Quarter 1

Learning Activity Sheets 1-4, Quarter 1

For Business Finance Grade 12

BUSINESS FINANCE

LAS_1
Major Roles in Financial Management and Individuals Involved

I. Learning Competency with Code

• explain the major roles of financial management and the different individuals
involved; and (ABM_BF12-IIIa-1)
• explain the flow of funds within an organization – through and from the
enterprise—and the role of the financial manager. (ABM_BF12-IIIa-5)

II. Activity Proper

ACTIVITY 1: Major Roles in Financial Management and Individuals Involved

Finance is an act or process of raising or providing funds. (www.merriam-

webster.com>finance)

Finance is the science and art of managing money. (Gitman & Zutter, 2012)

An organizational structure shows the roles and functions of the employees in a

company. Job descriptions and functions may vary from different companies, depending
on its size, and form of organization, but basic and important features of functions are
common in nature.

For example, in a small business, the president or head of the company can also
directly perform the responsibility of the marketing, finance and production managers,
while in a big or very large companies, there are Chief Financial Officers (CFO) or VP for

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Finance that assumes the responsibility that contributes to the good financial decisions
and directly reports to the top management; and other VP’s for specific departments.

Each line is working for the interest of the person above them, based on the
diagram, the managers or VP’s are working for the interest of the board of directors, and
the decisions of the board of directors are for the interest of the shareholders, therefore,
every individuals goal in an organization must be for the wealth maximization of the
shareholders’.

Positions and their Roles:

Shareholders. Owners of shares in a company. Each share held is equal to one voting
right. The shareholders elect the Board of Directors (BOD).

Board of Directors. The highest policy making body in a corporation. An elected group of
individuals that represent shareholders. Manages the company.

President/ Chief Executive Officer (CEO). Oversees the overall operations and
resources of the company. Ensures that planned strategies as approved by the board were
implemented and executed.

VP for Marketing. Directing and coordinating company’s sales, promotion, and

distribution of products.

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VP for Production. Ensures production meets customers demand. Maximizing
company’s optimal operating performance. Determines an effective production plan with
cost efficient and quality-based output process that maximizes the use of company’s
production facilities.

VP for Administration. Oversees the administrative task and functions and develops
strategies to enhance staff’s performance. Organize and manage the functions of different
departments in the firm.

Financial management
Deals with decisions that are supposed to maximize the value of shareholders’ wealth.
(Cayanan)
• These decisions will ultimately affect the markets perception of the company and
influence the share price.
• The goal of financial management is to maximize the value of shares of stocks.
• Managers of a corporation are responsible for making the decisions for the
company that would lead towards shareholders’ wealth maximization.

Financial Management refers to strategic planning, acquiring, directing, and controlling

of financial undertakings in an organization in a way that it achieves its goal.

Maximizing the value of the owner(s) share, as a finance manager, one must need
to learn to identify a sound investment, good planning and allocation of owner(s)
resources in the profits making venture that will favorably increase the value of the
owner(s) share.

Finance is applicable wherever there is cash flow. Cash flow plays a vital role in
determining the firm’s financial health; its ability to produce sufficient cash to pay its
obligations when due.

Finance plays a vital role in a business firm that cuts across functional limitations.
There are departments of an organization that are needed for the company’s survival, like

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sales & marketing and manufacturing departments for example, these departments are
crucial for the firm’s survival, but funds are needed in order for them to function
effectively and operate properly. Since finance deals with the management of money, a
finance manager must communicate and interact with other managers to determine their
respective goals and ways to achieve them.

Role of Finance Manager

Finance Manager’s responsibility includes the allocation of funds to its current and
fixed assets and to strategize an ideal mixture of debt and equity financing that is suited
for the firm as well as determining the appropriate risk-return trade off in order to achieve
its goal of maximizing its wealth for its shareholders.

Functions of Finance Manager

Four (4) Functions of a Financial Manager

1. Financing
2. Investing
3. Operating
4. Dividend Policies

Financing Decisions

Include making decisions on how to fund long term investments (such as company
expansions) and working capital which deals with the day to day operations of the
company (i.e., purchase of inventory, payment of operating expenses, etc.).

The role of the VP for Finance or the Financial Manager is to determine the
appropriate capital structure of the company. Capital structure refers to how much of your
total assets is financed by debt and how much is financed by equity.

Accounting Equation is Asset = Liabilities + Owner’s Equity. To be able to acquire

assets, there must be a source of funds. If such asset was bought through cash from the
firm’s shareholders own money, its then finance by equity. On the other hand, if the
money used to buy an asset came from borrowings, it is then finance by debt. To
illustrate, refer to the figure below.

From this figure it shows that the capital structure is 60% debt and 40% equity.

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 There is no ideal mixture of debt and equity across corporations. The mix of debt
and equity varies in different corporations depending on management’s strategies. It is
the responsibility of the Financial Manager to determine which type of financing (debt or
equity) is best for the company.

Investment Decisions

Investing is where to put your excess cash to make it more profitable. Expanding
that definition, let us include cash held taken from funds as a result of financing
decisions. Investments may either be short term or long term.

A financial decision that deals with the management of firm’s assets. To determine
the real asset of the business and best asset mix or the amount of money invested in
current and fixed assets. The assets that generates cash flows that are needed to meet the
firm’s operating expenses, interest paid to creditors, taxes, and dividends to shareholders.
A financial manager must also ensure that investments in current assets are sufficient to
be able to meet or pay its obligations when due.

Operating Decisions

Deal with the day-to-day operations of the company. The VP for Finance
responsibility will include as to determining how to finance working capital accounts such
as short-term assets.

Working Capital is the main concern of operating decisions. Managing the working
capital of the firm is a day-to-day activity that ensures sufficient resources to continue its
operation and to avoid costly disruptions. Working capital refers to short-term assets
and labilities of a firm.

In managing the working capital, the following must be taken into consideration:
1. How much cash, and inventory must be retained on hand?
2. What will be the company’s credit policy and terms when selling?
3. How and where would a firm borrow to generate its short-term financing?
4. In purchasing of goods, will the firm pay in cash for its raw materials or goods, or
should it borrow in short-term, or purchase on credit?

The company has a choice on whether to finance working capital needs by long term
or short-term sources. Why does a Financial Manager need to choose which source of
financing a company should use? What do they need to consider in making this decision?

Short-term sources include short-term bank loans and suppliers’ credit (amount owed
to suppliers for products/services provided) are funds that are payable in at most 12
months. Short-term loans generally have lower interest rates compared to long-term
loans, heading to lower financing cost.

Since long-term sources matures in longer periods, creditors/lenders anticipate more

risk and therefore requires higher interest rate as compared to short term sources. Given
the time to mature, long term sources have longer span of time compared to short term
sources, therefore the company has more time to gather cash to pay its obligations when
due.

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Dividend Policy

Shareholders return of investment based on their shareholdings were paid by

companies through cash dividends. Wherein, investors buy stocks of certain companies
with the expectation of receiving dividends at a certain time. Companies who fail to give
dividends may disappoint these investors. Therefore, a finance manager’s responsibility
will include the determination of when the company should declare cash dividends, the
frequency of payment of its dividends, and the amount to be retained by the by the
company in the form of reserves for financing its future growth or expansion.

Before a company may be able to declare cash dividends, two conditions must
exist:
1. The company must have enough retained earnings (accumulated profits) to
support cash dividend declaration.
2. The company must have cash.

What will affect the management’s decision in paying dividends?

Answer:
• Availability of financially viable long-term investment
• Access to long term sources of funds
• Management’s Target Capital structure

Remember that investing is one of the finance manager’s function, and investing is
where to put its excess cash to make it more profitable, may it be short-term or long-term
investment. Some small companies that are expanding may have limited access to long
term financing leading to these small companies to reinvest their earnings rather than
paying out as dividends. While companies that have access to long term sources of funds
may be able to declare dividends even though they have investment opportunities.
However, these investment opportunities are financed by both debt and equity. The
management usually appropriates a portion of retained earnings for investment
undertakings and this may limit the amount of retained earnings available for dividend
declaration.

III. Exercises

ACTIVITY SHEET 1
Major Roles in Financial Management and Individuals Involved

Exercise 1. Directions: True or False. Write the correct answer on the space before the
number.
________1. A Chief Executive Officer (CEO) or President oversees the company’s operation
and act as a representative of a company in various activities.
_______ 2. In the attempt of maximizing the wealth of the business firm, a financial
manager’s decisions must include planning, acquiring, and utilizing of funds involving its
risk and return impact.
_______ 3. A VP for Marketing has a function that is associated with the finance activity of
the firm.
_______ 4 A Working Capital refers to a firm’s long-term assets and its long-term
liabilities, that deals with the day to day operations of the company.

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_______ 5. Managing the firm’s working capital to ensure a sufficient funds for its
continuous operation and to avoid costly disruptions is known as an Investment Decision
of a Finance Manager.
_______ 6. The Dividend Policy as one of the financial decisions, deals with identifying the
optimal dividend distribution to be issued to owners, the rate of payments made, and the
amount retained for the firm.
_______ 7. Among the responsibility of a VP for Production is to ensure that customer’s
demands and production meet.
_______ 8. A VP for Finance deals with the selling, promotion, and distribution of a
product.
_______ 9. VP for Finance or the Financial Manager has the responsibility to determine an
appropriate mix of debt and equity of an organization.
_______ 10. A financial decision that deals with level of inventories, cash, and securities to
be maintained on hand; the credit policy to be offered to customers, and mode of payment
when purchasing raw materials or merchandise is an operating decision of a finance
manager.

Exercise 2. Directions: Essay. Write your answers at the back of this answer sheet. You
can use a separate sheet if needed.

A. What is the financial manager’s role in achieving the firm’s goal? (10 pts)

B. Why is a sound financing decision of a Finance manager important in the

maximization of the wealth of the owners? (10 pts)

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 Quarter 1
Learning Activity Sheets 2 (LAS_2, Qtr. 1)
for Business Finance Grade 12

BUSINESS FINANCE
ACTIVITY SHEET 2

Roles of Financial Institution, Financial Markets and Financial Instruments

I. Learning Competency with Code

• Distinguish a financial institution from financial instrument and financial market;
(ABM_BF12-IIIa-2)
• Enumerate the varied financial institutions and their corresponding services;
(ABM_BF12-IIIa-3); and
• Compare and contrast the varied financial instruments. (ABM_BF12-IIIa-4)

II. Activity Proper

ACTIVITY 2: Roles of Financial Institution, Financial Markets and Financial

Instruments

In an instance that you happen to have an excess cash, what do you do with that
money? If you are going to save your money, where would you keep it? Some might save
your money in a piggy bank, some might deposit it on a bank, or some might invest their
savings.

If you chose to invest your excess cash in a certain business owned by someone
who is in need of a fund, where the user, and supplier of funds are known for both
parties, such agreement is made under a private placement. But if both are unknown
facts to the parties, both the user and supplier can go to a Financial Market to meet and
make transactions along with other users and suppliers of funds. But if both do not want
to make an effort to look for a counterpart, both parties can go to a Financial Institution.
Therefore, how can you distinguish a private placement from a financial market and
financial institution? And what is a Financial Instrument?

Private Placement is the sale of a new security directly to an investor or group of

investors.

Financial Market is place where individuals are involved in any kind of financial
transaction. Financial market is a platform where buyers and sellers are involved in sale
and purchase of financial products like shares, mutual funds, bonds and so on.
(https://www.managementstudyguide.com/financial-market.htm.)
Financial Institution is an intermediary that channel the savings of individuals,
businesses, and governments into loans or investments.

Financial Instrument is an agreement that result in a financial asset of one party and a
financial liability or equity instrument to the other party.

Think of the following situation, if Learner B knows that Learner A is need of funds
and Learner A knows that Learner B is willing to invest her excess cash to Learner A’s
business, then both A and B may agree to make a Private Placement. Private Placement
is the sale of a new security directly to an investor or group of investors.

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 But if both A & B does not know that A is need of funds, and B has an excess fund,
both parties can go to a Financial Market.

Financial Market
➢ Is defined as an organized forum in which the suppliers and users of various types
of funds can make transactions directly.

➢ A place where individuals are involved in any kind of financial transaction.

Financial market is a platform where buyers and sellers are involved in sale and
purchase of financial products like shares, mutual funds, bonds and so on.
(https://www.managementstudyguide.com/financial-market.htm.)

In the Financial Market, along with other supplier and user of funds, Learner A and B
can meet and make transactions. Once they have met in a Financial Market, they can
agree to make a private placement.

But if learner A and B wish not to make an effort to find a counterpart int the
Financial Market, both A and B may go to a Financial Institution.

Financial Institution
➢ Is defined as an intermediaries that channel the savings of individuals, businesses,
and governments into loans or investments.

A Financial Institution will receive learner B’s supply of funds and match it with
learner A’s demand of funds. Unlike the Financial Markets were A and B knows to whom
the fund went and from whom the funds came, Financial Institutions serve as an
intermediary to the suppliers and users of funds. Moreover, Financial institutions actively
participate in the financial markets as both suppliers and users of funds.
With this being discussed, the resulting diagram illustrates the Financial System.

Source: Teaching Guide for Senior High School, Business Finance. Published by CHED K-12, 2016

Once the transactions between learner A (user of funds) and learner B (supplier of
funds) take place, the agreement can have a proof through a verbal and/or written
agreement, so as to the user of funds will be able to repay the supplier on time and with
the right amount. Due to the increased need for security for the performance of
obligations arising from these transactions and due to the growing size of the financial
system, the transfers of funds from one party to another are made through Financial
Instruments.

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Financial Instrument
➢ An agreement that results in a financial asset of one party and a financial liability
or equity instrument to the other party.

Note that on the diagram presented, the solid lines represent the flow of cash/funds,
while the broken lines represent the flow of financial instruments which represent
obligations to transfer cash or other assets in the future.

Recall from FABM the following definition:

Financial Asset is any asset that is:

• Cash
• An equity instrument of another entity
• A contractual right to receive cash or another financial asset from another entity.
• A contractual right to exchange instruments with another entity under conditions
that are potentially favorable. (IAS 32.11)
• Examples: Notes Receivable, Loans Receivable, Investment in Stocks, Investment in
Bonds

Financial Liability is any liability that is a contractual obligation:

• To deliver cash or other financial instrument to another entity
• To exchange financial instruments with another entity under conditions that are
potentially unfavorable. (IAS 32)
• Examples: Notes Payable, Loans Payable, Bonds Payable

Equity Instrument
• Any contract that evidences a residual interest in the assets of an entity after
deducting all liabilities. (IAS 32)
• Examples: Ordinary Share Capital, Preference Share Capital
The suppliers of funds are the holders of Financial Assets while the users of funds are
makers of Financial Liabilities and Equity instrument.

When companies are in need of funding, they either sell debt securities (or bonds)
or issue equity instruments. The proceeds from the sale of the debt securities and
issuance of bonds will be used to finance the company’s plans. On the other hand,
investors buy debt securities of equity instruments in hopes of receiving returns through
interest, dividend income or appreciation in the financial asset’s price.

Examples of Debt and Equity instruments

▪ Debt Instruments generally have fixed returns due to fixed interest rates.
i. Treasury Bonds and Treasury Bills are issued by the Philippine government. These
bonds and bills have usually low interest rates and have very low risk of default since the
government assures that these will be paid.

ii. Corporate Bonds are issued by publicly listed companies. These bonds usually have
higher interest rates than Treasury bonds. However, these bonds are not risk free. If the
company which issued the bonds goes bankrupt, the holder of the bonds will no longer
receive any return from their investment and even their principal investment can be
wiped out.

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▪ Equity Instruments generally have varied returns based on the performance of the
issuing company. Returns from equity instruments come from either dividends or stock
price appreciation. Types of equity instruments:

i. Preferred Stock has priority over a common stock in terms of claims over the assets of
a company. This means that if a company were to be liquidated and its assets have to be
distributed, no asset will be distributed to common stockholders unless all the claims of
the preferred stockholders have been given. Moreover, preferred stockholders also have
priority over common stockholders in cash dividend declaration. Dividends to preferred
stockholders are usually in a fixed rate. No cash dividends will be given to common
stockholders unless all the dividends due to preferred stockholders are paid first.
(Cayanan, 2015)

ii. Holders of Common Stock on the other hand are the real owners of the company. If
the company’s growth is spurring, the common stockholders will benefit on the growth.
Moreover, during a profitable period for which a company may decide to declare higher
dividends, preferred stock will receive a fixed dividend rate while common stockholders
receive all the excess.

Financial Market

Primary vs Secondary Markets

• To raise money, users of funds will go to a primary market to issue new securities
(either debt or equity) through a public offering or a private placement.

• Primary Market is a form of market where stocks and securities are issued for the
first time by organizations. (https://www.managementstudyguide.com/financial-
market.htm.)

• The sale of new securities to the general public is referred to as a public offering
and the first offering of stock is called an initial public offering. The sale of new
securities to one investor or a group of investors (institutional investors) is referred
to as a private placement.

• However, suppliers of funds or the holders of the securities may decide to sell the
securities that have previously been purchased. The sale of previously owned
securities takes place in secondary markets.

• Secondary market is a form of capital market where stocks and securities which
have been previously issued are bought and sold.
(https://www.managementstudyguide.com/financial-market.htm.)

• The Philippine Stock Exchange (PSE) is both a primary and secondary market.

Money Markets vs Capital Markets

• Money markets are a venue wherein securities with short-term maturities (1 year
or less) are sold. They are created because some individuals, businesses,
governments, and financial institutions have temporarily idle funds that they wish
to invest in a relatively safe, interest-bearing asset. At the same time, other

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 individuals, businesses, governments, and financial institutions find themselves in
need of seasonal or temporary financing.

• As the name suggests, money market involves individuals who deal with the
lending and borrowing of money for a short time frame.
(https://www.managementstudyguide.com/financial-market.htm.)

• On the other hand, securities with longer-term maturities are sold in Capital
markets. The key capital market securities are bonds (long-term debt) and both
common stock and preferred stock (equity, or ownership).

Money Market vs Capital Market

• Capital market is a market where individuals invest for a longer duration i.e. more
than a year is called as capital market. In a capital market, various financial
institutions raise money from individuals and invest it for a longer period.
(https://www.managementstudyguide.com/financial-market.htm.)

Financial Institutions

Examples of Financial Institutions

Commercial Banks

Individuals deposit funds at commercial banks, which use the deposited funds to
provide commercial loans to firms and personal loans to individuals, and purchase debt
securities issued by firms or government agencies.

Insurance Companies

Individuals purchase insurance (life, property and casualty, and health) protection
with insurance premiums. The insurance companies pool these payments and invest the
proceeds in various securities until the funds are needed to pay off claims by
policyholders. Because they often own large blocks of a firm’s stocks or bonds, they
frequently attempt to influence the management of the firm to improve the firm’s
performance, and ultimately, the performance of the securities they own.

Mutual Funds

Mutual funds are owned by investment companies which enable small investors to
enjoy the benefits of investing in a diversified portfolio of securities purchased on their
behalf by professional investment managers. When mutual funds use money from
investors to invest in newly issued debt or equity securities, they finance new investment
by firms. Conversely, when they invest in debt or equity securities already held by
investors, they are transferring ownership of the securities among investors.

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Pension Funds

Financial institutions that receive payments from employees and invest the
proceeds on their behalf.

Other Financial Institutions

Include pension funds like Government Service Insurance System (GSIS) and
Social Security System (SSS), unit investment trust fund (UITF), investment banks, and
credit unions, among others.

III. Exercises

ACTIVITY SHEET 2
Roles of Financial Institution, Financial Markets and Financial Instruments

Exercise 3. Essay. Direction: Analyze and answer the activity on the space provided.
(30pts)

Student A, who is good in cooking ventured on an online business, selling various

kinds of dishes, and posted her cooked dishes through different social media platforms as
one of her marketing strategies, and offers to deliver it personally to her customers. She
started to sell her dishes only with her closest friends and family members as her initial
customers, who are living near her place. But due of the good quality and taste of her
dishes, her business started to reach other potential customers. With good feedback from
her customers, her business was made well known through referrals. She made profitable
sales from her small business; she also hired one assistant to help her in her increasing
demand of orders. The fast growth experienced led to cash flow and capacity problems.
With her business growing, and exhausting food delivery, she plans to expand by putting
a physical store and to purchase new cooking materials, and to hire additional person to
be in charge for food delivery. But with not enough cash to fund the expansion, Student A
ask for your help to manage and direct her business’s growth. Specifically, she asked you
the following questions.

1. Where can you recommend, she get additional funding for her expansion? Why?

2. If Student B, a friend of Student A knows that student A is need of fund and sees the
potential of the business; she offers to lend her savings for a 20% interest. What do
you think will the advantages and disadvantages will it be for the business?

3. Lastly, what will you recommend to student A to take on? Why?

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Exercise 4. TRUE or FALSE. Direction: Before each statement, write TRUE if the
statement is correct and FALSE if otherwise.

_______ 1. A Financial Market is an organized venue for people or institutions that either
needs funds or money or those who have a money to invest.
_______ 2. Financial institution refers to any agreement that gives rise to a financial asset
of one party and a financial liability or equity instrument to the other party.
_______ 3. Financial instruments serve as intermediaries that manages suppliers’ savings
into debts or investments of users of funds.
_______ 4. Private placements occur when sale of new securities was made directly to an
investor(s).
_______ 5. Capital markets are where securities are being sold with short-term maturities.

Exercise 5. Matching Type. Direction: Write the letter of the correct answer on the
space provided.

A. Primary Market E. Commercial Banks

B. Secondary Market F. Mutual Funds
C. Money Market G. Insurance Companies
D. Capital Market H. Pension Funds

_______ 1. A market where a sale of securities was originally made.

_______ 2. Where securities are being sold with short-term maturities.
_______ 3. An institution where individuals are savers and borrowers, where deposited
funds were used to provide commercial loans to firms and personal loans to individuals.
_______ 4. Where securities are being sold with long-term maturities.
_______ 5. Owned by investment companies that pool investor funds to purchase financial
instruments in a diversified portfolio.

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 Quarter 1

Learning Activity Sheets 3 (LAS_3, Qtr. 1)

for Business Finance Grade 12

BUSINESS FINANCE

Financial Planning Process, Formula and Format for Preparation of Budgets and
Projected Financial Statements

I. Learning Competency with Code

• Identify the steps in the Financial Planning Process (ABM_BF12-IIIc-d-10)
• illustrate the formula and format for the preparation of budgets and projected
financial statement. (ABM_BF12-IIIc-d-11)

II. Activity Proper

ACTIVITY 1: Steps in Financial Planning Process

Steps in Financial Planning Process

1) Set goals or objectives.

For corporations, long term and short-term objectives are usually identified. These
can be seen in the company’s vision and mission statements. The vision statement states
where the company wants to be while the mission statement states the plans on how to
achieve the vision.

Examples of a company’s Vision-Mission statements are as follows:

Jollibee Foods Corporation (JFC)

Vision: To excel in providing great tasting food that meets local preferences better
than anyone; To become one of the three largestand most profitable restaurant companies
in the world by 2020.

Mission: To serve great tasting food, bringing the joy of eating to everyone.

McDonalds Philippines

Vision: First to respond to the fast changing needs of the Filipino family; First
choice when it comes to food and dining experience; First mention as the ideal employer
and socially responsible company; First to respond to the changing lifestyle of the Filipino
family

Mission: To serve the Filipino community by providing great-tasting food and the
most relevant customer delight experience.

2) Identify Resources

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Example, the resources needed are the following:

•PHP 300,000
• Man power

Resources include production capacity, human resources who will man the operations
and financial resources (Borja & Cayanan, 2015).

3) Identify goal-related tasks

Example: The goal-related task is to prepare an event to increase awareness of (whatever

issue you want).

4) Establish responsibility centers for accountability and timeline.

Example, there were different responsibilities formed as follows:

• Event Chairperson
• Budgeting Team
• Production Team
• Marketing Team
• Creatives Team
• Administrative Team

Also, there must be a timeline for the activities, especially since they were allotted a
specific time to do the activity.

5) Establish the evaluation system for monitoring and controlling

For corporations, the management must establish a mechanism which will allow
plans to be monitored. This can be done through quantified plans such as budgets and
projected financial statements. The management will then compare the actual results to
the planned budgets and projected financial statements. Any deviations from the budgets
should be investigated.

6) Determine contingency plans

• In planning, contingencies must be considered as well.

• Budgets and projected financial statements are anchored on assumptions. If these
assumptions do not become realities, management must have alternative plans to
minimize the adverse effects on the company (Borja & Cayanan, 2015).

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ACTIVITY 2: Formula and Format for Preparation of Budgets and Projected
Financial Statements

Budgeting

Budgeting is the act of estimating revenue and expenses over a period of time. It
involves preparing a plan on how to allocate resources in accomplishing organizational
goals. A quantified plan is represented through budgets and projected or pro-forma
financial statements.

A plan is useless if it is not quantified (quantified means to measure the amount or

size and express it as a number). A quantified plan is represented through budgets and
projected or pro-forma financial statements. These budgets and pro-forma financial
statements are useful for controlling and serve as the bases for monitoring actual
performance/s.

Meeting the plans is good. However, failing to meet the plans is not equivalent to
failure if the reasons for not meeting such plans can be justified especially when the
reasons are fortuitous in nature and are beyond the control of management.

Measuring actual performance vis a vis the plans even at the early start of the year
allows the management to assess the company’s performance and come up with remedial
actions if warranted (Cayanan, 2015).

Format for Preparation of Budget

1. Sales Budget.
The most important account in the financial statement in making a forecast is sales
since most of the expenses are correlated with sales.
In preparing a sales forecast, the following external and internal factors should be
considered:

Source: Teaching Guide for Senior High School, Business Finance. Published by CHED K-
12, 2016
When forecasting the sales budget, both the internal and external factors must be
considered. Let us try to analyze the following considerations:

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 a. A low GDP rate (external) coupled by a high inflation rate will mean that
consumers are likely to purchase less. It means that we cannot set a high forecast of sales
during the periods of low GDP rate.

b. Development in the Industry (external) also affects sales forecast, for

example, the products and services which have more development in its industry will
likely have a higher sale forecast as compared with the slower development industry.

c. Competition (external) must also be considered, if your business is the only

store offering a certain product or service, your sales forecast can be higher as compared
to a business that has 5 or more competitors. But customers preferences must be taken
into consideration as well, because even if your business is the sole producer of a certain
product or service, but is not within your target customers preference, your sales will be
affected.

d. The production capacity and manpower (internal) must also be considered

in preparing sales forecast. For example, the business has a high demand of sales, but
the production capacity fails to meet such demand, there can be an opportunity cost for
the forgone sales (opportunity cost is when customers want to buy but there are no
available products/services). Management may either choose to increase capacity, by
expanding their operations wherein they may hire more employees to meet the demand.
Another scenario will be, if they produced more units than the sales demand, the
unnecessarily increase in production capacity may end up with more inventories that are
not easily converted to cash, that will be affecting the working capital of the business.

Below is the computation for the sales budget.

Sales Budget Format

Budgeted Sales (No. of unit to be Sold) xx
x Unit Selling Price xx
Budgeted Sales Revenue Pxx

Sample Computation:

XYZ company is expecting to sell 2,700 units of goods in November at a selling

price of P65. Compute for the Sales budget.

Budgeted Sales (No. of unit to be Sold) 2,700

x Unit Selling Price P 65
Budgeted Sales Revenue P175,500

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 2. Production Budget

A production budget provides information regarding the number of units that should
be produced over a given accounting period based on expected sales and targeted level of
ending inventories.

Production Budget Format

It is computed as follows:
Projected Sales (No. of unit to be Sold) xx
Add: Target Ending Inventory xx
Total Production Required xx
Less: Beginning Inventory (xx)
Require Production Units xx

*Note: Ending inventory of current period is beginning inventory of next period.

Sample Computation:

XZC Company forecasts its sales in units for January to May as follows:
Jan Feb Mar Apr May
Units 2,000 2,200 2,500 2,800 3,000

• XZC company would like to maintain 100 units in its ending inventory at the end
of each month.
• Beginning inventory at the start of January amounts to 50 units.
• How many units should a company produce to fulfill the expected sales of the
company?

Solution:
For the Month of January

Projected Sales (No. of unit to be Sold) 2,000

Add: Target Ending Inventory 100**
Total Production Required 2,100
Less: Beginning Inventory (50)
Require Production Units 2,050 units

For the Month of February

Projected Sales (No. of unit to be Sold) 2,200

Add: Target Ending Inventory 100
Total Production Required 2,300
Less: Beginning Inventory (100**)
Require Production Units 2,200 units

**the ending inventory for the month of January will be the beginning inventory for
February.

Page 19 of 36
 MONTH
Jan Feb Mar Apr May
Projected Sales 2,000 2,200 2,500 2,800 3,000
Add: Target Ending inventories 100 100 100 100 100
Total Production Required 2100 2,300 2,600 2,900 3,100
Less: Beginning Inventories (50) (100) (100) (100) (100)

Required Production Units 2,050 2,200 2,500 2,800 3,000

3. Operating Budget

Operating budget refers to the variable and fixed costs and revenue generated that are
needed to run the operations of the company. Examples of this may include rent
payments, wages and salaries of personnel, travel and representation expenses, tax
payments etc.

Sample Computation:

DSA Corporation has the following forecasted expenses in October:

a. P6,500 monthly rental fee
b. P11,000 salaries per employee; DSA has 3 employees
c. Interest expense of P1,800
d. Travel Expense of P30,000
e. Taxes of P8,000

Compute for the operating budget of DSA Corporation

Solution:

Operating Budget
Rent Expense P6,500
Salaries Expense
(P11,000 x 3) 33,000
Interest Expense 1,800
Travel Expense 30,000
Tax Expense 8,000
Operating Budget P79,300

4. Cash Budget

The cash budget, or cash forecast, is a statement of the firm’s planned inflows and
outflows of cash. It is used by the firm to estimate its short-term cash requirements, with
particular attention being paid to planning for surplus cash and for cash shortages
(Gitman & Zutter, 2012).

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 Cash Budget Format

Cash Receipts (Note 1) xx

Less: Cash Disbursements (Note 2) (xx)
Net Cash Flows xx
Add: Beginning Cash Balance xx
Ending Cash Balance xx
Less: Required Ending Cash Balance (xx)
Total Financing (Note 3) xx
Ending Cash Balance Pxx

Notes:

Note 1
Cash Receipts
Cash Sales xx
Collection of Account Receivables xx
Total Cash Collection Pxx

Note 2
Disbursements
Purchases xx
Direct Labor xx
Cash Purchase of Fixed-Asset xx
Rent Expense xx
Selling & Admin. Expense xx
Taxes xx
Total Disbursements Pxx

Note 3
Financing
Borrowings xx
Payments of Borrowings (xx)
Interest (xx)
Total Financing Pxx

Projected Income Statement Format

Net Sales xx
Less: Cost of Sales (xx)
Gross Profit xx
Less: Operating Expenses (xx)
Operating Income xx
Less: Interest Expense (xx)
Income before Taxes xx

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Less: Taxes (xx)
Net Income Pxx

Budgeted Statement of Financial Position

Format
Budgeted Statement of Financial Position

Assets
Current Assets
Cash xx
Accounts Receivable xx
Inventory xx

Non-Current Assets
Building xx
Equipment xx
Total Assets Pxx

Liabilities and Owner’s Equity

Current Liabilities
Accounts Payable Pxx
Note Payable xx
Non-Current Liabilities
Mortgage Payable xx
Total Liabilities xx

Capital xx

Total Liabilities & Owner’s Equity Pxx

Sample Computation:

The Statement of Financial Position of GHI Company, a footwear distributor as of

September 30 were as follows:

GHI Company
Statement of Financial Position
September 30

Assets
Cash P25,000
Accounts Receivable 157,000
Inventory 25,000
Building, net of depreciation 280,000
Total Assets P487,000

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Liabilities & Owner’s Equity
Accounts Payable P97,000
Notes Payable 26,000
Mortgage Payable 114,000
De Juan, Capital 250,000
Total Liabilities & Owner’s Equity P487,000

GHI Company has the following data for the October budget:

a. A 2,000 units with a unit selling price of P140 is expected to be sold. Of these
sales, P110,000 will be sold in cash and the rest will be receivables. 60% of the
receivables will be collected on the month the sales occur and the remaining
amount will be collected on the following month. The outstanding receivables from
previous month are to be collected in October.
b. P95,000 worth of Inventories is expected to be purchased on account for the month
of October. Cash payment of 35% will be paid for all Purchased Inventories on the
same month of purchase, and the remaining amount payable for the next month.
All previous month’s accounts payable will be paid for the month of October.
c. 70% of the outstanding notes payable will be paid in October, and the interest for
the notes payable with the amount of P600 will be paid in cash.
d. Depreciation expense of P3,450 will be forecasted for the month of
October. Total of P73,000 of Operating expenses will be expected for the month of
October excluding depreciation.
e. An ending inventory balance of P55,000 is budgeted in October.
f. A computer equipment is expected to be purchased in October with the amount of
P22,000.

Prepare the following requirements:

1. Budgeted Income Statement for the month of October
2. Cash Budget for October, stating all the Notes showing the computation for the
cash receipts and cash disbursements
3. Budgeted Statement of Financial Position as of October 31

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Solution
1. Budgeted Income Statement for the month of October.

GHI Company
Budgeted Income Statement
For the Month of October

Sales (Note 1) P280,000

Cost of Sales
Beginning Inventory 25,000
Add: Purchases 95,000
Goods Available for Sale 120,000
Ending Inventory 55,000
Cost of Goods Sold 65,000
Gross Profit 215,000
Operating Expenses (Note 2) 76,450
Net Operating Income 138,550
Interest Expense 600
Net Income P137,950

Note 1
Sales Unit 2,000
x Unit Selling Price P140
Total Sales P280,000*

Note 2
Operating Expenses
Operating Expense P73,000
Depreciation Expense 3,450
Total Operating Expense P 76,450

2. Cash Budget for October

GHI Company
Cash Budget
For the Month of October

Cash Receipts (Note 3) P369,000

Less: Cash Disbursements (Note 4) (225,250)
Net Cash Flows 143,750
Add: Beginning Cash Balance 25,000
Ending Cash Balance 168,750
Total Financing (Note 5) (18,800)
Ending Cash Balance P149,950

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Note 3
Cash Receipts
Cash Sales P110,000
Sept collection of A/R 157,000
October Collection
[(P280,000*-110,000) x 60%] 102,000
Total Cash Receipts P369,000

Note 4
Cash Disbursements
Purchase of Inventory
September Purchases P97,000
October Purchases (P95,000x35%) 33,250
Total Purchases P130,250
Operating Expense 73,000
Purchase of Equipment 22,000
Total Cash Disbursement P225,250
Note 5
Financing
Payments of Borrowings
(P26,000x70%) P18,200
Interest 600
Total Financing P18,800

3. Budgeted Statement of Financial Position as of October 31

GHI Company
Budgeted Statement of Financial Position
October 31

Assets
Cash P149,950
Accounts Receivable (P170,000x40%) 68,000
Inventory 55,000
Building (P280,000-3,450) 276,550
Computer Equipment 22,000
Total Assets P571,500

Liabilities and Owner’s Equity

Accounts Payable (P95,000x65%) P61,750

Note Payable 7,800
Mortgage Payable 114,000
De Juan, Capital (P250,000+137,950) 387,950

Total Liabilities & Owner’s Equity P571,500

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 4. Budgeted Statement of Financial Position as of October 31
GHI Company
Budgeted Statement of Financial Position
October 31

Assets
Cash P149,950
Accounts Receivable (P170,000x40%) 68,000
Inventory 55,000
Building (P280,000-3,450) 276,550
Computer Equipment 22,000
Total Assets P571,500

Liabilities and Owner’s Equity

Accounts Payable (P95,000x65%) P61,750
Note Payable 7,800
Mortgage Payable 114,000
De Juan, Capital (P250,000+137,950) 387,950

Total Liabilities & Owner’s Equity P571,500

III. Exercises

ACTIVITY SHEET 3
Financial Planning Process, Formula and Format for Preparation of Budgets and Projected
Financial Statements

Exercise 6. Problem. Directions: Analyze and answer the problem. Write your answers on
your answer sheets. Prepare substantial solutions for each Note.

Problem1
JKL Corporation, a distributor of photocopying machines needs a cash budget for the
month of October. The following were the data available:
1. Cash balance at the beginning of October is P19,000
2. Actual Sales for August and September and expected for October are as follows:
August September October
Cash P17,300 P18,700 P21,200
Credit Sales 35,000 55,000 75,000
Total Sales P52,300 P73,700 P96,200

Credit Sales are to be collected within a three-month period in the following ratio,
15% will be collected in the month the sales occur, 65% will be collected in the
following month, and 20% will be collected in the second month following the sale.
3. Inventory purchases will be expected with the amount of P35,000 for October. 30%
of the inventory will be paid on the month the purchased was made. The balance
for September’s Inventory with the amount of P20,000 will be fully paid in October.
4. Operating expenses are expected to be P17,000 excluding depreciation expense
with the amount of P3,500.
5. Furniture and Fixtures costing P23,000 is expected to be purchased on cash by
October.
6. A minimum cash balance of P10,000 must be maintained.

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 Quarter 1

Learning Activity Sheets 4 (LAS_4, Qtr. 1)

for Business Finance Grade 12

BUSINESS FINANCE
Tools in Managing Cash, Receivables, and Inventory

I. Learning Competency with Code

• explain the tools in managing cash, receivables, and inventory (ABM_BF12-IIIc-d-
12).

II. Activity Proper

ACTIVITY 1: Tools in Managing Cash, Receivables, and Inventory

Managing the working capital of the firm is an activity that ensures sufficient
resources are available for continuous operation and to avoid costly disruptions. Working
capital refers to short-term assets and labilities of a firm.

In managing the working capital, the following must be taken into consideration:
5. How much cash, and inventory must be retained on hand?
6. When selling on credit, how long will the receivable be converted to cash?
7. How and where would a firm borrow to generate its short-term financing?
8. In purchasing of raw materials, or inventories, will the firm purchase in cash or
purchase on credit, or will it borrow in short-term financing intended for
purchases?

Working capital is the company’s investment in current assets such as cash,

accounts receivable, and inventories. Net Working capital is the difference between
current assets and current liabilities. Net Working Capital is directly related to its Current
ratio. Current Ratio is a liquidity ratio which measures company’s ability to finance short
term liabilities.

Computation:
(Refer from the data of XCV shop)

1. Net Working Capital = Current Assets – Current Liabilities

2.

Solution:
1. Net Working Capital = (Cash + A/R + Inventories)-Accounts Payable
= (P23,500+53,000+66,000) – P46,400
= P142,500 – P46,400
= P96,900

Page 27 of 36
 2.

= P142,500
P46,400
= 3.0711 times

The management must know how to maximize its current assets in order to pay its
current obligations when they fall due. To show the operating cycle of the business, refer
to the figure below:

Flow of the operating cycle of the business

The operating cycle is the sum of days of inventory and days of receivables.

The average age of inventories or the inventory conversion period can be

determined by computing the Days of Inventory, it is the average number of days to sell
its inventory. To determine the days of inventory and days of receivables, the following will
be the computations:

a. Days of Inventory

A DSI of 20 days means that on the average, it takes 20 days to sell its inventory.
Since the Statement of Financial Position tells the financial condition of a company at the
end of the period, we take Average Inventory for the year in our calculation.

Days of Inventory = 365 (or 360) days .

Inventory Turnover*

*Inventory Turnover = Cost of Goods Sold .

Beginning Inventory + Ending Inventory
2

or, this formula can be used without computing for inventory turnover:

Days of Inventory = Average Inventory .

Average COGS per day

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 b. Days of Sales Outstanding (DSO)

The Days of Sales Outstanding is defined as an average time for the company to collect
its receivables. Example, a DSO of 40 days means that a customer who purchased on the
company on account will pay his/her balance in 40 days.

Days of Inventory = 365 (or 360) days .

Receivable Turnover*

*Receivable Turnover = Net Credit Sales .

Beginning Accounts Receivable + Ending Accounts Receivable
2

Sales is from the Statement of Comprehensive Income and Accounts Receivables is

from the Statement of Financial Position.

We use the Average Receivables for the year in our calculation. For sales we
generally use the credit sales so we may have to exclude cash sales from the total sales
figure.

c. Cash Conversion Cycle

Cash conversion cycle is also called the net operating cycle, it is computed as the
operating cycle less days of payable.

Cash Conversion Cycle = Operating Cycle - Days of Payables

Cash
Conversion (Days of Inventory + Days of Receivables) Days of
= - Payables
Cycle

The Cash Conversion Cycle is the length of time it takes for the initial cash
outflows for goods and services purchased (materials, labor, etc.) to be realized as cash
inflows from sales (cash sales and in the collection of receivables).

d. Days of Payables Outstanding (DPO)

The average number of days for the company to pay its creditors. A DPO of 30 days
means that the company waits for 30 days before paying its creditors.

Days of Inventory = 365 (or 360) days .

Payables Turnover*
*Payables = Net Credit Purchases .
Turnover Beginning Accounts Payables + Ending Accounts Payables
2

Purchases are taken from the Statement of Comprehensive Income and Accounts
Payables are taken from the Statement of Financial Position.

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 Since the Statement of Financial Position tells the financial condition of a company
at the end of the period, we take Average payables for the year in our calculation.

For purchases we are generally concerned about the credit purchase, so we have to
exclude cash purchases from the total sales figure.

Going back with the Cash Conversion Cycle (CCC), given the formula,

CCC = Cash Conversion Cycle = Operating Cycle - Days of Payables

CCC = (Days of Inventory + Days of Receivables) - Days of Payable

We can see that the numerators of the turnovers needed for the computation of
cash conversion cycle are all Income Statement Accounts, while the denominators are all
Average Statement of Financial Position accounts. With the following computation,

CCC = (Days of Inventory + Days of Receivables) - Days of Payable

CCC = 20 + 40 – 30 = 30 days

We come up with the answer, which is 30 days, wherein it is the time between the
cash outlay and the cash received. A negative CCC indicates that the company has excess
cash to invest. A CCC of -10 for example, indicates that the company has an excess cash
to invest for 10 days. It should be noted that as the operating cycle and cash conversion
cycle increase, more funds are tied up in the working capital accounts.

Working Capital Management is the administration and control of the company’s

working capital.

The primary objective is to achieve a balance between profitability and risk.

Proper management of working capital is important because failure to do so may

result in the closure of business. Remember that when a business size increases, working
capital requirements also increases.

Example, a business which usually operates with a P3million worth of working

capital that supports a P9million sales; if the sales increase to P15million, will the
P3million working capital be able to sustain its operation?

Definitely, the answer to this is no, because an increase in sales to P15million will
definitely need more cash to fund its operation, receivables and even inventories, going
back with production capacity, an increase of sales will require more input as well.

Permanent and Temporary Working Capital

a. Permanent Working Capital is the minimum level of current assets required by a

firm to carry-on its business operations given its production capacity or relevant sales
range.

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b. Temporary working capital is the excess of working capital over the permanent
working capital given its production capacity or relevant sales range. (Source: Learn
Accounting with Online Accounting Course | Simplestudies.com. (2016).
Simplestudies.com. Retrieved 13 May 2016, from http://simplestudies.com/what-are-
the-types-of-working-capital)

Companies have slack season and peak season, wherein sales were not generated
uniformly throughout the year. Given this situation, the net working capital requirements
during the slack season is lower than those during the peak season. The net working
capital needed to support an operation during the slack season represents the permanent
working capital requirements while the additional net working capital needed during the
peak season represents the temporary working capital requirements.

3 Types of Working Capital Decision

1. Maturity-matching working capital financing policy

2. Aggressive working capital financing policy
3. Conservative working capital financing policy

1. Maturity-matching working capital financing policy

It is where permanent working capital requirements should be financed by long
term sources while temporary working capital requirements should be financed by
short-term sources of financing. The long-term sources of financing include long-term
debt and equity while short-term sources include short-term loans from a bank, and
these short-term loans from banks are called working capital loans. In a maturity-
matching policy, all permanent working capital must be financed by long-term sources
while temporary working capital requirements should be financed by short-term
sources.

2. Aggressive Working Capital Financing Policy

Under the aggressive working capital financing policy, some of the permanent
working capital requirements are financed by short-term sources of financing. Some
companies adopt this policy because long-term sources of funds have higher cost as
compared to short term sources of financing. By financing some of the permanent
working capital requirements with short-term sources of financing, financing cost is
minimized which in turn, improves net income. But what is the trade-off? Since it is
short-term, the debt has to be paid soon and the company may not yet have enough cash
by the time the debt matures. This refers to liquidity risk and this risk increases with the
aggressive working capital financing policy.

3. Conservative Working Capital Financing Policy

Based on the conservative working capital financing policy, even some of the
temporary working capital requirements are financed by long-term sources of financing.
This policy minimizes liquidity risk, but it also reduces the company’s profitability
because long-term sources of financing entail higher cost.

Page 31 of 36
 The central issue in managing the working capital is the ability to reduce operating
cycle days. This is to ensure that such operating cycle days will be shorter than the
payable days. The quickness of completing the operating cycle is measured by the
operating cycle days.

The following are some of the strategies in efficiently managing the cash conversion
cycle:

1. Turn over inventory as quickly as possible without stockouts that result in lost sales.
2. Efficiently manage the accounts receivable consistent with the company’s credit
policies. You need to also consider accelerating the collection of receivables through:
A. Shorter credit terms.
B. Offering special discounts to customers who pay their accounts within a
specified period.
C. Speeding up the mailing time of payments from customers to the firm.
D. Minimizing the float or reducing the time during which payments received by
the firm remain uncollected funds. For example, a customer deposited a check in the
name of the company on a Friday and the check will be cleared on Monday. The payment
is said to be floating for two days.
3. Manage mail, processing, and clearing time to reduce them when collecting from
customers and to increase them when paying suppliers.
4. Pay accounts payable as slowly as possible without damaging the firm’s credit rating.

Cash
Being the most liquid asset, cash is an important account in the balance sheet that
will affect the liquidity, and solvency of a company. It is also the most vulnerable when it
comes to theft. A good internal control must be properly implemented to safeguard this
asset.

Cash collections should be supported by official receipts which are summarized in a

daily collection report. The daily collection report is going to useful for the next control
measure for cash – depositing collections.

A good internal control over cash is by depositing all collections intact. The daily
collection reports are now compared with the deposit slips to find out if all collections are
indeed deposited.

If all collections need to be deposited, then payments must be made through a check
voucher system. There must also be two signatories in the check to provide a check and
balance. If the business is small, then the entrepreneur’s signature may suffice.

For small payments like the fare given to a messenger, a petty cash fund is used. A
petty cash fund which should be minimal in amount, will be issued to a petty cash fund
custodian, say the office administrator.

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 The check must also be cross-checked by drawing two lines on the payee section of
the check. This cross-checking requires depositing of a check and it cannot be encashed.
This makes it more difficult for somebody who stole a check to get the money

Motives for Holding Cash

Primary Reasons
a. Transactional. This is the cash used for paying expenses such as salaries, utilities,
rent and taxes, among others.
b. Compensating balance. This is the cash held to meet bank requirements such as
the minimum cash balance you maintain for checking accounts and if you have
existing loans, banks may also require a minimum amount of deposit with them.

Secondary Reasons
a. Precautionary. This is the cash maintained for emergencies such as the additional
cash you keep during political and economic uncertainties.
b. Speculative. This refers to the cash held by the company to take advantage of
opportunities

Budgeting Cash

a. The Cash Budget

The cash budget provides information regarding the company’s expected cash receipts
and disbursements over a given period. It is useful for identifying future funding
requirements or excess cash within a given period. This allows managers to find possible
sources of financing if the cash budget shows cash shortage or identify appropriate tenors
for money market placements for excess cash. Basically, cash budget has the following
parts:

i. Cash Receipts include all of a firm’s inflows of cash in a given financial period.
The most common components of cash receipts are cash sales, collections of
accounts receivable, and other cash receipts.
ii. Cash Disbursements include all outlays of cash by the firm during a given
financial period. The most common cash disbursements are:
• Cash Purchases
• Purchasing fixed assets
• Payments of accounts payables
• Interest payments
• Salaries expense
• Rent expenses
• Tax
The depreciation and other noncash charges are not included in the cash
budget, because they merely represent a scheduled write-off of an earlier cash outflow.

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Net Cash Flow, Ending Cash, Financing, and Excess Cash
The firm’s net cash flow is found by subtracting the cash disbursements from cash
receipts in each period. Then we add beginning cash to the net cash flow to determine the
ending cash for each period. Finally, we subtract the desired minimum cash balance from
ending cash to find the required total financing or the excess cash balance. If the
computed amount is negative, the company needs financing. Otherwise, the company has
excess cash.

The cash budget is part of planning. It helps managers anticipate future funding
requirements in order to obtain proper financing even before the need arises. This will
help them avoid usurious rates. On the other hand, if the company has excess cash,
managers are able identify the investment instruments that will maximize the returns on
the excess cash.

Accounts Receivable

a. Accounts receivables spring out of the need to sell merchandise.

b. Credit management strategically defines the quality of account receivables
collection.
c. Proper management of accounts receivable entails having a good billing and
collection system. A good system should lead to the sending of statements of
account to customers on time.
d. Aging of receivables is also a control measure to determine the amount of
receivables that are still outstanding and past due.
e. Accounts which have been past due for more than 90 days have higher probability
to default. The aging of receivables is useful in determining the allowance for
doubtful accounts.

INVENTORY MANAGEMENT
Inventory management involves the formulation and administration of plans and
policies to efficiently and satisfactorily meet production and merchandising requirements
and minimize costs relative to inventories.
Effective inventory management becomes critical when the nature of the products
is either perishable (e.g. fruits, vegetables), fragile (e.g. glasses), or toxic (e.g. bleaching
agent).
Proper inventory management involves the determination of reasonable levels of
inventories considering the size and nature of business.
a. Maintaining too many inventories has costs such as carrying or holding costs,
possible obsolescence, or spoilage.
b. On the other hand, too low inventory can result to stockout, and eventually lost
sales.

Three types of Inventory in A Manufacturing Company

a. Raw materials – these are purchased materials not yet put into production.
b. Work in process – these are goods and labor put into production but not yet
finished.

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 c. Finished goods – these are goods put into production and finished. These are ready
to be sold.

The ABC Analysis

One way to control inventory is to classify inventory into a classification system

called ABC Analysis.

A - inventories classified as “A” are high valued items which should be safeguarded the
most.

B - items, on the other hand, are average-cost items that should be safeguarded more
than

C - items but not as much as A items. • While C items have low cost and is the least
safeguarded.

III. Exercises

ACTIVITY SHEET 4
Tools in Managing Cash, Receivables, and Inventory

Exercise 7. Problem. Directions: Analyze and answer the following problems. Write your
answers with the solution on your answer sheets.
1. FGD Corporation has a days of sales outstanding period of 45 days, a day of inventory
of 80 days, and days of payable outstanding of 52 days. Compute for the length of FGD
Corporation’s cash conversion cycle.

2. ABC Company’s sale of P750,000 wherein 85% is on credit sale. If its receivable
turnover is 5, what is its average collection period? Used 365-days year.

3. JKL Company’s sale of P650,000 wherein 95% is on credit sale. If its receivable
turnover is 6, what is its year-end receivable? Used 365-days year.

4. Given the following data, compute for the net working capital and current ratio:
Cash P27,000 Accounts Payable P41,000
Accounts Receivable 33,000 Mortgage Payable 56,000
Inventories 45,000 Capital 85,000
Equipment 55,000

5. CVB Company’s inventories have an age of 90 days and accounts receivable are
collected in 60 days. Accounts payable are paid approximately within 30 days after they
occur. P25 million is the company’s annual sales. Assume there is no difference in the
investment per peso of sales in inventory, receivables, and payables and that there is a
360-day year. What is the company’s operating cycle? Calculate the company’s conversion
cycle.

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Exercise 8. TRUE or FALSE. Directions: On your answer sheet, write TRUE if the
statement is correct and FALSE if otherwise. Write your answers on your answer sheet.

_______ 1. Working Capital involves long-term assets and long-term liabilities.

_______ 2. Cash is the most liquid asset; an important account in the balance sheet that
will affect the liquidity, and solvency of a company.
_______ 3. A net working capital is defined as the sum between the company’s current
assets and current liabilities.
_______ 4. The operating cycle is the sum of Days of Inventory and Days
of Receivables.
_______ 5. The average number of days for the company to pay its creditors is known as
Days of Payables Outstanding.

Good work!

Prepared by: Noted by:

NECCA T. PALCAT-BERIN LOURENE J. GUANZON

Subject Teacher ABM Group Head

Approved by:

SALVADOR J. SEMBRAN, PhD

Asst. Principal II - SHS

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