MODULE #2 FINANCIAL MANAGEMENT

FINANCE- SYSTEM OF CIRCULATION OF MONEY, GRANTING OF CREDITS, MAKING OF INVESTMENT AND

PROVISION OF BANKING FACILITIES. IT HAS 3 AREAS:

FINANCIAL MANAGEMENT: ALSO CALLED THE CORPORATE FINANCE, DECISIONS RELATING TO HOW
MUCH AND WHAT ASSET TO BUY, HOW TO RAISE CAPITAL AND HOW TO RUN A CAPITAL.

CAPITAL MARKET: INTEREST RATE ALONG WITH THE STOCKS AND BONS WHERE PRICES ARE
DETERMINED. ALSO STUDIES THE FINANCIAL INSTITUTIONS THAT SUPPLY CAPITAL TO THE BUSINESS

GOVERNMENT ASSIST TO THIS ARE:

FEDERAL RESERVE SYSTEM: REGULATES THA BANK AND CONTROL THE SUPPLY OF MONEY

SECURITIES AND EXCHANGE COMMISSION (SEC): TRADING OF STOCKS AND BONDS IN PUBLIC MARKET

BOARD OF DIRECTORS: THEY ARE TOP GOVERNING BODY AND CHAIRPERSON OF THE BOARD AND
HIGHEST RANKING INDIVIDUAL. ALSO SERVE AS CEO

AFTER CEO COMES NEXT THE COO (CHIEF OPERATING OFFICER) : DESIGNATED AS FIRM PRESIDENT
AND DIRECT FIRMS OPERATIONS LIKES MANUFACTURING MARKING SALES AND OTHER OPERATING
DEPARTMENT

AFTER COO COMES NEXT CFO (CHIEF FINANCIAL OFFICER): THEY ARE SENIOR VICE PRESIDENT AND
THIRD RANKING OFFICER AND DESIGNATED WITH ACCOUNTING, CR POLICIY AND INVESMENT
RELATION

***IF THE FIRM IS PUBLICLY OWNED, THE CEO AND CFO MUST BOTH CERTIFY THE SEC TO REPORT
ANNUAL***

SARBANES-OXLEY ACT 2002: A LAW PASSED THIS TO CONGRESS THAT REQUIRES THE CEO AND CFO TO
CERTIFY THEIR FIRMS FINANCIAL STATEMENT ACCURATE

FORMS OF BUSINESS ORGANIZATION

SOLE PROPRIETORSHIP: A BUSINESS OWNED BY A SINGLE PERSON

PARTNERSHIP: A BUSINESS OWNED BY A TWO OR MORE PERSON

***THE ADVANTAGE OF THIS BOTH FORMS OF ORGANIZATION ARE SAME**

1. EASE OF FORMATION
2. SUBJECT TO FEW REGULATION
3. NO CORPORATE INCOME TAXES
****DISADVANTAGE ARE ALSO THE SAME***

1.DIFFICULY TO RAISE CAPITAL

2.UNILIMITED LIABILITY

3. LIMITED LIFE

3. CORPORATION: A LEGAL ENTITY CREATED BY STATE, SEPARATE AND DISTINCT FROM ITS OWNER
AND MANAGERS.

****ADVANTAGE**

1. EASY TO TRANSFER OWNERSHIP

2. EASE OF RAISING CAPITAL
3. UNLIMITED LIFE
4. LIMITED LIABILITY
****DISADVANTAGE***
1. DOUBLE TAXATION
2. COST OF SET UP AND FILLING REPORTS

LLC (LIMITED LIABILITY COMPANY) – POPULAR FORMS OF ORGANIZATION THAT IS HYBRID BETWEEN
PARTNERSHIP AND CORPORATION

LLP(LIMITED LIABILITY PARTNERSHIP): ALSO SAME WITH LLC BUT MORE ON PROFESSIONAL FIELD LIKE
ACCOUNTING, ARCHITECTURE AND ENGENEERING

****BOTH ARE PROTECTED BY LIMITED LIABILITY OR LLP(LIMITED LIABILITY PROTECTION)****

S CORPORATION- SPECIAL DESIGNATION FOR SMALL BUSINESSES THAT ALLOW TO MEETS ITS
QUALIFICIATION TO BE TAXED AS PROPRIETORSHIP OR PARTNERSHIP RATHER THAN CORPORATION

MODULE #3

**IMPORTANT DETAILS***

-MANAGERS AIM TO PERFORM WELL SO THEY CAN GET INCENTIVES SUCH AS BONUSES

-STOCKHOLDERS WANTS THEIR SHARES VALUE TO INCREASE BY EARNING A PROFIT AND PRFER
RISKIER PROJECTS BEC. OF THE POTENTIAL OF HIGHER RETURN IF THEY SUCCEED

-DEBTHOLDERS PREFER CONTRACTS WITH FIXED PAYMENTS

MANAGERS-STOCKHOLDERS CONFLICT

MANAGERS ARE NATURALLY INCLINED TO ACT WITH THEIR OWN BEST INTEREST BUT NOT ALWAYS THE
SAME WITH THE INTENTION OF STOCKHOLDERS. THEY ARE MORE INETERESTED IN MAXIMIZING THEIR
WEALTH RATHER THAN STOCKHOLDERS SO THE MANAGERS MIGHT GET PAY THEMSELVES EXECESSIVE
SALARIES
****COMPENSATION PACKAGES MIGHT MOTIVATE MANAGER****

1. REASONABLE COMPENSATION PACKAGES

2. FIRING THOSE MANAGERS WHO DON’T PERFORM WELL
3. THE THREAT OF HOSTILE TAKEOVERS

STOCKHOLDER-DEBTHOLDER CONFLICTS
STOCKHOLDER PREFER RISKIER PROJECTS BEC. THEY RECEIEV MORE THE UPSIDE IF THE
SUCCEED.

DEBTHOLDERS RECEIVED FIXED PAYMENT AND INTERESTED IN LIMITING RISK

CONCERNS OF USE OF ADDITIONAL DEBT
THEY ATTEMPT TO PROTECT THEMSELVES BY ADDING COVENANTS IN BOND AGREEMENT TO
LIMIT THE USE OF ADDITIONAL DEBT AND CONSTRAIN THE ACTION OF MANAGERS

BUSINESS ETHICS- COMPANY ATTITUDE AND CONDUCT TOWARDS ITS EMPLYOEE,

COMMUNITIES, CUSTOMERS AND STOCKHOLDERS. IMPORTANT TO OBSERVE AND FOLLOW THE
ETHICAL BEHAVIOR SO THE FRAUD, MISLEADING AND ACCTNG POLICY CAN BE AVOIDED AND
PUNISHED PFROPERLY.

MODULE #4

COMMON SIZE ANALYSIS – LINE ITEM OR ACCOUNT PRESENTED IN F.S AS PERCENTAGE

TWO TYPES ARE HORIZONTAL AND VERTICAL ANALYSIS

HORIZONTAL ANALYSIS- TREND ANALYSIS EXORESSED AS PERCENTAGE OF SOME PRIOR PERIOD

AMOUNT OR PERCENTAGE OF BASE PERIOD AMOUNT

PRECEEDING PERIOD AND PERIOD FURTHER IN THE PAST

FORMULA OF HORIZONTAL:

YEAR 2023-YEAR 2022/YEAR 2022*100

20000-15000 = 5000/15000=33.33%

2.VERTICAL ANALYSIS- EXPRESSED AS PERCENTAGE OF SOME OTHER LINE ITEM FOR THE SAME PERIOD

FOR BALANCE SHEET, ITS TOTAL ASSET

FORMULA OF BALANCE SHEET = LINE ITEM/TOTAL ASSET*100

FOR EXAMPLE: CASH IS 5000 AND TOTAL ASSET IS 10000 SO 5000/10000= 50%
FOR INCOME STATEMENT, ITS NET SALES

FORMULA IS= LINE ITEM/NET SALES

FOR EXAMPLE: COST OF GOOD SOLD IS 15000, NET SALES 50000 SO 15000/50000=30%

RATIO ANALYSIS- SECOND MAJOR TECHNIQUE FOR FSA

EITHER FRACTIONS OR PERCENTAGE

PAST HISTORY AND INDUSTRIAL AVERAGE

3 CATEGORIES:

1. LIQUIDITY RATIO
2. PROFITABILITY RATIO
3. LEVERAGE RATIO

1.LIQUIDITY RATIO: SHORT TERM DEBT PAYING ABILITY

1. CURRENT RATIO- PAY ITS SHORT TERM LIABILITY OVER SHORT TERM ASSET

FORMULA: CURRENT ASSET/CURRENT LIABILITY

2.QUICK RATIO OR ASSET TEST: MOST LIQUIDITY ASSETS

FORMULA: CASH+AR+MARKETABLE SECURITIES/CURRENT LIABILITIES

3.CASH RATIO: FORMULA: CASH+MARKETABLE SECURITIES/CURRENT LIABILITIES

4. ARTO: NET CREDIT SALES/AVE. AR

5. AVE. AR: (BEG+END AR)/2

6. AGE/DAYS OF AR= 360 OR 365/ ARTO

7. ITO= COGS/AVE. INVENTORY

8. AVE. INVENTORY: (BEG+END)/2

9. DAYS OR AGE OF INVENTORY: 360 OR 365/ITO

10. ENDING INVENTORY: COGS/ITO*2-BEG.INVENTORY

11. ENDING AR: NET CREDIT SALES/ARTO*2-BEG AR

12. CASH CONVERSION CYCLE: DIO+DSO-DPO (INVENTORY, AR, AP) *PERIOD

13. OPERATING CYCLE: DSI+DSO (DSI-PURCHASE) (DSO-CR. SALES)* PERIOD

14. APTO: NET CR. PURCHASE/AVE.AP

15. AVE AP: (BEG+END)/2

16. DAYS OR AGE: 360 OR 360/APTOB

MDOULE #5

1.LEVERAGE RATIO-COMPANY DEBT CARRYING ABILITY, TO MEET ITS LONG TERMA ND SHORT TERM
OBLIGATION, DEGREE OF PROTECTION PROVIDED BY THE COMPANY CREDITORS

1. TIMES INTEREST EARNED RATIO- INCOME BEFORE TAXES +INTEREST EXPENSE/ INTEREST EXPENSE

2. DEBT RATIO= TOTAL LIABILITIES/TOTAL ASSET

3. DEBT TO EQUITY RATIO= TOTAL LIABILITIES/TOTAL STOCKHOLDERS EQUITY

4. EQUITY RATO= TOTAL STOCKHOLDERS EQUTY/TOTAL ASSET

PROFITABILITY RATO- HOW PROFITABILITY THE FIRM IS OPERATING AND UTILZING THE ASSET

1.RETURN ON SALES – PROFIT MARGIN= NET INCOME/NET SALES

2.RETURN ON TOTAL ASSET= NET INCOME+(INTEREST EXPENSE(1-TAX RATE))/AVERAGE TOTAL ASSET

4. RETURN ON COMMON STOCKHOLDERS EQUITY= NET INCOME-PREFFERED DIVENDEND/AVERAGE

COMMON STOCKHOLDER EQUITY

5. EARNING PER SHARE- NET INCOME-(PREFFERED DIVEDENDS)/AVERAGE COMMON SHARE

6. PRICE PER SHARE- MARKET PRICE PER SHARE/EARNING PRICE PER SHARE

7. DIVEDEND YIELD- DIVDEND PRICE PER SHARE/MARKET PRICE PER SHARE

8. DIVENDEND PAYOUT- COMMON DIVDEND/(NET INCOME-PREFFERED DIVEND)