

49. One of the ways to minimize losses is to window dress the

financial statement in order to make it more attractive to
prospective investors.

50. The management in order to save the firm from bankruptcy

may perform unethical conduct since the end if it is with
noble intention may justify the means.

“THAT IN ALL THINGS, GOD MAY BE GLORIFIED”

“It does not matter how slow you go for as long as you don’t
stop”

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