FINANCIAL MANAGEMENT

IBM
City College of Angeles

B.S. in Entrepreneurship

FINALS
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Notes

Things to remember:
ACCOUNTING - It is a perspective that is summarized in a firm’s statement of cash flows.
FINANCIAL - It is a perspective from which firms often focus on both operating and free cash flow.
DEPRECIATION - It is the portion of the costs of fixed assets charged against annual revenues over time.
CASH FLOW - It is the primary ingredient in any financial valuation model.
OPERATING - It pertains to cash flows directly related to the sale and production of the firm's products
and services.
INVESTING - It pertains to cash flows associated with the purchase and sale of both fixed assets and
equity investments in other firms.
FINANCING - It pertains to cash flows that result from debt and equity financing transactions.
CASH PLANNING - It involves the preparation of the firm’s cash budget.
PROFIT PLANNING - It involves the preparation of pro forma statements.
COMPOUND - It is interest that is earned on a given deposit and becomes part of the principal at the end
of a specified period.
PRINCIPAL - It is the amount of money on which interest is paid.
ANNUITY - It is a stream of equal periodic cash flows over a specified period.
MIXED STREAM - It refers to the unequal amounts of inflows and outflows over the period.
PERPETUITY - It is an annuity with an infinite life, providing continual annual cash flow.
DISCOUNTING - It is the process of finding present values and the inverse of compound interest.
WORKING CAPITAL - It refers to current assets, which represent the portion of investment that
circulates from one form to another in the ordinary conduct of business.
PROFITABILITY - It is the relationship between revenues and costs generated by using the firm’s assets.
CASH CONVERSION CYCLE - It is the length of time required for a company to convert cash invested in
its operations to cash received as a result of its operations.
ABC - It is an inventory management technique that divides inventory into three groups.
REORDER - It is the point at which to reorder inventory, expressed as days of lead time x daily usage.
Things to understand:
1. A firm’s Operating Cycle (OC) is the time from the beg. of the production to the collection from the sale
of the finished product.
2. The Average Payment Period (APP) is the time it takes to pay the accounts payable, measured in days.
3. A permanent funding requirement is a constant investment in operating assets resulting from constant
sales over time.
4. A conservative funding strategy is one in which the firm funds both its seasonal and its permanent
requirements with LT debt.
5. Turn over inventory as quickly as possible without stockouts that result in lost sales.
6. Pay accounts payable as slowly as possible without damaging the firm’s credit rating.
7. Order costs are the fixed clerical costs of placing and receiving an inventory order.
8. Carrying costs are the variable costs per unit of holding an item in inventory for a specific period.
9. Current assets include inventory, accounts receivable, marketable securities, and cash.
10. A cash discount is a percentage deducted to the purchase price for a credit customer who pays within
a specified time.

Things to recall:
The five “Cs” of credit: CONDITION & COLLATERAL
Float's component parts: MAIL & PROCESSING
Spontaneous Liabilities: ACCOUNTS PAYABLE & ACCRUALS
Credit terms: CASH DISCOUNT & CREDIT PERIOD
Basic patterns of Cash Flow: ANNUITY & SINGLE AMOUNT
Inventory management techniques: ABC & JIT
Cash Conversion Cycle Seasonal Funding Strategies: AGGRESSIVE & CONSERVATIVE
Cash Flow Financial Perspective: OPERATING & FREE CASH FLOW
Net Present Value (NPV) decision: ACCEPT & REJECT
Capital Budgeting Technique’s criteria: NPV & IRR

Things to practice:
Sample Problem 1:

Bal Manufacturing expects stable sales through the summer months of June, July, and August. Construct
a cash budget for June, July, and August. The firm does not require any minimum cash requirement.
Denomination is in Pesos.

Given: 1.Beginning cash balance of 100,000 in June. Cash Sales of 500,000 per month.Purchases of
350,000 per month. Wages and salaries are estimated at 60,000 per month plus 7 percent of sales. June:
The firm must make a principal and interest payment on an outstanding loan of 100,000. June: The
second-quarter tax payment of 20,000 is also due.July: The firm plans a purchase of a fixed asset costing
75,000.
Sample Problem 2:

Deej Manufacturing is considering the purchase of new equipment for the company, and they have
narrowed down the possibilities for two models that perform equally well. However, the method of paying
for the two models is different. Which model should they buy? The denomination is in pesos.