Business Finance: St. Vincent'S College Incorporated

ST.
VINCENT’S COLLEGE INCORPORATED

COLLEGE OF BUSINESS EDUCATION
MAIN CAMPUS, PADRE RAMON STREET, BARANGAY ESTAKA
DIPOLOG CITY, 7100, ZAMBOANGA DEL NORTE, PHILIPPINES
TELEPHONE NO. (065)212-6292, TELEFAX (065)908-1133
www.svc.edu.ph
BUSINESS FINANCE
COURSE INFORMATION
Course Number BF 21 Course Title Business Finance
Course Code NAS Instructor Junrie Mark B. Sumalpong, MBA, LPT, MAEd-CAR
Course Credit 3 units Email Address junrie@svc.edu.ph Consultation Hours By appointment
School Year 2021-2022 Class Schedule 12:00 PM- 1:00 PM Room 410
COURSE DESCRIPTION
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 chapter 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.
COURSE LEARNING OUTCOMES
After completing the course students can:
 Describe the basic concepts of Business Finance and its field branches of studies (CO 1);
 Prepare and analyze financial statements (CO 2);
 Apply financial planning tools on working capital management (CO3); and
 Apply financial planning tools on short-term and long-term financing (CO 4).
TEACHING STRATEGIES / DELIVERY MODES
Online (Hybrid Model Blended (Asynchronous Model) Offline (Flex Model)
Online teleconferencing lecture/discussion is There will be no classroom meet-ups. Classroom lecture and discussion meet-ups is
conducted only once a week for MWF Classes and conducted only once a week for MWF Classes and
once a week for TThS classes with two (2) hours per However, web content resources are provided at once a week for TThS classes with two (2) hours per
meeting. regular intervals. meeting.
Self-directed learning and/or home assignments are to Assessment and evaluation will be done at regular Self-directed learning and/or home assignments are to
be spent with allocated two (2) hours per week. intervals depending on the promptness of the be spent with allocated two (2) hours per week.
compliance of students to every assessment given.
The remaining two (2) hours per week is to be devoted The remaining two (2) hours per week is to be devoted
in checking the materials submitted/sent by the in checking the materials submitted/sent by the
students and giving feedbacks, discussions, and students and giving feedbacks, discussions, and
clarifications. clarifications.
GRADING SYSTEM
Blended (Asynchronous
Description Online (Hybrid Model Offline (Flex Model)
Model)
Output Reports (Case Studies, Research Paper, FS/BP) 15.0% 15.0% 15.0%
Quizzes/Assignments 35.0% 35.0% 35.0%
Preliminary Term Major Examination 12.5% 12.5% 12.5%
Midterm Major Examination 12.5% 12.5% 12.5%
Semi-Final Major Examination 12.5% 12.5% 12.5%
Final Term Major Examination 12.5% 12.5% 12.5%
Total 100.0% 100.0% 100.0%
COURSE OUTLINE
Preliminary Term Midterm Semi-Final Term Final Term
Week 1 Week 3 Week 5 Week 7 to 8

 Introduction to Financial  Working Capital and Cash  Inventory Management  (Self-directed learning)
Management Management
Week 2 Week 4 Week 6

 Review of Financial Statements  Receivable Management  Short-Term Financing
Preparation and Financial
Statement Analysis Midterm Major Examination Semi-Final Term Major Examination Final Term Major Examination
(1 day) (1 day) (1 day)
Preliminary Term Major Examination
(1 day)
Preface
This course learning module which is Business Finance provides students an understanding of the methods used for analyzing the benefits of various sources of finance.
The module is divided into six (6) topics. Each topic coverage begins with an abstract of what the topic is all about, as well as the lesson objectives that indicate what the
students are expected to learn. The basic concepts are presented on each section of the Topic Content, after which problem exercises are to be supplied answers with. These
exercises may vary from topic to topic in terms of difficulty and application.
This learning material are adapted from books on financial management, management advisory services, management accounting, business finance, and other related
materials by prominent local and foreign authors.
Topic Coverage
The eight topics with their respective title and abstract are as follows:
1. Introduction to Financial Management – This focuses on the primary goal of business, the fundamentals of financial management decisions, the functions of finance manager,
and the different forms of business organization.
2. Review of the Financial Statement Preparation and Financial Statement Analysis – This focuses on the concepts and limitations of financial statements, as well as the ways in
analyzing financial statements.
3. Working Capital and Cash Management – This focuses on the concepts and the tolls used in analyzing working capital, and strategies for maximizing the use of working capital
and cash.
4. Receivable Management – This focuses on the concepts, tools, factors affecting accounts receivables, and strategies for maximizing accounts receivables.
5. Inventory Management – This focuses on the concepts, tools and techniques, factors affecting inventories, relevant cost in inventory management, and strategies to minimize
inventory costs.
6. Short-term Financing – This focuses on the concepts, the sources, and the other forms of short-term financing.
INTRODUCTION TO FINANCIAL MANAGEMENT
Time Duration and Allotment: Week 1; 6 hours
Abstract:
This focuses on the primary goal of business, the fundamentals of financial management decisions, the functions of finance manager, and the different forms of business organization.
Lesson Objectives:
As a result of completing this learning module, students will be able to:
 Discuss the primary objective of financial management;
 Distinguish profit maximization from stockholders’ wealth maximization;
 Identify the primary functions of the finance manager;
 Differentiate between sole proprietorship, partnership and corporation; and
 Define the basic features, advantages, and disadvantages of the different forms of business organization.
Module Guide:
1. Study topic content presented below. (TOPIC CONTENT)
TOPIC CONTENT
 Finance – refers to the body of facts, principles and theories relating to raising and using of money by individuals, businesses and governments. In simpler term,
it is the study of the acquisition and investment of cash for the purpose of enhancing value and wealth.
 Public finance – is that category of general finance, which deals with the revenue and expenditure patterns of the government and their various effects on the
economy.
 Private finance – deals with the area of general finance not classified under public finance.
1. Personal finance – is concerned with the fundamentals of managing one’s own personal money affairs.
2. Non-profit organization finance – includes private undertakings such as charity, religion, and some private educational institutions.
3. Business finance – refers to the provision of money for commercial use. It is concerned with the effective use of funds. It is also defined as the procurement
and administration of funds with the view of achieving the objectives of the business.
 The main goal of business finance is to maximize the value of the firm – to maximize owner’s wealth.
1. Maximizing profit
2. Maximizing wealth
3. Maximizing the economic value of the firm
4. Focus to stakeholders, and ETC.
 Financial management – concerned with the management of funds. It is the efficient and effective allocation, acquisition, and utilization of funds.
 The primary objective of financial management is to maximize the current value of ownership in a business firm – “maximize owner’s wealth”.
 Profit Maximization vs. Stockholders’ Wealth Maximization

Goal Objective Advantages Disadvantages
Profit Maximization Obtain large 1. Calculating profit is easy. 1. The short term is more emphasized.
amount of profits 2. Determining the link between financial 2. Risk or uncertainty is ignored.
decisions and profits is simple. 3. The timing of returns does not matter.
4. Immediate resources are necessary.
Stockholders’ wealth Achieve highest 1. The long term is emphasized. 1. There is no clear relationship between
maximization market value of 2. Risk or uncertainty is recognized. financial decisions and stock price.
common stock 3. The timing of returns is taken into 2. Management anxiety and frustration may
account. be experienced.
4. Stockholders’ return is considered.
 Financial Manager – is the one in charge in the finance unit. The highest finance manager position is the comptroller. He is responsible for the allocation of the
financial resources of a company, the acquisition of additional funds needed, and the utilization of these financial resources to attain organizational objectives.
- The responsibilities of the financial manager include the following (financial decisions):
1. Investment decision
2. Financing decision
3. Dividend policy decision
- Specifically, he is in charge of:
1. Acquisition of funds with the least cost from the right sources at the right time
2. Effective cash management
3. Effective working capital management
4. Effective inventory management
5. Effective investment decisions
6. Proper asset selection
7. Proper risk management – It is significant to note that an increase in return is coupled by a corresponding increase in risk. It cannot be expected that
whatever financial decision is made will immediately favor the firm. The finance manager’s obligation is to ascertain that such risk present is tolerable.
Risk is common and ubiquitous. It could be credit, financial, political, interest and social. The firm must recognize the risk and include this in whatever
financial decision is will make. The aphorism “the higher the return, the higher the risk” must always be kept in mind.
 Types of Business Organization

Sole Proprietorship Partnership Corporation
A sole proprietorship is a business owned by A partnership is composed of two or more A corporation is an artificial being created by
a single person. Typically, the individual person who agree to contribute money, the operation of law having the right of
proprietor originally finances the firm by property, or services for the purpose of succession and the powers, attributes, and
using his or her personal savings, dividing the profits between or among properties expressly authorized by law or
supplemented by bank or government loans themselves. Two or more persons, called the incident to its existence.
partners, own the business.
Advantage: Advantages: Advantages:
1. Ease of formation. 1. A partnership is relatively easy to 1. Limited liability. The special legal status
2. Control over operations. There are no-co- organize, being subject to few government enjoyed by the corporation acts as a
owners so the owner has complete control regulations. barrier to protect the owners/shareholders
over daily operations, thereby speeding 2. It is easy to handle since it is a group of from losses beyond the amount of their
up the decision-making process. people that share expertise in running the investment.
3. No sharing of profits. business. 2. Indefinite life. The life of the corporation
4. Simplicity. It is subject to less 3. The combined capital resources of the is not affected by the withdrawal of
government regulations compared with partners offer capitalization as compared shareholders in any way.
partnership. with those of a sole proprietorship. 3. No mutual agency. Shareholders who are
5. No taxation. The business itself is not not legal agents or officers are unable to
subject to tax. bind a corporation by their actions.
4. Ease of obtaining additional capital. It
has legal structure that enables them so
sell small ownership interest to the
general public.
5. Ease of transfer of ownership interest.
Shareholders can ordinarily sell their
shares to others without obtaining the
company’s approval.
6. Separate legal entity. By virtue of its
special legal status, a corporation has the
power to buy, own, or sell property, can
enter into contracts, and can sue or be
sued.
Disadvantages: Disadvantage: Disadvantages:
1. Limited life. Death and bankruptcy of the 1. Limited life. Withdrawal, death or 1. Double taxation. Corporate income is
owner results in the dissolution of the bankruptcy of a partner will result in the initially subject to the payment of income
business. dissolution of a partnership. Likewise, taxes by the corporate entity itself, and
2. Unlimited liability. The owner is admission of a new partner ends the old then the shareholders are required to pay
personally liable for the firm’s debts and partnership. income taxes on the portion of corporate
actions. 2. Unlimited liability. Each partner is earnings distributed to them in the form
3. Difficulty in raising capital. It has limited personally liable to creditors for debts of dividends.
access to large amount of borrowed incurred by other partners acting for the 2. More government control.
money. partnership. 3. More costly to organize.
4. Limitation of skills. It is quite rare to see 3. Mutual agency. Each partner is an agent 4. More involved decision-making process,
a proprietor who has all the skills of the company and can obligate the and quite-time consuming. Decisions are
involving finance, marketing and partnership for his or her acts within the usually referred up to the chain of
operations. scope of the partnership business. command.
4. Difficulty in raising capital. It is still 5. Dilution of earnings and control. A
difficult to raise huge amounts of typical corporation has a large number of
partnership capital since the ability to do shareholders who must share the earnings
so is limited by the partners’ personal and control of the corporation with many
wealth and borrowing power. other owners.
 Financial institutions – are institutions through which suppliers channel money to users of funds.
1. Depository – commercial banks, savings associations, savings banks, credit unions
2. Non-depository – insurance companies, security firms and investment banks, mutual funds and pension funds
 Financial instruments – are instruments or securities which are paper or electronic evidences of either debt (liability or obligation)/bonds or equity
(ownership)/stock covering financial transactions in the different markets. (Money or Capital; Primary or Secondary)
1. Money market instruments – are issued by corporations and government units to obtain short-term funds. (cash money bills, treasury bills, commercial papers,
banker’s acceptances, negotiable certificates of deposit, repurchase agreements, money market deposit accounts MMDAs, money market mutual funds MMMFs,
exchange-traded fund ETF, certificate of assignment, certificate of participation
a. Treasury Bills (government)
b. Repurchase agreements – involves a sale of securities by one party to another with a promise by the seller to repurchase the same securities form the
buyer at a specified date and price
c. Commercial papers (unsecured promissory notes of high credit rating companies) – have low risk of default and can have maturities ranging from 30 to
270 days with a usual minimum value of P25,000.
d. Negotiable certificates of deposits – time deposits that specifies an interest rate and maturity date and is negotiable (i.e., can be sold by the holder to
another party)
e. Banker’s Acceptance – time draft payable to a seller of goods, with payment guaranteed by a bank
f. Cash Management Bills – government-issued securities with maturities of less than 91 days (e.g., 35 days or 42 days).
g. Banker’s Acceptance – time draft payable to a seller of goods, with payment guaranteed by a bank
2. Capital market instruments (long term in nature) – are basically either equity (stock) securities or debt (bond) securities, as far as negotiable securities are
concerned such as: corporate stocks, mortgages, corporate bonds, treasury securities, state and local government bonds, US government agency securities, etc.
While for non-negotiable securities are concerned, we have: loans, leases, mortgages, letters of credit, etc.
 Financial markets – are structures through which funds flow. (Primary or secondary markets; money or capital markets). These are institutions and systems that
facilitate transactions in all types of financial claims. They are the bridge between those with excess (surplus) funds, otherwise known as surplus units, and those
who need funds or deficit units.
1. Primary markets - in which users of funds raise funds through new issues of financial instruments (e.g., stocks and bonds)
2. Secondary markets - markets where financial instruments are traded among investors (e.g., NYSE and PSE)
3. Money markets - markets that trade debt securities with maturities of one year or less (e.g., CDs and Treasury bills)
4. Capital markets - markets that trade debt (bonds) and equity (stock) instruments with maturities of more than one year
REVIEW OF FINANCIAL STATEMENT PREPARATION AND FINANCIAL STATEMENTS ANALYSIS
Abstract:
This focuses on the concepts and limitations of financial statements, as well as the ways in analyzing financial statements.
Lesson Objectives:
 Discuss the elements and limitations of financial statements;
 Analyze and interpret ratios, as well as evaluate the past performance of the company through financial ratios; and
 Differentiate the various activities of the firm – operating, investing and financing.
Module Guide:
TOPIC CONTENT
 Accounting is the art of recording, classifying, and summarizing transactions and events, which are, in part at least, of a financial character and interpreting the
results thereof.
 It is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in
making economic decisions.
 It is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information.
 The accounting cycle represents the steps or accounting procedures used to record transactions and prepare financial statements.
 Steps in the Accounting Cycle:
1. Identifying and analyzing business documents or transactions – The accountant gathers information from source documents and determines the effect
of the transactions on the accounts. Examples of source documents are: sales invoices, official receipts, purchase orders, delivery receipts, bank deposit
slips, bank statements, checks, Statement of Account and the like.
2. Journalizing – the identified accountable events are recorded in the journals.
3. Posting – information from the journal are transferred to the ledger.
4. Unadjusted trial balance – the balances of the general ledger accounts are proved as to be equality of debits and credits. The unadjusted trial balance
serves as basis for adjusting entries.
5. Adjusting entries – the accounts are updated as of the reporting date on an accrual basis by recording accruals, expiration of deferrals, estimations, and
other events often not signaled by new source documents.
6. Adjusted trial balance (and/or worksheet) – the equality of debits and credits are rechecked after adjustments are made. The adjusted trial balance
serves as basis for the preparation of the financial statements.
7. Financial statements – these are the means by which the information processed is communicated to users.
8. Closing entries – this involves journalizing and posting closing entries and ruling the ledger. Temporary accounts (or nominal accounts) are closed and
the resulting profit or loss is transferred to an equity account.
9. Post-closing trial balance – the equality of debits and credits are again rechecked after the closing process.
10. Reversing entries – are usually made at the beginning of the next accounting period and are made to simplify the recording of certain transactions in the
next accounting period.
 Financial Statements – are the end products or main output of financial accounting process. These are the means by which the information accumulated and
processed in financial accounting is periodically communicated to the users.
 It shows the results of operations, financial condition, changes in owner’s equity, and sources and uses of cash.
 The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a
wide range of users in making economic decisions.
 Components of Financial Statements

1. Statement of financial position / Balance sheet – is a formal statement showing the three elements comprising the financial position, namely assets,
liabilities and equity.
2. Income statement – is a formal statement showing the financial performance of an entity for a period of time. It primarily measures the level of income
earned by the entity through the effective and efficient utilization of its resources. Financial performance is also known as the results of operations.
3. Statement of cash flows – is a component of financial statements summarizing the operating, investing and financing activities of an entity. It provides
information
4. Statement of changes in equity – is a formal statement showing the changes in the owner’s equity of an entity for a period of time.
5. Notes to financial statements – provides a narrative description or disaggregation of items presented in the financial statements and information about items
that do not qualify for recognition. It contains information in addition to that presented in the financial statements. It is used to report information that does not
fit into the body of the statements in order to enhance the understandability of the statements. It helps clarify the items presented in the financial statements.
 Elements of Financial Statements

1. Assets – resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Its broad
classifications are current assets and noncurrent assets.
a. The asset is controlled by the entity.
b. The asset is the result of past transaction or event.
c. The asset provides future economic benefits.
d. The cost of the asset can be measured reliably.
Current Assets – PAS 1, paragraph 66, provides that an entity shall classify an asset as current when:
 The asset is cash or cash equivalent unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the
reporting period.
 The entity holds the asset primarily for the purpose of trading.
 The entity expects to realize the asset within twelve months after the reporting period.
 The entity expects to realize the asset or intends to sell or consume it within the entity’s normal operating cycle.
Noncurrent Assets – is a residual definition.
2. Liabilities – present obligation of an entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits.
a. The liability is the present obligation of a particular entity.
b. The liability arises from past transactions or event.
c. The settlement of the liability requires an outflow of resources embodying economic benefits.
Current Liabilities – PAS 1, paragraph 66, provides that an entity shall classify a liability as current when:
 The entity expects to settle the liability within the entity’s normal operating cycle.
 The entity holds the liability primarily for the purpose of trading.
 The liability is due to be settled within twelve months after the reporting period.
 The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.
Noncurrent Liabilities – is a residual definition.
3. Equity – is the residual interest in the assets of the entity after deducting all its liabilities. Also known as “net assets”.
4. Income / Revenue – increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that results in
increase in equity, other than contribution from equity participants. It is inflow of future economic benefit that increases equity, other than contribution by
owners. (sales, service revenue, other income and gains on disposal of assets)
5. Expenses – decrease in economic benefit during the accounting period in the form of outflow or decrease in asset and increase in liability that results in decrease
in equity, other than distribution to equity participants. It is outflow of future economic benefit that decreases equity, other than distribution or dividend paid to
owners.
 Financial Statement Analysis involves careful selection of data from financial statements for the primary purpose of forecasting the financial health of the
company. This is accomplished by examining trends in key financial data, comparing financial data across companies, and analyzing key financial ratios.
 Objectives of the financial statement analysis

1. General – identify the organization’s financial strengths and weaknesses.
2. Owners – concerned with investment income, profitability, stability and sound capital structure necessary for continued successful operations.
3. Potential investors – stability of earnings and dividends.
4. Short-term creditors – short-run liquidity.
5. Long-term creditors – long term security of their interest income and the company’s ability to maintain successful earnings and cash flows to meet
continuing financial commitments.
 General Approaches / Steps to Financial Statements Analysis

1. Background study and evaluation of the firm industry, economy and outlook
2. Short-term solvency analysis
3. Long-term solvency
4. Capital structure
5. Operational efficiency and profitability
6. Other Considerations – Quality of earnings and quality of assets and its relative amount of debt.
 Limitations to Financial Statements Analysis

1. Information derived by the analysis are not absolute measures of performance in any and all of the areas of business operations. They are only indicators
of degrees of profitability and financial strength of the firm.
2. Limitations inherent in the accounting data the analyst work with.
3. Limitations of the performance measures or tools and techniques used in the analysis.
4. Analysts should be alert to the potential for management to influence the outcome of financial statements in order to appeal to creditors, investors, and
others.
Note: Limitations of analysis may be overcome to some extent by finding appropriate benchmarks against which to measure a company’s
performance.
 Liquidity – the ability of the company to meet currently maturing obligations.
 Solvency- - the ability of the company to meet its long-term obligations as they become due.
 Financial structure – It is the framework of various types of financing employed by a firm to acquire and support resources necessary for its operations.
Commonly, it comprises of stockholders' (shareholders') investments (equity capital), long-term loans (loan capital), short-term loans (such as overdraft), and
short-term liabilities (such as trade credit) as reflected on the right-hand side of the firm's balance sheet.
 Capital structure – in comparison to financial structure, does not include short-term liabilities.
 Profitability – the ability of the company to earn profit
 Flexibility – the capacity for adaptation; the availability of cash to meet unexpected cash requirements and investment opportunities.
 Financial Statement Analysis Techniques:
- Horizontal analysis of financial statements – is the study of percentages changes in comparative statements. A good place to begin in financial statement
analysis is to put statements in comparative form. Significant changes in financial data are easier to see when financial statement amount for two or more
years are placed side by side in adjacent columns. Year-to-year comparisons for the same company are useful especially if reported changes are expressed in
percentages.
1. Compute the peso amount of change from the base (earlier) period to the later period, and
2. Divided the peso amount of change by the base-period amount. This is not dove however, if the base year figure is negative or zero.
- Vertical analysis of financial statements – “common size financial statements”; translates peso amounts to percentage, which indicate the relative size of an
item in proportion to the whole. Common-size balance sheet shows assets, liabilities and owners’ equity as a percentage of total assets, while common-size
income statement expresses revenue and expenses as a percentage of sales revenue.
1. For balance sheet, each item therein is converted to percent by dividing it by total assets.
2. In the income statement, each item is restated as a percentage of net sales or net operating revenue by dividing the former by the latter.
- Financial ratio – is a comparison in fraction, proportion, decimal or percentage form of two significant figures taken from financial statements. It expresses
the direct relationship between two or more quantities in the balance sheet and income statement of a business firm.
3 Research on the different rations widely accepted in the analysis of financial statements.
 The cash flow statement analyzes changes in cash and cash equivalents during a period. Along with the ration analysis, cash flow statement is a valuable tool to finance
managers. It is used to evaluate the cash inflows (sources) and cash outflows (uses) of a firm during a specified period of time.
 Purposes/functions of the Cash Flow Statement

1. It provides relevant information about the cash receipts and cash payments of the enterprise as of a given period.
2. It states the changes in the financial position of a firm.
3. It presents information on the structural health, liquidity and profitability of the firm.
4. It gives insights on the different activities of the firm.
5. It determines the capability of the firm to produce cash and cash equivalents.
 Main Sections of the Statement of Cash Flows

Cash Flows from Operating Activities
Cash Inflows Cash Outflows
 Cash receipts from sales of goods or services, including receipts from  Cash payments to acquire materials including principal
collections or sale of accounts and both short- and long-term notes payments on accounts and both short- and long-term notes
receivable from customers arising from those sales. payable to suppliers.
 Cash receipts from returns on loans, other debt instruments of other  Cash payments to other suppliers and employees for other
entities, and equity securities – interest and dividends. goods or services.
 All other cash receipts that do not stem from transactions defined as  Cash payments to governments for taxes, duties, fines, and
investing or financing activities, such as refunds from suppliers, other fees or penalties.
amounts received to settle lawsuits, and proceeds of insurance  Cash payments to lenders and other creditors for interest.
settlements (except for those that are directly related to investing or  Other cash payments that do not stem from transactions
financing activities, such as from destruction of a building) defined as investing or financing activities, such as payments
to settle lawsuits, cash contributions to charities, and cash
refunds to customers.
Cash Flows from Investing Activities
 Receipts from collections on loans  Disbursements for loans granted
 Receipts from sale of other entities’ debt instruments previously  Disbursement for the purchase of debt instruments of other
purchased. entities (other than cash equivalents and certain debt
 Receipts from sales of equity instruments of other enterprises and from instruments acquired specifically for resale)
returns of investment in those instruments.  Payments to acquire equity instruments of other enterprise.
 Receipts from sale of property, plant and equipment, and other  Payments at the time of purchase or soon before or after
productive assets. purchase to acquire property, plant and equipment, and other
productive assets.
Cash Flows from Financing Activities
 Issuance of long-term obligations such as bonds payable, mortgage  Payments of dividends or other distributions to owners,
payable, and long-term notes payable including outlays to reacquire the enterprises’ equity
 Proceeds from issuing equity instruments. instruments.
 Repayments of amount borrowed.
 Other payments to creditors who have extended long-term
credit.
 Other applications are the purchase of treasury stock and the
redemption of preferred stock, both of which require the
payment of cash.
Illustrative Problem – HORIZONTAL AND VERTICAL ANALYSES
The Comparative Balance Sheet and Income Statement of Gerald Co. are given below:
Gerald Company
Balance Sheet
December 31, 2016 – 2017
2016 2017
Assets
Current Assets
Cash P 56,400 P 166,800

Marketable Securities 210,200 89,800
Trade Receivables, net 522,200 583,800
Inventory 394,400 506,800
Other Current Assets 121,400 70,400
Total Current Assets P 1,304,600 P 1,417,600
Non-current Assets
Land, Building and Equipment, net P 853,800 P 1,440,200
Other Assets 8,600 349,600
Total Non-current Assets P 862,400 P 1,789,800
Total Assets P 2,167,000 P 3,207,400
Liabilities and Equity
Current Liabilities
Accounts Payable P 375,000 P 320,800
Notes Payable 112,600 86,600
Other Current Liabilities 147,400 57,600
Total Current Liabilities P 635,000 P 465,000
Non-current Liabilities
Long-term Liabilities (4%) P 325,000 P 401,000
Total Liabilities P 960,000 P 866,000
Equity
Share Capital (P100 par) Common P 850,000 P 1,240,000
Capita Paid in Excess of Par Value 140,000 320,000
Retained Earnings 217,000 781,400
Total Equity P 1,207,000 P 2,341,400
Total Liabilities and Equity P 2,167,000 P 3,207,400
Gerald Co.
Income Statement
For the year ended December 31, 2016 to 2017
2016 2017
Net Sales P 1,707,400 P 2,983,600
Cost of Goods Sold 1,248,200 2,109,400
Gross Margin on Sales P 459,200 P 874,200

Operating Expenses
Selling Expenses P 230,400 P 507,200
General and Administrative Expenses 99,000 185,000
Total Operating Expenses P 329,400 P 692,200
Operating Income P 129,800 P 182,000
Other Income and Expenses, net (deduct) ( 20,600) ( 15,000)
Income Before Taxes P 109,200 P 167,000
Less: Income Tax Expenses ( 51,200) ( 62,600)
Net Income P 58,000 P 104,400
Additional information:
1. Market value per share of ordinary shares as of December 31, 2017, P285.00.
2. Dividend declared in 2017, P25,800.
3. Retained earnings account was credited in 2017 for a prior period adjustment of P59,200.
4. Depreciation charges for 2017 amounted to P150,000.
Requirements: (Evaluate the company’s short-term solvency, long-term financial position and profitability using:
1. Horizontal analysis of financial statements.
2. Vertical analysis of financial statements.
Solutions:
Gerald Company
Balance Sheet
December 31, 2016 – 2017
(HORIZONTAL ANALYSIS)
Increase (Decrease)
2016 2017 Amount Percent
Assets
Current Assets
Cash P 56,400 P 166,800 P ? ?
Marketable Securities 210,200 89,800 ? ?
Trade Receivables, net 522,200 583,800 ? ?
Inventory 394,400 506,800 ? ?
Other Current Assets 121,400 70,400 ? ?
Total Current Assets P 1,304,600 P 1,417,600 P___?__________?
Non-current Assets
Land, Building and Equipment, net P 853,800 P 1,440,200 P ? ?
Other Assets 8,600 349,600 ____ ?_________ ?
Total Non-current Assets P 862,400 P 1,789,800 P __ ?__ ______ ?
Total Assets P 2,167,000 P 3,207,400 P____?__ ?
Current Liabilities
Accounts Payable P 375,000 P 320,800 ? ?
Notes Payable 112,600 86,600 ? ?
Other Current Liabilities 147,400 57,600 ? ?
Total Current Liabilities P 635,000 P 465,000 ? ?
Long-term Liabilities (4%) P 325,000 P 401,000 ? ?
Total Liabilities P 960,000 P 866,000 ? ?
Equity
Share Capital (P100 par) Common P 850,000 P 1,240,000 P ? ?
Capita Paid in Excess of Par Value 140,000 320,000 ? ?
Retained Earnings 217,000 781,400 ?______ ?
Total Equity P 1,207,000 P 2,341,400 P__?______ ?
Total Liabilities and Equity P 2,167,000 P 3,207,400 P__?_____ ?
Gerald Co.
Income Statement
Increase (Decrease)
2016 2017 Amount Percent
Net Sales P 1,707,400 P 2,983,600 P ? ?
Cost of Goods Sold 1,248,200 2,109,400 ___? ?__
Gross Margin on Sales P 459,200 P 874,200 P ___ ? ?__
Operating Expenses
Selling Expenses P 230,400 P 507,200 P ? ?
General and Administrative
Expenses 99,000 185,000 _ ? ?____
Total Operating Expenses P 329,400 P 692,200 P ___?__ ?
Operating Income P 129,800 P 182,000 P ? ?
Less: Other Income and Expenses, net 20,600 15,000 ______?__ ?

Income Before Taxes P 109,200 P 167,000 P ? ?
Less: Income Tax Expenses 51,200 62,600 _?_ ___ ?
Net Income P 58,000 P 104,400 P __?___ ?
Horizontal Analysis
1. Short-term Solvency
a. Current assets increased by 9% while current liabilities decreased by 27% by 2017. The current financial position of the Gerald Co. improved as reflected
by the increase in total current assets accompanied by the decrease in current liabilities. The improvement in the current financial position is also indicated
by the fact that the current assets were 2.05 times the current liabilities as of December 31, 2016 and 3.05 times at the most recent date.
b. The data reveal that cash, receivables and inventory showed upward tendency. The increase in receivables and inventory is favorable because net sales
increased at a faster rate. The favorable tendency indicates that more effective credit, collection and merchandising policies, could have been established
and made effective. The relatively smaller amount of trade receivables reflects more rapid turnover of customer accounts and possibly a large increase in
cash sales.
c. The decline in marketable securities and other current assets also indicates lesser investment in not-so-productive assets. The change of this item on either
directions reflect an increasing efficiency or working capital management.
2. Long-term Financial Position
a. A comparison in total liabilities and equity reveals that the former declined and the latter increased. As a result of these variations, the creditors’ margin of
safety increased significantly.
b. The expansion in property, plant and equipment which substantially increased was financed by shareholders’ capital through the issuance of share capital
at a premium, long-term liabilities and working capital derived from operations.
c. A greater reliance on equity funds rather than on creditor funds increased the margin of safety of the creditors and therefore strengthened the financial
position of the company.
3. Profitability
a. It will be observed that both sales and cost of sales showed upward pattern with sales increasing at a faster rate. These data reflect a favorable situation
from the point of view of managerial ability to control costs relative to change on sales volume. This more desirable percentage may have been the result
of one or more factors such as favorable price-level changes, more effective markup policies or greater efficiency in purchasing.
b. An unfavourable tendency is reflected by the fact that percentage change for selling, general and administrative expenses increased at a faster rate than the
net sales. The company could have earned more profit if better and more effective control over operating expenses were instituted.
Gerald Company
Balance Sheet
December 31, 2016 – 2017
(VERTICAL ANALYSIS)
Percentages
2016 2017 2016 2017
Assets
Current Assets
Cash P 56,400 P 166,800 ? ?
Marketable Securities 210,200 89,800 ? ?
Trade Receivables, net 522,200 583,800 ? ?
Inventory 394,400 506,800 ? ?
Other Current Assets 121,400 70,400 ?_____ ___ ?______
Total Current Assets P 1,304,600 P 1,417,600 _ ?_____ ___ ?______
Non-current Assets
Land, Building and Equipment, net P 853,800 P 1,440,200 ? ?
Other Assets 8,600 349,600 _?____ __ ?_____
Total Non-current Assets P 862,400 P 1,789,800 _ ?_____ ___ ?____
Total Assets P 2,167,000 P 3,207,400 100.0 100.0
Current Liabilities
Accounts Payable P 375,000 P 320,800 ? ?
Notes Payable 112,600 86,600 ? ?
Other Current Liabilities 147,400 57,600 _ ?___ _____?____
Total Current Liabilities P 635,000 P 465,000 __ ?____ _____?___
Long-term Liabilities (4%) P 325,000 P 401,000 ____?_ ?
Total Liabilities P 960,000 P 866,000 ____ ? ?
Equity
Share Capital (P100 par) Common P 850,000 P 1,240,000 ? ?
Capita Paid in Excess of Par Value 140,000 320,000 ? ?
Retained Earnings 217,000 781,400 ? ?
Total Equity P 1,207,000 P 2,341,400 ____? __ ___ ? _____
Total Liabilities and Equity P 2,167,000 P 3,207,400 100.0 100.0
Gerald Co.
Income Statement
Percentages
2016 2017 2016 2017
Net Sales P 1,707,400 P 2,983,600 100.0 100.0
Cost of Goods Sold 1,248,200 2,109,400 _ ?____ ____ ?__
Gross Margin on Sales P 459,200 P 874,200 _ ?____ ___ ?__
Operating Expenses
Selling Expenses P 230,400 P 507,200 ? ?
General and Administrative
Expenses 99,000 185,000 ____?___ _____?__
Total Operating Expenses P 329,400 P 692,200 ____?___ _____?_
Operating Income P 129,800 P 182,000 ? ?
Less: Other Income and Expenses, net 20,600 15,000 ____?___ ___ ?___
Income Before Taxes P 109,200 P 167,000 ? ?
Less: Income Tax Expenses 51,200 62,600 __?____ _____?___
Net Income P 58,000 P 104,400 3.4 3.5____
Vertical Analysis
Evaluation of the Financial Position
1. The Gilbert Co’s balance sheet showed that there had been substantial changes in the proportions of current and fixed assets and current and long-term liabilities
during the period from December 31, 2016 to December 31, 2017. The percentages showed a declining liquidity in the company’s assets accompanied by a
consistent reduction in liabilities over the period.
2. It can be observed that cash balance and accounts receivable as a percentage of total assets had been increasing while investment in inventory in relation to total
assets had been decreasing. Considering that the volume of sales was increasing, these changes can be viewed as beneficial to the company.
3. The increase in investment in fixed assets had been financed largely from owners’ investment as indicated in the increasing percentage of equity to total assets.
4. The decreasing percentage of total liabilities to total assets further indicates lesser reliance of the company from creditors in raising additional capital. This, of
course, is favorable as far as the long-term financial position of the company is concerned because a wider margin of safety is provided among the creditors.
Evaluation of Profitability
1. Favorable changes could be observed in the gross margin percentage in relation to net sale. The increase in percentage over the year could be due to improvement
in the company’s mark-up policy or better procurement policy.
2. Selling expenses in relation to sales however, show increasing percentages from 2016 to 2017, while administrative expenses had more or less remained constant.
Better control over the selling expenses should be instituted to further improve the profitability of the company.
3. Decrease in percentage of other expenses to net sales is traceable to the decreasing amount of note payable and long-term debts.
Illustrative Problem – FINANCIAL RATIOS
The Balance Sheets as of December 31, 2016 and 2017, Income Statement and Statement of Cash Flows of Julia B.Enterprises, Inc. for years 2015, 2016 and 2017 are
given below:
Julia B. Enterprises, Inc.

Balance Sheet
December 31, 2016 – 2017
2016 2017
Assets
Current Assets
Cash P 1,191,000 P 2,030,500
Marketable securities 4,002,000 2,636,000
Accounts receivable 4,383,500 4,704,000
Allowance for doubtful accounts ( 208,500) ( 224,000)
Inventories 18,384,500 23,520,500
Prepaid expenses 379,500 256,000
Total current assets P 28,132,000 P 32,923,000
Property, Plant and Equipment

Land P 405,500 P 405,500
Buildings and leasehold improvement 5,964,000 9,136,500
Equipment 6,884,000 10,761,500
Total P 13,253,500 P 20,303,500
Less: Accumulated depreciation and amortization ( 3,765,000) ( 5,764,000)
Net property, plant and equipment P 9,488,500 P 14,539,500
Other assets 334,000 186,500
Total Assets P 37,954,500 P 47,649,000

Current liabilities
Accounts payable P 3,795,500 P 7,147,000
Notes payable – banks 3,006,000 2,807,000
Current maturities of long-term debt 758,000 942,000
Accrued liabilities 2,656,500 2,834,500
Total current liabilities P 10,216,000 P 13,730,500
Deferred income taxes 317,500 421,500
Long term debt 8,487,500 10,529,500
Total liabilities P 19,021,000 P 24,681,500
Equity
Ordinary shares, par value P1, authorized
10,000,000 shares; issued, 2,297,000
Shares in 2017 and 2,41,500 in 2016 P 2,297,000 P 2,401,500
Additional paid in capital 455,000 478,500
Retained earnings 16,181,500 20,087,500
Total equity P 18,933,500 P 22,967,500
Total Liabilities and Equity P 37,954,500 P 47,649,000

Income Statement
For the years ended December 31, 2015, 2016 and 2017
2015 2016 2017
Net sales P 70,350,000 P 76,500,000 P 107,800,000

Cost of goods sold 40,803,000 45,939,500 64,682,000
Gross profit P 29,547,000 P 30,560,500 P 43,118,000
Selling and administrative expenses P 12,749,000 P 13,191,000 P 16,332,000

Advertising 4,770,500 5,396,000 7,129,000
Lease payments 3,633,500 3,555,500 6,529,000
Depreciation and amortization 1,250,500 1,492,000 1,999,000
Repairs and maintenance 1,515,500 1,023,000 1,507,500
Total P 23,919,000 P 24,657,500 P 33,493,500
Operating Profit P 5,628,000 P 5,903,000 P 9,621,500
Other income 369,000 419,000 211,000

(Other expenses) ( 637,000) ( 1,138,500) ( 1,292,500)
Earnings before income taxes P 5,360,000 P 5,183,500 P 8,540,000
Income taxes 2,412,000 2,228,500 3,843,000
Net Income P 2,948,000 P 2,955,000 P 4,697,000
Earnings per common share P 1.33 P 1.29 P 2.00
Statement of Retained Earnings
Retained earnings at beginning P 12,130,000 P 14,157,500 P 16,181,500
Net income 2,948,000 2,955,000 4,697,000
Cash dividends
(2017 – P0.33 per share;
2016 – P0.41 per share) ( 920,500) ( 931,000) ( 791,000)
Retained earnings at end of year P 14,157,500 P 16,181,500 P 20,087,500

Statement of Cash Flows
For the years ended December 31, 2016 and 2017
2016 2017
Cash Flow from Operating Activities – Direct Method

Cash received from customers P 74,830,500 P 107,495,000
Interest received 419 211
Cash paid to suppliers for inventory ( 49,968,000) ( 66,466,500)
Cash paid to employees (S&A expenses) ( 13,191,000) ( 16,332,000)
Cash paid for other operating expenses ( 10,675,000) ( 14,864,000)
Interest paid ( 1,138,500) ( 1,292,500)
Taxes paid ( 2,160,500) ( 3,739,000)
Net cash provided (used) by operating
activities (P 1,883,500) P 5,012,000
Cash Flow from Investing Activities

Additions to property, plant and equipment (P 2,386,500) (P 7,050,000)
Other investing activities 0 147,500
Net cash provided (used) by investing
activities P 2,386,500 (P 6,902,500)
Cash Flow from Financing Activities

Sales of ordinary shares P 91,500 P 128,000
Increase (decrease) in short-term borrowings
(includes current maturities of long-
term debt) 927,000 ( 15,000)
Additions to long-term borrowings 3,941,000 2,800,000
Reductions of long-term borrowings ( 796,500) ( 758,000)
Dividends paid ( 931,000) ( 791,000)
Net cash provided (used) by financing
activities P 3,232,000 P 1,364,000
Increase (Decrease) in Cash and Marketable Securities (P 1,038,000) (P 526,500)
Supplementary Schedule:
Cash Flow from Operating Activities – Indirect Method
Net income P 2,955,000 P 4,697,000
Noncash revenue and expense included in net income:
Depreciation 1,492,000 1,999,000
Deferred income taxes 68,000 104,000
Cash provided (used) by current assets and liabilities:
Account receivable ( 1,669,500) ( 305,000)
Inventories ( 3,503,000) ( 5,136,000)
Prepaid expenses 147,500 123,500
Accounts payable ( 525,500) 3,351,500
Accrued liabilities ( 848,000) 178,000
Net cash provided (used) by
operations (P 1,883,500) P 5,012,000
Additional information:
Market price per share – 2017: P30; 2016: P17
Requirements:
Using the financial ratios, evaluate the company’s financial position and operating results for years 2016 and 2017.
Solutions:
Financial Ratios 2016 2017
Liquidity or short-term solvency
1. Current ratio x x
2. Quick ratio or acid test ratio x x
3. Cash-flow liquidity ratio x x
Asset liquidity and asset management efficiency
4. Accounts receivable turnover x x
5. Average collection period 20 days 15 days
6. Inventory turnover x x
7. Average sale period 146 days 118 days
8. Fixed asset turnover x x
9. Total asset turnover x x
Leverage: Debt Financing and Coverage
10. Debt ratio % %
11. Debt to equity ratio % %
12. Times interest earned x x

13. Fixed charge coverage x x
Operating Efficiency and Profitability
14. Gross profit margin % %
15. Operating profit margin % %
16. Net profit margin % %
17. Cash flow margin ( 2.50%) 4.65%

18. Return on investment on assets % %
19. Return on equity % %
20. Earnings per share P 1.29 P 2.00
21. Price earnings ratio x x
22. Dividend payout ratio % %
23. Dividend yield % %
Summary of Financial Statements Analysis of Julia B. Enterprises, Inc.
1. Short-term Liquidity and Activity
Short-term liquidity analysis is of particular significance to trade and short-term creditors, management and other parties concerned with the ability of a
firm to meet near-term demands for cash.
Julia’s current and quick ratios decreased indicating a deterioration of short-term liquidity. However, the cash flow liquidity ratio improved in 2017 after a
negative cash generation in 2016.
The average collection period for accounts receivable and the inventory turnover improved in 2017 which could indicate improvement in the quality of
accounts receivable and liquidity of inventory. The increase in inventory level has been accomplished by reducing holdings of cash and cash equivalents.
This represents a trade-off of highly liquid assets for potentially less liquid assets. The efficient management of inventories is critical for the firm’s
ongoing liquidity.
Presently, there appears to be no major problems with the firm’s short-term liquidity position.
2. Long-term Solvency
The debt ratios for Julia B. shows a steady increase in the use of borrowed funds. Total debt has increased relative to total assets, long-term debt has
increased as a proportion of the firm’s permanent financing and external or debt financing has risen relative to internal financing.
Why has debt increased? The statement of cash flows shows that Julia B. has substantially increased its investment in capital or fixed assets and their
investments have been financed largely by borrowing especially in 2016 when the firm had a rather sluggish operating performance and no internal cash
generation.
Given the increased level of borrowing, times interest earned and fixed charge coverage improved slightly in 2017. These ratios should however be
monitored closely in the future particularly if Julia B. continues to expand.
3. Operating efficiency and profitability
As noted earlier, Julia B. has increased its investment in fixed asset as a result of store expansion. The asset turnover increased in 2017, the progress
traceable to improved management of inventories and receivable. There has been substantial sales growth which suggests future performance potential.
The gross profit margin was stable, a positive sign in the light of new store openings featuring discounted and “sale” items to attract customers. The firm
also managed to improve its operating profit margin in 2017 principally due to the firm’s ability to control operating costs. The net profit margin also
improved despite increased interest and tax expenses and a reduction in interest income from marketable security investment.
Return on assets and return on equity increased considerably in 2017. These ratios measure the overall success of the firm in generating profits from its
investments and management policies.
Conclusion: It appears that Julia B. Enterprises, Inc. is well positioned for future growth. Close monitoring the firm’s management of inventories is important
considering the size of the company’s capital tied up in it. The expansion in their operation may necessitate a sustained effort to advertise more, to
attract customers to both new and old areas. Julia B. has financed much of its expansion with debt, and so far, its shareholders have benefited from
the use of debt through financial leverage. The company should however be cautious of the increased risk associated with debt financing.
WORKING CAPITAL AND CASH MANAGEMENT
Abstract:
This focuses on the concepts and the tools used in analyzing working capital, and strategies for maximizing the use of working capital and cash.
Lesson Objectives:
 Define net working capital and the related trade-off between profitability and risk;
 Compute for the cash conversion cycle, its funding requirements, and the key strategies for managing it;
 Manage receipts and disbursements;
 Appreciate the use of different techniques in managing working capital; and
 Compute and explain cost of discount forgone.
Module Guide:
2. Answer the exercises presented after the topic content below. (EXERCISES)
TOPIC CONTENT
WORKING CAPITAL MANAGEMENT: INTRODUCTION
WORKING CAPITAL MANAGEMENT - involves managing the firm’s current assets and liabilities to achieve a balance between profitability and risk that contributes positively to
the firm’s value.
TRADE-OFF BETWEEN RISK AND RETURNS

The management of net working capital requires consideration for the trade-off between risk and returns. Holding more current than long-term assets means greater flexibility
and reduced liquidity risk. However, the rate of return will be less than with current assets than with long-term assets. Long-term assets typically earn a greater return than current
assets. Long-term financing has less liquidity risk associated with it than short-term debt, but it also carries a higher cost. Consider the following:
Working Capital Policy

Conservative Aggressive
Level of current assets High Low
Reliance on long-term financing High Low
Liquidity Risk Low High
Profitability and Returns Low High
*CONSERVATIVE* *AGGRESSIVE*
Current Liabilities Current Assets
Current
Current Assets
Liabilities
FACTORS TO CONSIDER IN MANAGING WORKING CAPITAL

 APPROPRIATE LEVEL This refers to adequacy of working capital
o Consider: Nature of business and length of operating cycle
 STRUCTURAL HEALTH This refers to composition of working capital
o Consider: Need for cash, accounts receivable and other current assets
 LIQUIDITY This refers to the relative-transformation (and its rate) of current assets into more liquid current assets (e.g., cash and marketable securities.)
In general, sound working capital policy requires:

 Managing cash and its temporary investment efficiently. (Cash/Marketable Securities Management)
 Ensuring efficient manufacturing operations and sound material procurement. (Inventory Management)
 Drafting and implementing effective credit and collection policies. (Receivable Management)
 Seeking favorable terms from suppliers and other temporary creditors. (Short-term credit financing)
CASH AND MARKETABLE SECURITIES MANAGEMENT
CASH MANAGEMENTinvolves the maintenance of the appropriate level of cash to meet the firm’s cash requirements and to maximize income on idle funds.
MS MANAGEMENT involves the process of planning and controlling investment in marketable securities to meet the firm’s cash requirement and to maximize income on idle
funds.
OBJECTIVE: to minimize the amount of cash on hand while retaining sufficient liquidity to satisfy business requirements (e.g., take advantage of cash discounts, maintain credit
rating, meet unexpected needs).
REASONS FOR HOLDING CASH: “Why would a firm hold cash when, being idle, it is a non-earning asset?”
1. TRANSACTION motive (Liquidity motive) Cash is held to facilitate normal transactions of the business.
2. PRECAUTIONARY motive (Contingent motive) Cash is held beyond the normal operating requirement level to provide for buffer against contingencies, such as slow-down in
accounts receivable collection, possibilities of strikes, etc.
3. SPECULATIVE motive. Cash is held to avail of business incentives (e.g., discounts) and investment opportunities.
4. CONTRACTUAL motive – Compensating Balance Requirements. A company is required by a bank to maintain a certain compensating balance in its demand deposit account
as a condition of a loan extended to it.
OPTIMAL CASH BALANCE: BAUMOL MODEL

2 ( Annual Cash Requirement )( Cost Per transaction )
OPTIMAL CASH BALANCE (OCB) =
√ Opportunity Cost of Holding Cash
Total Costs of Cash Balance = Holding Costs + Transaction Costs

 HOLDING Costs = Average cash balance* x opportunity cost
 TRANSACTION Costs = Number of transactions** x Cost per transaction
*Average cash balance = OCB ÷ 2
**Number of transactions = Annual Cash Requirement ÷ OCB
CASH CONVERSION CYCLE - is the average length of time a peso is tied up in current assets. It runs from the date the company makes payment of raw materials to the date
company receives cash inflow thru collection of accounts receivable. It is also known as the cash flow cycle.
Inventory conversion period Inventory / CGS* per day

+ Receivable collection period Receivables / Sales per day
- Payable deferral period Payables / Purchases per day
CASH CONVERSION CYCLE
*Alternatively, sales per day may be also used to compute conversion period. The intention is to use an amount in proportion to unit sales.
The firm’s goal should be to shorten its cash conversion cycle without hurting operations. The longer the cash conversion cycle, the greater the need for external financing; hence, the
more cost of financing.
CASH MANAGEMENT STRATEGIES

1. Accelerating collections (e.g., lockbox system)
2. Slowing disbursements (e.g., playing the floats)
3. Reducing precautionary idle cash (e.g., zero-balanced accounts)
THE CONCEPT OF FLOAT

FLOAT generally defined as the difference between the cash balance per BANK and the cash balance per BOOK as of a particular period, primarily due to outstanding
checks or other similar reasons.
Types of Float:
 POSITIVE (Disbursement) Float: Bank balance > Book Balance
EXAMPLE: Outstanding checks issued by the firm that have not cleared yet.
 NEGATIVE (Collection) Float: Book balance > Bank Balance
EXAMPLES:
1. MAIL Float – Amount of customers’ payments that have been mailed by customers but not yet recovered by the seller company.
2. PROCESSING Float – Amount of customers’ payments that have been received by the seller but not yet deposited.
3. CLEARING Float – Amount of customers’ checks that have been deposited but have not cleared yet.
Good cash management suggests that positive float should be maximized (negative float, minimized).
MARKTETABLE SECURITIES - short-term money market instruments that can easily be converted to cash
 CERTIFICATES of DEPOSITS (CD) – savings deposits at financial institutions (e.g., time deposit)
 MONEY MARKET FUNDS – shares in a fund that purchases higher-yielding bank CDs, commercial paper, and other large-denomination, higher-yielding securities.
 GOVERNMENT SECURITIES
 Treasury Bills – debt instruments representing obligations of the National Government issued by the Central Bank and usually sold at a discount through competitive
bidding.
 CB Bills or Certificates of Indebtedness (CBCIs) – represent indebtedness by the Central Bank.
 COMMERCIAL PAPERS – unsecured short-term promissory notes issued by corporations with very high credit standing
FACTORS INFLUENCING THE CHOICE OF MARKETABLE SECURITIES (MS)

1. RISK
 Default Risk – refers to the chances that the issuer may not be able to pay the interest or principal on time or at all.
 Interest Rate Risk – refers to fluctuations in MS prices caused by changes in market interest rates.
 Inflation Risk – refers to the risk that inflation will reduce the relevant value of the investment.
2. RETURNS – the higher the MS’s risk involved, the higher its required return. While MS must consist of highly liquid short-term investments, the company should not sacrifice
safety for higher rates of return.
3. MATURITY – Maturity dates of MS held should coincide, whenever possible, with the date at which the firm needs cash, or when the firm will no longer have cash to invest.
4. MARKETABILITY – refers to how quickly a security can be sold before maturity date without a significant price concession.
EXERCISES:
Exercise 1. Working Capital Exercise 4. Cash Conversion Cycle

Given the following information of Ryouzanpaku Company: Furinji Hasato Corporation purchases merchandise on 20-day term. Goods
Cash 12,000 Accounts Payable 10,000 are sold, on the average, 15 days after they are received. The average age
Accounts Receivable 18,000 Current Tax Liability 3,000 of accounts receivable is 45 days. Furinji Hasato pays its payable on due
Inventory 20,000 Accrued Payroll 7,000 date.
Fixed Assets 50,000 Bonds Payable 80,000
REQUIRED:
The bonds will mature in 10 years. All amounts are correctly stated. A. How long is the company’s normal operating cycle?
B. How long is the company’s cash conversion cycle?
REQUIRED: Determine the following: C. What is the number of cash conversion cycles in one year (360 days)?
1. Net Working Capital
2. Current Ratio
3. Acid-Test (Quick Assets) ratio
4. New Current Ratio
(assuming the entire accounts payable are paid in cash)
5. New Current Ratio
(assuming a P10,000 short-term loan is obtained from a bank)
Exercise 2. Optimal Cash Balance Exercise 5. Float & Lockbox System

Shirahama Kenichi Corporation is expecting to have total payments of It typically takes Kuoetsuji Akisame Corporation 8 calendar days to
P1,800,000 for one year, cost per transactions amounted to P25, and the receive and deposit customer remittances. Akisame is considering
interest rate of marketable securities is 10%. adopting a lockbox system and anticipates that the system will reduce the
float time to 5 days. Average daily cash receipts are P220,000. The rate of
REQUIRED: return is 10 percent.
A. What is the company’s optimal initial cash balance that minimizes total
cost? REQUIRED:
B. What is the total number of transactions (cash conversions) that will be A. How much is the reduction of float in cash balances associated with
required per year? implementing the system?
C. What will be the average cash balance for the period? B. What is the amount of return associated with the earlier receipt of the
D. What is the total cost of maintaining cash balances? funds?
C. If the lockbox costs P7,500 per month to implement, should the system
be implemented?
a. Yes, savings is P24,000 per year
b. Yes, savings is P82,500 per year
c. No, loss is P14,500 per year
d. No, loss is P24,000 per year
Exercise 3. Minimum Cash Balance Exercise 6. Marketable Securities

Furinji Miu Corporation’s cost of goods sold per year is P4,860,000. Ma Kensei Corporation has P20,000 excess cash that it might invest in
Annual operating expenses are estimated at P1,200,000, inclusive of marketable securities. It considers investing the money for a holding
depreciation and other non-cash expenses of P300,000. period of 3 months. The transaction fee arising from this is P300.
REQUIRED: REQUIRED: What is the break-even yield (annual basis) for the three-
How much must the corporation’s minimum cash balance be if it is to be month holding period?
equal to 15 days’ requirement? (Use a 360-day year)
Hint: Breakeven yield is the interest rate at which the income from
investment equals the transaction costs incurred.
Hence, based on P x R x T.
RECEIVABLE MANAGEMENT
Abstract:
This focuses on the concepts, tools, factors affecting accounts receivables, and strategies for maximizing accounts receivables.
Lesson Objectives:
 Discriminate the credit selection process from the quantitative procedure for evaluating changes in credit standards;
 Evaluate cash discount changes, credit terms, and credit monitoring in improving a firm’s performance;
 Compute accounts receivable that could be freed from the operations; and
 Appreciate how accounts receivable policies help the management in improving a firm’s profitability.
Module Guide:
TOPIC CONTENT
ACCOUNTS RECEIVABLE MANAGEMENT
AR MANAGEMENT – involves the determination of the amount and terms of credit to extend to customers and monitoring receivable from credit customers.
OBJECTIVE: To collect AR as quickly as possible without losing sales from high-pressure collection techniques. Accomplishing this goal encompasses three topics: (1) credit
selection and standards, (2) credit terms, and (3) credit collection and monitoring program
Consider this trade-off:

Offering liberal and relaxed credit terms attracts more customers while it would entail more costs of AR such as collection, bad debts and interests (opportunity
costs).
FACTORS TO CONSIDER FOR A/R POLICY
1. CREDIT STANDARD
Who (customers) will be granted credit? How much is the credit limit?
Factors to consider in establishing credit standards – the Five C’s of Credit:
 Character – customers’ willingness to pay
 Capacity – customers’ ability to generate cash flows
 Capital – customers’ financial sources (i.e., net worth)
 Conditions – current economic or business conditions
 Collateral – customers’ assets pledged to secure debt.
2. CREDIT TERMS
This defines the credit period and discount offered for customer’s prompt payment. The following costs associated with the credit terms must be considered: cash discounts,
credit analysis and collections costs, bad debts losses and financing costs.
3. COLLECTION PROGRAM
Shortening the average collection period may preclude too much investment in receivable (low opportunity costs) and too much loss due to delinquency and defaults. The same could
also result to loss of customers if harshly implemented.
EXERCISES:
Exercise 1. Average Investment in Accounts Receivable Exercise 3. Discount Policy

Takeda Ikki Co. sells on terms of 2/10, n/30. 70% of customers normally Ma Renka Company presents the following information:
avail of the discounts. Annual sales are P900,000, 80% of which is made on Annual credit sales: P25,200,000
credit. Cost is approximately 75% of sales. Rate of return: 18%
Collection period: 3 months
REQUIRED: Terms: n/30
A. Average balance of accounts receivable.
B. Average investment in accounts receivable. The company is considering offering a 4/10, n/30 credit term. It anticipates
that 30% of its customers will take advantage of the discount while sales
would remain constant. The collection period is expected to decrease to two
months.
REQUIRED:
What is the net advantage (disadvantage) of implementing the proposed
discount policy?
Exercise 2. Accelerating Collection Exercise 4. Credit Policy - Relaxation

Kousaka Shigure Co. makes credit sales of P2,160,000 per annum. The The Rachel Castor Co. reports the following information:
average age of accounts receivable is 30 days. Management considers Selling price per unit P10
shortening credit terms by 10 days. Cost of money is 18%. Variable cost per unit 8
Total Fixed Costs P120,000
REQUIRED: How much will the company save from financing charges? Annual credit sales 240,000 units
(Assume 360-day year) Collection period 3 months
Rate of return 25%
The Rachel Castor Co., which has enough idle capacity, is considering
relaxing its credit standards (more liberal extension of credit). If it does, the
following is expected to result: sales will increase by 25%; collection
period will increase to 4 months; bad debts losses are anticipated to be 5%
on the incremental sales; and collection costs will increase by P40,000.
REQUIRED:
Should the proposed relaxation in credit standards be implemented?
INVENTORY MANAGEMENT
Abstract:
This focuses on the concepts, tools and techniques, factors affecting inventories, relevant cost in inventory management, and strategies to minimize inventory costs.
Lesson Objectives:
 Explain the importance of having adequate inventories, as well as determine the benefits of having carefully planned inventories;
 Compute for EOQ, lead time, lead time usage, reorder point and safety stock; and
 Analyze inventory maintenance to minimize carrying and ordering costs.
Module Guide:
TOPIC CONTENT
INVENTORY MANAGEMENT
INVENTORY MANAGEMENT – refers to the process of formulation and administration of plans and policies to efficiently and satisfactorily meet the production and merchandising
requirements and minimize costs relative to inventories.
OBJECTIVE: To maintain inventory at a level that best balances the estimates of actual savings, the cost of carrying additional inventory, and the efficiency of inventory control.
INVENTORY MANAGEMENT TECHNIQUES

INVENTORY PLANNING involves determination of the quality and quantity and location of inventory, as well as the time of ordering, in order to minimize costs and meet future
business requirements.
Examples: Economic Order Quantity; Reorder Point; Just-in-Time (JIT) System.
INVENTORY CONTROL involves regulation of inventory within predetermined level; adequate stocks should be able to meet business requirements, but the investment in
inventory should be at the minimum.
SYSTEMS OF INVENTORY CONTROL
 JUST-IN-TIME PRODUCTION system – a “demand pull” (driven by demand) system in which each component of a finished good is produced when needed by the next
production stage.
 FIXED ORDER QUANTITY system – an order for a fixed quantity is placed when the inventory level reaches the reorder point. This is consistent with EOQ concept.
 PERIODIC REVIEW OR REPLACEMENT system – orders are made after a review of inventory level has been done at regular intervals.
 OPTIONAL REPLENISHMENT system – combination of fixed order and replacement systems.
 MATERIALS REQUIREMENT PLANNING (MRP) - MRP (a push through system) is designed to plan and control raw materials used in production based on a
computerized system that manufactures finished goods based on demand forecasts.
 MANUFACTURING RESOURCE PLANNING (MRP – II). A closed loop system that integrates various functional areas of a manufacturing company (e.g.,
inventories, production, sales and cash flows). It is developed as an extension of MRP.
 ENTERPRISE RESOURCE PLANNING (ERP). ERP integrates information systems of all functional areas in a company. Every aspect of operations is interconnected
as the company is connected with its customers and suppliers.
 ABC Classification system – inventories are classified for selective control
A items – high value requiring highest possible control
B items – medium cost items requiring normal control
C items – low cost items requiring the simples possible control
ORDER CYCLING METHOD OR CYCLE REVIEW METHOD

Establishes schedules of periodic or regular review of quantities of inventories (e.g., materials) on hand to determine the number of units to be ordered and bring the stock balance at
a desired level. High-value, critical normally require a short review cycle. Low-value, noncritical items, the usual review cycle time is longer because the stockout costs is minimal
and procurements are done in large quantities.
MIN-MAX METHOD
Minimum inventory level serves as the reorder point. It includes the normal quantity to be used from the time an order is placed up to the time the materials are received (i.e., lead
time). The safety stock quantity to minimize the occurrence of stockout is also included. The maximum inventory level is the sum of stockout quantity and the order size.
TWO-BIN SYSTEM
Materials are stored in bins, piles, bundles, or specific stocking area. Two bins are used; one bin contains the quantities to be used from the date the materials are received up to the
time an order is to be placed, and the other bin contains the quantities to be used during the waiting time (or lead time) and the safety stock. Once the first bin is consumed, an order
for two bins is automatically placed.
EOQ MODEL
Where: Total ordering costs = Total carrying costs
Total relevant inventory costs equal ordering costs and carrying cost.
Total relevant inventory costs are at the lowest
Ordering Costs include those spent in placing an order, waiting for an order, inspection and receiving costs, setup costs, and quantity discounts lost.
Cost per order = Total ordering costs / Number of orders
Total ordering costs = Cost per order X No. of orders
No. of orders = Annual demand / Order Size
Annual Demand represents the annual need or requirements of the business. Order size refers to the number of units or amount purchased per order batch.
Carrying Costs are those spent in holding, maintaining, or warehousing inventories such as warehousing and storage costs, handling and clerical costs, property taxes and
insurance, deterioration and shrinkage of stocks, obsolescence of stocks, interest, and return on investment (e.g., lost return on investment ties up in inventory).
Carrying cost per unit = Total carrying costs / Average inventory
Total carrying costs = Carrying cost per unit X Average inventory
also:
Carrying cost per unit = Unit cost X Carrying costs ratio
Carrying cost ratio = Carrying cost per unit / Unit cost
Average inventory = Order size / 2
EOQ ( units ) = 2 ( Annual Demand )( Cost per order ) EOQ ( pesos ) = 2 ( AD∈Pesos )( CPO )
√ Carrying Cost per Unit √ CC Ratio
THE REORDER POINT . .when to place an order?
 The reorder point (ROP) refers to the inventory level where a purchase order should be placed. Reorder point is the sum of lead time quantity and safety stock quantity.
Reorder point = Lead time quantity + Safety stock quantity = LTQ + SSQ
where:
Lead time quantity = normal usage x normal lead time = NU X NLT
Safety stock = safety stock (in usage) + safety stock (in time)
Safety stock (in usage) = (Maximum usage – Normal usage) X Normal lead time
Safety stock (in time) = (Maximum lead time – Normal lead time) X Normal usage
and;
Maximum inventory level = Safety stock quantity + Order size = SSQ + OS
 Lead time refers to the waiting time from the date the order is placed until the date the delivery is received. Lead time quantity represents the normal usage during the lead time
period. Normal usage means the average usage of inventory during a given specific period of time (e.g., days, weeks).
 Safety stock is established to served as an allowance in case of variations in normal usage and normal lead time. Hence, there is a safety stock for variation in usage and a safety
stock for variations in time.
EXERCISES:
Exercise 1. Economic Order Quantity Exercise 3. Reorder Point, Lead Time Quantity, Safety Stock Quantity
Sakuragi Co. has been buying product XXX in lots of 1,250 units which Rukawa Co. makes available the following information relative to its
represents a three month’s supply. The cost per unit is 220. The order cost Material G-224:
is P900 per order; and the annual inventory carrying cost per one unit is Annual demand 30,000 units
P25. Assume that the units will be required evenly throughout the year. Working days in a year 300 days
Normal lead time 12 days
Required: Determine the following:
Maximum lead time 19 days
a. Economic order quantity –
Economic order size 6,000 units
b. Number of orders in a year –
c. Average inventory based on economic order quantity. –
Required: Calculate the following:
d. Total carrying cost, ordering cost, and relevant inventory costs at
a. Lead time quantity –
economic order quantity. –
b. Safety stock quantity –
e. Total relevant inventory costs for order sizes of 2,000 units, 1,000 units,
c. Reorder point –
600 units, 250 units, and 100 units.
d. Average inventory –
e. Maximum inventory –
Exercise 2. EOQ in Pesos, No. of Materials Orders Exercise 4. Reorder Point, Lead Time Quantity, Safety Stock Quantity
Akagi Co. determines the manufacturing cost per order of a raw material is Rukawa Co. makes available the following information relative to its
P25. The company expects to use P50,000 of this materials in the coming Material G-224:
year. The carrying charge is 10% of inventory. Annual demand 30,000 units
Working days in a year 300 days
Required: Determine the following: Normal lead time 12 days
a. Economic order quantity in pesos – Maximum lead time 19 days
b. Number of times the raw materials be ordered in the coming year. Maximum lead time usage 125 units
c. Average inventory – Economic order size 6,000 units
d. Total relevant inventory costs at economic order quantity. –
Required: Calculate the following:
a. Lead time quantity –
b. Safety stock quantity –
c. Reorder point -
d. Average inventory –
e. Maximum inventory –
SHORT-TERM FINANCING
Abstract:
This focuses on the concepts, the sources, and the other forms of short-term financing
Lesson Objectives:
 Identify the different sources of short-term financing;
 Explain the advantages and disadvantages of short-term financing; and
 Compute the costs and benefits of short-term financing of the firm.
Module Guide:
TOPIC CONTENT
SHORT –TERM FINANCING
WORKING CAPITAL FINANCE refers to optimal level, mix and use of current assets and current liabilities
WORKING CAPITAL FINANCING POLICIES

A. AGGRESSIVE FINANCING STRATEGY – operations are conducted with a minimum amount of working capital. This is also known as restricted policy.
B. CONSERVATIVE FINANCING STRATEGY – a company seeks to minimize liquidity risk by increasing working capital. This is also known as relaxed policy.
C. MODERATE FINANCING STRATEGY - also known as semi-aggressive or semi-conservative financing strategy. Under this strategy, working capital maintained relatively not
too high (conservative) nor too low (aggressive). This is also known as balanced policy.
D. MATCHING POLICY This achieved by matching the maturity of financing source with an asset’s useful life. This is also known as self-liquidating policy or hedging policy.
 Short-term assets are financed with short-term liabilities.
 Long-term assets are funded by long-term financing sources.
HEDGING – Financing assets with liabilities of similar maturity.
TOTAL FINANCING REQUIREMENT

FIXED AND LONG-TERM ASSETS
PERMANENT financing requirement
PERMANENT CURRENT ASSETS
TEMPORARY financing requirement

(Seasonal operation requirement)
FACTORS OF CONSIDERATIONS IN SELECTING SOURCES OF SHORT-TERM FUNDS

 COST: The effective costs of various credit sources.
 AVAILABILITY: The readiness of credit as to when needed and how much is needed.
 INFLUENCE: The influence of use of one credit source and availability of other sources of
financing.
 REQUIREMENT: The additional covenants unique to various sources of financing (e.g., loans)
SOURCES OF SHORT-TERM FUNDS

 UNSECURED CREDITS (Accruals, trade credit and commercial papers)
 SECURED LOANS (Receivable Financing – pledging and factoring)
(Inventory Financing – blanket lien, trust receipts, warehouse receipts)
 BANKING CREDITS (Loan, line of credit, revolving credit agreement)
COSTS OF SHORT-TERM CREDIT
 Cost of TRADE CREDIT with supplier*:

Discount rate 360 days
COST =
100% - Discount rate Credit period – Discount period
* This cost is caused by foregoing cash discount (opportunity cost).
 Cost of BANK LOANS (EFFECTIVE ANNUAL RATE)
 Without compensating balance:
If not discounted (cash proceeds normally equal face value):
COST = Interest
Amount Received (Face)
If discounted (cash proceeds is net of interest deducted in advance):
Interest
COST =
Face Value – Interest
 With compensating balance (CB):

If not discounted:
Interest (or Nominal %)
COST =
Face Value (or 100%) – CB (or CB%)
If discounted:
Interest (or Nominal %)
COST = Face Value (or 100%) – Interest (Nominal %) – CB (or CB%)
 Cost of COMMERCIAL PAPERS

Interest + Issue Costs 360 days
COST =
Face value – Interest – Issue Costs Term
EXERCISES:
Exercise 1. Cost of Trade Credit Exercise 3. Cost of Commercial Paper

Ikki Trading Co. purchases merchandise for P200,000, 2/10, n/30. Simca Trading Co. plans to sell P100,000,000 in 180-day maturity paper,
which it expects to pay discounted interest at an annual rate of 12% p. a.
Required: Due to this commercial paper, Simca Trading expects to incur P100,000 in
a. The annual cost of trade credit. – dealer placement fees and issuance costs.
b. The annual cost of trade credit if term is changed to 1/15, n/20. –
Required: The effective cost of Simca’s credit. –
Exercise 2. Cost of Bank Loans Exercise 4. Cost of Factoring Receivable

Agito Trading Co. was granted a P200,000 bank loan with 12% stated Ringo Trading Co. has P200,000 in receivable that carries 30-day credit
interest. term, 2% factor’s fee, 6% holdback reserve, and an interest of 12% per
annum on advance.
Required: The effective annual rate, under the following cases:
a. Agito receives the entire amount of P200,000. – Required:
b. Agito was granted a discounted loan. - a. Cash proceeds from factoring Ringo Co.’s receivable. –
c. Agito is required to maintain a compensating balance of P10,000 under b. The effective annual financing cost of factoring receivable. –
the non-discounted loan. –
d. Agito is required to maintain a compensating balance of 10% under a
discounted loan. -
Review on the topic coverage from Preliminary Term to Semi-Final Term

Time Duration and Allotment: Week 7 and 8, 12 Hours
Activities, Resources, and Assessment

Resources: Resources: Resources:

Google Classroom/Messenger Google Classroom/Messenger Textbook: Financial Management, Part 1 by:
Textbook: Financial Management, Part 1 by: Textbook: Financial Management, Part 1 by: Ferdinand L. Timbang
Ferdinand L. Timbang. Ferdinand L. Timbang.
Activities: Activities: Activities:

All learning materials in Google Classroom of this All learning materials in Google Classroom of this You are required to go over again all the learning
course will be opened for access (i.e., reading course will be opened for access (i.e., reading materials handed to you since Preliminary Term to
materials, exercises, and quizzes). materials, exercises, and quizzes). Semi-Final Term for review and study.
You are required to go over again all those learning You are required to go over again all those learning
materials for review and study. materials for review and study.
Final Term Major Examination
Time Duration and Allotment: 1 day
Activities, Resources, and Assessment

Resources: Resources: Assessment:

Google Classroom/Messenger Google Classroom/Messenger Final Term Major Examination will be issued to you
and will be answered at home, which will be
Assessment: Assessment: immediately due for submission the following day at
Final Term Major Examination (Comprehensive Final Term Major Examination (Comprehensive the box placed at the SVCI guard house.
Examination) will be publish at Google Classroom. Examination) will be publish at Google Classroom. Communication as to the receipt the said quiz will be
Instructions as to the time allocated for answering and Instructions as to the time allocated for answering and through text messaging.
deadline for submission of assessment will be deadline for submission of assessment will be
announced via Messenger Group Chat. announced via Messenger Group Chat.
_End of module_

Business Finance: St. Vincent'S College Incorporated

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Business Finance: St. Vincent'S College Incorporated

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ST.

VINCENT’S COLLEGE INCORPORATED

Week 1 Week 3 Week 5 Week 7 to 8

Week 2 Week 4 Week 6

1. Study topic content presented below. (TOPIC CONTENT)

 Profit Maximization vs. Stockholders’ Wealth Maximization

 Types of Business Organization

1. Study topic content presented below. (TOPIC CONTENT)

2. Journalizing – the identified accountable events are recorded in the journals.

3. Posting – information from the journal are transferred to the ledger.

 Components of Financial Statements

 Elements of Financial Statements

 Objectives of the financial statement analysis

 General Approaches / Steps to Financial Statements Analysis

 Limitations to Financial Statements Analysis

 Profitability – the ability of the company to earn profit

 Financial Statement Analysis Techniques:

 Purposes/functions of the Cash Flow Statement

 Main Sections of the Statement of Cash Flows

Illustrative Problem – HORIZONTAL AND VERTICAL ANALYSES

Cash P 56,400 P 166,800

Total Assets P 2,167,000 P 3,207,400

Liabilities and Equity

Total Liabilities and Equity P 2,167,000 P 3,207,400

Net Sales P 1,707,400 P 2,983,600

Cost of Goods Sold 1,248,200 2,109,400

Gross Margin on Sales P 459,200 P 874,200

Operating Income P 129,800 P 182,000

Other Income and Expenses, net (deduct) ( 20,600) ( 15,000)

Income Before Taxes P 109,200 P 167,000

Less: Income Tax Expenses ( 51,200) ( 62,600)

Net Income P 58,000 P 104,400

Total Assets P 2,167,000 P 3,207,400 P____?__ ?

Liabilities and Equity

Total Liabilities and Equity P 2,167,000 P 3,207,400 P__?_____ ?

Net Sales P 1,707,400 P 2,983,600 P ? ?

Cost of Goods Sold 1,248,200 2,109,400 ___? ?__

Gross Margin on Sales P 459,200 P 874,200 P ___ ? ?__

Operating Income P 129,800 P 182,000 P ? ?

Less: Other Income and Expenses, net 20,600 15,000 ______?__ ?

Less: Income Tax Expenses 51,200 62,600 _?_ ___ ?

Net Income P 58,000 P 104,400 P __?___ ?

2. Long-term Financial Position

Total Assets P 2,167,000 P 3,207,400 100.0 100.0

Liabilities and Equity

Total Liabilities and Equity P 2,167,000 P 3,207,400 100.0 100.0

Net Sales P 1,707,400 P 2,983,600 100.0 100.0

Cost of Goods Sold 1,248,200 2,109,400 _ ?____ ____ ?__

Gross Margin on Sales P 459,200 P 874,200 _ ?____ ___ ?__

Operating Income P 129,800 P 182,000 ? ?

Less: Income Tax Expenses 51,200 62,600 __?____ _____?___

Net Income P 58,000 P 104,400 3.4 3.5____

Evaluation of the Financial Position

Julia B. Enterprises, Inc.

Property, Plant and Equipment

Total Assets P 37,954,500 P 47,649,000

Total Liabilities and Equity P 37,954,500 P 47,649,000

Julia B. Enterprises, Inc.

2015 2016 2017

Net sales P 70,350,000 P 76,500,000 P 107,800,000

Selling and administrative expenses P 12,749,000 P 13,191,000 P 16,332,000

Operating Profit P 5,628,000 P 5,903,000 P 9,621,500

Total Assets P 2,167,000 P 3,207,400 P__? ?

Total Liabilities and Equity P 2,167,000 P 3,207,400 P?___ ?

Cost of Goods Sold 1,248,200 2,109,400 _? ?

Gross Margin on Sales P 459,200 P 874,200 P _ ? ?

Less: Other Income and Expenses, net 20,600 15,000 ____? ?

Net Income P 58,000 P 104,400 P ?_ ?

Cost of Goods Sold 1,248,200 2,109,400 _ ?__ ?

Gross Margin on Sales P 459,200 P 874,200 _ ?__ _ ?__

Less: Income Tax Expenses 51,200 62,600 ? _?_