LIMAY POLYTECHNIC COLLEGE

FINANCIAL
MANAGEMENT

Submitted to
JOHN CARLO P. ORACION, CPA, CTB, CTT, CTS
Institute of Business and Accountancy
 Limay Polytechnic College

Course Information
Course Title : Financial Management
Program : Bachelor of Science in Accountancy
Course Code : AE 19
Credit Units : 3
Reference Book : Financial Management Comprehensive Volume 2019-2020 Edition
by Ma. Elenita Balatbat Cabrera and Gilbert Anthony B. Cabrera

Instructor Information
Name : John Carlo Prieto Oracion
Certified Public Accountant
Certified Tax Bookkeeper
Certified Tax Technician
Certified Tax Specialist
Contact Information
a. Number : +639-292-422-634
b. Email : Jcprietooracion04@gmail.com

Course Purpose and Description

Financial Management is an introductory finance course designed to make students
understand the basic finance concepts. The course involves studies on decision-making utilizing
financial resources available to the firm from the perspective of the manager. The course
emphasizes the understanding of finance theory and working knowledge of the financial
environment in which the firm operates in order to develop appropriate financial strategies. Hence,
it covers the whole range of basic finance concepts, economics and financial environment,
financial statement analysis, risk analysis, the valuation process, capital budgeting, and capital
structure, and dividend policy. It will also cover financial analytical tools, cash flow management
techniques & working capital management.

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CHAPTER 4: BUSINESS ORGANIZATION AND TRENDS

Intended Learning Outcomes:

After studying Chapter 4, you should be able to:
1. Explain the basic legal forms of business organizations such as, sole proprietorship,
partnership, and corporation.
2. Known the advantages and disadvantages of adopting the
a. Sole proprietorship
b. Partnership
c. Corporation
form of business organization.
3. Determine the form of business organization most adaptable to an enterprise.
4. Understand the important business trends such as
• Increase globalization of business
• Improving information technology
• Outsourcing
and how they import a business firm's business operation.

THE ORGANIZATION OF THE BUSINESS FIRM

The business firm is an entity designed to organize raw materials, labor, and machines with the
goal of producing goods and/or services. Firms
1. Purchase productive resources from households and other firms,
2. transform them into a different commodity, and
3. Sell the transformed product or service to consumers
For business firms engaged in retail or trading activities, transforming purchased goods into a
different commodity does not necessarily take place.
Business firms can be organized in one of three ways:
a) proprietorship

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b) partnership
c) corporation
LEGAL FORMS OF BUSINESS ORGANIZATION
PROPRIETORSHIP

- A sole proprietorship is a business owned by a single person who has complete control over
business decisions.

- This individual owns all the firm’s assets and is responsible for all its liabilities.

- The owner of a proprietorship is not separable from the business and is personally liable for
all debts of the business.

- The business is an entity separate from the owner (proprietor).

Among the advantages of a sole proprietorship are:

1. Ease of entry and exit
A sole proprietorship requires no formal charter and is inexpensive to form and dissolve.
2. Full ownership and control
The owner has full control, reaps all profits and bears all losses.
3. Tax savings
The entire income generated by the proprietorship passes directly to the owner. This may result in
a tax advantage if the owner’s tax rate is less than the tax rate of a corporation.
4. Few government regulations
A sole proprietorship has the greatest freedom as compared with nay form of business
organization.

Major disadvantages of the proprietorship form include:

1. Unlimited liability
The owner is personally liable or responsible for any and all business debts. Thus, the owner’s
personal assets can be claimed by the creditors if the firm defaults on its obligations.
2. Limitations in raising capital

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Fund-raising ability is limited. Resources may be limited to the assets of the owner and growth
may depend on his or her ability to borrow money.
3. Lack of continuity
Upon death or retirement of the owner, the proprietorship ceases to exist.

Therefore, the proprietorship may be an ideal form of business organization when the following
conditions exist:
✓ The anticipated risk is minimum and adequately covered by insurance.

✓ The owner is either unable or unwilling to maintain the necessary organizational documents and
tax returns of more complicated business entities.
✓ The business does not require extensive borrowing.

PARTNERSHIP

- Two or more persons agree to contribute capital or services to the business and divide the
profits or losses.
Formal partnership - May established using a written contract known as partnership agreement
which is filed with SEC.
Partnership may be either general or limited
General partnership – Each partner has unlimited liability for the debt incurred by the business.
General partner manage the firm and may enter into contractual obligation on firm’s behalf.
Limited partnership – Containing one or more general partners and one or more limited partner.
Personal liability of limited partners is limited to their investment they also cannot be active in
management.
Advantages of a Partnership
1. Ease of formation – forming may require relatively little effort and low startup cost
2. Additional sources of capital – Financial resources of several individuals.
3. Management base – broader management base or expertise than to a sole proprietorship.
4. Tax implication – does not pay any taxes.
Disadvantages of a Partnership

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1. Unlimited liability – General partner have unlimited liability.

2. Lack of continuity – A partnership may dissolve upon withdrawal or death of a general
partner.
3. Difficulty of transferring of ownership – It is difficult for a partner to liquidate or transfer
ownership.
4. Limitation in raising capital – may have problem raising large amount of capital.

CORPORATION

- Artificial being created by law and is legal entity separate and distinct from its owner.

- Legal entity: own assets, borrow money and engage in other business entities without
directly involving the owners.

- Shareholders- corporation owners that do not directly manage the firm.

- Board of Directors- authorized to act in corporation’s behalf.

The articles of incorporation includes among others the following:

 Incorporators
 Name of the corporation
 Purpose of the corporation
 Capital stock
 Authorized shares

Advantages of a Corporation:
 Limited liability
 Unlimited life
 Ease in transferring ownership
 Ability to raise capital
Disadvantages of a Corporation:
 Time and cost of formation

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 Regulation
 Taxes
IMPORTANT BUSINESS TRENDS
 Increased globalization of business
 Ever improving information technology (IT)
 Corporate governance
 Outsourcing
GLOBALIZATION OF THE FIRM

- Most large corporations operate on a global basis and with good reason: investing abroad
has proven to be highly profitable.
- As domestic demand reaches maturity, the search for new markets leads corporation to
invest and sell abroad. The trend to develop a presence abroad is also motivated by a
desire to hedge against risks.
- Competition is intensified with the emergence of foreign industrial power, like Japan,
South Korea and Japan because of the opportunities for local firms to import lower priced
goods for sale the domestic market. This is not only saves the domestic firm the need to
invest in new capacity, but it also allows to share in the technological advances of that
country.
- Globalization of the firm will continue to provide highly profitable opportunities to
domestic firms, but this movement requires careful decision making and highly skillful
financial management.
Ever-Improving Information Technology

- Improvement in IT are spurring globalization, they’re changing financial management, as it

is practice in North America, Europe, Southeast Asia & elsewhere.
- Firms are collecting massive data and using them takes much of the guesswork out of
financial decision.
- E.g. Double dragon Corporation is considering a potential site for a new mail, it can draw
historical results from thousands of other stores to predict results at the propose site.
- This lowers the risk of investing in new stores.

Corporate Governance
- This relates to the way the top managers operate and interface with stakeholders. At the
same time, the Securities and Exchange Commission (SEC) which has jurisdiction over the
shareholders and the information that must be given has made it easier to activist
shareholders to changes the way things are done within firm.

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- Currently, investors who control huge pools of capital (hedge funds and private equity
groups or venture capitalists) are constantly looking for underperforming firms and they
quickly take control and replace manager.

Most firms today have strong written codes of ethical behavior and companies also conduct
training programs to ensure that employees understand proper behavior in different
situations. When conflicts arise involving profits and ethics, ethical consideration are so
obviously important that they dominate.
Outsourcing
- It occurs when domestic firms invest and produce goods in foreign countries on when these
firms choose to rely on imports rather than build domestic plans and produce these goods
domestically.
When evaluating the merits of outsourcing in a corporate manager is forced to make central
decisions.
1.) Invest or produce domestically or move a plant overseas.
2.) Import cheaper foreign goods to take advantage of low labor and other costs or shift for
more capital intensive and technologically advanced operations.
3.) Invest abroad in order to gain access to new rapidly growing foreign markets.
Outsourcing relieves manager from having to purchase raw materials or to hedge against the
risk that the prices of these raw materials will increase. Outsourcing firm does not have to incur
high costs of pension plan, health benefits etc. Technological obsolesce and unforeseen changes in
demand become less important.

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REVIEW QUESTIONS AND PROBLEMS

QUESTIONS:
1. What are the three basic forms of business ownership? What are the advantages and
disadvantages of each?
2. Between the three basic forms of business ownership, describe the ability of each form to
access capital.
3. Explain how the founder of a business can eventually lose control of the firm. How can the
founder ensure this will not happen?
4. Who owns a corporation? Describe the process whereby the owners control the firm’s
management. What is the main reason that an agency relationship exists in the corporate
form of organization? In this context, what kinds of problems can arise?
5. In what way can statistics be used to help managers succeed?
6. Why do firms seek global exposure?
7. What kind of different decisions are faced by a global firm?
8. What are some of the advantages of outsourcing? What are some of the problems it creates
for the firm?
9. If a company’s board of directors wants management to maximize shareholder wealth,
should the CEO’s compensation be set as affixed peso amount, or should the compensation
depend on how well the firm performs? If it is to be based on performance, how should
performance be measured? Would it be easier to measure performance by the growth rate
in reported profits or the growth rate in the stock’s intrinsic value? Which would be the
better performance measure? Why?
10. What are some actions that shareholders can take to ensure that management’s and
shareholders’ interests are aligned?

CASE:

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In early 20X1, Dee and Lyn Reyes formed the Super Delicious Cake Company. The company
produced a full line of cakes and its specialties included cheese cake, lemon pound cake, double-
iced cake and double-chocolate cake. The couple formed the company as an outside interest and
both continued to work at their current jobs. Dee did all the baking and Lyn handled the marketing
and distribution. With good product quality and a sound featured in a widely distributed
entrepreneurial magazine. Later that year, the company was featured in Best Desserts, a leading
specialty food magazine. After the article appeared in Best Desserts, sales exploded and the
company began receiving orders from all over the world.
Because of the increased sales, Dee left his other job, followed shortly by Lyn. The company hired
additional workers to meet demand. Unfortunately, the fast growth experienced by the company
led to cash flow and capacity problems. The company is currently producing as many cakes as
possible with the assets it owns, but demand for its cakes is still growing. Further, the company has
been approached by a national supermarket chain with a proposal to put four of its cakes in all of
the chain’s stores, and a national restaurant chain has connected the company about selling Super
Delicious cakes without a brand name.
Dee and Lyn have operated the company as a sole proprietorship. They have approached you to
help manage and direct the company’s growth. Specifically, they have asked you to answer the
following questions.
1. What are the advantages and disadvantages of changing the company organization from a sole
proprietorship to a limited partnership?
2. What are the advantages and disadvantages of changing the company organization from a sole
proprietorship to a corporation?
3. Ultimately, what action would you recommend the company undertake? Why?

MULTIPLE CHOICE QUESTIONS:

1. One of the major disadvantages of a sole proprietorship is

a. that there is unlimited liability to the owner.
b. the simplicity of decision making.
c. low organizational costs.
d. low operating costs.

2. The partnership form of organization

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a. avoids the double taxation of earnings and dividends found in the corporate form of
organization.
b. usually provides limited liability to the partners.
c. has unlimited life.
d. simplifies decision making.

3. A corporation is
a. owned by stockholders who enjoy the privilege of limited liability.
b. easily divisible between owners.
c. a separate legal entity with perpetual life.
d. all of the above.

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