Dumaguete City National High School

Dumaguete City Division

BUSINESS FINANCE
Prepared by: Miss Clareen June E. Dagoy

Quarter 1 – Week 1
Content Standard:
The learners demonstrate an understanding of the definition of finance, the activities of the financial manager, and financial
institutions and markets.

Performance Standard:
The learners are able to describe the role of financial institutions and markets.

Most Essential Learning Competencies (MELCs):

The learner distinguishes a financial institution from financial instrument and financial market and explains the flow of
funds within an organization – through and from the enterprise—and the role of the financial manager.
In the previous lesson, you have learned about the meaning of financial management and the major role of the financial
management and the different individuals involved
financial management and financial managers play a
crucial role in making financial decisions and exercising
control over finances in the organization.

Activity #1: What’s New

Below activity will help you check how much you know about
the phases of economic development and its impact to business
environment.
Directions:
1. Circle the PUZZLE words correctly.
2. SEARCH its meaning from the different sources such as dictionary or books
3. IDENTIFY each word if it is FINANCIAL MARKET, INSTRUMENT OR INSTITUTION.

Capital -
Credit unions-
Bank deposit-
Cash-
Stocks-
Bonds-
Real state-
Bond market-
Insurance-
Central bank-

The Flow of Funds within an Organization –

Through And From the Enterprise

Below are scenarios to further understand the functions of Financial Markets, Financial Institutions and Financial Instruments,
Scenario 1: If A knows that B is in need of funds, or if B knows that A is willing to invest funds, A and B may agree to make a
Private Placement.

A = giver of funds Private

A B
B = user of funds Placement
Scenario 2: However, if these facts are unknown to them , A and B can go to a Financial Market which is an organized forum
that lets A, along with other suppliers of funds, and B, along with other users of funds, meet and make transactions. Once A and B
have met in the Financial Market, they can now agree to make a private placement.

FACTS ARE UNKNOWN TO THEM

A B

Once, they have met Private

and agree in the
Financial Financial Market
Placement
Market

Scenario 3: If A
and B do not want to make an effort to find a counterparty in the Financial Markets, A and B
may go to a Financial Institution. A Financial Institution will receive A’s supply of funds and match it with B’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.

A AND B DO NOT WANT TO FIND A COUNTERPARTY IN FINANCIAL MARKET

A B
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
Financial the suppliers and users of funds.
Institutions
The Financial System

TAKE NOTE: 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.
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.

The composition of the Financial System

a. Financial Instruments
Note: When a financial instrument is issued, it gives rise to a financial asset on one hand and a financial liability Instruments or equity
instrument on the other.

*Recall from your ABM subjects the following definitions:

  A 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

 A 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

 An Equity Instrument is 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 holders of Financial Assets – SUPPLIERS/GIVERS OF FUNDS

The makers of Financial Liabilities and Equity – USERS OF FUNDS

Examples of Debt and Equity Instruments

Debt Instruments generally have fixed returns due to fixed interest rates. Examples of debt instruments are as follows:
 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.
 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.

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. The following are types of equity
instruments:
 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 have also 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)
 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.

b. Financial Markets
Classify Financial Markets into comparative groups:

1. 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.
 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.
 The Philippine Stock Exchange (PSE) is both a primary and secondary market.

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

c. 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.
 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.

Activity #2: What’s More: ARRANGE- SEARCH

The activity below will help you familiarize the key terms on the flow of money and the role of the financial manager.

Directions:
1. ARRANGE the rumble words correctly to form a word.
ARRANGE
Rumble Words Answer
1. OYMEN
2. PEDISROTO
3. IALCFIANN MSERGANA
4. ROBERWRO
5. ORTONCERSLL
6. TIDERC SREGANAM
7. ENACRUSIN GANAMSRE
8. CATIONINUMNOC
9. THAM SLLIKS
10. ALOINTAZAGROIN LLIKSS

SEARCH
Words Answer
1
2
3
4
5
6
7
8
9
10

The Role of Financial Managers

Financial managers perform data analysis and advise senior managers on profit maximizing ideas. Financial managers are responsible
for the financial health of an organization. They produce financial reports, direct investment activities, and develop strategies and
plans for the long-term financial goals of their organization.

Financial managers typically:

• Prepare financial statements, business activity reports, and forecasts,
• Monitor financial details to ensure that legal requirements are met,
• Supervise employees who do financial reporting and budgeting,
• Review company financial reports and seek ways to reduce costs,
• Analyze market trends to find opportunities for expansion or for acquiring other companies,
• Help management make financial decisions.

Types of Financial Managers

There are distinct types of financial managers, each focusing on a particular area of management.
  Controllers direct the preparation of financial reports that summarize and forecast the organization’s financial position, such
as income statements, balance sheets, and analyses of future earnings or expenses.
 Credit managers oversee the firm’s credit business. They set credit-rating criteria, determine credit ceilings, and monitor the
collections of past-due accounts.
 Cash managers monitor and control the flow of cash that comes in and goes out of the company to meet the company’s
business and investment needs.
 Risk managers control financial risk by using hedging and other strategies to limit or offset the probability of a financial loss
or a company’s exposure to financial uncertainty.
 Insurance managers decide how best to limit a company’s losses by obtaining insurance against risks such as the need to
make disability payments for an employee who gets hurt on the job or costs imposed by a lawsuit against the company.

Important Skills for Financial Managers

 Analytical skills. Financial managers increasingly assist executives in making decisions that affect the organization, a task for
which they need analytical ability.
 Communication. Excellent communication skills are essential because financial managers must explain and justify complex
financial transactions.
 Attention to detail. In preparing and analyzing reports such as balance sheets and income statements, financial managers must
pay attention to detail.
 Math skills. Financial managers must be skilled in math, including algebra. An understanding of international finance and
complex financial documents also is important.
 Organizational skills. Financial managers deal with a range of information and documents. They must stay organized to do
their jobs effectively.

Activity #3: What I have learned

Part I. True or False.

Directions: Before each statement on the space provided, write TRUE if the statement is correct or FALSE if the statement is
incorrect.
_____________1. Primary and secondary markets are markets for short-term and long-term securities, respectively.
_____________2. Financial markets are intermediaries that channel the savings of individuals, businesses, and government into loans
or investments.
_____________3. The money market involves trading of securities with maturities of one year or less while the capital market
involves the buying and selling of securities with maturities of more than one year.
_____________4. Holders of equity have claims on both income and assets that are secondary to the claims of creditors.
_____________5. Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to payment of any
interest to outstanding bonds.
Part II. Multiple Choice
Directions: Choose the letter corresponding to the correct answer for each of the questions provided below. Encircle the letter of the
correct answer.

1. A ______________________is one financial intermediary handling individual savings and receives premium payments that are
placed in loans.
A. life insurance company
B. commercial bank
C. savings bank
D. credit union

2. The key participants in financial transactions are individuals, businesses, and governments. Individuals are net of funds, and
businesses are net of funds.
A. suppliers; users
B. purchasers; sellers
C. users; suppliers
D. users; providers

3. Which of the following is not a financial institution?

A. A pension fund
B. A newspaper publisher
C. A commercial bank
D. An insurance company

4. A is set up so that employees of corporations or governments can receive income after retirement.
A. life insurance company
B. pension fund
C. savings bank
D. credit union

5. A is a type of financial intermediary that pools savings of individuals and makes them available to business and government users.
Funds are obtained through the sale of shares.
A. mutual fund
B. savings and loans
C. savings bank
D. credit union

6. Most businesses raise money by selling their securities in a.

A. a direct placement.
B. a stock exchange.
C. a public offering.
D. a private placement.

7. Which of the following is not a service provided by financial institutions?

A. Buying the businesses of customers
B. Investing customers’ savings in stocks and bonds
C. Paying savers’ interest on deposited funds
D. Lending money to customers

8. Government usually
A. borrows funds directly from financial institutions.
B. maintains permanent deposits with financial institutions.
C. is a net supplier of funds.
D. is a net demander of funds.

9. By definition, the money market involves the buying and selling of

A. funds that mature in more than one year.
B. flows of funds.
C. stocks and bonds.
D. short-term funds.

10. The _____________________ is created by a financial relationship between suppliers and users of short-term funds.
A. financial market
B. money market
C. stock market
D. capital market

Part III. What A News!

Direction: Look for an article or news clip that reports something about the role of the financial manager. Copy or cut and paste it on a
separate worksheet. Having the article as a reference, complete the following:
(USE A ONE LONG BONDPAPER FOR THIS OUTPUT)
1. Don’t forget to read and understand the rubrics before proceeding to the output making.
2. Name of the Article/Newspaper
3. Paste the URL of the Article (if it’s coming from the internet) or take a picture of the newspaper/Article if it is a hard copy.
4. Copy the table below and fill in the required responses.
Case Facts Responses (with discussions)
Kind of Finance Manager
His functions
His roles
His skills

References:

Books
Cayanan, A. & Borja (forthcoming). Business Finance.
Quezon City. Rex Bookstore.
Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial Finance (13th Ed), USA:
Prentice-Hall
Teaching Guide for Senior High School, Business Finance, Published by the
Commission on Higher Education, 2016
Kenneth L. Yumang, Tyrone Panzer L. Chan Pao, Patricia Pefianco-Benito, Erlinda
C. Pefianco, ED.D Exploring Small Business and Personal Finance. Phoenix
Publishing House Inc, 2016
Teaching Guide for Senior High School, The Commission on Higher Education in
Collaboration with the Philippine Normal University

Websites
https://www.suomenpankki.fi/en/financial-stability/the-financial-system-inbrief/, Retrieved June 19, 2020
https://www.yourarticlelibrary.com/macro-economics/national-incomemacro-economics/flow-of-funds-accounts-meaning-limitation-
andimportance/30779, Retrieved June 19, 2020
https://en.wikipedia.org/wiki/Flow_of_funds, Retrieved June 19, 2020
https://www.researchgate.net/publication/242549124_Using_Flow_of_Funds_to
_Explain_the_Financial_Markets_Crisis, Retrieved June 19, 2020
https://www.suomenpankki.fi/en/financial-stability/the-financial-system-in-brief/
https://courses.lumenlearning.com/boundless-business/chapter/introduction-tofinancial-management
https://www.suomenpankki.fi/en/financial-stability/the-financial-system-inbrief/