CHAPTER 3:

Sources and Uses

of Short Term
and Long Term
Funds
WORKING CAPITAL
 The current assets of the business
that are used in operations. (E.
Brigham, J. Houston)
 A measurement of an entity’s current
assets, after subtracting its liabilities.
 A business accounting term referring
to the liquid assets immediately
accessible to a company
3
►To maintain a regular supply of raw materials, which in turn
facilitates smoother running of production process.
►Ensures the regular and timely payment of wages and
salaries, thereby improving the morale and efficiency of
employees.
►The efficient use of fixed assets.
►It is necessary to build a good reputation and to make
payments to creditors in time.
►Helps avoid the possibility of undercapitalization.
►It is needed to pick up stock of raw materials even during
economic depression.
►To pay fair rate of dividend and interest in time, which
increases the confidence of the investors in the firm.
CAPITAL
 Consists of equity or capital stock financing
and borrowed capital or debt financing or
borrowings.

1. Equity – the financial resources

provided by owners of the business.
2. Borrowed Capital – loans extended
by financial intermediaries or investors.
 EQUITY VS BORROWED CAPITAL
Equity/Invested Capital Debt Financing/Borrowed Capital

Permanent in the business entity. Reduced by Non-permanent. It has its maturity date, with
accumulated losses or dissolution. period amortizations.

Interest and other financing charges are paid

Dividends are paid to investors. Not
to creditors. Deductible for tax purposes, gives
deductible for income tax purposes.
rise to tax benefits.

Financial management requires maximizing Financial management requires minimizing

earnings on invested capital. finance charges on borrowed capital

Owners claims, upon dissolution, given after Creditors’ claims have priority over owners in
claims of third parties are paid. distribution of asset for liquidation.
SHORT-TERM FUNDS
 Used for business operations’ working capital.
 Funds that is secured and repaid in full within one calendar
year.
 Used to finance new marketing projects, launch new products,
or to make improvements to existing facilities.

LONG-TERM FUNDS
 Used for start-up business requirements, or capital expenditures
or business expansion for existing businesses.
 Used to expand operations or to acquire other businesses.
BONDS
 A long-term sources of capital.
 A liability of a company that has a specified principal value and
maturity date.
 A certificate of indebtedness with fixed interest rate and maturity
date.

 Indenture or Bond Indenture is the written agreement on

bond issues between the issuing party and the bondholder.
 Bondissuer is the debtor company.
 Bondholder is the investor or creditor of the bond.
 Interest is also called the yield(current yield or yield to
maturity).
CLASSIFICATIONS OF BONDS
AS TO THE ISSUING PARTY:

Government Bonds – issued by the

government.
Corporate/Commercial Bonds – issued
by a private corporation.
CLASSIFICATIONS OF BONDS
AS TO SECURITY:
 Mortgage Bonds – secured by lien or real
property.
 Equipment Trust Bonds – secured by equipment
of the company.
 Collateral Trust Bonds – secured by securities
invested in by the issuing company.
 Debenture Bonds – secured by all of the free
assets of the issuing company.
CLASSIFICATIONS OF BONDS
AS TO MATURITY OF PRINCIPAL:
 Straight Bonds – the entire principal will mature at
one time.
 Serial Bonds – the principal matures in installments.
 Convertible Bonds – can be exchanged for other
securities of the company at the option of the
bondholder.
 Callable or Redeemable Bonds – can be called,
redeemed or retired by the issuing company before
maturity date.
 Non-callable or Non-redeemable Bonds – are not
subject to calls or redemption before maturity date.
History of
Philippine
Banking
• Banking began in the 16th century with the establishment
of Obras Pias.
• In August 1, 1851 the first state bank in the Philippines
was established – El Banco Español-Filipino de Isabel II.
And in January 1, 1912 it changed its name to Bank of the
Philippine Islands.
• Monte de Piedad y Caja de Ahorros was the first mutual
savings in the country, a unique combination of savings
bank and pawnshop.
• Three years after the American regime ended, the Central
Bank of the Philippines was created, establishing a
managed monetary system in the country.
Sources of
Funds
 Philippine Financial System

Non-Banking Financial
Banking Institutions
Institutions

Private Nonbank Financial Government Nonbank

Private Banks Government Banks
Institutions Financial Institutions

Universal Specialized Investment Government Service

Banks Banks Houses Insurance System

Commercial Investment Social Security

Banks Companies System

Financing
Thrift Banks
Companies

Rural Banks Pawnshops

Insurance
Companies
 BANK
• A financial intermediary that brings together
depositors and borrowers.
• Major source of funding for working capital
requirements.
• In the Philippines, it is regulated by the
Bangko Sentral ng Pilipinas.
a. Safekeeping of funds through the acceptance
of deposits of money.
b. Provision of credit through lending of
money.
 Universal Bank
 Commercial Bank
 Thrift Bank
 Rural Bank
 Specialized Bank
 NONBANKS
• Are financial intermediaries as well but are
supervised and regulated by the Securities
and Exchange Commission (SEC).
Examples:

• Life Insurance Company

• Finance Company
• Investment Company
• Mortgage Company
 Pure Discount Loan
 Interest-only Loan
 Amortized Loan
 PURE DISCOUNT LOAN
• The simplest form of loan.
• The debtor receives money today and repays a
single lump sum at some other time in the future.
Example:
• Treasury Bills

Where:
P = Principal
i = Interest Rate
n = Term/Year(s)
 INTEREST-ONLY LOAN
• Allows the debtor to pay interest each period and
to repay the principal at some point in time.
• Most corporate bonds have the general form of
interest-only loan.

Where:
P = Principal
r = Interest Rate
t = Time
 AMORTIZED LOAN
• It requires the debtor to repay parts of the loan
amount over time.
• The debtor pays the interest each period plus fixed
amount.

Where:
P = Principal
i = Interest Rate
n = Term/Year(s)
Suppose a business takes out a
₱50,000 for a five-year loan at 9
percent interest rate.

Prepare for the amortization schedule.

 Beginning Principal Interest Total Remaining
Year
Balance Paid Paid Payment Balance

1 ₱50,000 ₱10,000 ₱4,500 ₱14,500 ₱40,000

2 ₱40,000 ₱10,000 ₱3,600 ₱13,600 ₱30,000

3 ₱30,000 ₱10,000 ₱2,700 ₱12,700 ₱20,000

4 ₱20,000 ₱10,000 ₱1,800 ₱11,800 ₱10,000

5 ₱10,000 ₱10,000 ₱900 ₱10,900 0

TOTAL ₱50,000 ₱13,500 ₱63,500

 Beginning Amortization Principal Remaining
Year Interest Paid
Balance Paid Paid Balance

1 ₱50,000 ₱12,854.46 ₱8,354.46 ₱4,500 ₱41,645.54

2 ₱41,645.54 ₱12,854.46 ₱9,106.36 ₱3,748.10 ₱32,539.18

3 ₱32,539.18 ₱12,854.46 ₱9,925.93 ₱2,928.53 ₱22,613.25

4 ₱22,613.25 ₱12,854.46 ₱10,819.27 ₱2,035.20 ₱11,793.98

5 ₱11,793.98 ₱12,854.46 ₱11,793.98 ₱1,061.46 0

TOTAL ₱64,272.30 ₱50,000 ₱14,273.29

 Ability to repay the loan.
 Character of the borrower.
 Capacity to pay the loan.
 Capital and personal assets.
 Collateral and size of business
assets.
 Copy of Valid Identification
 Bureau of Internal Revenue
Registration Certificate
 Department of Trade and Industry
Certificate
 Business Permit or Mayor’s Permit
 Settlements Procedures and Details
 Pay your bills on time.
 Lower your balances.
 Set a monthly date wherein you can pay a certain
amount regularly if you are not able to pay the
entire balance.
 Target paying the entire balance all the time.
 Delay or forgo unimportant purchase like luxury
items.
 Use credit wisely.
 Yumang, Chan Pao, Pefianco-Benito, Pefianco Ed.D. (2016), Exploring
Small Business and Personal Finance, Published by The Phoenix
publishing House Inc.
 Ma. Elenita B. Cabrera, CPA, Financial Management Principles and
Applications, Volume 1 & 2, 2015 Edition
 Anastacio, Dacanay, Aliling, Fundamentals of Financial Management,
Revised Edition 2016, Rex Book Store
 Roberto G. Medina, Business Finance, Second Edition
 3G E-LEARNING, Business Finance, Second Edition
 Ruby F. Alminar-Mutya, Business Finance A Management Approach,
2018 Edition