Ateneo de Zamboanga University

School of Management and Accountancy

Accountancy Department

LEARNING PACKET
FINMAN1 – Financial Markets
Session 2, First Semester, SY 2020-21

LEARNING PACKET NO. 1 DATE: October 5 – 9, 2020

TOPIC: Introduction to Finance Week No.: 1
Session: 1

INTENDED LEARNING OUTCOME:

At the end of this learning units, the learners shall:

1. Develop an insight of the importance of the study of finance.

2. Describe the relevance of finance in one’s daily life and the importance of studying finance.
3. Understand the different areas of finance and distinguish the differences in applying the finance tools and
techniques to each area.

I. CONCEPT NOTES

Finance, Defined

Finance - The study of how individuals, institutions, governments, and businesses acquire, spend, and manage
money and other financial assets.
- The science and art of managing money.

Why study FINANCE?

1. We deal with it in our daily lives
2. Finance provides understanding of the tools and techniques in of our economic decisions.
3. It can aid us in making informed investment decisions.
4. It can aid us in determining good financing sources.

Finance versus Economics and Accounting

• Finance, as we know it today, grew out of economics and accounting.

• Economists developed the notion that an asset’s value is based on the future cash flows the asset will
provide, and accountants provided information regarding the likely size of those cash flows.
• Finance then grew out of and lies between economics and accounting, so people who work in finance
need knowledge of those two fields.

Areas of Study of Finance

1. Financial Institutions and Markets – relates to the study of financial systems and its components,
interest and securities valuation, and the regulation of financial markets and institutions.
2. Financial Management – also called as managerial finance and corporate finance, it focuses on
decisions relating to how much and what types of assets to acquire, how to raise the capital needed to
buy assets, and how to run the firm so as to maximize its value.
3. Investments – focuses on decisions concerning stock and bond investments, security analysis, portfolio
management, and market analysis.

Areas of Application
1. Business Finance – application of finance tools in investing and financing decisions in a business or
institutional setting.
2. Personal Finance – application of finance tools in the management of individual and family financial
resources.
 3. Public Finance – application of finance tools for the effective allocation of public funds for government
services, public investment, and public debt.

Career Opportunities in Finance

1. Financial Management – concerned with the administration of the financial affairs of the business,
which includes tasks such as developing financial plans, extending customer credits, evaluating large
investment projects, and raising money to fund the firm’s operations
a. Financial Analyst – prepares the firm’s financial plans and budgets, financial forecasting,
performing financial comparisons, and working closely with accounting.
b. Cash Manager – maintains and controls the firm’s daily cash balances, manages the firm’s cash
collection and disbursement activities and short-term investments and coordinates short-term
borrowing and banking relationships.
c. Credit Analyst – administers the firm’s credit policy by evaluating credit applications, extending
credit, and monitoring and collecting accounts receivable.
d. Capital Expenditure Manager – evaluates and recommends proposed long-term investments.
May be involved in the financial aspects of implementing approved investments.
e. Project Finance Manager – arranges financing for approved long-term investments.
Coordinates consultants, investment bankers, and legal counsel.
f. Pension Fund Manager – oversees or manages the assets and liabilities of the employees’
pension fund.
g. Foreign Exchange Manager – manages specific foreign operations and the firm’s exposure to
fluctuations in exchange rates.

2. Financial Services - concerned with the design and delivery of advice and financial products to
individuals, businesses, and governments.
a. Loan Analyst – evaluates consumer and/or commercial loan applications.
b. Bank Teller – assists customers with their day-to-day checking and banking transactions.
c. Investment Research Analyst – conducts research on investment opportunities for a bank trust
department.
d. Insurance Agent – sells insurance to individuals and businesses and participates in the process
of claims.
e. Real Estate Agent – markets, and sells or leases residential or commercial properties.
f. Mortgage Analyst – analyzes real estate loan applications and assists in arranging mortgage
financing.
g. Stockbroker – assists clients in purchasing and selling stocks and bonds, and in building
investment wealth.
h. Security Analyst – analyzes and makes recommendations on the investment potential of specific
securities.
i. Investment Banking Analyst – conducts financial analysis and valuation of new securities being
issued.
j. Financial Planner Assistant – analyzes individual client insurance needs and investment plans
to meet retirement goals.

IMPORTANCE OF ETHICS IN FINANCE

• Ethics in finance consists of the moral norms that apply to financial activity broadly conceived.
• That finance be conducted according to moral norms is of great importance, not only because of the
crucial role that financial activity plays in the personal, economic, political, and social realms but also
because of the opportunities for large financial gains that may tempt people to act unethically.
• Ethics plays a vital role, in addition to laws and regulations, first, by guiding the formation of laws and
regulations and, second, by guiding conduct in areas not governed by laws and regulations.
• In general, moral norms reflect the conduct in financial activity that follows from fundamental ethical
principles.
 • Ethical dilemma -- Each person has his or her own set of values, which forms the basis for personal
judgments about what is the right thing.
• Violations of these standards in finance involve a variety of actions: “creative accounting,” earnings
management, misleading financial forecasts, insider trading, fraud, excessive executive compensation,
options backdating, bribery, and kickbacks.
• Sound ethical standards are important for business and personal success. Unethical decisions can destroy
reputations (ex. Enron, Bernie Madoff).
• Ethical behavior is doing the right thing! … but what is the right thing?
• Robert A. Cooke, a noted ethicist, suggests that the following questions be used to assess the ethical
viability of a proposed action:
o Is the action arbitrary or capricious? Does the action unfairly single out an individual or group?
o Does the action affect the morals, or legal rights of any individual or group?
o Does the action conform to accepted moral standards?
o Are there alternative courses of action that are less likely to cause actual or potential harm?

PRINCIPLES OF FINANCE

Principle 1: Money has Time Value

• A peso received today is worth more than a peso received in the future.
o Since we can earn interest on money received today, it is better to receive money sooner rather
than later.
• Opportunity Cost – It is the cost of making a choice in terms of next best alternative that must be
foregone.
o Example: By lending money to your friend at zero percent interest, there is an opportunity cost
of 1% that could potentially be earned by depositing the money in a savings account in a bank.

Principle 2: Cash Flows are the Source of Value

• Accounting profits are not equal to cash flows. It is possible for a firm to generate accounting profits but
not have cash or to generate cash flows but not report accounting profits in the books.
• Cash flow, and not profits, drive the value of a business.
• We must determine after-tax incremental or marginal cash flows when making financial decisions.
Incremental cash flow is the difference between the projected cash flows if the project is selected, versus
what they will be, if the project is not selected.

Principle 3: Risk Requires a Trade-Off of Return

• Investors will not take on additional risk unless they expect to be compensated with additional reward or
return.
• Investors expect to be compensated for “delaying consumption” and “taking on risk.” Thus, investors
expect a return when they deposit their savings in a bank (ex. delayed consumption) and they expect to
earn a relatively higher rate of return on stocks compared to a bank savings account (ex. taking on risk).

Principle 4: Share Prices Reflect Information (Efficient Market Theory)

• In an efficient market, the market prices of all traded assets (such as stocks and bonds) fully reflect all
available information at any instant in time.
• Thus, stock prices are a useful indicator of the value of the firm. Price changes reflect changes in
expected future cash flows. Good decisions will tend to increase in stock price and vice versa.
• Note there are inefficiencies in the market that may distort the market prices from value of assets. Such
inefficiencies are often caused by behavioral biases.

Principle 5: Owners’ and Managers’ Interests may Differ

• The Agency Theory is a branch of economics relating to the behavior of principals and their agents.
• In a corporate setting, the management acts as an agent for the owners/shareholders (principal) of the
firm. Thus, the principals must provide incentives so that management acts in the principals’ best
interests and then monitor results.
• Agency Problems arise when managers place personal goals ahead of the goals of shareholders. In this
case, managers may make decisions that are not consistent with the goal of maximizing shareholder
wealth.
 • Agency costs arise from agency problems that are borne by shareholders due to the presence or
avoidance of agency problems, and in either case represent a loss of shareholder wealth.
• In order to reduce agency costs, the corporate body, through the board of directors, must ensure that
managers’ interests are aligned with those of shareholders.
• Agency conflict is reduced through: (a) monitoring (ex. annual reports); (b) interventions; (c)
compensation schemes (ex. stock options); and (d) market mechanisms (ex. hostile takeovers)

II. CHECKING FOR UNDERSTANDING/ANALYSIS

Answer the following questions objectively.

1. What is finance?
2. What are the different areas of finance?
3. Describe how ethics is important in finance? What will happen if finance professionals do not have a
sense of ethical responsibility?
4. What are these principles in finance for? Why are they necessary in the understanding of how finance
professional pursue with their careers?

III. INTEGRATION

Reflect on the following:

1. How does finance affect your day-to-day life? Cite an example of situations where finance is applied to
your life as a student?
2. Have you ever been caught in a situation where you’re in a dilemma whether to do a specific thing or
not (e.g. to cheat or not in an examination to get a good grade)? What happened? How did you resolve
such a dilemma?

IV. INDEPENDENT LEARNING

INDEPENDENT TASK 1: Research on the “Global Economic Recession of 2007-2010”. Assess the violations
in the principles that the management of the financial institutions involved might have done to cause a serious
global economic turmoil during that era.

INDEPENDENT TASK 2: Investigate some of the world’s most coveted financial and accounting scandals.
How do some of the management and employees of these companies acted? What ethical considerations and
practices might have been put in place to avoid these scandals? Write a short write-up on this investigation.

PREPARED BY:

JOHN CARLOS S. WEE, CPA MBA CMITAP

ROMEL W. DELOSA, CPA CMA
JUDEAN GRACE D. GALVEZ, CPA
FINMAN1 Instructors