The Commission on Higher Education
in collaboration with the Philippine Normal University
Teaching Guide for Senior High School
BUSINESS
FINANCE
SPECIALIZED SUBJECT
This Teaching Guide was collaboratively developed and reviewed by educators
from public and private schools, colleges, and universities. We encourage
teachers and other education stakeholders to email their feedback, comments,
and recommendations to the Commission on Higher Education, K to 12
Transition Program Management Unit - Senior High School Support Team at
k12@ched.gov.ph. We value your feedback and recommendations.
Development Team
Team Leader: Arthur S. Cayanan, Ph.D.
Writers: Jerelleen A. Rodriguez, Al-Habbyel B.
Yusoph, Rachelleen A. Rodriguez, Diogenes C. Dy
Technical Editors: Pamela Anne S. Lloren, Ma.
Andrea Antonino-Balce
Copyreader: Patricia Carmela I. Lumanlan
Published by the Commission on Higher Education, 2016
Chairperson: Patricia B. Licuanan, Ph.D.
Commission on Higher Education
K to 12 Transition Program Management Unit
Office Address: 4th Floor, Commission on Higher Education,
C.P. Garcia Ave., Diliman, Quezon City
Telefax: (02) 441-0927 / E-mail Address: k12@ched.gov.ph
Illustrator: Patricia G. De Vera
Cover Artists: Maria Cecilia C. Manalo
Senior High School Support Team
CHED K to 12 Transition Program Management Unit
Program Director: Karol Mark R. Yee
Lead for Senior High School Support:
Gerson M. Abesamis
Consultants
THIS PROJECT WAS DEVELOPED WITH THE PHILIPPINE NORMAL UNIVERSITY.
University President: Ester B. Ogena, Ph.D.
VP for Academics: Ma. Antoinette C. Montealegre, Ph.D.
VP for University Relations & Advancement: Rosemarievic V. Diaz, Ph.D.
Ma. Cynthia Rose B. Bautista, Ph.D., CHED
Bienvenido F. Nebres, S.J., Ph.D., Ateneo de Manila University
Carmela C. Oracion, Ph.D., Ateneo de Manila University
Minella C. Alarcon, Ph.D., CHED
Gareth Price, Sheffield Hallam University
Stuart Bevins, Ph.D., Sheffield Hallam University
Course Development Officers:
John Carlo P. Fernando, Danie Son D. Gonzalvo,
Stanley Ernest G. Yu
Lead for Policy Advocacy and Communications:
Averill M. Pizarro
Teacher Training Officers:
Ma. Theresa C. Carlos, Mylene E. Dones
Monitoring and Evaluation Officer:
Robert Adrian N. Daulat
Administrative Officers:
Ma. Leana Paula B. Bato, Kevin Ross D. Nera,
Allison A. Danao, Ayhen Loisse B. Dalena
Printed in the Philippines by EC-TEC Commercial, No. 32 St.
Louis Compound 7, Baesa, Quezon City, ectec_com@yahoo.com
This Teaching Guide by the
Commission on Higher Education is
licensed under a Creative
Commons AttributionNonCommercial-ShareAlike 4.0
International License. This means
you are free to:
Share — copy and redistribute the
material in any medium or format
Adapt — remix, transform, and
build upon the material.
The licensor, CHED, cannot revoke
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follow the license terms. However,
under the following terms:
Attribution — You must give
appropriate credit, provide a link to
the license, and indicate if changes
were made. You may do so in any
reasonable manner, but not in any
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endorses you or your use.
NonCommercial — You may not use
the material for commercial
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ShareAlike — If you remix,
transform, or build upon the
material, you must distribute your
contributions under the same license
as the original.
Introduction
As the Commission supports DepEd’s implementation of Senior High School (SHS), it upholds the vision
and mission of the K to 12 program, stated in Section 2 of Republic Act 10533, or the Enhanced Basic
Education Act of 2013, that “every graduate of basic education be an empowered individual, through a
program rooted on...the competence to engage in work and be productive, the ability to coexist in
fruitful harmony with local and global communities, the capability to engage in creative and critical
thinking, and the capacity and willingness to transform others and oneself.”
To accomplish this, the Commission partnered with the Philippine Normal University (PNU), the National
Center for Teacher Education, to develop Teaching Guides for Courses of SHS. Together with PNU, this
Teaching Guide was studied and reviewed by education and pedagogy experts, and was enhanced with
appropriate methodologies and strategies.
Furthermore, the Commission believes that teachers are the most important partners in attaining this
goal. Incorporated in this Teaching Guide is a framework that will guide them in creating lessons and
assessment tools, support them in facilitating activities and questions, and assist them towards deeper
content areas and competencies. Thus, the introduction of the SHS for SHS Framework.
SHS for SHS
Framework
The SHS for SHS Framework, which stands for “Saysay-Husay-Sarili for Senior High School,” is at the
core of this book. The lessons, which combine high-quality content with flexible elements to
accommodate diversity of teachers and environments, promote these three fundamental concepts:
SAYSAY: MEANING
HUSAY: MASTERY
SARILI: OWNERSHIP
Why is this important?
How will I deeply understand this?
What can I do with this?
Through this Teaching Guide,
teachers will be able to facilitate
an understanding of the value
of the lessons, for each learner
to fully engage in the content
on both the cognitive and
affective levels.
Given that developing mastery
goes beyond memorization,
teachers should also aim for
deep understanding of the
subject matter where they lead
learners to analyze and
synthesize knowledge.
When teachers empower
learners to take ownership of
their learning, they develop
independence and selfdirection, learning about both
the subject matter and
themselves.
1
About this
Teaching Guide
Earth Science is a Core Subject taken in the first semester of Grade 11. This learning area is
designed to provide a general background for the understanding of the Earth on a planetary
scale. It presents the history of the Earth through geologic time. It discusses the Earth’s
structure and composition, the processes that occur beneath and on the Earth’s surface, as
well as issues, concerns, and problems pertaining to Earth’s resources.
Implementing this course at the senior high school level is subject to numerous challenges
with mastery of content among educators tapped to facilitate learning and a lack of
resources to deliver the necessary content and develop skills and attitudes in the learners,
being foremost among these.
In support of the SHS for SHS framework developed by CHED, these teaching guides were
crafted and refined by biologists and biology educators in partnership with educators from
focus groups all over the Philippines to provide opportunities to develop the following:
Saysay through meaningful, updated, and context-specific content that highlights important
points and common misconceptions so that learners can connect to their real-world
experiences and future careers;
Husay through diverse learning experiences that can be implemented in a resource-poor
classroom or makeshift laboratory that tap cognitive, affective, and psychomotor domains
are accompanied by field-tested teaching tips that aid in facilitating discovery and
development of higher-order thinking skills; and
Sarili through flexible and relevant content and performance standards allow learners the
freedom to innovate, make their own decisions, and initiate activities to fully develop their
academic and personal potential.
These ready-to-use guides are helpful to educators new to either the content or biologists
new to the experience of teaching Senior High School due to their enriched content
presented as lesson plans or guides. Veteran educators may also add ideas from these
guides to their repertoire. The Biology Team hopes that this resource may aid in easing the
transition of the different stakeholders into the new curriculum as we move towards the
constant improvement of Philippine education.
Parts of the
Teaching Guide
This Teaching Guide is mapped and aligned to the DepEd SHS Curriculum, designed to be highly
usable for teachers. It contains classroom activities and pedagogical notes, and is integrated with
innovative pedagogies. All of these elements are presented in the following parts:
1.
•
•
•
•
•
2.
•
•
•
•
3.
•
•
•
•
4.
•
•
•
•
5.
•
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•
•
6.
•
•
Introduction
Highlight key concepts and identify the essential questions
Show the big picture
Connect and/or review prerequisite knowledge
Clearly communicate learning competencies and objectives
Motivate through applications and connections to real-life
Motivation
Give local examples and applications
Engage in a game or movement activity
Provide a hands-on/laboratory activity
Connect to a real-life problem
Instruction/Delivery
Give a demonstration/lecture/simulation/hands-on activity
Show step-by-step solutions to sample problems
Give applications of the theory
Connect to a real-life problem if applicable
Practice
Discuss worked-out examples
Provide easy-medium-hard questions
Give time for hands-on unguided classroom work and discovery
Use formative assessment to give feedback
Enrichment
Provide additional examples and applications
Introduce extensions or generalisations of concepts
Engage in reflection questions
Encourage analysis through higher order thinking prompts
Evaluation
Supply a diverse question bank for written work and exercises
Provide alternative formats for student work: written homework, journal, portfolio, group/individual
projects, student-directed research project
3
On DepEd Functional Skills and CHED College Readiness Standards
As Higher Education Institutions (HEIs) welcome the graduates of
the Senior High School program, it is of paramount importance to
align Functional Skills set by DepEd with the College Readiness
Standards stated by CHED.
The DepEd articulated a set of 21st century skills that should be
embedded in the SHS curriculum across various subjects and tracks.
These skills are desired outcomes that K to 12 graduates should
possess in order to proceed to either higher education,
employment, entrepreneurship, or middle-level skills development.
On the other hand, the Commission declared the College
Readiness Standards that consist of the combination of knowledge,
skills, and reflective thinking necessary to participate and succeed without remediation - in entry-level undergraduate courses in
college.
The alignment of both standards, shown below, is also presented in
this Teaching Guide - prepares Senior High School graduates to the
revised college curriculum which will initially be implemented by AY
2018-2019.
College Readiness Standards Foundational Skills
DepEd Functional Skills
Produce all forms of texts (written, oral, visual, digital) based on:
1.
2.
3.
4.
5.
Solid grounding on Philippine experience and culture;
An understanding of the self, community, and nation;
Visual and information literacies, media literacy, critical thinking
Application of critical and creative thinking and doing processes;
and problem solving skills, creativity, initiative and self-direction
Competency in formulating ideas/arguments logically, scientifically, and creatively; and
Clear appreciation of one’s responsibility as a citizen of a multicultural Philippines and a
diverse world;
Systematically apply knowledge, understanding, theory, and skills for the development of
the self, local, and global communities using prior learning, inquiry, and experimentation
Global awareness, scientific and economic literacy, curiosity,
critical thinking and problem solving skills, risk taking, flexibility
and adaptability, initiative and self-direction
Work comfortably with relevant technologies and develop adaptations and innovations for
significant use in local and global communities
Global awareness, media literacy, technological literacy,
creativity, flexibility and adaptability, productivity and
accountability
Communicate with local and global communities with proficiency, orally, in writing, and
through new technologies of communication
Global awareness, multicultural literacy, collaboration and
interpersonal skills, social and cross-cultural skills, leadership
and responsibility
Interact meaningfully in a social setting and contribute to the fulfilment of individual and
shared goals, respecting the fundamental humanity of all persons and the diversity of
groups and communities
Media literacy, multicultural literacy, global awareness,
collaboration and interpersonal skills, social and cross-cultural
skills, leadership and responsibility, ethical, moral, and spiritual
values
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACADEMIC TRACK
Grade: 12
Core Subject Title: Business Finance
Semester: 2nd
No. of Hours/ Semester: 80 hours/ semester
Prerequisite: Fundamentals of ABM1
Co-requisite: Fundamentals of ABM2
Subject Description: This course deals with the fundamental principles, tools, and techniques of the financial operation involved in the management of business
enterprises. It covers the basic framework and tools for financial analysis and financial planning and control, and introduces basic concepts and principles needed in making
investment and financing decisions. Introduction to investments and personal finance are also covered in the course. Using the dual-learning approach of theory and
application, each chapter and module engages the learners to explore all stages of the learning process from knowledge, analysis, evaluation, and application to preparation
and development of financial plans and programs suited for a small business.
CONTENT
1. Introduction to Financial
Management
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
LEARNING COMPETENCIES
The learners are able to…
The learners…
1. define Finance
2. describe who are
responsible for financial
management within an
organization
3. describe the primary
activities of the financial
manager
4. describe how the financial
manager helps in achieving
the goal of the organization
5. describe the role of
financial institutions and
markets
1.
explain the major role of
financial management and
the different individuals
involved
2.
distinguish a financial
institution from financial
instrument and financial
market
3.
4.
5.
K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016
CODE
ABM_BF12-IIIa-1
ABM_BF12-IIIa-2
enumerate the varied
financial institutions and
their corresponding
services
ABM_BF12-IIIa-3
compare and contrast the
varied financial
instruments
ABM_BF12-IIIa-4
explain the flow of funds
within an organization –
through and from the
enterprise—and the role of
the financial manager
ABM_BF12-IIIa-5
Page 1 of 7
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACADEMIC TRACK
CONTENT
CONTENT STANDARD
2. Review of Financial
Statement Preparation,
Analysis, and Interpretation
the process of preparing
financial statements as well as
the methods or tools of analysis
of financial statements, including
horizontal analysis, vertical
analysis, and financial ratios to
test the level of liquidity,
solvency, profitability, and
stability of the business
PERFORMANCE STANDARD
solve exercises and problems
that require financial statement
preparation, analysis, and
interpretation using horizontal
and vertical analyses and
various financial ratios
K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016
LEARNING COMPETENCIES
CODE
1.
prepare financial
statements
ABM_BF12-IIIb-6
2.
define the measurement
levels, namely, liquidity,
solvency, stability, and
profitability
ABM_BF12-IIIb-7
3.
perform vertical and
horizontal analyses of
financial statements of a
single proprietorship
4.
compute, analyze, and
interpret financial ratios
such as current ratio,
working capital, gross
profit ratio, net profit
ratio, receivable turnover,
inventory turnover, debtto- equity ratio, and the
like
ABM_BF12-IIIb-8
ABM_BF12-IIIb-9
Page 2 of 7
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACADEMIC TRACK
CONTENT
CONTENT STANDARD
3. Financial Planning Tools and
Concepts
the financial planning process,
including budget preparation,
cash management, and working
capital management
PERFORMANCE STANDARD
LEARNING COMPETENCIES
CODE
1. illustrate the financial
planning process
2. prepare budgets such as
projected collection, sales
budget, production budget,
income projected statement
of comprehensive income,
projected of financial
position, and projected cash
flow statement
1.
identify the steps in the
financial planning process
ABM_BF12-IIIc-d-10
2.
illustrate the formula and
format for the preparation
of budgets and projected
financial statement
ABM_BF12-IIIc-d-11
explain tools in managing
cash, receivables, and
inventory
ABM_BF12-IIIc-d-12
cite bank and nonbank
institutions in the locality
that would serve as
possible sources of funds
for business operations
ABM_BF12-IIIe-f-13
compare and contrast the
loan requirements of the
different bank and
nonbank institutions
ABM_BF12-IIIe-f-14
3. describe concepts and tools
in working capital
management
3.
4.
Sources and uses of shortterm and long-term funds
the sources and uses of shortterm and long-term funds , and
the requirements , procedure ,
obligation to creditor, and
reportorial necessities
1. distinguish debt and equity
financing
2. identify the bank and
nonbank institutions in the
vicinity that are possible
sources of funds, and
enumerate their
requirements and process
for loan application
1.
2.
3.
4.
5.
K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016
draw a flow chart on the
steps in loan application
list down obligations of
entrepreneurs to creditors
identify uses of funds
ABM_BF12-IIIe-f-15
ABM_BF12-IIIe-f-16
ABM_BF12-IIIe-f-17
Page 3 of 7
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACADEMIC TRACK
CONTENT
5.
Basic Long-term Financial
Concepts
CONTENT STANDARD
basic concepts of risk and
return, and the time value of
money
PERFORMANCE STANDARD
1. distinguish simple and
compound interest
2. solve exercises and
problems in computing for
time value of money with
the aid of present and
future value tables
3. prepare loan amortization
tables
LEARNING COMPETENCIES
1.
calculate future value and
present value of money
2.
compute for the effective
annual interest rate
ABM_BF12-IIIg-h-19
3.
compute loan amortization
using mathematical
concepts and the present
value tables
ABM_BF12-IIIg-h-20
apply mathematical
concepts and tools in
computing for finance and
investment problems
ABM_BF12-IIIg-h-21
explain the risk-return
trade-off
ABM_BF12-IIIg-h-22
4. compute for the net present
value of a project with a
conventional cash-flow
pattern
5. describe the risk-return
trade-off
4.
5.
K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016
CODE
ABM_BF12-IIIg-h-18
Page 4 of 7
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACADEMIC TRACK
CONTENT
6.
7.
Introduction to investment
Managing Personal Finance
CONTENT STANDARD
the definition, purpose, kinds,
advantages, and disadvantages
and the risks of investment
the philosophy and practices in
personal finance
PERFORMANCE STANDARD
LEARNING COMPETENCIES
CODE
1. identify the types of
investments particularly
bank deposits , insurance,
real estate , hard assets,
mutual funds, and stocks
and bonds
2. indicate the advantages and
disadvantages of each type
of investment
3. explain the risks inherent in
each type of investment
1. compare and contrast the
different types of
investments
ABM_BF12-IVm-n-23
2. classify investment
according to its type and
features, and advantages
and disadvantages
ABM_BF12-IVm-n-24
3. measure and list ways to
minimize or reduce
investment risks in simple
case problems
ABM_BF12-IVm-n-25
1. enumerate money
management philosophies
ABM_BF12-IVo-p-26
2. illustrate the money
management cycle and
gives examples of sound
practices in earning,
spending, saving, and
investing money
ABM_BF12-IVo-p-27
1. identify money
management philosophy
2. apply basic personal finance
principles and practices in
earning, spending, saving,
and investing money
K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016
Page 5 of 7
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACADEMIC TRACK
CODE BOOK LEGEND
SAMPLE CODE:
ABM_BF12-IIIa-1
LEGEND
SAMPLE
Accountancy, Business and
Management
Strand
Track/ Strand
underscore_
First Entry
Track/ Strand Subject
Business Finance
Grade Level
12
ABM_BF12
Roman Numeral
*Zero if no specific quarter
Quarter
Quarter
III
Lowercase Letter
*Put a hyphen (-) in between letters to indicate
more than a specific week
Week
Week
a
-
Arabic Number
Competency
K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016
explain the major role of financial
management and the different
individuals involved
1
Page 6 of 7
References:
K to 12 BASIC EDUCATION CURRICULUM
SENIOR HIGH SCHOOL – ACADEMIC TRACK
Bernstein, Leopold. Financial Statement Analysis, 4th Ed. Illinois: Irwin, 2014.
Brealey, Richard A., Myers, Stewart.C. and Marcus, Alan .J. Fundamentals of Corporate Finance , 3rd Edition. New York: Mc-Graw Hill Co., 2014.
Brigham, Eugene F. Fundamentals of Corporate Finance, 8th Ed. Canada: Dryden, 2010
Cabrera, Elenita B. Management Advisory Services. Manila: Conanan, 2015.
Cabrera, Elenita B. Management Consulting. Manila: Conanan, 2015.
Cecchetti, Stephen G. Money, Banking and Financial Markets, 2nd Edition. 2010
Cruise, Tom. The Firm. DVD. Directed by Sydney Pollack. USA: Paramount, 1993.
Eakins, Stanley G. The Study Guide. North Carolina: East Carolina University, 2014.
Gitman, Lawrence J. and Joehnick, Michael D. Fundamentals of Investing, 8 th Edition. Boston: Addison Welsey, 2013.
Gitman, Lawrence J. Principles of Financial Management. New York: Pearson 2014
http://suppscentral.aw.com
Ilano, Alberto R. Investment Management and The Philippine Stock Market . Manila: FINEX, 2014
Melicher, Ronald W. and Norton,Edgar A. Introduction to Finance, Markets, Investments and Financial Management, 14th Edition. Canada: McGraw-Hill Ryerson Higher
Education, 2014.
Padilla, Nicanor B. Jr. How to Analyze Financial Statements. Manila: Conanan, 2007.
Pringle, John J. and Harris, Robert Samuel. Essentials of Managerial Finance, 2nd E. Canada: Dryden, 2014.
Saldana, Cesar G. Principles of Managerial Finance: Philippine Setting. Quezon City: AFA Publications, 2000.
Weston, Fred and Copland, Thomas E. Managerial Finance, 9th Ed., Canada: Dryden, 2012.
White, Gerald I., Sondhi, Ashwinpaul C., and Fried, Dov. The Analysis and Use of Financial Statements, New Jersey: Wiley, 2012.
www.aw-bc.com/gitman
K to 12 Senior High School Accountancy, Business and Management Strand – Business Finance May 2016
Page 7 of 7
Business'Finance
90 MINS
Introduction to Financial Management
Content Standards
The learners demonstrate an understanding of the definition of finance, the
activities of the financial manager, and the financial institutions and markets.
Performance Standards
The learners will be able to define finance.
Learning Competencies
The learners shall be able to explain the major role of financial management
and the different individuals involved. (ABM_BF12-IIIa-1)
Specific Learning Outcomes
The learners will be able to:
• Have an appreciation of what the overall objective of management should
be.
• Describe the goals of the firm and explain why maximizing the value of the
firm is an appropriate goal for a business.
• Identify factors that influence the change in market price.
LESSON OUTLINE
Introduction Introduction to Finance and Key Concepts
/Motivation
45
Instruction
40
Discussion of Shareholder’s Wealth
Enrichment Integration of learning
Evaluation
Quiz
Materials
• Board Notes
Resources
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
City. Rex Bookstore.
(2) Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial
Finance (13th Ed), USA: Prentice-Hall
5
30
DAY 1 SESSION
1. Distribute the Course Outline/Curriculum and read the subject description.
2.
•
•
•
•
Go through the various topics and highlight the following:
Coverage of first quarter exam
Date of first quarter exam
Coverage of second quarter exam
Date of second quarter exam
3.
•
•
•
•
Ask the learners to introduce themselves by answering the following suggested questions:
What is your full name?
What is your nickname?
Why did you choose the ABM Strand?
What are your expectations for this class?
4. Homework for next session:
5. • On a sheet of paper, answer the following questions:
A. How much is your daily allowance? If not given daily, how much is your average allowance per day?
B. Write down all the items you spend money on. List the description and peso amount spent.
C. Compute for the balance of your allowance by deducting the expenses you listed from your daily allowance.
D. If the answer to Question C is positive, what do you do with the money left? If the answer is negative, where do you get additional
money?
INTRODUCTION/MOTIVATION (40 MINS)
1. Finance in Everyday Life (7 mins)
• Begin by presenting a scenario in everyday life (Try: the life of a high school student).
• Narrate the scenario in your own style or as prescribed below:
- Ask the learners how much allowance they are given to and how often do they receive it (daily, weekly, etc.)
- Continue discussing the activities done in a day from getting to school, to attending flag ceremony, classroom discussions, lunch breaks,
end of classes, occasional meriendas or going out with friends and playing computer games, going back home and going back out to a
nearby store to buy autoload because they realized that they can’t end the day without texting
their crush.
- Ask learners how many have savings out of the allowance they get from their parents.
- End the story by identifying the expenses they incurred (i.e. tricycle fare, lunch, merienda,
computer games) and letting them recognize the value of savings and possibly investing at a
young age.
- Reveal that most of the activities they do involving decisions on where to use their allowance is a
finance decision.
2. Present Relevant Vocabulary (15 mins)
• Define Finance as follows:
- Finance can be defined as the science and art of managing money. (Gitman & Zutter, 2012)
• Engage the learners by exhausting from them the expenses they wrote down on their homework
and listing all these down on the board with the respective peso amounts. Try to get as many
answers as possible.
• Give an allowance cap based on the answers given by the learners during the beginning story. This
will serve as the average daily allowance that the class is able to spend.
• Go back to the list of expenses and ask for the total peso amount of the listed items. If the peso
amount exceeds the daily allowance, ask the learners which items should be dropped off from the
list. Cross out the items dropped but do not erase completely. Continue this until total items
remaining in the list can be covered by the daily allowance.
• Explain that the activity they did is called budgeting.
- Budgeting is the act of estimating revenue (in the form of their allowance) and expenses over a
period of time (in this case, on a daily basis).
- Inform them that budgeting will be further discussed in Lesson 3 – Financial Planning Tools.
• Go back to the activity and focus the learners’ attention on the surplus resulting from their
budgeting. Ask the learners who among them had answered on their homework which resulted in
savings or excess cash. Ask them what they do with the excess money.
- Possible answers:
Teacher Tips:
Terms Defined:
1. Finance
2. Budgeting
3. Investments
4. Sources of funds
• Carry over to the next day
• Return to parents
• Save. Ask how and where? Coin savers, Hidden under their beds, Deposit in banks, Invest in stocks (rare answer)
- Explain that excess money presents an opportunity for investments.
Investments come in many forms that will generate income or appreciate in the future.
- Between hiding their cash under their bed and depositing it in the bank, it would be better to keep their money in bank deposits
because these earn interest.
- Inform the learners that investments will be discussed further in Lesson 6 – Introduction to investments.
• Go back to the activity that is written in the board. Post the question of what other problems they may face in making financial decisions. Let
them assume that all the expenses listed on the board (including those that were previously crossed out) are incurred during the day. Let
them compute how much more cash they would need to support all those expenses.
• Ask who among the learners who made their homework encountered the same situation. If none, ask them if ever they are in a situation
where they are short of cash, what would they do? Where will they get extra cash? What other sources of cash do they know?
- Possible answers:
• Ask from parents
• Borrow from a friend
• Fund raising activities
• Pawnshops
• 5/6
• Banks
- Explain that all their answers are sources of funds. When faced with financial difficulties (in this case, the lack of funds to meet the
current expenses) we look for people or institutions that will give us the money we need.
- Inform the learners that they will know more about where to get funds on Lesson 4 – Sources of short term and long term funding.
• Summarize the discussion by pointing out that, for individuals, Finance is concerned with decisions about:
- How much of their earnings they spend
- How much they save or how much they need
- How they invest their savings
- How they raise additional funds they need (Gitman)
3. Review of Prerequisite Knowledge (10 mins)
• Tell the learners that once they graduate from school, they will no longer receive their daily allowance. Either they would be employed by a
company, manage their family business, or start up their own business.
• Ask the learners who among them wants to own their own business (get a raise of hands). Ask them what type of business organization is
owned by one person who operates it for his or her own profit (Answer: Sole Proprietorship).
• Continue to recall from ABM 1 the forms of business organizations:
- Sole Proprietorship - A business owned by one person and operated for his or her own profit.
- Partnership - A business owned by two or more people and operated for profit.
- Corporation – An entity created by law owned by shareholders.
• Ask the learners if they recall how they can be shareholders of a corporation (Answer: by buying stocks). At this point, ask them if they are
aware of big listed companies like PLDT, Globe, JFC, BPI, Banco Deo Oro, San Miguel Corporation, among others to interest them about the
subject.
• Ask how and where can they buy stocks?
- Corporations may either be privately owned or publicly owned.
- Privately owned corporations are often owned by family members whose stocks may not be offered to outsiders unless consent by the
family members is secured.
- Companies which are publicly listed are owned by unrelated investors and are traded in organized exchanges like the Philippine Stock
Exchange. While there are many stockholders, there is generally a group of investors or a family which controls each listed company. For
example, in the case of BPI, the biggest stockholder is Ayala Corporation and in the case of Banco De Oro, it is SM Investment
Corporation. Prices of stocks of listed corporations are driven by several factors such as the earnings of the companies, the prospects of
the industry where these companies operate, the general market sentiment, and the economic prospects of the country, among others.
4. Knowing the Shareholder (8 mins)
• Tell the learners to assume that they are the biggest shareholder in a corporation. Ask them the objectives they want to achieve as owners of
the corporation.
- Possible answers: Be profitable, Have a lot of cash
• Ask if they think a profitable company is a successful company. Can success be attributed to profitability only? Recall that the determination of
profit is based on the accrual method. Is it possible that a company can have profits but still does not have enough cash to pay its obligations
(i.e. suppliers, lenders)? What will happen if the company cannot pay its obligations?
• Ask the learners what they think of a company who has very large amount of cash. (Possible answer:
They may say that this is good because the company will always have enough cash to pay its
obligations.) Tell them that though having a lot of cash has its advantages, it also signals unhealthy
company practices. It may tell them that management has not been putting the company’s resources
into good use. Also, keeping too much cash in the books is like hiding your extra allowance under
their bed. They will be missing out on investment opportunities.
• Reveal that the overall objective of a shareholder should be wealth maximization. What defines a
shareholder’s wealth? Reveal the answer using the example below.
INSTRUCTION (45 MINS)
1. Measurement of the shareholder’s wealth (15 mins)
• Post the question of how do we measure shareholders wealth? Simplify the example.
- Assume a learner bought 10 shares of Globe Telecom at PHP2,510 each on September 9, 2010.
This brings his investments to PHP25,100. What happens to the value of his investment if the price
goes up to PHP2,600 per share or it goes down to PHP2,300 per share?
• Conclude that shareholders’ wealth is measured based on the current market price of the
corporation’s stocks. The market price changes across different periods. Hence, the value of your
investment changes in different points on time based on the market value at that time.
• At this point, start discussing the factors which can affect prices.
2. Factors that Influence Market Price (25 mins)
• Group the factors into two: Factors that the Management can control and external factors that
cannot be controlled by management.
Teacher Tips:
An increase of the share price to PHP2,600
per share means that people are willing to
buy the shares for that amount. If the
learners were to sell their shares at this
point, it will result to a profit of PHP90 per
share or PHP900 on their whole investment.
Hence, the value of their investment
increased from PHP25,100 to PHP26,000.
Therefore, there is an increase in
shareholder’s wealth.
On the other hand, a decrease in the share
price to PHP2,300 per share means that
people are only willing to buy shares for
PHP2,300. If the learners were to sell their
investment at this point, they will receive
PHP23,000 which would result to a loss of
PHP2,100. The decrease in value of their
investment leads to a decrease in
shareholder’s wealth.
Controllable by Management
Uncontrollable External Factors
• profitability
• having a good liquidity and reasonable
leverage position
• dividends
• competent management which affects the
company’s operating efficiency
• coming up with corporate plans that improve
the business prospects of the company
• macroeconomic conditions
• political stability
• prospects of the industry where the
company operates
• general market sentiment
• flow of foreign funds invested in the
Philippine stock market
• Discuss how each factor influences market price
- Profitability
• Profit is a measure of the financial performance of a company for a period of time.
• Although it is a major driver for increasing the value of stock, an investor should not rely on profits alone. As discussed earlier, it is possible
that the company has profits but its cash flow is negative.
- Examples: Suppose the following Income Statements and Cash Flow Statements of companies A, B and C were presented to you. Which
do you think is a more attractive company?
COMPANY A
COMPANY B
Income Statement
Cash Flows
Income Statement
Cash Flows
Sales
P 100,000
Collection from Customers
P0
Sales
P 100,000
Collection from Customers
P 100,000
Less: Costs
50,000
Payment of Expenses
50,000
Less: Costs
150,000
Payment of Expenses
50,000
Profits
P 50,000
Net Cash Flow
(P 50,000)
Profits
(P 50,000)
Net Cash Flow
P 50,000
COMPANY C
Income Statement
Cash Flows
Sales
P 100,000
Collection from Customers
P 100,000
Less: Costs
70,000
Payment of Expenses
70,000
Profits
P 30,000
Net Cash Flow
P 30,000
• Company A is profitable but generated negative cash flows which resulted from the uncollected accounts receivable of PHP100,000.
Without adequate cash inflows to meet its obligations, the company will face liquidity problems, regardless of its level of profits.
• Company B on the other hand has a positive cash flow but is unprofitable. This is a result of the company’s delay in payment of its costs.
Accordingly, the Company will soon have to pay the remaining PHP100,000 liability and its cash will no longer be sufficient. Again, without
adequate cash inflows to meet its obligations, the company will face liquidity problems.
• Company C is profitable and has a positive cash flow. Based on the information provided, Company C seems to be the best.
- Good liquidity and reasonable leverage position.
• Liquidity and leverage refers to the company’s management of the type and amount of assets and liabilities that it will hold in the course
of its operations. This will further be discussed in Lesson 2.
- Dividends.
• Holders of shares receive dividends from a corporation as returns on their investments in form of cash or other properties. Companies
which have better dividend policies are generally more attractive than companies who do not pay out dividends.
• Note that there may be times that companies do not pay out dividends because of future expansions. Same with the other factors
affecting share price, dividend policies should go hand in hand with other factors in determining market price.
- Competent management.
• Competent managers may have any of the following attributes: 1) visionary 2) decisive 3) people-oriented, 4) inspiring, 5) innovative, 6)
respected and 7) experienced/seasoned manager.
- Corporate plans that improve the business prospects.
• Example: Company A which is in the business of selling Halo-halo in the Dapitan area (or any other area) for 5 years. Company A is
consistently earning profits and has a positive cash flow. When asked how Company A sees itself after 5 more years, Company A answered
that it would continue to sell Halo-halo in Dapitan (or any other area).
• On the other hand, Company B sells Buko Juice in Katipunan area (or any other area different from Company A’s area) for 5 years.
Company B is consistently earning profits and has a positive cash flow. When asked how Company B sees itself after 5 more years,
Company B answered that it has generated enough cash to expand its business to Cubao area (or any other area) to take advantage of
the growing demand of Buko Juice in Cubao.
• Between Company A and Company B, which would be a better investment? Company B. Since it has more concrete future prospects
allowing investors to hope for better revenues and net income.
• External Factors
- These factors influences the general reaction of investors in making an investment decision.
- Its effect is not only to a specific company but on all companies or a group of companies under
similar circumstances.
- Such factors are a result of the environment a company operates in rather than the decisions of the
company’s management.
3. Role of Financial Management (5 mins)
• Ask the learners, given the factors that influence market price, how will the company ensure that
such objectives will be achieved? Reveal the answer that this is achieved through financial
management.
• 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.
• Tell the learners that for the next parts of this course, they will fill in the shoes of a Chief Financial
Officer (CFO) and every problem that they will encounter for this course should be dealt with having
shareholders wealth maximization in mind.
ENRICHMENT (5 MINS)
1. Integration of Learning
• Ask the learners the following:
- Aside from the factors mentioned during class, what other factors can influence the investor’s
perception on the company’s performance which would ultimately affect share price?
- Why is the study of finance important to you?
2. Homework
• Go to a business in your locality. Ask who is in charge of the finances of the business. Interview the
“Chief Financial Officer (“CFO”) or the Vice-President for Finance” and ask them to report about their
roles and functions within the organization.
Teacher Tips:
Possible answers: Ethics, Corporate Social
Responsibilities, Employee Relationships.
Business'Finance
60 MINS
Introduction to Financial Management
Content Standards
The learners demonstrate an understanding of the definition of finance, the
activities of the financial manager, and the financial institutions and markets.
LESSON OUTLINE
Introduction Identifying the roles in a Corporate
Organization
Performance Standards
The learners will be able to:
• Describe who are responsible for financial management within an
organization.
• Describe the primary activities of the financial manager.
• Describe how the financial manager helps in achieving the goal of the
organization.
Learning Competencies
The learners shall be able to:
• Explain the major role of financial management and the different individuals
involved. (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)
Motivation
Instruction
Identifying the functions of a Financial
Manager
Enrichment Integration of learning
Materials
• Board Notes
Resources
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
City. Rex Bookstore.
(2) Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial
Finance (13th Ed), USA: Prentice-Hall
Specific Learning Outcomes
At the end of this lesson, the learners will be able to:
• Understand the key positions in a corporate organization and identify the roles of each.
• Identify the primary activities of the financial manager.
Message from the CFOs
25
5
25
5
INTRODUCTION (25 MINS)
1. Discussion of Homework (5 mins)
• Begin by asking at least five learners to share in class the result of their interview with a Chief
Financial Officer (CFO) or Vice-President for Finance.
• Write on the board the roles and functions that the students identified from their interview.
• Take note of functions that are not roles of a Financial Manager but are roles of other managerial
positions.
• \Discuss that these functions are done by people in the company who are holding other managerial
positions. A Financial Manager is part of a management team whose ultimate goal is to maximize
shareholders wealth.
2. The Corporate organization Structure (20 mins)
• Illustrate the corporate organization structure and inform them that this particular set of people
each play a role in the decision making of the company.
SHAREHOLDERS
elects
OWNERS
BOARD OF DIRECTORS
appoints
PRESIDENT (CEO)
MANAGERS
VP FOR
MARKETING
VP FOR
FINANCE
VP FOR
PRODUCTION
VP FOR
ADMINISTRATION
Figure 1: Illustration of the Corporate Organization Structure
• From the diagram presented, emphasize that each line is working for the interest of the person on
the line above them. Since the managers of the company are making decisions for the interest of
Teacher Tips:
The various types of functions are expected
if the person they interviewed is a small
business owner who makes decisions on
various aspects of the business.
the board of directors and the board of directors does the same for the interest of the shareholders, it follows that the goal of each
individual in a corporate organization should have an objective of shareholders’ wealth maximization.
• Discuss briefly the roles of each position identified.
• Shareholders: The shareholders elect the Board of Directors (BOD). Each share held is equal to one voting right. Since the BOD is elected
by the shareholders, their responsibility is to carry out the objectives of the shareholders otherwise, they would not have been elected in
that position. Ask the learners again what the objective of the shareholders is just to refresh.
• Board of Directors: The board of directors is the highest policy making body in a corporation. The board’s primary responsibility is to
ensure that the corporation is operating to serve the best interest of the stockholders. The following are among the responsibilities of the
board of directors:
- Setting policies on investments, capital structure and dividend policies.
- Approving company’s strategies, goals and budgets.
- Appointing and removing members of the top management including the president.
- Determining top management’s compensation.
- Approving the information and other disclosures reported in the financial statements (Cayanan, 2015)
• President (Chief Executive Officer): The roles of a president in a corporation may vary from one company to another. Among the
responsibilities of a president are the following:
- Overseeing the operations of a company and ensuring that the strategies as approved by the board are implemented as planned.
- Performing all areas of management: planning, organizing, staffing, directing and controlling.
- Representing the company in professional, social, and civic activities.
• Tell the learners that although the president carries out the decision making for all functions, it would be difficult for him/her to do this
alone. The president cannot manage the company on his own, especially when the corporation has become too big. To assist him are the
vice presidents of different functional areas: finance, marketing, production and administration.
• Determine from the list of roles written on the board the functions that pertain to the respective VPs. Add the following functions if needed:
• VP for Marketing: The following are among the responsibilities of VP for Marketing
- Formulating marketing strategies and plans.
- Directing and coordinating company sales.
- Performing market and competitor analysis.
- Analyzing and evaluating the effectiveness and cost of marketing methods applied.
- Conducting or directing research that will allow the company identify new marketing opportunities, e.g. variants of the existing
products/services already offered in the market.
- Promoting good relationships with customers and distributors. (Cayanan, 2015)
• VP for Production: The following are among the responsibilities of VP for Production:
- Ensuring production meets customer demands.
- Identifying production technology/process that minimizes production cost and make the company cost competitive.
- Coming up with a production plan that maximizes the utilization of the company’s production facilities.
- Identifying adequate and cheap raw material suppliers. (Cayanan, 2015)
• VP for Administration: The following are among the responsibilities of VP for Administration:
- Coordinating the functions of administration, finance, and marketing departments.
- Assisting other departments in hiring employees.
- Providing assistance in payroll preparation, payment of vendors, and collection of receivables.
- Determining the location and the maximum amount of office space needed by the company.Identifying means, processes, or systems
that will minimize the operating costs of the company. (Cayanan, 2015)
• Finally, focus the learners’ attention to the role of the VP for finance as this is where the rest of the topics for this course will revolve.
MOTIVATION (5 MINS)
Message from the CFOs (5 Minutes)
• Share the following quotes from the Chief Financial Officers (CFOs) of the respective corporations:
- Unilever: “Finance plays a critical role across every aspect of our business. We enable the business to turn our ambition and strategy into
sustainable, consistent and superior performance” - Jean-Marc Huët (Unilever)
- Jollibee: “It’s very exciting because you are not just thinking of today but what the company will need in the future” - Ysmael V. Baysa
(Morales, 2013)
- Globe Telecom: “Yesterday’s solutions are never adequate for the future” - Albert De Larrazabal (Klobucher, 2015)
- SM Corporation: “Now, we don’t go out because we need funds. We go out because it’s an opportunity.” – Jose T. Sio (Montealegre, 2015)
• Reflect on the quotes cited and mention how critical and dynamic working in the finance field is.
INSTRUCTION (45 MINS)
1. Functions of a Financial Manager
• Identify the four functions of a VP for finance (CFO) as follows:
- Financing
- Investing
- Operating
- Dividend Policies
• Recall from the previous session that there are situations when we are faced with lack of funds.
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 of 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. To illustrate, show/draw the figure below:
Equity
Liabilities
Assets
100%
75%
50%
25%
0%
Total Assets
Capital Structure
Table 1: Sample Capital Structure
Teacher Tips:
Write the four functions on the board and
identify what is the role of the Financial
Manager in each function.
Teacher Tips:
Financing – to determine the appropriate
capital structure of the company and to
raise funds from debt and equity.
• Recall that Assets = Liabilities + Owner’s Equity.
- To be able to acquire assets, our funds must have come somewhere. If it was bought using cash
from our pockets, it is financed by equity.
- On the other hand, if we used money from our borrowings, the asset bought is financed by
debt.
- In the figure above, the total assets is financed by 60% debt and 40% equity. Accordingly, the
capital structure is 60% debt and 40% equity.
• Ask the learners if they think there is an ideal mix of debt and equity across corporations?
- Answer: No. 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.
• The advantages of debt and equity financing will be discussed in Lesson 5: Sources and Uses of
Funds.
• Recall that, previously, you discussed investing as where to put your excess cash to make it more
profitable. We expand that definition by including cash held taken from funds as a result of
financing decisions.
• Investments may either be short term or long term.
- Short term investment decisions are needed when the company is in an excess cash position.
• To plan for this, the Financial Manager should be able to make use of Financial Planning tools
such as budgeting and forecasting which will be discussed in Lesson 3: Financial Planning
Tools and Concepts.
• Moreover, the company should choose which type of investment it should invest in that would
provide an most optimal risk and return trade off. We will learn more about this on Lesson 6:
Introduction to investments.
- Long term investments should be supported by a capital budgeting analysis which is among
the responsibilities of a finance manager.
• Capital budgeting analysis is a tool to assess whether the investment will be profitable in the
Teacher Tips:
A. Investing
• Short term investments:
1. Plan for expected excess in cash using
Financial Planning tools such as
budgeting and forecasting
2. Choose which type of investment should
it invest in that would secure the best
profits
• Long term investments:
Prepare a capital budgeting analysis to
determine if the long term investment will
be profitable
B. Operating - determine how to finance
working capital accounts such as
accounts receivable and inventories
(short term vs. long term)
long run and will be further discussed in Lesson 5: Basic Long Term Financial Concepts. This is
a crucial function of management especially if this investment would be financed by debt.
• The lenders should have the confidence that the investments that management will push
through with will be profitable or else they would not lend the company any money.
• Operating decisions deal with the daily operations of the company. The role of the VP for finance
is determining how to finance working capital accounts such as accounts receivable and inventories.
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 are those that will be payable in at most 12 months. This includes short-term
loans with banks and suppliers’ credit. For short-term bank loans, the interest rate is generally
lower as compared to that of long-term loans. Hence, this would lead to a lower financing cost.
- Suppliers’ credit are the amounts owed to suppliers for the inventories they delivered or
services they provided. While suppliers’ credit is generally free of interest charges, the
obligations with them have to be paid on time to maintain good supplier relationship. Such
relationships should be nurtured to ensure timely delivery of inventories.
- Short term sources pose a trade-off between profitability and liquidity risk. Because this source
matures in a short period, there is a possibility that the company may not be able to obtain
enough cash to pay their obligation (i.e. liquidity risk).
- Long term sources, on the other hand, mature in longer periods. Since this will be paid much
later, the lenders expect more risk and place a higher interest rate which makes the cost of long
term sources higher than short term sources. However, since long term sources have a longer
time to mature, it gives the company more time to accumulate cash to pay off the obligation in
the future.
- Hence, the choice between short and long term sources depends on the risk and return trade
off that management is willing to take. The learners will learn more about this on Chapter 4:
Sources and uses of funds.
• Dividend Policies. Recall that cash dividends are paid by corporations to existing shareholders
based on their shareholdings in the company as a return on their investment. Some investors buy
stocks because of the dividends they expect to receive from the company. Non-declaration of
dividends may disappoint these investors. Hence, it is the role of a financial manager to determine
when the company should declare cash dividends.
Teacher Tips:
There are two types of liquidity risk:
A. Risk that the company will fail to pay its
short term obligations.
B. Risk that you will not be able to sell
investments in financial assets
immediately.
- 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.
• Ask the learners what they think will affect the decision of management in paying dividends.
Remind them that dividends come from the company’s cash and availability of unrestricted retained
earnings.
- Answer Key:
• Availability of financially viable long-term investment
• Access to long term sources of funds
• Management’s Target Capital structure
• Recall that one of the functions of a finance manager is investing and its available cash may be used
to invest in long term investments that would increase the profitability of the company. Some small
enterprises which are undergoing expansion may have limited access to long term financing (both
long term debt and equity). This results to these small companies reinvesting their earnings into
their business rather than paying them out as dividends.
• On the other hand, a company which has access to long term sources of funds may be able to
declare dividends even if they are faced with investment opportunities. However these investment
opportunities are generally 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.
- Creditors are not willing to finance entirely the cost of a company’s long term investment.
Hence, the need for equity financing (e.g. internally generated funds or issuance of new shares).
- Examples of these companies are publicly listed companies such as PLDT, Globe Telecom, and
Petron. PLDT and Globe are two of the Philippine listed companies which have generously
distributed cash dividends for the last five years (information as of 2014).
• For companies which have limited access to capital and have target capital structure, they may end
up with a residual dividend policy. This means that when companies are faced with investment
opportunities, internally generated funds will be used first to finance these investments and
Teacher Tips:
Dividend Policies - These determine when
the company should declare cash dividends.
dividends can only be declared if there are excess funds.
ENRICHMENT (5 MINS)
Integration of Learning
• Ask the learners the following:
- Explain why shareholder wealth maximization should be the overriding objective of management.
- What other positions can you think of that are related to financial management?
Answer: Treasurer, Controller. These are positions under the CFO)
Business'Finance
90 MINS
Introduction to Financial Management
Content Standards
The learners demonstrate an understanding of the definition of finance, the
activities of the financial manager, and the financial institutions and markets.
Performance Standards
The learners will be able to describe the role of financial institutions and
markets.
Learning Competencies
The learners shall be able to:
• 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)
• Compare and contrast the varied financial instruments. (ABM_BF12-IIIa-4)
• Explain the flow of funds within an organization – through and from the
enterprise—and the role of the financial manager. (ABM_BF12-IIIa-5)
Specific Learning Outcomes
The learners will be able to:
LESSON OUTLINE
Introduction Introduce the concept of a Financial System
30
Instruction
45
Identify the types of Financial Markets,
Financial Institutions, and Financial
Instruments
Enrichment Integration of learning
Evaluation
Materials
Short Quiz on Financial Institutions, Markets,
and Instruments
• Board Notes
Resources
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
City. Rex Bookstore.
(2) Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial
Finance (13th Ed), USA: Prentice-Hall
• Prepare a diagram illustrating how the Financial System works.
• Define Financial Markets, Financial Institutions and Financial Instruments.
• Identify the types of Financial Markets, Financial Institutions and Financial Instruments.
5
10
INTRODUCTION/MOTIVATION (30 MINS)
1. Savings and Shortages (10 mins)
• Recall from the previous discussions that one of the functions of a financial manager is financing and
investing of funds.
• Pick a random learner (A) and present a scenario that during his/her management of money, some
cash will remain. Ask him/her what he/she should do with that cash.
- Expected answer: Save or Invest
• Ask your students if they are going to save their money, where would they keep it.
- Expected answers: Banks, Piggy bank, Investments – stocks, mutual funds, insurance
• Pick another learner (B) and ask B what business he/she would like to try. Now, suppose that he/she
had the business running and is profitable for some time. B then decides to expand his/her business
but does not have enough cash to pay for the expansion. Ask the students where can B get the
additional funding?
- Expected answers: Ask from parents, ask from friends, banks, lending institutions.
• Suppose B knew that A had excess money and approached A to lend him/her the capital he/she
needs to expand his/her business for a 20% interest. Since A observed that B’s business has been
profitable, A is willing to lend B the money since he/she is confident that B can repay his loan. A is
now expecting to be 20% richer from his lending to B and B can now expand his operations to gain
more profit from his business.
• Emphasize that this scenario where the lender and the borrower are present at the right time and at
the right place may not happen all the time. In fact, it seldom happens. What happens if they did
not meet? A will not be able to find someone to invest his money to and B cannot get funds to start
his expansion. Here is where the Financial System comes in.
2. Role playing to introduce the concept of saving and investing (20 mins)
• Draw two boxes and label with names of learners A and B. Below [A], write “Saver”, and below [B],
write “users of funds”.
Terms Defined:
Financial Markets – organized forums in
which the suppliers and users of various
types of funds can make transactions
directly
• Continue discussion as follows:
- 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. (Draw the box for Private Placement between A and B and
link the boxes as shown in Figure 1.)
- 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. (Draw the box for Financial Markets and link this to A and B as
shown in Figure 1.)
- 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. (Draw the box for Financial Institutions and link this to A and B as
shown in Figure 1.)
- Moreover, Financial institutions actively participate in the financial markets as both suppliers and
users of funds. (Draw the link between Financial Institutions and Financial Markets as shown in
Figure 1.)
• Mention that the resulting diagram illustrates the Financial System.
Terms Defined:
Financial Institutions – intermediaries that
channel the savings of individuals,
businesses, and governments into loans or
investments.
Private Placements - the sale of a new
security directly to an investor or group of
investors.
Public Offering - The sale of either bonds or
stocks to the general public.
Financial Instruments – is a real or a virtual
document representing a legal agreement
involving some sort-of monetary value
(Source: Investopedia - Sharper Insight.
Smarter Investing. | Investopedia. (2016).
Investopedia. Retrieved 8 May 2016, from
http://investopedia.com). These can be
debt securities like corporate bonds or
equity like shares of stock.
Financial System
Financial
Institutions
[Learner A]
Savers/Suppliers
of Funds
Private Placement
[Learner B]
Users/Demanders
of Funds
Financial Markets
Flow of funds
Flow of securities/notes/bonds/debt instruments
Figure 1: The Financial System
• Post the question of how transactions between suppliers and users of funds take place. How would they prove that there was a transaction
so that the demander will be able to repay the supplier on time and at the right amount?
- Answers:
- Verbal agreement
- Written agreement
• Discuss that 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.
• 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.
INSTRUCTION (45 MINS)
Tell the learners that you will further discuss the composition of the Financial System and that you will identify the types of Financial Markets,
Financial Institutions and Financial Instruments.
1. Financial Instruments (20 mins)
• When a financial instrument is issued, it gives rise to a financial asset on one hand and a financial liability or equity instrument on the other.
• Recall from ABM 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
• Ask the learners who are the holders of Financial Assets.
- Answer: Suppliers of Funds
• Ask who the makers of Financial Liabilities and Equity instruments are.
- Answer: Users of Funds
• Continue discussing that 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.
• Identify common 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.
• Ask the learners which of the financial instruments presented they find most appealing.
• Inform them that they will learn more about the advantages and disadvantages of debt and equity
instruments in Lesson 4: Sources and Uses of Funds and Lesson 5: Introduction to Investments.
2. Financial Markets (10 mins)
Terms Defined
• Recall the definition of financial markets from earlier discussion.
Primary Market - Financial market in which
securities are initially issued; the only
market in which the issuer is directly
involved in the transaction.
• Classify Financial Markets into comparative groups:
- 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.
- 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).
3. Financial Institutions (15 mins)
• Recall the definition of Financial institutions from the earlier discussion.
• Identify 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
Terms Defined
Public offering - The sale of either bonds or
stocks to the general public.
Private placement - The sale of a new
security directly to an investor or group of
investors.
Secondary market - Financial market in
which preowned securities (those that are
not new issues) are traded.
Money market - A financial relationship
created between suppliers and users of
short-term funds.
Capital market - A market that enables
suppliers and users of long-term funds to
make transactions.
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.
Figure 2: How Financial Institutions Provide Financing for Firms (Gitman & Zutter, 2012)
• The figure above illustrates how the key financial institutions serve as intermediaries for suppliers and users of funds.
• Ask the learners which type of financial institution do they think is most critical for firms?
ENRICHMENT (5 MINS)
Integration of Learning
• Question for reflection: How would you relate the role of financial managers, role of financial markets
and role of investors?
Role of Financial Managers
Role of Financial Markets
Role of Investors
Financial managers make financing
decisions that require funding from
investors in the financial markets.
The financial markets provide a
Investors provide the funds that are
forum in which firms can issue
to be used by financial managers to
securities to obtain the funds that
finance corporate growth.
they need and in which investors can
purchase securities to invest their
funds.
EVALUATION (10 MINS)
Provide a 10 minute quiz covering Lesson 1.
Quiz:
Part 1: True/False
1. To achieve the goal of profit maximization for each alternative being considered, the financial
manager would select the one that is expected to result in the highest monetary return.
2. Dividend payments change directly with changes in earnings per share.
3. The wealth of corporate owners is measured by the share price of the stock.
4. Financial markets are intermediaries that channel the savings of individuals, businesses, and
government into loans or investments.
5. 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.
Teacher Tips
You may use suggested format or take
questions from the test banks found at the
end of this file.
Answer Key:
Part 1: T, F, T, F, T
Part 2: B, D, A, C, B
Part 2: Multiple Choice
1. 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
2. Firms that require funds from external sources can obtain them from _____.
A. financial markets.
B. private placement.
C. financial institutions.
D. All of the above.
3. The major securities traded in the capital markets are ____.
A. stocks and bonds.
B. bonds and commercial paper.
C. commercial paper and Treasury bills.
D. Treasury bills and certificates of deposit.
4. The primary goal of the financial manager is _____.
A. minimizing risk.
B. maximizing profit.
C. maximizing wealth.
D. minimizing return.
5. A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide
earnings over a three-year period as described below.
Asset
Year 1
Year 2
Year 3
1 $ 21,000 $ 15,000 $ 6,000
2 $ 9,000
$ 15,000 $ 21,000
3 $ 3,000
$ 20,000 $ 19,000
4 $ 6,000
$ 12,000 $ 12,000
Based on the profit maximization goal, the financial manager would choose _____.
A. Asset 1.
B. Asset 2.
C. Asset 3.
D. Asset 4.
Appendix
Test Bank - Goal of the Firm (Gitman & Zutter, 2012)
True/False
1. High cash flow is generally associated with a higher share price whereas higher risk tends to result
in a lower share price.
2. When considering each financial decision alternative or possible action in terms of its impact on the
share price of the firm's stock, financial managers should accept only those actions that are
expected to increase the firm's profitability.
3. To achieve the goal of profit maximization for each alternative being considered, the financial
manager would select the one that is expected to result in the highest monetary return.
4. Dividend payments change directly with changes in earnings per share.
5. The wealth of corporate owners is measured by the share price of the stock.
6. Risk and the magnitude and timing of cash flows are the key determinants of share price, which
represents the wealth of the owners in the firm.
7. _When considering each financial decision alternative or possible action in terms of its impact on
the share price of the firm's stock, financial managers should accept only those actions that are
expected to maximize shareholder value.
8. An increase in firm risk tends to result in a higher share price since the stockholder must be
compensated for the greater risk.
9. Stockholders expect to earn higher rates of return on investments of lower risk and lower rates of
return on investments of higher risk.
Answer Key
True/False
1. T
2. F
3. T
4. F
5. T
6. T
7. T
8. F
9. F
Multiple Choice
1. C
2. B
3. C
4. D
5. C
6. A
7. C
8. B
9. B
10. B
11. A
12. D
13. B
14. A
Multiple Choice
1. The primary goal of the financial manager is
A. minimizing risk.
B. maximizing profit.
C. maximizing wealth.
D. minimizing return.
2. Corporate owner's receive realizable return through
A. earnings per share and cash dividends.
B. increase in share price and cash dividends.
C. increase in share price and earnings per share.
D. profit and earnings per share.
3. The wealth of the owners of a corporation is represented by
A. profits.
B. earnings per share.
C. share value.
D. cash flow.
4. Wealth maximization as the goal of the firm implies enhancing the wealth of
A. the Board of Directors.
B. the firm's employees.
C. the federal government.
D. the firm's stockholders.
5. The goal of profit maximization would result in priority for
A. cash flows available to stockholders.
B. risk of the investment.
C. earnings per share.
D. timing of the returns.
6. Profit maximization as a goal is not ideal because it does NOT directly consider
A. risk and cash flow.
B. cash flow and stock price.
C. risk and EPS.
D. EPS and stock price.
7. Profit maximization as the goal of the firm is not ideal because
A. profits are only accounting measures.
B. cash flows are more representative of financial strength.
C. profit maximization does not consider risk.
D. profits today are less desirable than profits earned in future years.
8. Profit maximization fails because it ignores all EXCEPT
A. the timing of returns.
B. earnings per share.
C. cash flows available to stockholders.
D. risk.
9. The key variables in the owner wealth maximization process are
A. earnings per share and risk.
B. cash flows and risk.
C. earnings per share and share price.
D. profits and risk.
10. Cash flow and risk are the key determinants in share price. Increased cash flow results in ________, other things remaining the same.
A. a lower share price
B. a higher share price
C. an unchanged share price
D. an undetermined share price
11. Cash flow and risk are the key determinants in share price. Increased risk, other things remaining the same, results in
A. a lower share price.
B. a higher share price.
C. an unchanged share price.
D. an undetermined share price.
12. Financial managers evaluating decision alternatives or potential actions must consider
A.
B.
C.
D.
only risk.
only return.
both risk and return.
risk, return, and the impact on share price.
13. A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide
earnings over a three-year period as described below.
Asset Year 1
Year 2
Year 3
1 $ 21,000 $ 15,000 $ 6,000
2 $ 9,000
$ 15,000 $ 21,000
3 $ 3,000
$ 20,000 $ 19,000
4 $ 6,000
$ 12,000 $ 12,000
Based on the profit maximization goal, the financial manager would choose
A. Asset 1.
B. Asset 2.
C. Asset 3.
D. Asset 4.
14. A financial manager must choose between three alternative investments. Each asset is expected to provide earnings over a three-year
period as described below. Based on the wealth maximization goal, the financial manager would
Asset Year 1
Year 2
1 $ 21,000 $ 9,000
Year 3
$ 15,000
2 $ 15,000 $ 15,000 $ 15,000
3 $ 9,000
$ 21,000 $ 15,000
$ 45,000 $ 45,000 $ 45,000
A.
B.
C.
D.
choose Asset 1.
choose Asset 2.
choose Asset 3.
be indifferent between Asset 1 and Asset 2.
Test Bank - Financial Markets, Financial Institutions, Financial Instruments (Gitman & Zutter, 2012)
True/False
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.
6. Commercial banks obtain most of their funds from borrowing in the capital markets.
7. Credit unions are the largest type of financial intermediary handling individual savings.
8. A mutual fund is a type of financial intermediary that obtains funds through the sale of shares and
uses the proceeds to acquire bonds and stocks issued by various business and governmental units.
9. IPO stands for Interest and Principal Obligation.
Multiple Choice
1. A ______ is one financial intermediary handling individual savings. It receives premium payments
that are placed in loans or investments to accumulate funds to cover future benefits.
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.
Answer Key
True/False
1. F
2. F
3. T
4. T
5. F
6. F
7. F
8. T
9. F
Multiple Choice
1. A
2. A
3. B
4. B
5. A
6. C
7. A
8. D
9. D
10. B
11. D
12. A
13. A
A.
B.
C.
D.
suppliers; users
purchasers; sellers
users; suppliers
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
11. Firms that require funds from external sources can obtain them from
A. financial markets.
B. private placement.
C. financial institutions.
D. All of the above.
12. The major securities traded in the capital markets are
A. stocks and bonds.
B. bonds and commercial paper.
C. commercial paper and Treasury bills.
D. Treasury bills and certificates of deposit.
13. Long-term debt instruments used by both government and business are known as
A. bonds.
B. equities.
C. stocks.
D. bills.
Business'Finance
180 MINS
Review of Financial Statement
Preparation, Analysis,
LESSON OUTLINE
and Interpretation
Introduction Brief introduction on learning objectives
10
Content Standards
The learners demonstrate an understanding of the process of preparing
financial statements as well as the methods or tools of analysis of financial
statements, including horizontal analysis, vertical analysis, and financial ratios
to test the level of liquidity, solvency, profitability, and stability of the business.
Motivation
20
Performance Standards
The learners will be able to solve exercises and problems that require financial
statement preparation, analysis, and interpretation using horizontal and vertical
analyses, and various financial ratios.
Learning Competencies
The learners shall be able to prepare financial statements (ABM_BF12-III-6)
Specific Learning Outcomes
At the end of this lesson, the learners will be able to:
Matching type exercise as an ice breaker
Instruction/ Discussion
Delivery
90
Practice
Board work/exercises and presentation
30
Evaluation
Quiz
30
Materials
• Calculators
• Laptops
Resources
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
City. Rex Bookstore.
(2) Valencia and Roxas. Basic Accounting.
(3) Copies of sample financial statements
• Identify and explain the basic steps in the accounting process (accounting cycle).
INTRODUCTION/REVIEW (10 MINS)
Communicate learning objectives
• Introduce the following learning objectives using any of the suggested protocols (verbatim, own
words, read-aloud):
- I will be able to identify and explain the basic steps in the accounting process (accounting cycle).
MOTIVATION (20 MINS)
Match the letter with the definition that corresponds to the following terms:
(Modified from Basic Accounting, Valencia & Roxas)
1. Accounting
System
2. Debit
3. Credit
4. Transactions
5. Double-Entry
Accounting
6. Journal Entry
7. Journals
8. Accounting
Process (or cycle)
9. Special Journals
10. General Journal
11. Account
12. Ledger
13. Posting
14. General Ledger
15. Subsidiary
Ledgers
A. Exchanges of goods or services between/among two or more entities
or some other event having an economic impact on a business
enterprise.
B. An accounting record used to list a particular type of frequently
recurring transaction.
C. A record used to classify and summarize the effects of transactions.
D. An entry on the right side of an account.
E. A record used as the basis for analyzing and recording transactions.
Examples include invoices, check stubs, and receipts.
F. A collection of accounts maintained by a business.
G. Procedures used for analyzing, recording, classifying, and
summarizing the information to be presented in accounting reports.
H. An entry on the left side of an account.
I. Procedures and methods used, including data processing equipment,
to collect and report accounting data.
J. An accounting record used to record all business activities for which a
special journal is not maintained.
K. The process of summarizing transactions by transferring amounts
from the journals to the ledger accounts.
L. The grouping of supporting accounts that in total equal the balance
of a control account in the general ledger.
M. The general ledger account that summarizes the detailed information
in a subsidiary ledger.
Teacher Tips
Answer Key
1. i
2. h
3. d
4. a
5. o
6. q
7. p
8. g
9. b
10. j
11. c
12. f
13. k
14. n
15. l
N. A collection of all the accounts used by a business that could appear
on the financial statements.
O. A system of recording transactions in a way that maintains the
equality of the accounting equation.
P. Records in which transactions are first entered, providing a
chronological record of business activity.
Q. The recording of a transaction in which debits equal credits. It usually
includes a date and an explanation of the transaction.
INSTRUCTION/DELIVERY (90 MINS)
Discuss the following:
Accounting is the systematic and comprehensive recording of financial transactions pertaining to a business. (Investopedia - Sharper Insight.
Smarter Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com)
1. The Accounting Equation
The basic accounting equation is:
ASSETS = LIABILITIES + OWNER’S EQUITY
• This means that the whole assets of the company comes from the liability, or debt of the company, and from the capital of the owner of the
business, and the income it generated from the business operations. This reflects the double-entry bookkeeping, and shown in the balance
sheet.
• Double entry bookkeeping tells us that if we add something from the one side, which is asset, we must add the same amount to the other
side to keep them in balance.
• For example, if we were to increase cash (an asset) we might have to increase note payable (a liability account) so that the basic accounting
equation remains in balance.
ASSETS
P 500.00
=
LIABILITIES
P 500.00
+ OWNER’S EQUITY
• In double-entry bookkeeping, there is the concept of debit (dr) and credit (cr). Debit is the left, and credit is the right.
• There is also a concept of normal balances. A normal balance, either a debit normal balance or a credit normal balance, is the side where a
specific account increases.
• In the accounting equation, asset is on the left side, while liabilities and equity is on the right side. Therefore, asset has a debit normal
balance, meaning that cash as an asset is debited to increase, while credited to decrease.
• On the other hand, liabilities and owners’ equity have a credit normal balance. This means that a liability account is credited to increase, while
debited to decrease. The accounting equation provides the foundation for what eventually becomes the balance sheet.
2. T-Account Analysis
In double-entry bookkeeping, the terms debit and credit are used to identify which side of the ledger account an entry is to be made. Debits
are on the left side of the ledger and Credits are on the right side of the ledger. It does not matter what type of account is involved.
CASH
DEBIT (DR)
Php 500.00
ACCOUNTS PAYABLE
CREDIT (CR)
DEBIT (DR)
CREDIT (CR)
Php 500.00
• The debit to cash increases the Cash Account by PHP500 while the credit to Accounts Payable increases this liability account by the same
PHP500.
• In the above example, we analyzed the accounting equation in terms of assets, liabilities, and owners’ equity. These are called Real or
Permanent Accounts. These accounts remain open and active for the life of the enterprise.
• In contrast, there are accounts that reflect activities for a specific accounting period. These are called Nominal or Temporary Accounts. After
the end of the specific period and the start of a new period, the balance of the nominal accounts are zero.
• Using the accounting equation, we can now expand the analysis that will include both real and nominal accounts. All nominal accounts will be
then closed to a Retained Earnings account at the end of the period, which is an owner’s equity account.
Illustrative Example:
Calvo Delivery Service is owned and operated by Noel Calvo. The following selected transactions were completed by Calvo Delivery Service
during February:
A. Received cash from owner as additional investment, P35,000.
B. Paid creditors on account, P1,800.
C. Billed customers for delivery services on account, P11,250.
D. Received cash from customers on account, P6,740.
ASSETS
CASH
A
PHP35,000
B
PHP1,800
C
D
ACCOUNTS
RECEIVABLE
ACCOUNTS
PAYABLE
OWNER’S EQUITY
CALVO,
CAPITAL
SERVICE
REVENUE
PHP35,000
PHP1,800
PHP11,250
PHP6,740
= LIABILITIES +
PHP11,250
PHP6,740
3. Nominal Accounts
There are two major categories of nominal accounts: Expense and Revenue accounts.
• Expense Accounts
- A resource, when not yet used up for the current period, is considered an Asset and will provide benefits at a future time.
- On the other hand, a resource that has been used for the current period is called an Expense. At the end of each accounting period,
expenses are closed out to the Retained Earnings Account which decreases the Owners’ Equity. Since expenses decrease the owners’ equity,
those expense accounts carry a normal debit balance.
• Revenue Accounts
- Revenue Accounts reflect the accumulation of potential additions to retained earnings during the current accounting period.
- At the end of the accounting period accumulation of revenues during the period are closed to the Retained Earnings Account which
increases Owners’ Equity.
- Therefore revenue accounts carry a normal credit balance meaning the same balance as the Retained Earnings Account.
Illustrative Example:
J. F. Outz, M.D., has been a practicing cardiologist for three years. During April 2009, Outz completed the following transactions in her practice
of cardiology:
Mar 1
Provide medical services to clients for cash P35,000.
Mar 2
Paid rent for the month, P3,000.
Paid advertising expense, P1,800.
Mar 6
Purchased office equipment on account, P12,300.
Mar 15
Paid creditor on account, P1,200.
Mar 27
Paid cash for repairs to office equipment, P500.
Mar 30
Paid telephone bill for the month, P180.
Mar 31
Paid electricity bill for the month, P315.
ASSETS
MAR
CASH
ACCOUNTS
RECEIVABLE
=
OFFICE
EQUIPMENT
LIABILITIES
ACCOUNTS
PAYABLE
+
OWNER’S EQUITY
SERVICE
REVENUE
EXPENSES
1
PHP35,000
2
PHP3,000
PHP3,000
2
PHP1,800
PHP1,800
6
PHP35,000
PHP12,300
PHP12,300
15
PHP1,200
PHP1,200
27
PHP500
PHP500
30
PHP180
PHP180
31
PHP315
PHP315
If journalized:
March
1 Debit Cash for PHP35,000; Credit Service Revenue for PHP35,000
2 Debit Rent Expense for PHP3,000; credit Cash for PHP3,000
2 Debit Advertising Expense for PHP1,800; Credit Cash for PHP1,800
6 Debit Office Equipment for PHP12,300; Credit Accounts Payable for PHP12,300
15 Debit Accounts Payable for PHP1,200; Credit Cash for PHP1,200
27 Debit Repairs Expense for PHP500; credit Cash for PHP500
30 Debit Utilities Expense (or telephone) for PHP180; Credit Cash for PHP180
31 Debit Utilities Expense (or energy) for PHP315; credit Cash for PHP315
4. The Accounting Cycle
• Because accounting is all about getting data and putting them into the accounting equation, the end products are financial statements such
as a balance sheet and income statements, the process of accounting follows a cycle called the Accounting Cycle.
• It starts with the identification of whether a transaction is accountable or can be quantified, and ends with a post-closing trial balance.
The Process:
Step 1: Analyze Business Transactions.
• In this step, a transaction is analyzed to find out if it affects the company and if it needs to be recorded.
• Personal transactions of the owners and managers that do not affect the company should not be recorded.
• In this step, a decision may have to be made to identify if a transaction needs to be recorded in special journals such as a sales or purchases
journal.
Therefore, what you should do is:
A. Carefully read the description of the transaction to determine whether an asset, a liability, an owner’s equity, a revenue, an expense, or a
drawing account is affected.
B. For each account affected by the transaction, determine whether the account increases or decreases.
C. Determine whether each increase or decrease should be recorded as a debit or a credit, following the rules of debit and credit.
Illustrative Example:
• N. Juna resigned from Company X. This does not affect any asset, liability, or the owner’s equity account.
• B. Cano purchased PHP500 cash worth of supplies at Ace Hardware. This affects cash and supplies, both asset accounts.
Step 2: Record This in the Journal.
• Using the rules of debit and credit, transactions are initially entered in a record called a Journal and the entry made is called a Journal Entry.
• The journal serves as a record of when transactions occurred and were recorded.
• For repetitive transactions or high volume transactions (e.g. one thousand sales transactions in one day), Special Journals are made. These
special journals include sales journal, purchases journal, cash receipts journal, and cash disbursements journal.
The Source Document is the file or document (i.e. official receipt, purchase order, contract) that will provide a basis or reason for a journal entry.
For example, an official receipt issued by the business will tell you that a sale transaction occurred and will be reflected by the journal entry.
Illustrative Example:
• M. Jaya resigned from Company X. No journal entry.
• C. Danto purchased PHP500 cash worth of supplies to Ace Hardware. Debit Supplies PHP500, Credit Cash PHP500.
Step 3: Post the Transactions on a Ledger.
• A transaction is first recorded in a journal. Periodically, the journal entries are transferred to the accounts in the ledger.
• The process of transferring the debits and credits from the journal entries to the accounts is called Posting.
• Ledgers provide chronological details as to how transactions affect individual accounts. There are two types of ledgers: the General Ledger
and Subsidiary Ledger. The general ledger is a summary of the different Subsidiary Ledgers and can serve as a control account.
• For example, a general ledger for accounts receivable summarizes the balances found in the different subsidiary ledgers for different
customers.
Illustrative Example:
J. Gaya, a CPA, is an independent auditor with only two clients. The Accounts Receivable ledger account has a balance of PHP100,000. His two
clients are A. Rania, and X. Campos. The subsidiary ledger of A. Rania has a balance of PHP25,000. X. Campos’s ledger balance is PHP75,000.
The sum of subsidiary ledgers must total the general ledger or else there must be an investigation to identify the source of discrepancies.
ACCOUNTS RECEIVABLE
DATE
December 31, 2015
Bal. Php 100,000
Subsidiary Ledgers
A. RANIA
DATE
December 31, 2015
X. CAMPOS
DATE
Bal. Php 25,000
December 31, 2015
Bal. Php 75,000
Posting in the subsidiary ledgers can be done anytime and the balances are summarized at the end of an accounting period. Posting in the
general ledger is done at the end of an accounting period.
Step 4: Prepare an Unadjusted Trial Balance.
• Errors may occur in posting debits and credits from the journal to the ledger. One way to detect such errors is by preparing a trial balance.
• Double-entry accounting requires that debits must always equal credits. The trial balance verifies this equality.
• The steps in preparing a trial balance are as follows:
1. List the name of the company, the title of the trial balance, and the date the trial balance is prepared.
2. List the accounts from the ledger and enter their debit or credit balance in the Debit or Credit column of the trial balance.
3. Total the Debit and Credit columns of the trial balance.
4. Verify that the total of the Debit column equals the total of the Credit column.
Step 5: Make adjustments. Journalize adjusting entries.
• At the end of the accounting period, many of the account balances in the ledger can be reported in the financial statements without change.
• For example, the balances of the cash and land accounts are normally the amount reported on the balance sheet. However, some accounts in
the ledger require updating.
• This updating is required for the following reasons:
1. Some expenses are not recorded daily. For example, the daily use of supplies would require many entries with small amounts. Also,
managers usually do not need to know the amount of supplies on hand on a day-to-day basis.
2. Some revenues and expenses are earned as time passes rather than as separate transactions. For example, rent received in advance
(unearned rent) expires and becomes revenue with the passage of time. Likewise, prepaid insurance expires and becomes an expense
with the passage of time.
3. Some revenues and expenses may be unrecorded. For example, a company may have provided services to customers that are has not
billed or recorded at the end of the accounting period. Likewise, a company may not pay its employees until the next accounting period
even though the employees have earned their wages in the current period.
• The analysis and updating of accounts at the end of the period before the financial statements are prepared is called the Adjusting Process.
The journal entries that bring the accounts up to date at the end of the accounting period are called Adjusting Entries.
• The following are normally adjusted at the end of a period:
- Accruals. These include unpaid salaries for the accounting period, unpaid interest expense, or unpaid utility expenses.
- Prepayments. If a company has prepaid expenses such as prepaid rent or prepaid insurance then the correct balances for these accounts
have to be established at the end of each accounting period to reflect their correct balances.
- Depreciation and amortization expenses. Depreciation expenses are recognized at the end of each accounting period through
adjusting entries. If there are intangible assets such as franchise, the allocation of their costs which is called amortization expense, is also
recognized at the end of each accounting period through adjusting entries.
- Allowance for uncollectible accounts. Bad debt expense from accounts receivable is also recognized through adjusting entries.
Step 6: Prepare an Adjusted Trial Balance.
An adjusted trial balance is prepared after taking into consideration the effects of the adjusting entries. Again, this is to ensure that the total
debit balances equal the credit balances after posting and journalizing adjusting entries made.
Step 7: Prepare the financial statements.
From the adjusted trial balance, the financial statements can then be prepared. These are the statement of financial position, statement of profit
or loss, and the statement of cash flows.
Step 8: Make the closing entries.
In the discussion about accounts, it was discussed that nominal accounts (revenue and expense accounts) are closed to retained earnings, or an
owner’s capital account because these accounts refer only to a specific accounting period. Actually, these accounts to be closed are accounts
that can be seen in the income statement.
Upon closing:
- If the revenues exceed expenses during an accounting period, retained earnings will increase.
- The reverse is true which means that if the expenses exceed revenues, the retained earnings will decrease.
In closing temporary accounts:
- Revenue account balances are transferred to an account called Income Summary Account (sometimes profit or loss summary).
- Expense account balances are also transferred to the Income Summary Account.
- The balance of the Income Summary (net income or net loss) is transferred to the owner’s capital account.
- The balance of the owner’s drawing account is transferred to the owner’s capital account.
Step 9: Make a Post-Closing Trial Balance.
A Post-Closing Trial Balance shows the accounts that are permanent or real. These are the accounts that can be seen in your balance sheet.
The post-closing trial balance is prepared to test if the debit balances equal the credit balances after closing entries are considered.
5. Basic Financial Statements.
A financial statement is basically a summary of all transactions that are carefully recorded and transformed into meaningful information. It also
shows the company’s permanent and temporary accounts. Basically, financial statements are comprised of the following:
a. Income Statement
• These are also known as the Profit/Loss Statement, Statement of Comprehensive Income, or Statement of Income.
• This is a summary of the revenue and expenses of a business entity for a specific period of time, such as a month or a year.
Figure 1: Sample Income Statement
Source: Warren, Duchac, Fess. Accounting.
Statement of Owner’s Equity
These are also known as the Statement of Changes in Equity.
This reports the changes in the owner’s equity over a period of time.
It is prepared after the income statement because the net income or net loss for the period must be reported in this statement.
Similarly, it is prepared before the balance sheet since the amount of owner’s equity at the end of the period must be reported on the
balance sheet.
• Because of this, the statement of owner’s equity is often viewed as the connecting link between the income statement and balance sheet.
b.
•
•
•
•
Figure 2: Sample Statement of Owner’s Equity
Source: Warren, Duchac, Fess. Accounting
c. Balance Sheet
• Formerly known as the Statement of Financial Position.
• This provides information regarding the liquidity position and capital structure of a company as of a given date.
• It must be noted that the information found in this report are only true as of a given date.
• It shows a list of the assets, liabilities, and owner’s equity of a business entity as of a specific date, usually at the close of the last day of a
month or a year.
Figure 3: Sample Balance Sheet
Source: Warren, Duchac, Fess. Accounting
d.
•
•
•
Statement of Cash Flows
The statement of cash flows reports a company’s cash inflows and outflows for a period.
This is used by managers in evaluating past operations and in planning future investing and financing activities.
It is also used by external users such as investors and creditors to assess a company’s profit potential and ability to pay its debt and pay
dividends.
Figure 4: Sample Statement of Cash Flows
PRACTICE (30 MINS)
1. Using the following (scrambled) accounts, prepare a balance sheet for ABC, a retail company, for the year ending in December 31, 2014.
Assume that these are the only Balance Sheet Accounts.
Accounts Payable
39,000
Accrued Expenses
8,000
Accumulated Depreciation
51,000
Additional Paid-In Capital
86,000
Allowance for Doubtful Accounts
2,000
Cash
23,000
Common Stock (PHP0.20 par)
45,000
Current Portion of L.T. Debt
6,000
Gross Accounts Receivable
40,000
Gross Fixed Assets
Inventories
Long-Term Debt
Net Accounts Receivable
486,000
54,000
210,000
38,000
Net Fixed Assets
435,000
Retained Earnings
138,000
Short-Term Bank Loan (Notes
Payable)
Answer Key
18,000
Balance Sheet
ABC, Incorporated
December 31, 2014
Cash
23,000
Gross accounts receivable
40,000
Allowance for doubtful accounts
(2,000)
Net accounts receivable
38,000
Inventories
54,000
Current assets
115,000
Gross fixed assets
486,000
Accumulated depreciation
(51,000)
Net fixed assets
435,000
Total assets
550,000
Short-term bank loan (notes payable)
18,000
Accounts payable
39,000
Accrued expenses
8,000
Current portion of L.T. Debt
6,000
Current liabilities
71,000
Long term debt
210,000
Total liabilities
281,000
Common stock (P0.20 par)
45,000
Additional paid-in capital
86,000
Retained earnings
138,000
Total liabilities and equity
550,000
2. Prepare a multi-step income statement for the retail company, ABC, for the year ending December 31, 2014 given the information below:
Advertising expenditures
68,000
Beginning inventory
256,000
Depreciation
78,000
Ending inventory
248,000
Gross Sales
3,210,000
Interest expense
64,000
Lease payments
52,000
Management salaries
240,000
Materials purchases
2,425,000
R&D expenditures
35,000
Repairs and maintenance costs
22,000
Returns and allowances
48,000
Taxes
51,000
Answer Key:
Income Statement
The ABC Company
For the 12 month period Ending December 31, 2014
Net sales
3,162,000
Cost of goods sold
2,433,000
Gross profit
729,000
Operating expenses (excluding depreciation)
417,000
Depreciation
78,000
Operating profit
234,000
Interest expense
64,000
Earnings before taxes
170,000
Taxes
51,000
Net income
119,000
EVALUATION (30 MINS)
1. Indicate whether the following items would appear on the income statement (IS), or balance sheet
(BS).
A. ________ Office Supplies
B. ________ Accounts Payable
C. ________ Computer Equipment
D. ________ Commission Fees Earned
E. ________ Salaries Expense
F. ________ B. So, Capital
G. ________ Accounts Receivable
Teacher Tip:
Answer Key
1. a. BS
b. BS
c. BS
d. IS
e. IS
f. BS
g. BS
2. Using the following accounts from the retail store, A-Mart Incorporated’s income statement for the
year ending in December 31, 2013, answer the questions below. Note that all figures are in millions.
Cost of goods sold
PHP600
Lease payments
30
Advertising
20
Taxes
35
Repairs and maintenance expenses
40
Management salaries
Net sales
Depreciation
100
1,000
60
A. A-Mart’s gross profit is PHP___________________.
B. A-Mart’s operating profit is PHP___________________.
C. A-Mart’s net profit is PHP___________________.
3. Using the following accounts from the A-Mart, Incorporated’s balance sheet for the year ending
December 31, 2013, answer the questions below. Use cash as a plug figure. Note that all figures are
in millions.
Teacher Tip:
Answer Key
2. a. PHP 400
b. 150
c. 115
Current portion of L.T. Debt
Leasehold improvements
Accrued expenses
PHP 60
300
40
Accumulated depreciation
200
Gross fixed assets
900
Accounts payable
90
Inventories
190
Common stock (PHP1.00 par)
400
Short-term bank loan
20
Net accounts receivable
100
Long-term bank loan
600
Retained earnings
200
Cash
???
A.
B.
C.
D.
E.
A-Mart’s current assets are PHP___________________.
A-Mart’s current liabilities are PHP___________________.
A-Mart’s total assets are PHP___________________.
A-Mart’s total liabilities are PHP____________________.
A-Mart’s total stockholder’s equity is PHP___________________.
Teacher Tip:
Answer Key
3. a. PHP 410
b. 210
c. 1,410
d. 810
e. 600
Business'Finance
180 MINS
Financial Planning Tools and Concepts
Content Standards
The learner demonstrates and understanding of the financial planning process
including budget preparation, cash management, and working capital
management.
Performance Standards
The learner will be able to describe concepts and tools in working capital
management.
Learning Competencies
The learner shall be able to describe the concepts and tools in working capital
management. (ABM_BF12-IIIc-d-12)
Specific Learning Outcomes
At the end of this lesson, the learners will be able to:
LESSON OUTLINE
Introduction Communicate the learning objectives
/Review
10
Motivation
20
Instruction/ Discussion Proper
Delivery
90
Practice
20
• Compute and analyze the effects of an operating cycle and cash conversion
cycle on the working capital requirements of the company,
Seatwork.
Enrichment Group work
Materials
• Understand working capital management, net working capital, and the
related trade-off between profitability and risk.
• Appreciate working capital financing policies and their effects on the
profitability and risk of the company.
Present Actual Company Financial
Statements
• Calculator
• Computer
• Internet Connection
• LCD Projector
• Manila Paper
• Pens
Resources
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
City. Rex Bookstore.
30
INTRODUCTION (10 MINS)
Communicate the learning objectives by asking a learner to read the following aloud in class:
Teacher Tips
1. I will be able to understand working capital management, net working capital, and the related
trade-off between profitability and risk.
If the learners still do not know what they
want five years from now, write “not sure”.
2. I will be able to describe the cash conversion cycle, its funding requirements, and the key strategies
for managing it.
MOTIVATION (20 MINS)
1. Give an example of a local Philippine company and its working capital practices.
Sample:
Jollibee Foods Corporation
Statements of Financial Position
As of December 31, 2014
(In Millions of PHP)
Current assets
Cash and cash equivalents
7,618
Accounts receivable, net
7,621
Inventories
5,972
Other current assets
2,810
Total current assets
24,021
Noncurrent assets
30,097
Total assets
54,119
Teacher Tips
You can choose a local company that the
learners’ are familiar with. The purpose of
this exercise is to expose the learners to a
real world example. The learners should be
guided on the importance of working
capital on the daily operations of a business
enterprise.
Current liabilities
Trade payables
6,576
Other current liabilities
12,515
Total current liabilities
19,091
Noncurrent liabilities
6,950
Total liabilities
26,041
Total equity
28,078
Total liabilities and equity
54,119
2. Ask the students: What are the assets needed by Jollibee for its daily operation?
3. Cross reference the students’ answers with the Statement of Financial Position of Jollibee.
INSTRUCTION/DELIVERY (30 MINS)
Teacher Tips
Discuss the following financial planning tools and concepts:
Relate the classification of the working
capital assets to operations.
1. Introduce the different Working Capital Assets and their important in the operations of the
company.
You can discuss and differentiate the
classification of the same assets as classified
in the statement of financial position.
• 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.
2) Illustrate the flow of the operating cycle.
You may relate your discussion with the
financial ratios topic.
• The operating cycle is the sum of days of inventory and days of receivables.
3) Explain how to compute the Days of Inventory and Days of Receivables.
• Days of Inventory or inventory conversion period or average age of inventories, is the average number of days to sell its inventory.
- A DSI of 20 days means that on the average it takes 20 days to sell its inventory. The formula is:
- 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 =
*Inventory Turnover =
365 (or 360) days
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
• Days of Sales Outstanding (DSO) is the average time for the company to collect its receivables.
- For 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.
- The formula is:
Days of Inventory =
*Receivable Turnover =
365 (or 360) days
Receivable Turnover*
Net Credit Sales
Beginning Accounts Receivable + Ending Accounts Receivable
2
- Revenue 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 revenue we generally use the credit sales so we may have to exclude
cash sales from the total sales figure.
4) Discuss how to compute Cash Conversion Cycle (CCC).
• Cash Conversion Cycle, also called the net operating cycle, is computed as the operating cycle less days of payable.
- In formula form:
Cash Conversion Cycle = Operating Cycle - Days of Payables
Cash Conversion Cycle = (Days of Inventory + Days of Receivables) - Days of Payables
- 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).
• Days of Payables Outstanding (DPO) is 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.
- The formula for DPO is:
365 (or 360) days
Days of Inventory =
Payables Turnover*
*Payables Turnover =
Net Credit Purchases
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.
- 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 purchases so the learner may have to
exclude cash purchases from the total sales figure.
FORMULA
NUMERATOR
DENOMINATOR
Inventory Turnover
Cost of Goods Sold
Average Inventory
Receivables Turnover
Net Credit Sales
Average Receivables
Payables Turnover
Net Credit Purchases
Average Payables
- 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 Balance Sheet
Accounts.
- Graphical Representation
Teacher Tips
Ending Balance Sheet Accounts such as
Ending Accounts Receivable can also be
used in the computation of Turnover ratios
however, consistency must be applied.
Figure 1: Corelation of the Operating Cycle and Number of Days
Also, there must be a timeline for the activities, especially since they were allotted a specific time to do
the activity.
• Using the above figures, the CCC will be:
CCC = 20 + 40 – 30 = 30
30 days is the time between the cash outlay and the cash received.
If the CCC is negative, it indicates that the company has excess cash to invest. A CC of -10
indicates that the company has excess cash to invest for 10 days.
5) Discuss the different working capital policies:
• 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. Basically, there are
three types of working capital financing policies the management can choose from:
- Maturity-matching working capital financing policy
- Aggressive working capital financing policy
Teacher Tips
It should be noted that as the operating
cycle and cash conversion cycle increase,
more funds are tied up in the working
capital accounts.
- Conservative working capital financing policy
• Managing working capital is important because failure to do so may result in the closure of business.
- It must be noted that working capital requirements increase as the size or volume of the business increases.
- For example, a company needs PHP10 million in working capital to support an annual sales of PHP50 million. If the sales increase to
PHP100 million, will the PHP10 million working capital be enough? Most likely, the answer is no.
• Why? Because with PHP100 million sales, there will be more cash needed for the operations, more accounts receivable, and if the
company is a trading or a manufacturing company, more inventories.
6) Define Permanent and Temporary Working Capital.
• 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.
• 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)
• During the year, sales are not the same every month. This is why companies have slack season and peak season. If a company has annual
sales of PHP50 million, chances are these sales are 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.
• Illustrative Sample: Bugay is managing the working capital of SR Ice Cream. SR Ice Cream is engaged in the selling of different ice creams.
The following are the sales volume, and the working capital needed based on the recent years:
QUARTER
SALES
WORKING CAPITAL
1st (January to March)
PHP200,000
PHP120,000
2nd (April to June)
PHP900,000
PHP300,000
3rd (July to September)
PHP750,000
PHP250,000
4th (October to December)
PHP350,000
PHP150,000
- We can see that the working capital never goes below PHP120,000. That is the permanent working capital requirement.
- The maximum temporary working capital is PHP180,000 (difference between the PHP300,000 working capital and the permanent working
capital of PHP120,000) at the peak season with PHP900,000 sales level. For the 4th Quarter, the temporary working capital is PHP30,000
(difference between the PHP150,000 working capital and the permanent working capital of PHP120,000).
7) Explain the Working Capital Financing Policies.
• Financing policies can either be aggressive, conservative or maturity-matching:
- Maturity-matching working capital financing policy
• Based on the maturity-matching working capital financing policy, permanent working capital requirements should be financed by longterm sources while temporary working capital requirements should be financed by short-term sources of financing.
• Long-term sources of financing include long-term debt and equity such as common stock and preferred stock. Short-term sources include
short-term loans from a bank.
• These short-term loans from banks are called working capital loans which perfectly describe the reasons why these loans are incurred.
Source: Cayanan and Borja. Business Finance.
2016.
• In maturity-matching, all permanent working capital must be financed by long-term sources while temporary working capital requirements
should be financed by short-term sources.
- 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.
• Why do managers of some companies adopt this policy? It is because long-term sources of funds have higher cost as compared to shortterm 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.
Source: Cayanan and Borja. Business Finance. 2016.
- 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.
Source: Cayanan and Borja. Business Finance. 2016.
• Illustrative Sample: B. Bugay is managing the working capital of SR Ice Cream. SR Ice Cream is engaged in the selling of different ice
creams. The following are the sales volume, and the working capital needed based on the recent years:
QUARTER
SALES
WORKING CAPITAL
1st (January to March)
PHP200,000
PHP120,000
2nd (April to June)
PHP900,000
PHP300,000
3rd (July to September)
PHP750,000
PHP250,000
4th (October to December)
PHP350,000
PHP150,000
The following banks offered the following loans:
BANK
TERM (OR DURATION)
AMOUNT
BPI
3 years
PHP40,000 - PHP90,000
BDO
5 months
PHP25,000 - PHP60,000
AUB
4 years
PHP90,000 - PHP150,000
PNB
9 months
PHP65,000 - PHP105,000
What banks will be probably chosen by B. Bugay when choosing different policies?
Answer Key:
Permanent working capital = P120,000
Temporary working capital = P300,000 – P 120,000 = P180,000
POLICY
TEMPORARY
PERMANENT
Maturity-Matching
BDO, PNB
AUB, BPI
Aggressive
BDO, PNB
All banks are considered
Conservative
All banks are considered
AUB, BPI
8) Explain the strategies for managing the cash conversion cycle.
• 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.
PRACTICE (20 MINS)
Philippine Products Company is concerned about managing cash efficiently. On the average, inventories have an age of 90 days and accounts
receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about PHP30
million. 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.
1. Calculate the firm’s operating cycle.
2. Calculate the firm’s cash conversion cycle.
3. Discuss how management might be able to reduce the cash conversion cycle.
Answer Key:
1. 90+60=150 days
2. 90+60-30=120 days
3. Reduce days to sell inventory, reduce days to collect accounts receivable and lengthen payable payment period without negatively affecting
relationship with suppliers.
ENRICHMENT (30 MINS)
As a group work, ask the learners to download the financial statements of Jollibee Foods Corporation.
Reflection questions:
1. What is the impact of the working capital management to the profitability and risks based on the
group’s analysis of Jollibee Foods Corporation financial statements?
2. What types of working capital policies is JFC using based from your analysis of it’s financial
statements?
3. What impact can you observe this strategy has to JFC's profits?
4. Is there any effect on the riskiness such as liquidity or solvency?
Notes:
• Remind the groups to have a “Group Facilitator” who will direct the discussion.
• Remind the groups to have a “Scribe/Reporter” who will write the key concepts shared by each
member and report the group’s findings to the class.
• Allow them to discuss for ten (10) minutes.
• Ask each group to share their findings to the class for 2 minutes per group.
Teacher Tips
Make sure that all members of the group
participate in the discussion and no one
dominates the discussion.
Business'Finance
180 MINS
Financial Planning Tools and Concepts
Content Standards
The learner demonstrates and understanding of the financial planning process
including budget preparation, cash management, and working capital
management.
Performance Standards
The learner will be able to describe concepts and tools in working capital
management.
Learning Competencies
The learners shall be able to explain the tools in managing cash, receivables,
and inventory. (ABM_BF12-IIIc-d-12)
Specific Learning Outcomes
At the end of this lesson, the learners will be able to explain how to manage
cash, accounts receivables, and inventories.
LESSON OUTLINE
Introduction Communicate the learning objectives
/Review
10
Motivation
20
Real life situational analysis
Instruction/ Discussion
Delivery
90
Enrichment Group work
30
Evaluation
30
Materials
Quiz
• Calculator
• Computer
• Internet Connection
• LCD Projector
• Manila Paper
• Pens
Resources
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
City. Rex Bookstore.
INTRODUCTION (10 MINS)
Communicate the learning objectives by asking a learner to read the following aloud in class:
Teacher Tips
1. List the reasons for holding cash.
If the learners still do not know what they
want five years from now, write “not sure”.
2. Construct a cash budget and explain its purpose.
3. Briefly explain useful tools and procedures for effectively managing cash inflows and outflows.
4. State the goal of inventory management and identify the three categories of inventory costs.
5. Identify and briefly explain the use of several inventory control systems.
6. List and explain the four elements of a firm’s credit policy and identify other factors influencing
credit policy.
MOTIVATION (20 MINS)
You are to organize your birthday celebration this year. What are the things that should be considered
in planning? List on the board the needed resources that will be needed for the birthday celebration.
Based on the listings the learners made, separate the current assets and long term assets then relate
them to the need of working capital assets in any activity.
INSTRUCTION/DELIVERY (120 MINS)
1. 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:
- A basic internal control system entails the assignment of custodial function and recording function
to separate individuals, unless you are the owner. Why is this so? Imagine a cashier of a company
who is also the chief accountant. If tempted, this person can steal cash from the company and can
Teacher Tips
This exercise is geared toward letting the
learners relate common activities and the
need of working capital for these activities.
manipulate the records so that nobody can discover that he is stealing. If you are the owner, you
probably will not steal from yourself and adjust the records?
- 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. The petty cash fund may be PHP10,000 or PHP20,000. Disbursements from this
petty cash funds must be supported by a petty cash voucher signed by the recipient of the petty
cash. When the petty cash fund is almost depleted, the petty cash fund custodian will get
reimbursements. This reimbursement will go through the check voucher system where the
custodian gets a check with the petty cash vouchers as supporting documents.
- 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. It cannot be encashed. This makes it more
difficult for somebody who stole a check to get the money.
2. Motives For Holding Cash
• The following are the reasons 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
Teacher Tips
Relate the classification of the working
capital assets to operations.
You can discuss and differentiate the
classification of the same assets as classified
in the statement of financial position.
You may relate your discussion with the
financial ratios topic.
keep during political and economic uncertainties. For example, if your business requires a
substantial amount of importation, a relatively higher amount of cash has to be maintained
when the exchange rate becomes highly volatile due to political instability such as what
happened during EDSA II.
b. Speculative. This refers to the cash held by the company to take advantage of opportunities
(e.g. buying stocks during major corrections such as what happened at the height of the global
financial crisis in 2008 and 2009 where stock valuations went down by as much as 80% for some
companies).
3. Budgeting Cash
Teacher Tips
• 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.
- Normally, a cash budget is prepared for a one year period broken down into smaller intervals like
months. This allows managers to see the seasonality of the business which affects the cash flows.
B. BUGAY INDUSTRIES
Cash Budget
For the months of October, November, and December 2015
OCTOBER
NOVEMBER
DECEMBER
Cash Receipts
Less: Cash Disbursements
xxx
(xxx)
xxx
(xxx)
xxx
(xxx)
Net Cash Flows
xxx
xxx
xxx
Add: Beginning Cash Balance
xxx
xxx
xxx
Ending Cash
xxx
xxx
xxx
Less: Minimum cash balance
(xxx)
(xxx)
(xxx)
Cumulative financing requirement (if negative) or
Cumulative excess cash balance (if positive)
xxx
xxx
xxx
Money market placements refer to shortterm financial instruments with a maximum
tenor of one year.
• Basically, cash budget has the following parts:
- 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.
- Illustrative Example:
Source: Gitman, L. (1976). Principles of managerial finance. New York: Harper & Row.
B. Bugay Industries, a defense contractor, is developing a cash budget for October, November, and December. Jungaya’s sales in August
and September were PHP100,000 and PHP200,000 respectively. Sales of PHP400,000, PHP300,000, and PHP200,000 have been forecast
for October, November, and December respectively.
Historically, 20% of the firm’s sales have been for cash, 50% have generated accounts receivable collected after 1 month, and the
remaining 30% have generated accounts receivable collected after 2 months. In December, the firm will receive a PHP30,000 dividend
from stock in a subsidiary.
Required: Prepare the cash receipts section of the cash budget.
Answer Key:
Forecasted sales
Cash Sales (20%)
100,000
200,000
August
September
P20,000
P40,000
P50,000
400,000
October
300,000
200,000
November
December
P80,000
P60,000
P40,000
P100,000
P200,000
P150,000
P30,000
P60,000
P120,000
Collection of AR
1st month (50%)
2nd month (30%)
Other cash receipts
TOTAL CASH RECEIPTS
P30,000
P210,000
P320,000
P340,000
- 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 payable
• Interest payments
• Rent (and lease) payments
• Cash dividend payments
• Wages and salaries
• Principal payments (loans)
• Tax
• It is important to recognize that 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.
• Illustrative Example:
Jungaya Industries has gathered the following data needed for the preparation of a cash disbursements schedule for October, November,
and December.
- Purchases - The firm’s purchases represent 70% of sales. Of this amount, 10% is paid in cash, 70% is paid in the month immediately
following the month of purchase, and the remaining 20% is paid 2 months following the month of purchase.
- Rent Payments - Rent of PHP5,000 will be paid each month.
- Wages and Salaries - Fixed salary cost for the year is PHP96,000, or PHP8,000 per month. In addition, wages are estimated as 10% of
monthly sales.
- Tax Payments - Taxes of PHP25,000 must be paid in December.
- Fixed Assets - New machinery costing PHP130,000 will be purchased and paid for in November.
- Interest Payments - An interest payment of PHP10,000 is due in December.
Answer Key:
70,000
Forecasted purchases (70%)
Cash Purchases (10%)
140,000
280,000
210,000
140,000
August
September
OCTOBER
NOVEMBER
DECEMBER
P7,000
P14,000
P28,000
P21,000
P14,000
Payment of AP
49,000
1st month (70%)
2nd month (20%)
Total Cash Purchases
P7,000
P63,000
Rent
Wages and Salaries
98,000
196,000
147,000
14,000
28,000
56,000
140,000
245,000
217,000
5,000
5,000
5,000
48,000
38,000
28,000
25,000
Tax
Machinery purchase
130,000
Interest
TOTAL CASH DISBURSEMENTS
10,000
193,000 P418,000
P285,000
4. 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.
• Illustrative Example: Given the two illustrative examples, generate a cash budget showing the net cash flow, ending cash flow, financing,
and excess cash. At the end of September, Jungaya’s cash balance was PHP50,000,and its notes payable and marketable securities equaled
PHP0. The company wishes to maintain as a reserve for unexpected needs, a minimum cash balance of PHP25,000.
• Answer Key:
B. BUGAY INDUSTRIES
Cash Budget
For the months of October, November, and December 2015
OCTOBER
NOVEMBER
DECEMBER
210,000
(193,000)
320,000
(418,000)
340,000
(285,000)
Net Cash Flows
17,000
(98,000)
55,000
Add: Beginning Cash Balance
50,000
67,000
(31,000)
Ending Cash
67,000
(31,000)
24,000
(25,000)
(25,000)
(25,000)
42,000
(56,000)
(1,000)
Cash Receipts
Less: Cash Disbursements
Less: Minimum cash balance
Cumulative excess cash balance (Cumulative
required financing)
• Comprehensive Illustrative Example:
It was December 2014 and the president of DCD Corporation wants to find out if the company has enough cash to pay the principal
balance of the company’s loan worth PHP3 million by the end of 2015. He asked the chief accountant to prepare the cash budget for 2015.
The following assumptions which will be used for the preparation of the cash budget for 2015 are as follows:
- Projected quarterly sales for 2015 are as follows:
First quarter - Php 5 million
Second quarter - -Php 7.5 million
Third quarter - Php 8.5 million
Fourth quarter - Php 10 million
Fourth quarter sales in 2014 was Php 8 million.
Sales are collected 90% in the quarter the sales are made. The remaining 10% is collected the following quarter.
- The cost of sales is 75% of sales. Merchandise inventories are purchased in the quarter these are sold. All merchandise purchased in
the quarter are paid in the same quarter.
- Operating expenses for each quarter paid in cash are as follows:
First quarter - PHP500,000
Second quarter - -PHP750,000
Third quarter - PHP850,000
Fourth quarter - PHP1,000,000
On top of these cash operating expenses, depreciation expenses that should be charged to operations is PHP150,000 per quarter.
- Interest expense paid every quarter is PHP75,000.
- Income tax rate is 30%. The income taxes to be paid every quarter will be as follows:
First quarter - PHP157,500
Second quarter - - PHP270,000
Third quarter - PHP315,000
Fourth quarter - PHP382,500
- Expected cash balance at the end of 2014 is about PHP350,000. For 2015, target cash balance is raised to PHP500,000 because of
expected increase in sales.
Given the above assumptions, a cash budget can now be prepared for 2015.
DCD Corporation
Cash Budget
For the Year Ending December 31, 2015
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
Collections
4,500,000
6,750,000
7,650,000
9,000,000
800,000
500,000
750,000
850,000
5,300,000
7,250,000
8,400,000
9,850,000
3,750,000
5,625,000
6,375,000
7,500,000
Cash operating expenses
500,000
750,000
850,000
1,000,000
Income taxes
225,000
157,500
270,000
315,000
Quarter of Sale
A quarter after sale
Payments
Purchases
Loan payment
Interest expense
Total payments
3,000,000
75,000
75,000
75,000
75,000
4,550,000
6,607,500
7,570,000
11,890,000
830,000
(2,040,000)
Net cash flow for the period
750,000 642,5000
Cash balance, beginning
350,000
1,100,000
1,742,500
2,572,500
1,100,000
1,742,500
2,572,500
532,500
Target cash balance
500,000
500,000
500,000
500,000
Cumulative excess cash (funding
requirements)
600,000
1,242,500
2,072,500
32,500
Cash balance without financing
Teacher Tips
The 5Cs of credit will also be discussed in
Sources and Uses and long-term funds that
will be discussed in the third quarter.
5. Accounts Receivable
• Accounts receivables spring out of the need to sell merchandise.
• An excellent business proposition is to generate sales without offering a credit facility to customers. However, this concept is theoretically
sound, but not sustainable.
- Consider a real estate company which sells condominium units at PHP5 million per unit. How many units can the property developer sell if
he sells the units only on cash basis? Do you think he can sell a lot? Probably not as many as compared to providing instalment payments.
• Credit management strategically defines the quality of account receivables collection.
• The collectability of accounts receivables depends largely on the quality of customers. The quality of customers depends on the standards
or credit policies set up and used by an organization. Credit policies are an integral part of the credit evaluation and there are 5C’s used in
credit evaluation. These are:
-
Character –the willingness of the borrower to repay the loan
Capacity – a customer’s ability to generate cash flows
Collateral – security pledged for payment of the loan
Capital – a customer’s financial resources
Condition – current economic or business conditions
• 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.
- Follow-ups through phone calls or any form of gentle reminders should be made if customers fail to pay on time. These follow-ups can also
serve as the management’s way of validating if the contact details given by customers are still valid and if the customers still occupy the
same office.
• Aging of receivables is also a control measure to determine the amount of receivables that are still outstanding and past due.
Current
P 60 million
1 - 30 day past due
20 million
31 - 60 day past due
10 million
61 - 90 day past due
3 million
Over 90 days past due
7 million
Total
Php 100 million
• 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.
6. 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 are 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.
- Maintaining too much inventories has costs such as carrying or holding costs, possible obsolescence or spoilage.
- On the other hand, too low inventory can result to stockout, and eventually lost sales.
7. Inventory In A Manufacturing Company
• In a manufacturing company, there are three types of inventory:
- Raw materials – these are purchased materials not yet put into production.
- Work in process – these are goods and labor put into production but not yet finished.
- Finished goods – these are goods put into production and finished. These are ready to be sold.
8. The ABC Analysis
• One way to control inventory is to classify inventory into a classification system called ABC Analysis.
• 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.
To summarize:
INVENTORY CLASS
A
B
C
Money value
High
Medium
Low
Quality of control
Very strict
Strict
Not too Strict
Inventory movement (flows)
Slow
Relatively fast
Fast
Sources:
Agamata, F. (2014). Management Services.
Gitman, L. (1976). Principles of managerial finance. New York: Harper & Row.
Gitman, L. & Joehnk, M. (1981). Fundamentals of investing. New York: Harper & Row.
Horngren, C. (1972). Cost accounting; a managerial emphasis. Englewood Cliffs, N.J.: Prentice-Hall.
Roque, R. (1990). Reviewer in Management Advisory Services. Roque Press, Inc.
ENRICHMENT (30 MINS)
Group work:
What are the three ways for Maria to better manage her cash balance?
Maria Luna, a 25-year-old nurse, works at a hospital that pays her every 2 weeks by direct deposit into her checking account which pays
no interest and has no minimum balance requirement. She takes home about PHP9,000 every 2 weeks or about PHP18,000 per month.
She maintains a checking account in the bank that does not earn any interest income with a balance of around PHP7,500. Whenever it
exceeds that amount she transfers the excess into her savings account, which currently pays 1.5% annual interest.
She currently has a savings account balance of PHP85,000 and estimates that she transfers about PHP3,000 per month from her
checking account into her savings account.
Maria pays her bills immediately when she receives them. Her monthly bills average about PHP9,500, and her monthly cash outlays for
food and transportation cost total about PHP4,500.
An analysis of Maria’s bill payments indicates that on average she pays her bills 10 days early. Bank Time Deposit are currently yielding
about 4.2% annual interest. Maria is interested in learning how she might better manage her cash balances.
Answer Key:
The three ways for Maria to better manage her cash balance:
1. Invest current balances. Maria can transfer her current savings account balances into a Time Deposit, thereby increasing the rate of interest
earned from 1.5% to about 4.2%. On her current P17,000 balance, she will immediately increase her annual interest earnings by about
PHP2,295. (0.042 - 0.015) X P85,000
2. Invest monthly surpluses. Maria can transfer monthly the PHP3,000 from her checking account to the Time Deposit, thereby increasing the
annual earnings on each monthly transfer by about PHP81(0.042 - 0.015) X PHP3,000 which, for the 12 transfers, would generate additional
annual earnings of about PHP972 (12 months X PHP81).
3. Slow down payments. Rather than paying her bills immediately on receipt, Maria can pay her bills nearer their due date. By doing this she
can gain 10 days of disbursement float each month, or 120 days per year (10 days per month over12 months), on an average of PHP9,500 of
bills. Assuming she can earn 4.2% annual interest on the PHP9,500, slowing down her payments would save about P133 annually (120/360)
X 0.042 X P9,500 .
Based on these three recommendations, Maria would increase her annual earnings by a total of about PHP3,400 (PHP2,295 + PHP972 +
PHP133) . Clearly, Maria can grow her earnings by better managing her cash balances.
EVALUATION (30 MINS)
Multiple Choice
1. The _________ inventory consists of all items currently in the production process.
(a) raw materials
(b) work-in-process
(c) finished goods
(d) apital goods
2. The _________ inventory consists of items that have been produced but not yet sold.
(a) raw materials
(b) work-in-process
(c) finished goods
(d) capital goods
3. The three basic types of inventory are all of the following EXCEPT
(a) raw materials
(b) work-in-process
(c) finished goods
(d) capital goods
4. The _________ inventory contains the basic components of the production process.
(a) raw materials
(b) work-in-process
(c) finished goods
(d) capital goods
Teacher Tips
Answer Key
1. B
2. C
3. D
4. A
5. D
5. The credit applicant’s _________ is the amount of assets the applicant has available for use in securing the credit.
(a) character
(b) capacity
(c) capital
(d) collateral
Problem Solving:
Gerry Jacobs, a financial analyst for Best Valu Supermarkets, has prepared the following sales and cash disbursement estimates for the period
of August through December of the current year.
Month
Sales
Cash Disbursements
August
$400
$300
September
500
500
October
500
700
November
600
400
December
700
500
90% of sales are for cash, the remaining 10% are collected one month later. All disbursements are on a cash basis. The firm wishes to maintain a
minimum cash balance of $50. The beginning cash balance in September is $25. Prepare a cash budget for the months of October, November,
and December, noting any needed financing or excess cash available.
Answer Key:
A Cash Budget for Best Valu Supermarkets
Sept
Oct
Nov
Dec
$ 450
$ 450
$ 450
$ 630
Cash receipts
Sales (cash 90%)
Sales Collected (1 mo. lag 10%)
Total cash receipts
40
$ 490
50
$ 500
50
$ 590
60
$ 690
Total cash disbursements
500
700
400
500
Net cash flow
(10)
(200)
190
190
Beg. cash balance
25
15
(185)
5
Ending cash balance
15
(185)
5
195
Minimum balance
50
50
50
50
Required financing
35
235
45
Excess Cash
45
Best Valu Supermarkets should arrange for a line of credit for at least $235 during the four-month period.
Business'Finance
375 MINS
Financial Planning Tools and Concepts
Content Standards
The learners demonstrate an understanding of the financial planning process,
including budget preparation, cash management, and working capital
management.
Performance Standards
The learners will be able to prepare budgets such as projected collection, sales
budget, production budget, projected statement of comprehensive income,
projected statement of financial position, and projected cash flow statement.
LESSON OUTLINE
Introduction Review of the Financial Planning Process
/Review
15
Motivation
15
Instruction/ Budgeting and Financial Statement
Practice
Projection
a.
b.
c.
d.
e.
Learning Competencies
The learners shall be able to illustrate the formula and format for the
preparation of budgets and projected financial statements.
Specific Learning Outcomes
The learners will:
• Know and apply the tools used in planning and forecasting.
• Know and apply the tools used in budgeting.
Planning and Controlling
f.
Evaluation
235
Sales Forecast (20 mins)
Production Forecast (30 mins)
Operations Forecast (5 mins)
Cash Budget (75 mins)
Uncertainties in the Cash Budget (45
mins)
Projected Financial Statements (60 mins)
Preparing a Budget and Projected Financial
Statements Case Presentation
100
Enrichment Integration of Learning
Materials
• Board materials
Resources
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
City. Rex Bookstore.
(2) Gitman, L.J., & Zutter, C.J. (2012). Principles of Managerial
Finance. (13th ed.). USA: Prentice Hall.
10
INTRODUCTION (15 MINS)
• Review the Financial Planning Process.
• Recall that the financial planning process involves setting up long term and short term goals.
- Long term goals set the direction of the company.
- Short term goals are the specific steps or actions that will ultimately reach the company’s long term goals.
• Recall the steps in planning as follows:
A. Set goals or objectives.
B. Identify Resources.
C. Identify goal-related tasks.
D. Establish responsibility centers for accountability and timeline.
E. Establish the evaluation system for monitoring and controlling.
F. Determine contingency plans.
• Inform the learners that for the rest of the sessions, they will learn how to establish the evaluation system of monitoring and controlling.
• Characteristics of an Effective Plan.
• In planning, the goal of maximizing shareholders’ wealth must always be put in mind.
• The following criteria may be used for effective planning:
-
Specific – target a specific area for improvement.
Measurable – quantify or at least suggest an indicator of progress.
Assignable – specify who will do it.
Realistic – state what results can realistically be achieved, given available resources.
Time-related – specify when the result(s) can be achieved. (Doran, G. T. (1981). "There's a S.M.A.R.T. way to write management's goals and
objectives". Management Review (AMA FORUM) 70 (11): 35–36.)
MOTIVATION (15 MINS)
Planning and Controlling
1. Recall the previous class activity. Ask the students one of the most important activities they have
done in the previous exercise.
2. Get insights from the learners on the following questions:
- What is a budget?
- What is the importance of a budget?
- What will happen if the budget is not met?
• Tell the students that a plan is useless if it is not quantified. 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. They serve as the bases
for monitoring actual performance.
• Tell the students that 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).
INSTRUCTION/PRACTICE (205 MINS)
1. Sales Budget (20 mins)
• Discuss how a sales budget is formulated.
- The most important account in the financial statement in making a forecast is sales since most of
the expenses are correlated with sales.
- Recall from Lesson 2: Financial Statement analysis that cost of sales ratio, gross profit ratio, and
Teacher Tips
On asking what the most important activity
done in the previous class activity, the
teacher should be able to lead the answers
to Budgeting.
Get at least two to three insights from the
learners. Relate their answers to the class
activity done taking note what should
happen or what could have happened
based on their answers.
variable operating expenses ratio are based on the sales figure.
- Given the importance of the sales forecast, the financial manager must be able to support this figure with reasonable assumptions. The
following external and internal factors should be considered in forecasting sales:
External
Internal
• Gross Domestic Product
(GDP) growth rate
• Inflation
• Interest Rate
• Foreign Exchange Rate
• Income Tax Rates
• Developments in the
industry
• Competition
• Economic Crisis
• Regulatory Environment
• Political Crisis
• production capacity
• man power requirements
• management style of
managers
• reputation and network of
the controlling stockholders
• financial resources of the
company
Table 1: Factors that Influence Sales
• Discuss the following external and internal factors influencing sale, among others:
- Macroeconomic Variables (external)
Macroeconomic variables such as the GDP rate, inflation rate, and interest rates, among others play an important role in forecasting
sales because it tells us how much the consumers are willing to spend. A low GDP rate coupled by a high inflation rate means that
consumers are spending less on their purchases of goods and services. This means that we should not forecast high sales of the periods
of low GDP.
- Developments in the Industry (external)
Products and services which have more developments in its industry would likely have a higher sales forecast than a product or service in
slow moving industry. Consumer trends are always changing, thus the industry should be competitive to be able to appeal to more
customers and stay in the market.
- Competition (external)
Suppose you are selling bread and you know that each person in your community eats an average of one loaf of bread a day. The
population of your community is 500 people. If you are the only person selling bread in your town, then your sales forecast is 500 units
of bread. However, you also have to take account your competition. What if there are 4 other sellers of bread? You will need to have to
divide the sales between the 5 of you. Does this mean your new forecast should be 100 units of bread? Not necessary. You should also
know the preference of your consumers. If more of them would prefer to buy more bread from you, then you should increase your sales
forecast.
- Production Capacity and man power (internal)
Suppose that you have already evaluated the macroeconomic factors and identified that there is a very strong market for your product
and consumers are very likely to buy from you. You forecasted that you will be able to sell 1,000 units of your product. However, you
only have 20 employees who are able to produce 20 units each. Your capacity cannot cover your expected demand hence, you are
limited by it. To be able to increase capacity, you should be able to expand your operations.
• Discuss the implications if sales budget is not correct. If understated, there can be lost opportunities in the form of forgone sales. If it is too
optimistic, the management may decide to unnecessarily increase capacity or hire more employees and end up with more inventories.
2. Production Budget (30 mins)
• Discuss what a production budget is and how it is formulated.
- 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.
- It is computed as follows
Required production in units = Expected Sales + Target Ending Inventories - Beginning Inventories
Note: Ending inventory of current period is beginning inventory of next period.
• Provide the following example (EASY):
- [A] Company forecasts sales in units for January to May as follows:
Jan
Units
Feb
2,000
Mar
2,200
Apr
2,500
May
2,800
3,000
-
Moreover, [A] 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 in order to fulfill the expected sales of the company?
Answer Key:
MONTH
Jan
Projected Sales
Target level of ending inventories
Total
Less: beginning inventories
Required production
Feb
Mar
Apr
May
2,000
2,200
2,500
2,800
100
100
100
100
2,100
2,300
2,600
2,900
50
100
100
100
2,050
2,200
2,500
2,800
Total
3,000 12,500
100
100
3,100 12,600
100
50
3,000 12,500
3. Budgeting Cash
• Discuss what an Operation Budget is and how it is formulated.
- Operations budget refers to the variable and fixed costs needed to run the operations of the company but are not directly attributable to
the generation of sales.
- Examples of this are the following:
• Rent payments
• Wages and Salaries of selling and administrative personnel
• Administrative Costs
• Travel and representation expenses
• Professional fees
• Interest Payments
• Tax Payments
4. Cash Budget (75 mins)
• Discuss the importance of a Cash Budget and how it is formulated.
• Recall from the start of the term the exercise you did where the learners were asked how much
allowance they were given and how much expenses they would incur in a day. Recall that at the end
of the activity, they were able to identify whether they had excess cash or they had a deficit.
• Relate that this is what the cash budget aims to do.
- For a business enterprise, having the right amount of cash is important since cash is used to make
payments for purchases, for operational expenses, to creditors, and for other transactions.
- The cash budget forecasts the timing of these cash outflows and matches them with cash inflows
from sales and other receipts. The cash budget is also a control tool to monitor the way the
company handles cash.
• Below is the general form of the Cash Budget:
CASH BUDGET
Jan
Feb
…
Nov
Dec
Total
Cash Receipts
xxx
xxx
…
xxx
xxx
xxx
Less: Cash Disbursements
xxx
xxx
…
xxx
xxx
xxx
Net Cash Flow
xxx
xxx
…
xxx
xxx
xxx
Add: Beginning Cash
xxx
xxx
…
xxx
xxx
xxx
Ending Cash
xxx
xxx
…
xxx
xxx
xxx
Required Ending Cash Balance
xxx
xxx
…
xxx
xxx
xxx
Required total financing
(xxx)
Excess cash balance
…
xxx
…
(xxx)
xxx
xxx
Teacher Tips
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).
• The following are the steps in formulating a cash budget:
A. Form the sales forecast, identify how much would be collected in the cash budget period. Sales may be made in cash or for credit. Cash
sales are translated to cash at the point of sale while credit sales are collected depending on the credit period. Credit periods may range
from 10 days to more than a month depending on the strategy of the company. Recall from Lesson 2: Financial Statement Analysis the
implications of the company’s credit policy.
- Continuing from previous example, assume selling price is PHP100/unit. Sales for each month are expected to be collected as follows:
‣ Month of sales : 20%
‣ A month after sales: 50%
‣ 2 months after sales: 30%
- How much is total receipts from sales (DIFFICULT)?
Jan
Units
Sales in Pesos
Collection from current months sales
Collection from previous months sales
Collection from two months prior sales
Total Collections from Sales
B. Identify other receipts.
‣
‣
‣
‣
‣
Examples:
interest received
return on principal investments
proceeds from sale of non-operating assets
issuance of capital stock
proceeds from borrowings
Feb
Mar
Apr
May
3,000
Total
2,000
2,200
2,500
2,800
12,500
200,000
220,000
250,000
280,000
40,000
44,000
50,000
56,000
60,000
250,000
100,000
110,000
125,000
140,000
150,000
60,000
66,000
75,000
84,000
40,000 144,000 220,000 247,000 275,000
926,000
300,000 1,250,000
- Add these receipts to the collections from sales to get to total receipts.
C. From the Production Budget, identify how much of the purchases made will be paid by the company on the cash budget period. Like
sales, purchases may be made in cash or on credit depending on the supplier’s credit terms.
- Continuing from previous example:
‣ Assume that cost per unit is PHP50.
‣ All purchases this month are paid the following month. How much is total cash disbursements for purchases (AVERAGE)?
Jan
Required production
Cost in Peso
Feb
Mar
Apr
May
Total
2,050
2,200
2,500
2,800
3,000
12,550
102,500
110,000
125,000
140,000
150,000
627,500
102,500
110,000
125,000
140,000
477,500
Payment from current months sales
150,000
Payment from previous months sales
Payment from two months prior sales
Total Payments for Purchases
0 102,500 110,000 125,000 140,000
477,500
D. From the operations budget, identify which expenses will be paid in cash during the cash budget period.
- The following expense items will be paid based on the following periods:
‣ Rent payments: Rent of PHP5,000 will be paid each month.
‣ Wages and salaries: Fixed salaries for the year are PHP96,000, or PHP8,000 per month. Wages are estimated as 10% of monthly sales.
‣ Tax payments: Taxes of PHP25,000 must be paid in April.
E. Identify all other cash payments to be made.
- Examples:
‣ Fixed-asset purchases in cash
‣ Cash dividend payments
‣ Principal Payments
‣ Repurchase of common stock
‣ Purchase of stock/bond investments
- It is important to recognize that depreciation and other noncash charges are NOT included in the cash budget.
- The following items will be paid based on the following periods:
‣ Fixed-asset outlays: New machinery costing PHP130,000 will be purchased
and paid for in April.
‣ Interest payments: An interest payment of PHP10,000 is due in May.
‣ Cash dividend payments: Cash dividends of PHP20,000 will be paid in January.
‣ Principal payments (loans): A PHP20,000 principal payment is due in February.
Jan
Total Payments for Purchases
Feb
-
Mar
Apr
May
Total
102,500
110,000
125,000
140,000
477,500
5,000
5,000
5,000
5,000
5,000
25,000
Wages
20,000
22,000
25,000
28,000
30,000
125,000
Salaries
8,000
8,000
8,000
8,000
8,000
40,000
Rent Payments
Tax Payment
Fixed Asset Outlay
Principal Payment
Total Cash Disbursements
25,000
130,000
130,000
10,000
Interest Payment
Cash Divident
25,000
20,000
10,000
20,000
20,000
53,000 157,500 148,000 321,000 193,000
20,000
872,500
F. Match the receipts and disbursements on the periods they become collectible and payable, respectively.
G. Set a minimum required cash balance. This balance is maintained in case contingencies arise. Recall from the steps in planning that we
should also plan for contingencies.
H. If the net cash flow is above the minimum cash balance, the company is in excess cash and may consider putting it in short term
investments. If it is below, the company should make a short term borrowing during that period.
- Moreover, [A] Company has a beginning cash balance of PHP80,000 and would like to maintain an ending cash balance of PHP100,000
per month. Prepare [A] Company’s Cash Budget for January to May. Prepare a cash budget (DIFFICULT).
Jan
Cash Receipts
40,000
Feb
144,000
Mar
220,000
Apr
247,000
May
275,000
Total
926,000
Less: Cash Disbursements
(53,000) (157,500) (148,000) (321,000) (193,000) (872,500)
Net Cash Flow
(13,000)
(13,500)
72,000
(74,000)
82,000
53,500
Add: Beginning Cash
80,000
67,000
53,500
125,500
51,500
80,000
Ending Cash Balance
67,000
53,500
125,500
51,500
133,500
133,500
Less: Minimum Cash Balance
(100,000) (100,000) (100,000) (100,000) (100,000) (100,000)
Cumulative excess cash balance
(Cumulative required financing)
(33,000)
(46,500)
25,500
(48,500)
33,500
33,500
- Evaluating the Cash Budget:
‣ If the ending cash balance after payment of all required disbursements is less than the required ending balance, the company needs to
borrow additional cash from short term borrowings to meet its required ending balance. Should the ending cash balance exceed the
company’s minimum cash requirement the next period, the company may be able to repay the loan plus accrued interest.
‣ Should the Company have excess cash above its required maintaining cash balance, the company may invest this cash on short term
investments so that it will have an opportunity to earn additional profits. If the company’s cash balance would then fall below its
minimum cash requirement, the company may withdraw the investment to be able to meet the required cash balance.
5. Projected Financial Statements (60 mins)
• Discuss the purpose of projected financial statements.
- Projected financial statements is a tool of the company to set an overall goal of what the company’s performance and position will be for
and as of the end of the year. It sets targets to control and monitor the activities of the company. The following reports may be
forecasted:
‣ Projected Income Statement
‣ Projected Statement of Financial Position
‣ Projected Statement of Cash Flows
• Provide the learners a historical financial statement that they would use to make their forecast. You may use your own set of financial
statements or the one found below.
[A] Company
Income Statements
For the years ended December 31
2014
2013
2012
2011
2010
Net Sales
5,250,000
4,770,000
4,310,000
3,910,000
3,547,000
Cost of sales
4,305,000
3,959,100
3,663,500
3,128,000
2,979,480
Gross Profit
945,000
810,900
646,500
782,000
567,520
Operating expenses
314,750
297,890
246,231
221,500
217,538
Operating income
630,250
513,010
400,259
560,500
349,982
Interest Expense
250,000
250,000
250,000
450,000
300,000
Income before taxes
380,250
263,010
150,259
110,500
49,982
Taxes
114,075
78,903
45,078
33,150
14,995
Net Income
266,175
184,107
105,181
77,350
34,987
[A] Company
Statement of Financial Positions
As of December 31
2014
2013
2012
2011
2010
Cash
1,060,000.00
990,000.00
770,000.00
760,000.00
880,000.00
Receivables
2,300,500.00
1,921,000.00
1,722,000.00
1,454,000.00
1,396,000.00
Inventories
4,850,000.00
4,500,000.00
3,797,000.00
3,290,000.00
3,350,000.00
Other current assets
1,050,000.00
980,000.00
984,000.00
735,000.00
998,000.00
9,260,500.00
8,391,000.00
7,273,000.00
6,239,000.00
6,624,000.00
2,440,000.00
2,260,000.00
1,810,000.00
1,870,000.00
1,900,000.00
835,689.00
925,681.00
896,842.00
876,235.00
827,490.00
3,275,689.00
3,185,681.00
2,706,842.00
2,746,235.00
2,727,490.00
266,175.00
184,107.00
105,181.00
77,350.00
34,987.00
5,050,000.00
4,756,000.00
4,130,000.00
3,300,000.00
2,870,000.00
28,520.00
19,725.00
11,270.00
8,290.00
3,750.00
2,250,000.00
2,500,000.00
1,000,000.00
2,000,000.00
2,000,000.00
85,600.00
28,700.00
40,990.00
30,688.00
37,890.00
7,414,120.00
7,304,425.00
5,182,260.00
5,338,978.00
4,911,640.00
Assets
Current Assets
Total Current Assets
Non-current Assets
Property, plant, and equipment, net
Other noncurrent assets
Total non-current assets
Total assets
Liabilities and Equity
Current Liabilities
Notes payable (external funds needed)
Trade payables
Income taxes payable
Current portion of long-term debt
Other current liabilities
2014
2013
2012
2011
2010
1,000,000.00
3,000,000.00
Non-current Liabilities
Long-term debt, net of current portion
Total liabilities
2,000,000.00
1,250,000.00 -
9,414,120.00
8,554,425.00
5,182,260.00
6,338,978.00
7,911,640.00
Capital stock
1,000,000.00
1,000,000.00
1,000,000.00
1,000,000.00
1,000,000.00
Retained earnings
2,122,069.00
2,022,256.00
3,797,582.00
1,646,257.00
439,850.00
Total stockholders’ equity
3,122,069.00
3,022,256.00
4,797,582.00
2,646,257.00
1,439,850.00
Total liabilities and stockholders’
equity
12,536,189.00 11,575,681.00
9,979,842.00
8,985,235.00
9,351,490.00
Stockholders’ equity
• Enumerate and discuss the Steps on
Financial Statement Projection.
a. Forecast Sales.
Earnings
Cost of Sales
Income Tax Expense
Finance Cost
Operating Expense
100
- Reiterate the importance of Sales
in forecasting financial statements.
Recall from lesson 2: Financial
Statement Analysis that most of
the income statement items are
related to sales.
- Recall the financial ratios related
to sales and show how they are
related to each other as follows:
75
50
25
0
Sales
Gross Profit
Operating Profit Earnings Before Tax
Net Income
- Start the exercise in financial statement projection with the Projected Income Statement. Provide the information below.
Sales are expected to increase by 10% in 2015 from the 2014 sales level. This
growth assumption is based on the assessment of the external and internal
factors related to the Company and the historical growth of the company. The
company’s sales grew by 10.3% annually from 2010 to 2014.
- Ask the learners to prepare pro-forma financial statements without numbers. The blank spaces will be filled as the steps on financial
statement projections are discussed.
- Flash an excel file of the blank FS on the screen if there are available facilities. Otherwise a set of blank pro-forma FS can be written on
the board.
[A] Company
Projected Income Statement
For the year ending December 31
Net Sales
xxx
Cost of sales
xxx
Gross Profit
xxx
Operating expenses
xxx
Operating income
xxx
Interest Expense
xxx
Income before taxes
xxx
Taxes
xxx
Net Income
xxx
[A] Company
Projected Statement of Financial Position
December 31, 2015
[A] Company
Projected Statement of Financial Position
December 31, 2015
Assets
Non-current liabilities
Current Assets
Long-term debt, net of current
portion
xxx
Total liabilities
xxx
Cash
xxx
Receivables
xxx
Inventories
xxx
Other Current Assets
xxx
Total Current Assets
xxx
Non-current assets
Property, plant, and equipment, net
xxx
Other non-current assets
xxx
Total non-current assets
xxx
Total Assets
xxx
Liabilities and Equity
Current liabilities
xxx
Notes payable (external funds
needed)
xxx
Trade payables
xxx
Income taxes payable
xxx
Current portion of long term debt
xxx
Other current liabilities
xxx
xxx
Stockholders’ equity
Capital stock
xxx
Retained earnings
xxx
Total stockholders’ equity
xxx
Total liabilities and stockholders’
equity
xxx
- Compute for projected sales.
Projected Sales in 2015 = 5,250,000 x (1 + 10%) = 5,775,000
b. Forecast Cost of Sales and Operating Expenses
- In determining the cost of sales and operating expenses, variable and fixed costs should be identified.
- Cost of sales are direct costs associated in the generation of sales. One way of projecting cost of sales is using the cost of sales ratio.
Companies would generally have a consistent historical cost of sales ratio. The company may use this as a starting point.
- Suppose that the company has an average of 60% cost of sales ratio. In doing projections, the financial manager may use the same
average ratio or, if the company is pushing for efficiency, the financial manager may reduce this ratio to say 57% depending on his
judgment.
- Operation costs are a mix of variable and fixed costs. Variable costs usually vary with sales. To project these costs, the percentage of
sales method may be used. On the other hand, fixed costs remain the same no matter how the volume of sales has changed.
The Company wants to maintain the same gross profit per year as 2014.
Variable operating expense is 5% of sales.
Depreciation expense is 5% of the gross beginning balance of property, plant and equipment. As of December
31, 2014, the gross balance of PPE is PHP5,200,000. For January 2015, PHP1,000,000 new PPE will be acquired.
It is the policy of the company that PPE acquired in the first half of the year will be depreciated for one full year.
- Compute for Cost of Sales, Variable Operating Expense, and Depreciation Expense.
Cost of sales percentage in 2014
=
4,305,000 ÷ 5,250,000) x 100%
Cost of sales percentage in 2014
=
82%
Projected cost of sales in 2015
=
82% x 5,775,000
Projected cost of sales in 2015
=
4,735,500
Variable (5% x Sales of 5,775,000)
Fixed (depreciation expense)
288,750
(5,200,000 + 1,000,000) x 5%
310,000
Total operating expenses
598,750
- Compute for net PPE.
PPE net, beginning
Additions
Less: Depreciation
PPE net, end
2,440,000
1,000,000
(310,000)
3,130,000
c. Forecast Net Income and Retained Earnings.
- To forecast net income, interest expense and income tax expense should also be considered using the relevant interest and tax rates.
Retained earnings is arrived at by adding projected net income to beginning retained earnings then deducting dividends to be declared
during the year.
- Just note this information. Return to this when all income statement items are complete.
Income tax rate is 30% of the income before taxes. 75% of the income tax expense will be paid in 2015 while the
balance will be paid in 2016.
d. Determine balance sheet items that will vary with sales or whose balances will be highly correlated to sales.
- Balance sheet items that may vary with sales or will be highly correlated with sales are cash, accounts receivable, inventories, accounts
payable, and accrues expenses payable.
- Compute as follows:
The following financial statement accounts are expected to
vary with sales based on the 2014 financial statements:
A. Cash
B. Trade accounts receivable
C. Inventories
D. Other current assets
E. Trade accounts payable
Cash
Cash as a percentage of sales in 2014
=
( 1,060,000 ÷ 5,200,000) x 100%
Cash as a percentage of sales in 2014
=
20.19%
Projected cash in 2015
=
20.19 % x 5,775,000
Projected cash in 2015
=
1,165,973
Accounts receivable
Accounts receivable as a % of sales in 2014 =
(2,300,500 ÷ 5,200,000) x 100%
Accounts receivable as a % of sales in 2014 =
43.82%
Projected accounts receivable in 2015
=
43.82% x 5,775,000
Projected accounts receivable in 2015
=
2,530,605
Inventories as a % of sales in 2014
=
( 4,850,000 ÷ 5,200,000) x 100%
Inventories as a % of sales in 2014
=
92.38%
Projected inventories in 2015
=
92.38% x 5,775,000
Projected inventories in 2015
=
5,334,945
Inventories
Other current assets
Other current assets as a % of sales in 2014 =
(1,050,000 ÷ 5,200,000) x 100%
Other current assets as a % of sales in 2014 =
20%
Projected other current assets in 2015
=
20% x 5,775,000
Projected other current assets in 2015
=
1,155,000
Accounts payable
Accounts payable as a % of sales in 2014
=
(5,050,000.00 ÷ 5,200,000) x 100%
Accounts payable as a % of sales in 2014
=
96.19%
Projected accounts payable in 2015
=
96.19% x 5,775,000
Projected accounts payable in 2015
=
5,554,973
e. Determine payment schedule for loans.
- Compute for interest expense:
As of December 31, 2014, there are two long-term loans. Both have an annual interest rate of 8%.
A. The first loan will mature on June 30, 2015 and the remaining principal balance to be paid on June 30, 2015 is
PHP1,250,000.
B. The second loan which was incurred on December 31, 2014 is paid at the rate of PHP500,000 principal
balance every June 30 and December 31.
New loans of PHP3,500,000 will be incurred on December 31, 2015 payable at the rate of PHP500,000 every June
30 and December 31. Annual interest rate is expected at 8%.
First Loan
Interest from January 1 to June 30, 2015
1,250,000 x 8% x (6 mos ÷ 12 mos)
50,000
Second Loan
Interest from January 1 to June 30, 2015
(1,000,000 + 2,000,000) x 8% x (6 mos ÷ 12 mos)
120,000
Interest from July 1 to December 31, 2015
100,000
(500,000 + 2,000,000) x 8% x (6 mos ÷ 12 mos)
Total interest expense for 2015
270,000
- Complete projected income statement as follows:
[A] Company
Projected Statement of Profit or Loss
For the year ending December 31
Net Sales
5,775,000
Cost of sales
4,735,500
Gross Profit
1,039,500
Operating expenses
598,750
Operating income
440,750
Interest Expense
270,000
Income before taxes
170,750
Taxes
51,225
Net Income
119,525
- Compute for Income Tax Payable.
Projected Income Tax Payable in 2015: 51,225 x (1 – 75%) = 12,806
- Compute for current and non-current portion of long term assets:
Loan
Current Portion
Long-term Portion
Total
Loan incurred on December 31, 2014 of PHP3 million
1,000,000
1,000,000
2,000,000
Loan of PHP3.5 million to be incurred on December
31, 2015
1,000,000
2,500,000
3,500,000
Total
2,000,000
3,500,000
5,500,000
f.
Check for other information
Cash dividends of PHP300,000 will be paid for 2015.
Other non-current assets and other current liabilities will remain unchanged.
- Compute for retained earnings
Retained earnings, beginning
2,122,069
Add: Net Income
119,525
Less: Dividents
(300,000)
Retained earnings, end
1,941,594
g. Determine external funds needed (EFN).
h. Determine how external funds needed may be financed.
- External Funds Needed is a plug figure to make projected assets equal projected liabilities and shareholders’ equity.
EFN = change in total assets – (change in total liabilities + total change in stockholders’ equity)
Or
EFN = Squeeze figure to balance assets to Liabilities and equity
2015 Balances Without EFN
2014 Balances
Change
Total assets
14,152,212
12,536,189
1,616,023
Total liabilities
11,153,379
9,414,120
1,739,259
2,941,594
3,122,069
(180,475)
Total stockholders' equity
EFN
57,239
- Ask the learners what the implication of a positive or negative EFN is.
- Suggested discussion:
‣ A positive value for EFN, means that the company needs more funds equivalent to the positive value of EFN. As to how this will be
raised depends on the management and the company’s ability to access funds. This EFN can be raised in the form of short term
borrowing, long term borrowing or equity, or a combination of all sources. The projected balance sheet which generated this EFN is
just the first iteration in preparing a pro-forma balance sheet.
‣ A negative value for EFN, means that the company has excess cash. As to how this excess cash will be distributed will be the subject
of the next iteration for the pro-forma balance sheet. This can be disposed by adding it to the projected cash balance or it can be
used to retire some of the debt if pre-termination is allowed.
- Complete FS as follows:
[A] Company
Projected Statement of Financial Position
December 31, 2015
[A] Company
Projected Statement of Financial Position
December 31, 2015
[A] Company
Projected Statement of Financial Position
December 31, 2015
Assets
Liabilities and Equity
Non-current liabilities
Current Assets
Current liabilities
Long-term debt, net of current
portion
Cash
1,165,973
Receivables
2,530,605
Inventories
5,334,945
Other Current Assets
1,155,000
Total Current Assets
10,186,523
Non-current assets
Property, plant, &equipment, net
Other non-current assets
Total non-current assets
Total Assets
Notes payable (external funds
needed)
Trade payables
Income taxes payable
Current portion of long term
debt
Other current liabilities
3,130,000
835,689
3,965,689
13,152,212
57,239
Total liabilities
5,554,973
12,806
2,000,000
85,600
7,710,618
3,500,000
11,210,618
Stockholders’ equity
Capital stock
1,000,000
Retained earnings
1,941,594
Total stockholders’ equity
2,941,594
Total liabilities and stockholders’
equity
13,152,212
- Prepare the projected statement of cash flows. Follow the discussion.
[A] Company
Projected Statement of Cash Flows
For the Year Ending December 31, 2015
[A] Company
Projected Statement of Cash Flows
For the Year Ending December 31, 2015
Cash flows from financing activities
Cash flows from operating activities
170,750
Income before taxes
Adjustments:
Payment of cash dividents
Short-term notes payable (EFN)
Depreciation
310,000
Changes in the following accounts
(300,000)
57,239
Loans, net of payments
1,250,000
Cash flows from financing activities
1,007,239
Decrease (Increase) in accounts receivable
(230,105)
Net change in cash
Decrease (Increase) in inventories
(484,945)
Cash, beginning
1,060,000
Decrease (increase) in other current assets
(105,000)
Cash, ending
1,165,973
Increase (decrease) in accounts payable
Increase (decrease) in other current liabilities
504,973
(66,939)
Income taxes paid
98,734
Cash flows from operating activities
Cash flows from investing activities
Acquisitions of PPE
Acquisition of other non-current assets
Cash flows from investing activities
(1,000,000)
(1,000,000)
105,973
EVALUATION (100 MINS)
1. Case Study Introduction (10 minutes)
• The learners were given a copy of a case before the discussion of cash budgets and projected financial statements began.
• Provide a brief summary of the case and explain what is required to be submitted and presented in class.
2. Case Presentation (60 minutes)
• The presenting groups will have a 20 minute class presentation followed by a 10 minute cross examination from the critic groups.
• Assign a critic group to each presenting group. They will be required to ask questions to the presenters. Let the second presenting group
leave the room while the first presenting group is doing their presentation. All groups are required to submit their papers.
3. Case Discussion (30 minutes)
• Reveal to the class any oversight they may have made in analyzing the case. Discuss corrections and additional solutions. See Annex 1 for
suggested solutions.
ENRICHMENT (5 MINS)
Integration of Learning:
Ask the learners the following: What should the management do if the actual performance of the company fell short of the plans as early as in
the first quarter?
Suggested Answer: Try to identify the sources of the differences, whether these are beyond or within the control of the management. Whatever
the causes are, remedial actions should have to be taken. Or depending on the circumstance, the plans may have to be adjusted.
Appendix
ANNEX 1: Sweet Beginnings Co. Suggested Solution
Jan
Feb
Mar
Apr
May
June
Sales 20X5
1,361,240
2,035,060
3,008,340
6,193,650
10,617,680
13,449,060
Sales Forecast 20X6
1,633,488
2,442,072
3,610,008
8,051,745
13,802,984
17,483,778
Sales Forecast 20X7
1,960,186
2,930,486
Cash receipts from sales two months before (60%)
1,433,388
1,167,942
980,092.80 1,465,243.20 2,166,004.80
4,831,047
778,628
653,395
976,829
1,444,003
3,220,698
5,521,194
Cash Receipts From Collections
2,212,016
1,821,337
1,956,922
2,909,246
5,386,703
10,352,241
Less: Payment for purchase of Raw Materials
1,985,504
4,428,460
7,591,641
9,616,078
8,577,092
4,318,964
Less: Payment for Salaries and Wages
456,667
675,071
1,505,676
2,581,158
3,269,466
2,916,211
Less: Payment to Delivery Contractors
49,005
73,262
108,300
241,552
414,090
524,513
Cash receipts from sales last month (40%)
450,000
Less: Dividents Paid
450,000
1,321,900
363,835
(7,698,696) (10,851,442)
(7,237,780)
2,142,552
Less: Income Tax Paid
Net Cash Flow
Add: Beginning Cash
Less: Required Ending Balance
Add: Return on Investment (12%)
Less: Interest on Borrowing (16%)
(279,161)
(3,355,456)
641,123
640,000
640,000
640,000
640,000
640,000
(640,000)
(640,000)
(640,000)
(640,000)
(640,000)
(640,000)
-
(7,834.33)
(11,645.96)
(56,540.65)
(159,943.81)
-
(306,762.29)
(407,356.18)
Less: Repayment of Principal
(1,735,195)
Add: Liquidation of Investment
Required Financing
Excess Cash
(285,872)
(3,367,102)
(7,755,237) (11,011,386)
(7,544,542) -
Jan
Feb
Mar
Apr
Loan Balance - Beginning
(587,575)
(873,447)
(4,240,549)
(11,995,786)
Add: Required Financing
(285,872)
(3,367,102)
(7,755,237)
(11,011,386)
Less: Repayments
(873,447)
Loan Balance - End
(4,240,549)
(11,995,786)
-
May
(23,007,172)
June
(30,551,714)
(7,544,542) -
(23,007,172)
1,735,195
(30,551,714)
(28,816,518)
Investment Balance - Beginning
-
-
-
-
-
-
Add: Excess Cash
-
-
-
-
-
-
Less: Liquidation of Investment
-
-
-
-
-
-
Investment Balance - End
-
-
-
-
-
-
ANNEX 1: Sweet Beginnings Co. Suggested Solution
Jul
Aug
Sep
Oct
Nov
Dec
Total
Sales 20X5
12,475,770
6,282,130
3,539,230
3,008,340
2,388,980
1,946,570
66,306,050
Sales Forecast 20X6
15,594,713
7,852,663
4,424,038
3,760,425
2,986,225
2,433,213
84,075,350
8,281,790.40
10,490,266.80
9,356,827.50 4,711,597.50 2,654,422.50 2,256,255.00
49,794,878
6,993,511
6,237,885
3,141,065
1,769,615
1,504,170
1,194,490
33,435,483
15,275,302
16,728,152
12,497,893
6,481,213
4,158,593
3,450,745
83,230,361
Less: Payment for purchase of Raw Materials
2,433,221
2,068,234
1,642,424
1,338,267
1,078,102
1,611,768
46,689,754
Less: Payment for Salaries and Wages
1,468,448
827,295
703,199
558,424
455,011
366,555
15,783,183
Less: Payment to Delivery Contractors
467,841
235,580
132,721
112,813
89,587
72,996
2,522,261
450,000
1,800,000
Sales Forecast 20X7
Cash receipts from sales two months before (60%)
Cash receipts from sales last month (40%)
Cash Receipts From Collections
Less: Dividents Paid
450,000
1,862,285
Less: Income Tax Paid
Net Cash Flow
Add: Beginning Cash
Less: Required Ending Balance
Add: Return on Investment (12%)
1,319,433
4,867,453
10,905,792
11,734,758
9,569,548
4,471,709
1,216,460
949,426
11,567,710
640,000
640,000
640,000
640,000
640,000
640,000
641,123
(640,000)
(640,000)
(640,000)
(640,000)
(640,000)
(640,000)
(640,000)
26,747
71,732
84,614
183,092
-
-
-
Less: Interest on Borrowing (16%)
(384,220.24)
(243,932.63)
(90,721.62) -
Less: Repayment of Principal
(10,521,571)
(11,490,826)
(6,804,121)
-
(1,668,958)
-
(587,575)
Add: Liquidation of Investment
Required Financing
Excess Cash
-
2,674,705
4,498,456
1,288,192
1,034,040
9,495,393
Jan
(28,816,518)
Loan Balance - Beginning
Add: Required Financing
Feb
-
Less: Repayments
(18,294,947)
-
10,521,571
May
June
(6,804,121) -
-
-
-
-
-
6,804,121 -
-
-
-
-
-
11,490,826
(18,294,947)
Loan Balance - End
Mar
(6,804,121) -
Investment Balance - Beginning
-
-
Add: Excess Cash
-
-
Less: Liquidation of Investment
-
-
Investment Balance - End
-
-
Apr
2,674,705
-
2,674,705
7,173,161
8,461,353
4,498,456
1,288,192
1,034,040
2,674,705
7,173,161
8,461,353
9,495,393
ANNEX 1: Sweet Beginnings Co. Suggested Solution
Income Statement
Computation
84,075,350
Gross Sales
Cost of Goods
84,075,350 x 73.70%
Gross Profits
61,963,533
22,111,817
Delivery Fees
84,075,350 x 3.00%
2,522,260.50
Operating Expenses
84,075,350 x 6.00%
5,044,521
Depreciation
9,896,000 x 10.00%
989,600
Interest Expense
Return on Investment + Interest on borrowings
12,069,570
Pretax profit
Income Tax
1,485,866
22,111,817 x (1-40%) x 30%
Net profit
3,980,127
8,089,443
Balance Sheet
Computation
Cash
Ending balance of cash budget
Accounts receivable
3,379,958 + 84,075,350 - 83,230,361
4,224,948
Inventories
Same as last year
1,076,000
Short term investments
From cash budget
9,495,393
Total Current Assets
640,000
15,436,340
Gross plant, property, and equipment
8,696,000 + 1,200,000
9,896,000
Accumulated depreciation
1,278,500 + 989,600
2,268,100
Net PPE
Total Assets
7,627,900
23,064,240
Balance Sheet
Computation
Accounts payable
654,234 + 61,963,533* + 5,044,521 46,689,754 - 15,783,183
Short term borrowings
-
Payable to PPE supplier
Cost to be paid for purchase equipment
Accrued taxes
9,179,863 x (1-73.7%) x (1-40%) x 30%
1,200,000
434,575
6,823,926
Total current liabilities
Owners equity
5,189,351
9,950,872 + 8,089,443 - 1,800,000
16,240,315
23,064,240
Total liabilities and equity
Inventory 20X5
1,076,000
Add: *Purchases
61,963,533
Less: Inventory 20X6
1,076,000
Cost of goods sold
61,963,533
Business'Finance
110 MINS
Financial Planning Tools and Concepts
Content Standards
The learners demonstrate an understanding of the financial planning process,
including budget preparation, cash management, and working capital
management.
Performance Standards
The learners will be able to illustrate the financial planning process.
Learning Competencies
The learners shall be able to identify the steps in the financial planning
process.
LESSON OUTLINE
Introduction Importance of planning
/Review
20
Motivation
50
Formulation of an Event Plan
Instruction/ Steps of Financial Planning
Delivery
Enrichment Integration of Learning
Materials
Specific Learning Outcomes
The learners will be able to:
• Explain the importance of planning.
• Differentiate between strategic planning and tactical planning.
• Enumerate and apply the steps in planning.
30
1-
• Board notes
• Play money
• Cartolina
• Colored Papers
• Tape
• Glue
• Pencils
• Markers
Resources
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
City. Rex Bookstore.
(2) Gitman, L. J., & Zutter, C. J. (2012). Principles of Managerial
Finance (13th ed.). USA: Prentice Hall.
INTRODUCTION (20 MINS)
1. Discuss the importance of Planning.
Teacher Tips
• Ask the learners how they see themselves five years from now. Write the answers on the board and
tally repeating answers.
If the learners still do not know what they
want five years from now, write “not sure”.
• Reveal that their answers are the long-term goals that they plan to achieve in the future. Tell the
learners that in the activity you did, you have demonstrated that planning plays an important role in
everyday life as the learners already have in mind a set of plans for the next five years. Tell them that
even those who said they are not yet sure what they want five years from now will probably still have
an idea of what kind of life they want. They are still in the process of planning.
• Proceed to defining planning as suggested below:
- Planning is an important aspect of the firm’s operations because it provides road maps for
guiding, coordinating, and controlling the firm’s actions to achieve its objectives (Gitman & Zutter,
2012).
- Management planning is about setting the goals of the organization and identifying ways on how
to achieve them (Borja& Cayanan, 2015).
• Continue by focusing on one example given by the learners. Suppose some of the students answered
that in five years, they will be owners of a successful business. How will they be able to attain this
goal? If they want to be able to be an owner of a successful business, they should first be able to set
up one, or buy into one which would require capital. Hence, they must be able to raise the necessary
funds. This new milestone is their short term goal.
2. Presentation of Relevant Vocabulary.
• There are two phases of financial planning. Financial planning starts with long term plans which would
then translate to short term plans.
• Strategic vs. Tactical Planning
- Discuss the difference between Strategic and Tactical planning.
Teacher Tips
Alternative Example:
• Long term goal: Graduate from a
university
• Short term goal: Pass the college entrance
exam
• Long-term financial plans
- These are a set of goals that lay out the overall direction of the company.
- A long-term financial plan is an integrated strategy that takes into account various departments such as sales, production, marketing, and
operations for the purpose of guiding these departments towards strategic goals.
- Those long-term plans consider proposed outlays for fixed assets, research and development activities, marketing and product
development actions, capital structure, and major sources of financing.
- Also included would be termination of existing projects, product lines, or lines of business; repayment or retirement of outstanding debts;
and any planned acquisitions(Gitman & Zutter, 2012).
• Short-term financial plans
- Specify short-term financial actions and the anticipated impact of those actions. Part of short term financial plans include setting the sales
forecast and other forms of operating and financial data. This would then translate into operating budgets, the cash budget, and pro forma
financial statements(Gitman & Zutter, 2012).
- For the purpose of this topic, emphasis will be made on short-term financial planning.
Long-Term Planning
Short Term Planning
Persons
Involved
More participation from top
management
Top management is still involved but there is more
participation from lower level managers (production,
marketing, personnel, finance and plant facilities) because
their inputs are crucial at this stage since they are the ones
who implement these plans
Time Period
2 to 10 years
1 year or less
Level of
Detail
Less
More
Focus
Direction of the company
Everyday functioning of the company
Table 1: Comparison of Short-Term and Long-Term Planning (Gitman & Zutter, 2012)
MOTIVATION (50 MINS)
1. Event Planning (40 minutes)
• Description of the Activity
- This is a simulation of conducting a campaign event beginning from inception (planning stage)
to actual performance (execution).
- This will involve the facilitator role playing as provider of the goods and services needed, and
the learners as the event coordinators and performers for the event (i.e. the learners will act as
the celebrities/dancers/singers who are part of promoting the cause of the event.)
• Objectives
- Inform the learners that this section aims to let them experience the planning process in a
simple activity given a short amount of time and resources.
- At the end of this activity, they will be able to:
• Organize a small classroom event given the limited time and resources in the class.
• Perform the functions of planning and implementing plans under a controlled set up.
• Evaluate result of event based on a predetermined criteria (see Annex for Grading Rubrics).
• Materials
Cartolina (or 1/4 manila paper)
Php 8 (or 4)
Bond Papers (5 pieces)
5
Colored Papers (or art paper)
10
Tape
5
Glue
5
Pencils
15
Markers
20
Pens
12
Crayons
20
PHP 100
Teacher Tips
If the teacher does not have enough funds
to supply the materials, the teacher may
change the materials or the learners may be
asked to use their own materials as long as
their simulated budget can cover the
materials.
• Mechanics
- As facilitator, you will act the following roles:
• Supplier of materials/paraphernalia to be used in the campaign.
• Proprietor of the venues where the event will be held.
• Talent manager of the special guests.
- All of the following should be present during the event proper:
• Event title and campaign slogan (Example: Existence: Cut the Greed, Not the Green, a benefit concert to save endangered forests,
featuring a performance from the XX group of dancers)
• Campaign paraphernalia (posters/brochures) containing the following:
‣ Title of the event
‣ Date and time
‣ Campaign slogan
‣ Vision Statement (Example: To save the endangered Philippine Forest)
‣ Mission Statement (Example: To increase awareness of deforestation by organizing events that emphasize on tree planting)
3
• (min) to 5 (max) minutes informative presentation on the campaign.
• 3 (min) to 5 (max) minutes production number (may be song, dance or any creative presentation) from the special guest (which will be
role played by the learners). Back up performers may participate.
• The informative presentation may be incorporated in the production number. Whole presentation should be 7 (min) to 10 (max) minutes.
- Allow the students to assign themselves to perform the following functions:
Position
Description
Short Term Planning
Event Chairperson
Oversees the functions of the other
committees. Must be able to set the
overall direction of the group.
• Event title and slogan
• Mission and vision of the campaign
Administrative Team
Responsible for other functions that the
Event Chairperson deems necessary.
This may include stage direction, event
conceptualization, crowd control,
backstage organizer, etc.
Position
Description
Short Term Planning
Budgeting Team
Responsible for the allocation of the
• Record of goods and services
given budget to purchase the necessary
purchased
materials to make the event possible.
• Documentation of timeline of
They will also negotiate with the
activities done during the planning
facilitator regarding prices of the
and execution stage
required materials.
Production Team
Responsible for organizing the
performances to be presented during
the event. This includes role playing as
the celebrities who will perform in the
campaign event.
Marketing Team
Responsible for the presentation that
would persuade the audience to join
the campaign initiative.
Creatives Team
Responsible for the production of the
campaign paraphernalia. The posters
and brochures should be able to catch
the attention of the target audience.
• Song/dance number incorporated in
the campaign
• Not all need to present. Some may
just choreograph.
• Persuasive/informative speech
incorporated in the campaign. May be
done in between song/dance
numbers
Tip: Emphasize on the importance of
• Not all need to present. Some may
the campaign, how the audience can be
just formulate the script.
involved and what would they get from
supporting the campaign.
• Whole cartolina campaign poster
• Whole bond paper campaign
pamphlet
- In 20 minutes, the learners should be able to come up with an event to raise awareness of either of the following suggested issues:
•
•
•
•
•
Proper Waste Segregation
Anti-Smoking Campaign
Barangay or Community Cleaning
Dengue Prevention
Community Image Improvement
- The following are available to them:
• Venue
‣ Center of the Community Plaza – PHP150,000 (Restrictions: Performance must include singing)
‣ Concert grounds – PHP200,000 (Restrictions: None, any type of performance is allowed)
‣ School Auditorium – PHP100,000 (Restriction: Performance must include dancing)
‣ Basketball Court – PHP90,000 (Restriction: Performance must include a song and dance number)
• Materials – may be used for posters, stage design, and other campaign paraphernalia.
‣ Cartolina – PHP50,000 each
‣ Marker – PHP10,000 each
‣ Pencil – PHP5,000 each
‣ Pens – PHP7,000 each
‣ Crayons – PHP5,000 each stick
‣ Tape – PHP8,000 per roll
‣ Glue/paste – PHP3,000 per bottle/tube
‣ Colored papers – PHP5,000 per piece
‣ Bond Papers – PHP10,000 per piece
• Special Guest (to be role played by the learners from the productions team)
‣ Kathryn Bernardo and Daniel Padilla – PHP200,000 (Restrictions: None, may perform anywhere)
‣ Nadine Samonte and James Reid – PHP100,000 (Restrictions: Will not perform in a basketball court or school auditorium)
‣ Maine Mendoza and Alden – PHP150,000 (Restrictions: Will not perform in a basketball court)
‣ Jolina Magdangal and Marvin Agustin – PHP90,000 (Restrictions: Will not perform in a school auditorium)
- Provide them with a budget of P 300,000.
2. Event Evaluation (10 minutes)
• At the end of the activity, summarize what the learners have done and integrate this to the objectives of the activity. Allow the students to
reflect on the activity.
INSTRUCTION/DELIVERY (30 MINS)
1. Presentation of the Financial Planning Process.
• From the event planning activity, the learners were able to experience an actual planning process.
• Ask the learners to identify what are the steps they did in planning for their event.
- Sample Answers:
• Identify the leader
• Divide the group to different functions
• Think of a slogan
• Conceptualize an idea/design
• Made a budget
• Made the plan operational
• Measuring the actual performance vis a vis the plans
• Inform the learners that the events they presented are a result of the planning process.
• Continue discussing the planning process as follows:
1) Set goals or objectives.
• For the activity done, the objective was to increase awareness of (chosen issue).
• 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 largest
and 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
For the activity done, the resources the learners have 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
• For the activity done, 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.
For the activity done, 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 the activity done, the learners were given an expectation of their output and the teacher will
grade them based on a predetermined criteria. Other evaluation for awareness events may be
number of attendees, feedback, etc.
Teacher Tips
This section is further discussed in the
budgeting discussion proper.
• 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).
Teacher Tips
Recognize that this step is not done in the
activity, but in reality, this is something that
should be part of planning.
ENRICHMENT (10 MINS)
1. Integration of learning.
• Ask the learners the following:
- Retell briefly the steps in Planning.
- What is the difference between long term and short term goals?
2. Homework
• Assign the students to read about budgeting and projected financial statements. Refer to the
following references:
- Business Finance (Cayanan and Borja): Chapter 3
- Principles of Managerial Finance (Gitman and Zutter): Chapter 4
3. Assign the case study in Appendix 2.
• Have the learners form four groups. Each group will be working on the assigned case.
• Assign two groups who will be the presenting groups and two who will be critic groups.
Teacher Tips
The case study is not meant to be solved
yet but is given in advance to give the
learners some ideas of what they are
expected to cover the following meeting.
• The presenting groups will have a 20 minute class presentation followed by a 10 minute cross examination from the critic groups. Assign a
critic group to each presenting group. They will be required to ask questions from the presenters.
Appendix
Annex 1: Event Planning Evaluation Rubrics
Position
Description
Expected Output
On the whole
Event
Chairperson
Oversees the functions of
the other committees.
Must be able to set the
overall direction of the
group.
Administrative Responsible for other
Team
functions that the Event
Chairperson deems
necessary. This may include
stage direction, event
conceptualization, crowd
control, backstage
organizer, etc.
• Event title and
slogan
• Mission and
vision of the
campaign
Evaluation Critera
4 - Outstanding
5 - Competent
2 - Emerging
1 – Needs
Improvement
0 – Objectives
not met
The event was
carried out
smoothly and the
whole class was
participative.
The event was
carried out
smoothly but
there are
members of the
class that did not
participate.
There were
minor
challenges
during the
presentations
but the class
made the effort
to give a good
presentation.
The event was
carried out but
the members of
the class were
only focusing on
their own
functions which
did not translate
to the whole.
There were a lot
of disorder in
the
presentations
and the
members of the
class have not
been working
together.
Leads
discussions and
made timely
decisions.
Leads the
discussions but
was reluctant at
making
decisions.
Did not
consistently
engage in
discussions but
still had a final
say on what to
do.
Occasionally
intervenes in the
activity only
when problems
arises.
Watches and
lets everyone
else do their
own job.
Present in
coordinating the
different
functions and
motivating the
members of the
class to work on
their functions.
Present in
coordinating the
different
functions but
allows other
members of the
class to slack off.
May
occasionally
lose focus on
the direction of
the functions.
Stopped
working after
expected output
has been
formulated.
No initiative to
direct shown.
Position
Description
Expected Output
Evaluation Critera
4 - Outstanding
5 - Competent
2 - Emerging
1 – Needs
Improvement
0 – Objectives
not met
Budgeting
Team
Responsible for the
allocation of the given
budget to purchase the
necessary materials to
make the event possible.
They will also negotiate
with the facilitator
regarding prices of the
required materials.
• Record of goods
and services
purchased
• Documentation
of timeline of
activities done
during the
planning and
execution stage
Was on time on
creating the
budget and
organized in the
documentation
of the timeline of
events.
Had a few delays
on delivering the
budget but was
able to give what
the other teams
needed.
Wanted to cater
to ALL needs of
ALL teams
which
compromised
deadlines.
Prepared
No
budgets but did documentation
not show
was presented.
initiative to
incorporate what
other teams
needed.
Production
Team
Responsible for organizing
the performances to be
presented during the
event. This includes role
playing as the celebrities
who will perform in the
campaign event.
• Song/dance
number
incorporated in
the campaign
Was confident
and entertaining
and was able to
present within
the time limit.
Provided a good
presentation but
time limit was
not observed.
Provided a
good
presentation
but some of the
members did
not participate.
Presented with a
lot of flaws but
made the effort
to give the
presentation.
Unable to
present
anything.
Marketing
Team
Responsible for the
presentation that would
persuade the audience to
join the campaign
initiative.
• Persuasive/
informative
speech
incorporated in
the campaign.
May be done in
between song/
dance numbers
• Not all need to
present. Some
may just
formulate the
script
Spoke loud and
audibly to be
able to catch the
attention of
listeners.
Spoke well but
did not work
within the time
limit.
Provided a
good
presentation
but some of the
members did
not participate.
Presented with a
lot of flaws but
made the effort
to give the
presentation.
Unable to
present
anything.
Tip: Emphasize on the
importance of the
campaign, how the
audience can be involved
and what would they get
from supporting the
campaign.
Position
Creatives
Team
Description
Expected Output
Responsible for the
• Whole cartolina
production of the
campaign poster
campaign paraphernalia.
• Whole bond
The posters and brochures
paper campaign
should be able to catch the
pamphlet
attention of the target
audience.
Evaluation Critera
4 - Outstanding
5 - Competent
2 - Emerging
1 – Needs
Improvement
0 – Objectives
not met
Materials were
appealing and
complete in all
requirements .
Materials were
appealing but
incomplete.
Both materials
were made but
it wasn’t very
appealing.
Only the poster
or the pamphlet
was made.
No campaign
materials were
made.
Annex 2: Sweet Beginnings Co. Case Study
Sweet Beginnings Co. is currently the most talked about clothing shop in town. Not only was the shop filled with customers every day, but they
have been a major supplier of clothing to other shops. Ms. Muff, the owner of the shop has remained confident that the operations will go
smoothly until one early morning when there had been problems with the delivery that was supposed to leave the shop. The clothes which
were scheduled to be delivered were already packed and waiting on the loading bay. It was past 30 minutes of the scheduled delivery and no
delivery truck was in sight. Ms. Muff decided to call the delivery contractor to find out what was taking the trucks so long.
“You’ve been one month late from your scheduled payment for our delivery service,” the frustrated delivery contractor said. “We’ve been
sending you notices every day for the past week and your company doesn’t seem to be responding. Unless you will be able to pay the amount
due by this morning, we will not send any truck to deliver your goods.
Ms. Muff was astounded to hear of the unpaid fee. To clear up the mishap, Ms. Muff hurriedly approached the company’s accountant, Mr. Phil in
hopes of drawing cash from the company. Mr. Phil regrettably reported that the company does not have cash to pay the delivery contractor. In
fact, the company has been consistently borrowing short term funds for three months from the start of the year. The company has yet to pay
any of these borrowings and Mr. Phil informed Ms. Muff that the short term lenders have been reluctant to lend money at this point.
As a result, the shipments will not be delivered to the customers until the company figures out how to pay their delinquency with the delivery
contractors. The outside customers have been understanding enough to acknowledge that there will be a delay on the deliveries for this day.
However, too much delay may frustrate these customers and may cause bad reputation to the company. Ms. Muff is looking into taking a loan
from Fresh Rural Bank to pay for the delinquent fees. The bank manager of Fresh Rural Bank has requested a meeting with Ms. Muff to discuss
the financial condition of Sweet Beginnings Co. and plans for restoring its liquidity.
Outraged, Ms. Muff told Mr. Phil, “Why don’t we have any balance in our cash account? Our company has been very profitable but we seem to
be depending on loans to finance our operations. We need to figure out what is going wrong. Otherwise, we may lose our customers.”
Company Background
Sweet Beginnings Co. was founded in 20X0 as a manufacturer of summer clothes. The first shop was located near a calm beach with sky blue
waters and powdery sands. Families and tourist would usually flock to the beach on summer weekends which gave the clothing shop foot traffic
and gained the market’s attention. Due to its high quality products, the clothing store became a popular stop shop for vacation goers. In 20X1,
a known blogger fancied the clothing line displayed in Sweet Beginnings and published an article promoting the shop. This earned the
company nationwide publicity which led to other clothing stores offering shelf space for Sweet Beginning’s brand. In 20X3 it expanded its
garment productions due to the increasing demand of their products. To this day, the company maintained its position as a summer clothing
store since this line has brought its brand equity.
Clothing Market
The demand for clothing was characterized by a stable year-to-year growth. Unit demand increased with both population and individual
income. However, the seasonal character of the company’s product has resulted to cyclical sales.
Competition among other clothing shops in the town is unlikely to clash with the company’s sales growth. The company believes it will maintain
its average growth rate for sales for the succeeding years.
Sales Forecast
Sweet Beginnings Co. had been consistently profitable. Moreover, sales had grown at an annual rate of 18 percent in 20X5. Gross sales were
projected to grow at 20% of the sales of the same months on the first quarter, 30% of sales of the same months on the second quarter and 25%
of sales of the same months on the third and 4th quarter. This growth rate is expected to be constant until 20X8.
Financial Information
To prepare a forecast on a business-as-usual basis, Ms. Muff and Mr. Phil agreed on various parameters. Cost of goods sold would run at 73.7%
of gross sales—a figure that was up from recent years because of increasing price competition. Operating expenses would be about 6% of sales
—also up from recent years to include the addition of a quality-control department and two new sales agents. Depreciation is at 10% of cost of
property, plant and equipment (PPE). Additions during 20X6 is expected to amount to PHP1,200,000 which will be paid on January 20X7. The
Company’s policy is to expense full year’s depreciation on the date of purchase. The Company expects inventory level for 20X6 to be the same
as 20X5.
The company’s income tax rate was 30% paid for each quarter in May, August, November, and April of the following year, respectively. The
company opts to use optional standard deduction of 40% from the company’s gross profit to arrive at the taxable income for the quarter.
The delivery contractor’s fee (at 3% of sales) was collected at the loading gate as trucks left to make deliveries to customers. Ms. Muff proposed
to pay dividends of PHP450,000 per quarter. For years Sweet Beginnings had paid high dividends.
Mr. Phil observed that sales collections in any given month had been running steadily at the rate of 40% of the last month’s sales plus 60% of
the sales from the month before last. The value of raw materials paid in any month represented on average 55% of the value of sales expected
to be made two months later. Wages and other expenses in a given month were equivalent to about 34% of purchases in the previous month.
As a matter of policy, Ms. Muff wanted to see a cash balance of no less than PHP640,000.
Sweet Beginnings Co. had a line of credit from Fresh Rural Bank, where it also maintained its cash balances. Fresh Rural Bank’s short-term
interest rate was currently 16%. Return on investment for short term investments is at 12%.
Historical Information
Sweet Beginnings Co.
Monthly Sales
2015
Sweet Beginnings Co.
Historical Income Statements
Sweet Beginnings Co.
Balance Sheet
December 31, 20X5
Problem
Ms. Muff needs to prove that the company will be liquid enough to pay for its loans with Fresh Rural Bank so that it will be allowed to ask for
another loan to meet the delivery contactor’s fee. How should Ms. Muff explain to First Rural Bank that the company is in a good financial
position? Moreover, should the company prove to have financial liquidity problems, what can to company do to cope with their need for cash?
Learner’s Guide
1. Assume that you are Ms. Muff and you will be presenting to the Fresh Rural Bank. Convince the bank that you are in a good financial
position evidenced by your cash budget and projected financial statements.
2. Prepare a monthly cash budget for Sweet Beginnings Co. for the year ending December 20X6. Start with the monthly sales forecast (Tip:
Forecast sales up to Feb 20X7).
3. The following table format may be used for the cash budget:
Jan
Cash Receipts From Collections
Less: Purchase of Raw Materials
Less: Payment for Salaries and Wages
Less: Payment to Delivery Contractors
Less: Dividends Paid
Less: Income Tax Paid
Net Cash Flow
Add: Beginning Cash
Less: Required Ending Balance
Add: Return on Investment (12%)
Less: Interest on Borrowing (16%)
Less: Repayment of Principal
Add: Liquidation of Investment
Required Financing
Excess Cash
Feb
…
Nov
Dec
Total
Jan
Loan Balance - Beginning
Feb
…
Nov
Dec
Total
587,575
Add: Required Financing
Less: Repayments
Investment Balance - Beginning
Add: Excess Cash
Less: Liquidations
Investment Balance - End
4. Forecast Financial Statements. Start with income statement.
Gross Sales
Total of monthly forecasted sales
Cost of goods
73.7% of Sales
Gross profit
Delivery Fees
3% of sales
Operating expenses
6% of sales
Depreciation
10% of Total PPE cost
Interest expense
Total of Interest from borrowings and return of investment from cash budget
Pretax profit
Income tax
Net profit
Gross profit x (1-40%) x 30%
5. Forecast Financial Statements. Start with income statement.
Cash
Required cash balance
Accounts receivable
Accounts receivable beginning + Sales - Collections from Customers
Inventories
Same as last year
Short term investments
Resulting balance from cash budget
Total current assets
Gross plant, property and
equipment
Beginning balance + current year additions
Accumulated depreciation
Beginning balance + depreciation expense
Net PPE
Total Assets
Accounts payable
Accounts payable 20X5 + Purchases* + Operating Expense - Cash payment
for raw materials - Cash Payment for Salaries and Wages
*Purchases = Cost of goods sold + Inventory 20X6 – Inventory 20X5
Short term borrowings
Resulting balance from cash budget
Payable to PPE supplier
Additions to PPE payable on January 20X7
Accrued taxes
Tax payable for the last quarter
Total current liabilities
Owners’ equity
Total liabilities and equity
Owners’ Equity 20X5 + Net Income - Dividends paid
Format of Paper/Presentation
Prepare a paper containing the following:
1. Letter to Fresh Rural Bank explaining that the company is in a healthy financial position and has capacity to pay loans when they come due.
2. Cash Budget for 20X6 in good form.
3. Projected Financial Statements for 20X6 in good form.
4. Supporting computations.
Presenting Group
Prepare a 20 minute presentation using the following outline
• Case Background: Brief explanation of the problem of the Company.
• Methodology: Explain why the cash budget and projected financial statements was made in order to help the company in their dilemma.
• Budgets and Projections: Present the resulting budgets and implications of the figures that were derived. Explain in class how you were able
to derive your figures.
• Conclusion: Was the company performing well based on the budgets and projections and will it be able to sustain its operations?
Critic Group
Take the point of view of Fresh Rural Bank. From the presentation of Budgets and Projections, ask questions that will challenge the presenting
group’s conclusions. The critic may also ask clarifications on the presentation or comment on how differently they did their analysis.
Business Finance
Review of Financial Statement
Preparation, Analysis,
LESSON OUTLINE
and Interpretation Pt.3
Content Standards
The learners demonstrate an understanding of the process of preparing financial
statements as well as the methods or tools of analysis of financial statements,
including horizontal analysis, vertical analysis, and financial ratios to test the level
of liquidity, solvency, profitability, and stability of the business.
Performance Standards
The learners will be able to solve exercises and problems that require financial
statement preparation, analysis, and interpretation using horizontal and vertical
analyses, and various financial ratios.
Learning Competencies
The learners shall be able to:
120MINS
Introduction Introduce the learning objectives and
/Review
20
Motivation
10
review the concepts behind the relevant
accounts on the income statement and
balance sheet
Discuss the granting of credit by sari-sari
stores
Instruction/ Define efficiency ratios and solve sample
Delivery
30
Practice
20
problems
Board work/exercises and presentation
Enrichment Analyze and interpret efficiency ratios for
various companies from different industries.
Evaluation
Quiz and essay
• Define the measurement levels, namely, liquidity, solvency, stability, and
profitability. (ABM_BF12-IIIb-7)
• Compute, analyze, and interpret financial ratios such as current ratio, working
capital, gross profit ratio, net profit ratio, receivable turnover, inventory turnover,
debt-to-equity ratio, and the like. (ABM_BF12-IIIb-9)
Materials
Specific Learning Outcomes
At the end of the lesson, the learners will be able to:
(1) Copies of sample financial statements
• Calculators
• Laptops
• Projectors
• Handouts
Resources
• Define efficiency.
• Solve efficiency/activity ratios (accounts receivable turnover, average collection period, average age of AR, or days sales outstanding, inventory
turnover, average age of inventory or days in inventory, accounts payable turnover, average age of payables, average payment period, or days in
accounts payable, total asset turnover, operating cycle, and cash conversion cycle.
• Analyze, interpret, and compare the efficiency ratios of sample companies.
30
20
INTRODUCTION/REVIEW (20MINS)
1. Communicate the learning objectives
•
Introduce the following learning objectives using any of the suggested protocols (verbatim, own
word, read-aloud):
•
Define efficiency.
•
Solve for efficiency/activity/turnover ratios (accounts receivable turnover, average collection
period, average age of AR, or days sales outstanding, inventory turnover, average age of
inventory or days in inventory, accounts payable turnover, average age of payables, average
payment period, or days in accounts payable total asset turnover, operating cycle, and cash
conversion cycle)
•
Teacher Tip:
Make sure to emphasize that purchases are
not found on the face of the financial
statements but rather, are computed using
this general formula:
Ending Inventory
Add: Cost of Goods Sold
Less: Beginning Inventory
Purchases
Analyze, interpret, and compare the efficiency ratios of sample Philippine companies.
2. Review
• Review the differences between an income statement and a balance sheet and what relevant
accounts (accounts receivable, inventory, sales, cost of goods sold, purchases, accounts payable)
mean.
• Emphasize that income statement represents a period of time or the movement through that period
while the balance sheet represents amounts as a point of time.
MOTIVATION (20 MINS)
1. Ask the learners if they have tried buying from sari-sari stores on credit. How many days were given
to them as the “credit period” or the period within which they needed to pay? Do they strictly
follow this credit period? When do they actually pay?
2. This time, ask them about the consequences of paying much later than the credit period on the
operations of the sari-sari stores with respect to their obligations. Will it create problems for the
sari-sari store if, for example, it has a due obligation tomorrow but none of its customers have paid
their obligations yet?
3. Now ask them if a shorter credit period, by itself, is always better than a longer credit period or
Teacher Tip:
The following table summarizes the possible
effects of changes in credit terms (tenor).
Short
Credit
Period
Long
Credit
Period
Effect on sales
Decrease
Increase
Effect on AR
Decrease
Increase
Effect on Bad
Debt Expense*
Decrease
Increase
* the risk of customer not paying is less
when given a short credit period.
does the length depend on other factors.
4. Write their answers on the board.
INSTRUCTION/DELIVERY (20 MINS)
Teacher Tip:
1. Define efficiency.
• Efficiency refers to a company’s ability to be efficient in its operations. Specifically, it refers to the
speed with which various current accounts are converted into sales, and ultimately, cash.
• You may refer back to the sari-sari store example to illustrate the meaning of efficiency (in that
example, the credit period is the target speed with which the store goals to collect their receivables).
2. Define the efficiency ratios and write the formulas in the board.
• Accounts receivable turnover
• Average collection period, otherwise known as average age of AR, days’ receivable or days sales
outstanding
• Inventory turnover
• Average age of inventory or days’ inventory
• Accounts payable turnover
• Average age of payables, average payment period, or days’ payable
• Total asset turnover
• Operating cycle
• Cash conversion cycle
Accounts receivable turnover =
Average collection period =
Sales
Accounts Receivable
365
Accounts Receivable Turnover
If the learners have a hard time memorizing
the formulas, a simple tip is that the name
of the turnover is the denominator in the
formula.
Assume all sales are on credit.
For purchases, if there is no beginning
inventory given, it is sufficient to use cost of
goods sold as a substitute number, if there
is no other information given. Even if both
beginning and ending inventories are made
available, some analysts still just use the
cost of goods sold in computing accounts
payable turnover ratio to facilitate the
computation. Consistency must be
observed in the application of the formula.
In computing for these ratios, some authors
would prefer to use that average amount of
the balance sheet accounts involved
(accounts receivable, inventory, accounts
payable, total assets) in the computation.
The idea is that since the income statement
accounts are earned (sales) or incurred (cost
of goods sold, purchases) over the year,
average balances for the balance sheet
accounts should be used.
A simple way to compute for the average is
just to add the beginning and ending
balances then divide the sum by two. For
ease, you may just use ending balances in
computing the ratios. Whichever approach
is used, consistency must be observed.
Inventory turnover =
For the number of days in a year, 365 or 360
maybe used. Again, consistency must be
observed. There are occasions when
quarterly data instead of annual are used,
hence, use 90 in the formulas for computing
average collection period, average age of
inventory, and average payment period.
Cost of goods sold
Inventory
Average age of inventory =
Accounts payable turnover =
Average payment period =
365
Inventory Turnover
Purchases
Inventory
For our purpose, we will consistently be
using 365 days.
Cash conversion cycle is also known as net
trade cycle.
365
Accounts Payable Turnover
Operating Cycle = Average Collection Period + Average Age of Inventory
Cash Conversion Cycle = Average collection period + Average age of inventory - Average age of payables
OR
Cash Conversion Cycle = Operating Cycle - Average Age of Payables
3. Show a sample financial statement and ask learners to compute the ratios:
Answer Key:
Sample Company Statement of Financial Position as of December 31, 2014
ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
P 120,000.00
Accounts Payable
P 70,000.00
Marketable Securities
P 35,000.00
Short-term notes
P 55,000.00
Accounts Receivable
P 45,000.00
Cash
Inventories
P 130,000.00
Current Assets
P 330,000.00
Current Liabilities
Long-term debt
Total Liabilities
Equipment
P 2,970,000.00
Common stock
Buildings
P 1,600,000.00
Retained earnings
P 125,000.00
P 2,700,000.00
P 2,825,000.00
P 500,000.00
P 1,575,000.00
Fixed Assets
P 4,570,000.00
Stockholders’ equity
P 2,075,000.00
Total Assets
P 4,900,000.00
Total liabilities and equity
P 4,900,000.00
Sample Company Statement of Financial Performance for the Year Ended December 31, 2014
Sales Revenue
P 2,000,000.00
Cost of Sales/Service
P (1,300,000.00)
Gross Margin
Operating Expenes
Operating Profit
P 700,000.00
P (199,000.00)
P 501,000.00
Other Income
P 5,000.00
Other Expenses
P (2,800.00)
Net Income before Tax
Income Tax
Net Income after Tax
P 503,200.00
P (150,960.00)
P 352,240.00
(provide that the beginning inventory is
P 247,000):
• Accounts recievable turnover: 44.4x
• Average collection period: 8.2 days
• Inventory turnover: 10x
• Average age of inventory: 36.5 days
• Accounts payable turnover: 18.57x
• Average payment period: 19.65 days
• Total asset turnover: 0.41x
• Operating cycle: 44.7 days
• Cash conversion cycle: 25.05 days
PRACTICE (20 MINUTES)
Provide exercises. Here are sample questions with varying difficulty:
(Easy)
• Total asset is PHP750,000. Sales is PHP1,500,000. What is the total asset turnover?
• Accounts receivable turnover is 4. What is the average collection period assuming annual data are
used? What is the average collection period assuming quarterly data are used?
• Sales for the year amount to PHP100,000. Accounts receivable amount to PHP12,000. What is the
average collection period assuming annual data are used? What is the average collection period
assuming quarterly data are used?
(Average/Difficult)
A. The quick ratio is 1.7 while the current ratio is 2.5. The current liabilities amount to PHP5,000. Cost
of goods sold is PHP52,500. What is the inventory turnover? Average age of inventory?
B. Beginning inventory is PHP2,000 while ending inventory is PHP5,000. Cost of goods sold is double
the ending inventory and accounts payable is PHP4,000. What is accounts payable turnover?
Average payment period?
C. Ending inventory is PHP13,000 while accounts payable is PHP2,500. Purchases were half the ending
inventory. What is accounts payable turnover? Average age of payables?
D. Current assets amount to PHP30,000 while noncurrent assets are PHP50,000. Sales amount to
PHP200,000. What is the total asset turnover?
E. Based on your answers from letters c, d, and e, what is the operating cycle of the company? Cash
conversion cycle?
Teacher Tip:
By this time, the learners should’ve
mastered the computation of efficiency
ratios and the different names of each ratio.
Answer Key:
• Total asset turnover = 1.5M/750K = 2
• Average collection period: 365/4 = 91.25
• Average collection period = 43.8 days,
Accounts receivable turnover = 8.3x
• Inventory turnover = 13.1x, Average age
of inventory = 27.8 days
• Accounts payable turnover = 3.25x,
Average payment period = 112.3 days
• Accounts payable turnover = 2.6x,
Average age of payables = 140.4 days
• Total asset turnover = 2.5x
• Operating cycle = 71.6 days, Cash
conversion cycle = (40.7) days
ENRICHMENT (20 MINUTES)
1. Summarize and recap the relationship of the accounts in computing the ratios.
2. Ask learners to discuss what they think the ratios mean and its applications. Some reflection
questions you may use: (Check the teacher tips to the right for answers/discussions)
• Are high turnover ratios good or bad? (Possible answer: It really depends on the operations of the
company. High inventory turnover ratios are less costly for the company but it can also create more
risks for the company. For example, very high inventory turnover ratios could mean that there are
inventory stock-outs or lost sales since a very low turnover is maintained. On the other hand, A
company will want to have a low payable turnover ratios.)
• If company A has accounts receivable turnover of 3.5 while company B has an accounts receivable
turnover of 8.1, which is a better company? Explain why. (Generally, a company with higher receivable
turnover, assuming all other factors are same, is at a better position compared to a company with a
lower receivable turnover)
• What factors affect inventory turnover ratio? (Possible answers: projected sales, industry
developments, nature of industry, management decisions, stock out costs)
• What factors affect accounts payable turnover ratio? (Possible answers: credit terms of suppliers,
relationship to suppliers, availability of supplies in the market)
• Does a shorter or a longer operating cycle indicate the efficiency of a business? What about for the
cash conversion cycle? (See teacher tips for discussion)
3. Show the statement of financial position and statement of financial performance of three
companies: Jollibee, Petron, and Globe. You may project the financial statements using LCD
projector or overhead projector or provide printed copies. These financial statements can be used
for the succeeding topics. You may also select other companies as examples. Just make sure to
simplify and condense the financial reports before presenting them to class.
The condensed financial statements of the three companies as of December 31, 2014 were already
provided in the previous modules.
4. Ask learners to compute the following ratios of the sample companies:
Teacher Tip:
A company’s average collection period
should be compared with the credit terms it
grants its customers. If the average
collection period is higher than the credit
period, it may indicate a problem with the
credit department (granting credit to noncreditworthy people or companies) or with
the collection department (inefficient or lack
of means of collection) or both.
Teacher Tip:
Inventory turnover is more meaningful when
compared with that of the industry norms.
High industry turnovers are common (and
expected) for fastfood restaurants but not
for real estate firms. Fastfood restaurants
sell stocks very quickly and keep just the
right amount of inventories to prevent
spoilage, storage, and handling costs. But it
is common for real estate firms to take a
couple of years before selling units.
Teacher Tip:
Average payment period makes sense to be
analyzed in relation to the credit terms
extended by a company’s suppliers. If a
company manages to pay beyond the credit
period available (in finance, this is called
“stretching the payables”) without
damaging its credit rating, then this
indicates good payables management by
the company because they are able to take
advantage of (almost) free financing. (The
cost of financing for accounts payable can
actually be computed using the amount of
percent discount granted to the firm and
the credit period, which shall be discussed
in later topics.)
A. Average collection period
B. Average age of inventory
C. Average payment period
D. Operating cycle
E. Cash conversion cycle
Answer Key:
JFC
Petron
Globe
Average collection period
30.68
13.56
83.24
Average age of inventory
29.57
41.91
109.08
Average payment period
12.15
23.25
426.52
Operating cycle
60.24
55.48
192.32
Cash conversion cycle
48.09
32.23
(234.21)
5. Ask the learners the possible reason why the sample companies have different turnover ratios,
operating cycle and cash conversion cycle.
6. Before you end this section, summarize the importance of efficiency ratios, how they are computed,
and the caveats to each ratio (such as high turnover ratios are not necessarily good while low
turnover ratios are not always a sign of trouble either).
Total asset turnover indicates the degree to
which management has efficiently used the
firm’s assets to generate sales. Generally,
the higher the ratio, the more efficiently its
assets have been used. In other words, a
higher ratio is a strong positive indicator of
a firm’s operations. However, note that, due
to depreciation of fixed assets, older
companies in an industry may appear to be
much more efficient in terms of generating
sales using its assets. Because of this, a
higher-than-average total assets turnover
might indicate that the company is already
in its mature stage (due to high sales
amount relative to assets), that its fixed
assets are getting too old, or that it may
need to review its depreciation policies (it
may be depreciating its fixed assets too
quickly).
The measure for operating cycle imparts
more insight if analyzed in comparison to a
company’s peers in its industry. A longer
operating cycle compared to the industry
average might be a sign of a problem with
its receivables management (poor credit or
collection policies) or with its inventory
management (holding too much inventories,
which could become obsolete or damaged)
or both. In the same manner, a shorter
operating cycle could also be a signal for
too-tight receivables management (very
aggressive collection policies or too strict
with the granting of credit, which might turn
away customers eventually or might be a
reason for high administrative costs
associated with collection or extensive
background-checking) or inventory
management (keeping too little stocks,
causing frequent stockouts and lost
opportunities for sales) or both.
The cash conversion cycle goes one step
further by including the measure of average
payment period. Comparing this number
with that of other companies in the industry
also gives insight into the firm’s receivables,
inventory, and payables management. In
addition to the discussion in the previous
paragraph, a cash conversion cycle that is
higher than the industry norm might
indicate that a company pays for its
payables too fast (and does not take
advantage of the financing extended to it)
while a cash conversion cycle that is lower
than the average might be an indication of
poor payables management (the company’s
credit rating might significantly deteriorate
by not paying its payables within the period
given). For the cash conversion cycle, it may
be helpful for the learners if they can see a
“timeline” of events to see the chronology
of the events and understand the period
specified by the number.
Jollibee Foods Corporation (JFC) – JFC
relatively has a high accounts receivable
turnover. This low receivables balance of
JFC is due to nature of its operations where
customers pay in cash. The accounts
receivable balance maybe from its
franchisees where JFC has control over.
Similarly, inventory turnover is the highest
again due to the nature of its operations as
a fastfood company. It holds only enough
quantity of stocks and sells them quickly.
Its relatively low operating cycle makes
sense, again, because it reflects the nature
of its business of being in the fastfood
industry. It sells its stocks quickly and
converts its receivables almost
instantaneously, relatively speaking.
Petron Corporation – The average
collection period of Petron is mainly caused
by its industrial customers. These are
customers who are also businesses that are
given credit periods as compared to normal
consumers who need to pay in cash when
purchasing fuel from the gas station. As
expected with Petron’s products, it has a
longer average age of inventory versus
Jollibee. On average, the suppliers in the
fuel and oil industry provide longer credit
terms versus the food industry as evidenced
by Petron’s longer average payment period
(versus JFC).
.
Globe Corporation - The high average
collection period is hard to explain at 83
days. This might be driven by postpaid
subscribers.
Since its inventory is mostly composed of
cellphones and other mobile devices, the
computed average age of inventory is
reasonable. The average payment period is
also quite surprising at 426.52. Globe could
have a high bargaining power with its
suppliers or they have special kinds of
agreements that can’t be inferred from the
provided data.
EVALUATION (20 MINUTES)
1. Provide a written true-or-false or multiple-choice quiz similar to the Practice exercises above.
2. Include an essay question in the quiz. Possible questions would be:
• When compared with last year, a company’s inventory turnover increased. What positive situation might this reflect?
Possible answer: Sales has increased or the company has maintained low levels of inventory due to better inventory management and sales
forecasting.
• What is the incentive of management in computing efficiency ratios?
Possible answer: To monitor performance and do remedial actions if actual performance falls below plans.
Business Finance
Review of Financial Statement
Preparation, Analysis,
LESSON OUTLINE
and Interpretation Pt.4
Content Standards
The learners demonstrate an understanding of the process of preparing
financial statements as well as the methods or tools of analysis of financial
statements, including horizontal analysis, vertical analysis, and financial ratios
to test the level of liquidity, solvency, profitability, and stability of the business.
Performance Standards
The learners will be able to solve exercises and problems that require financial
statement preparation, analysis, and interpretation using horizontal and vertical
analyses, and various financial ratios.
Learning Competencies
The learners shall be able to:
• Define the measurement levels, namely, liquidity, solvency, stability, and
profitability. (ABM_BF12-IIIb-7)
• Compute, analyze, and interpret financial ratios such as current ratio, working
capital, gross profit ratio, net profit ratio, receivable turnover, inventory
turnover, debt-to-equity ratio, and the like. (ABM_BF12-IIIb-9)
Specific Learning Outcomes
At the end of the lesson, the learners will be able to:
• Define financial leverage.
• Solve leverage ratios (debt ratio, debt-to-equity ratio, interest coverage ratio).
• Analyze, interpret, and compare the leverage ratios of sample companies.
120MINS
Introduction Introduce the learning objectives and
/Review
20
Motivation
10
review the concepts behind the relevant
accounts on the income statement and
balance sheet
Discuss the use of borrowings as capital in
starting a business
Instruction/ Define leverage ratios and solve sample
Delivery
30
Practice
20
problems
Board work/exercises and presentation
Enrichment Analyze and interpret leverage ratios for
various companies from different industries.
Evaluation
Materials
Quiz and essay
• Calculators
• Laptops
• Projectors
• Handouts
Resources
(1) Copies of sample financial statements
30
20
INTRODUCTION/REVIEW (20MINS)
1. Communicate the learning objectives
•
Introduce the following learning objectives using any of the suggested protocols (verbatim, own
word, read-aloud):
•
Define leverage.
•
Solve leverage ratios (debt ratio, debt-to-equity ratio, interest coverage ratio)
•
Analyze, interpret, and compare the leverage ratios of sample companies
2. Review
• Review the difference between an income statement and a balance sheet and what relevant accounts
(liabilities, assets, equity, interest expense, earnings before interest and taxes) mean.
• Emphasize that income statement represents a period of time or the movement through that period
while the balance sheet represents amounts as of a point in time.
MOTIVATION (10 MINS)
1. Ask learners how one opens their own business? Ask them what if you have no capital or personal
money ready to start a business?
2. They will most likely answer that one can borrow from friends, family, and banks. Follow-up by
asking them what these borrowings entail? Make sure that idea of paying interest is brought up.
3. Ask them how paying interest affects the earnings of the company.
Teacher Tip:
Relevant accounts are those accounts
needed to solve leverage ratios.
INSTRUCTION/DELIVERY (30 MINS)
1. Define financial leverage.
• Financial leverage refers to the company’s use of debt. It defines the company’s capital structure
which indicates how much of the total assets are financed by debt and equity.
2. DIllustrate how financial leverage works. The teacher may provide a scenario/case where an
entrepreneur is deciding how to finance a business venture, specifically what capital structure
should be chosen. With this, you can demonstrate that with increased debt comes greater risk as
well as higher potential return. An example is provided before:
• Pam has a small restaurant business with current equity of PHP60,000. With the increasing demand,
she is planning to expand her restaurant space. After much analysis she determined that an initial
investment of PHP50,000 in fixed assets is necessary. These funds can be obtained in either of two
ways. The first is the no-debt plan, under which she would ask a relative to become an investor
(owner) by investing the full PHP50,000. The other alternative, the debt plan, involves borrowing
PHP50,000 from the nearby rural bank at 10% annual interest.
• Pam expects PHP 30,000 in annual sales, PHP18,000 in operating expenses, and a 30% tax rate. The
no-debt plan results in after-tax profits of PHP8,400, which is an 8.4% return on equity (new equity of
PHP100,000)
• The debt plan results in PHP4,400 of after-tax profits or 8.8% return on equity (equity still at
PHP50,000). The debt plan provides Pam with a higher rate of return, but the risk of this plan is also
greater, because the annual PHP5,000 of interest must be paid whether Pam’s business is profitable
or not.”
• Provide sensitivity analysis, focus on Earnings before Income Tax [EBIT]
• You may summarize the results of the two alternatives in the board.
3. Define the types of leverage ratios and write the formulas on the board.
• Debt ratio – This ratio measures the proportion of total assets finance by total liabilities or money
provided by creditors (not by the business owners).
• Debt-to-equity ratio – A variation of debt ratio, shows the proportion of debt to equity.
• The teacher may review the accounting equation (Assets = Liabilities + Equities) in showing how the
first two ratios relate.
• Interest coverage ratio – This ratio shows the company’s ability to pay its fixed interest charges in
Teacher Tip:
Before reaching this point, make sure the
class understands what debt and preferred
stocks are.
relation to its operating income or earnings before interest and taxes.
Debt Ratio =
Total Liabilities
Total Assets
Debt-to-Equity Ratio =
Total Liabilities
Interest coverage ratio * =
Total Equity
Earnings before interest and taxes (EBIT)
Interest Expense
* Another name of interest coverage ratio is Times Interest Earned.
4. Show a sample financial statement and ask learners to compute for the ratios.
Answer Key:
Sample Company Statement of Financial Position as of December 31, 2014
ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
P 120,000.00
Accounts Payable
P 70,000.00
Marketable Securities
P 35,000.00
Short-term notes
P 55,000.00
Accounts Receivable
P 45,000.00
Cash
Inventories
P 130,000.00
Current Assets
P 330,000.00
Current Liabilities
Long-term debt
Total Liabilities
Equipment
P 2,970,000.00
Common stock
Buildings
P 1,600,000.00
Retained earnings
P 125,000.00
P 2,700,000.00
P 2,825,000.00
P 500,000.00
P 1,575,000.00
Fixed Assets
P 4,570,000.00
Stockholders’ equity
P 2,075,000.00
Total Assets
P 4,900,000.00
Total liabilities and equity
P 4,900,000.00
Debt ratio = 57.65%
Debt-to-equity ratio = 1.3614
Interest coverage ratio = 180.7143
Sample Company Statement of Financial Performance for the Year Ended December 31, 2014
Sales Revenue
P 2,000,000.00
Cost of Sales/Service
P (1,300,000.00)
Gross Margin
Operating Expenes
Operating Profit
P 700,000.00
P (199,000.00)
P 501,000.00
Other Income
P 5,000.00
Other Expenses
P (2,800.00)
Net Income before Tax
Income Tax
Net Income after Tax
P 503,200.00
Additional note: “Other
expenses” in the
Statement of Financial
Performance is
composed solely of
interest expense. Hence,
interest expense for the
period ended December
31, 2014 is Php 2,800.
P (150,960.00)
P 352,240.00
Teacher Tip:
5. Discuss what factors influence capital structure, hence, also affecting leverage ratios. You may refer
to Cayanan, et.al. for more discussions. The following are just some of the factors that can influence
management’s decision in setting its capital structure.
• Nature of Business
• Stage of Business Development
• Macroeconomic conditions
• Prospects of the industry
• Taxes
• Management style
Nature of Business – If the business is risk
then it has to be financed conservatively
hence, lower debt ratio.
State of Business Development – A newly
formed business may have difficulty
borrowing from banks. Banks usually look
for the historical financial performance of
borrowers.
Macroeconomic conditions – If the overall
economy is good then management can be
more aggressive on taking in risk through
increased debt financing.
Prospects of the industry – A growing
industry makes business more confident to
take on more financial risk.
Taxes - Interest expenses are tax deductible
while cash dividends are not. By having
more debt than equity, businesses save on
taxes as interest expense (multiplied by the
tax rate) decreases income tax due.
Management style –Management and the
board of directors can be aggressive or
conservative in terms of taking on risk.
PRACTICE (20 MINUTES)
Provide exercises. Here is a sample question:
1. (Easy) Total assets is 100,000. Total debt is 50,000. What is the debt-to-equity ratio?
2. (Average/Difficult) If the pro forma balance sheet shows that total asset increase by PHP400,000
while retaining a debt-equity ratio of .75 then:
Teacher Tip:
By this time, the learners should’ve
mastered the computation of leverage
ratios and the different names of each ratio.
Answer Key:
1. 100% or 1
2. c - debt must increase by P171,428.
A. debt must increase by PHP300,000.
B. equity must increase by the full PHPH400,000.
C. debt must increase by PHP171,428.
D. equity must increase by PHP100,000.
ENRICHMENT (20 MINUTES)
Answer Key: (Change % to times)
JFC
1. Summarize and recap the relationship of the accounts in computing the ratios.
2. Ask learners to discuss what they think the ratios mean and its applications. Some reflection
questions:
• What is a good capital structure?
• Are low debt ratios always favorable?
3. Show the statement of financial position and statement of financial performance of three
companies: Jollibee, Petron, and Globe. You may project the financial statements using LCD
projector or overhead projector or provide printed copies. These financial statements can be used
for the succeeding topics. You may also select other companies as examples. Just make sure to
simplify and condense the financial reports before presenting them to class.
• The condensed financial statements of the three companies as of December 31, 2014 were already
provided in the previous modules.
Petron
Globe
Debt Ratio
8%
17%
33%
Debt-toEquity Ratio
16%
58%
108%
45.32
1.69
8.56
Interest
coverage
ratio
Recall:
JFC
Return on
equity
19.55%
Petron Globe
2.65%
24.52%
• Note: Included in the 2014 Income Statement of the three companies are Interest Expenses:
Company
JFC
Interest Expense
152.50
Petron
5,528.00
Globe
2,565.00
4. Ask the learners to compute the ratios of the sample companies and ask them to compare the three companies using the ratios computed.
Recall other relevant ratios like return on equity in highlighting how leverage magnifies risk and return in companies.
5. Ask the learners the possible reason why the sample companies have debt ratios.
Answers will mostly focus on the selected companies’ nature of business, management style/preference, stability of cash flows.
6. Summarize the discussion for today. Focus on how to analyze and interpret the efficiency ratios.
EVALUATION (20 MINUTES)
1. Provide a written true-or-false or multiple-choice quiz similar to the Practice exercises above.
2. Include an essay question in the quiz. Possible questions would be:
• In starting a business, is it okay to start with having debt during the early stages?
• What dictates the company’s choice of leverage structure?
Business Finance
Review of Financial Statement
Preparation, Analysis,
LESSON OUTLINE
and Interpretation Pt.6
Content Standards
The learners demonstrate an understanding of the process of preparing
financial statements as well as the methods or tools of analysis of financial
statements, including horizontal analysis, vertical analysis, and financial ratios
to test the level of liquidity, solvency, profitability, and stability of the business.
Performance Standards
The learners will be able to solve exercises and problems that require financial
statement preparation, analysis, and interpretation using horizontal and vertical
analyses, and various financial ratios.
Learning Competencies
The learners shall be able to:
• Define the measurement levels namely, luquidity, solvency, stability, and
profitability (ABM_BF12-IIIb-7)
• Compute, analyze, and interpret financial ratios such as current ratio, Review
of Financial Statement Preparation, Analysis, and Interpretation
120MINS
Introduction Introduce the learning objectives and
/Review
15
Case
Analysis
45
review financial ratios, focusing on
liquidity and efficiency ratios. Introduce
the case study.
Ask learners to analyze and discuss the case
in groups.
Presentation Ask assigned groups to present their case
analysis to the whole class.
Enrichment Discuss important points of the case and
and
provides commentaries to the groups’
Summary
analysis
Materials
• Calculators
• Laptops
• Projectors
• Textbook
Resources
(1) Several copies of case to distribute to learner-groups
Specific Learning Outcomes
At the end of this lesson, the learners will be able to:
• Apply their knowledge on liquidity and efficiency ratios in tackling real life business problems.
• Pinpoint business problems and formulate relevant recommendations and strategies.
30
30
PRE-WORK
Provide copies of the financial statement of the subject company to the learners a day before the class. Ask them to compute for liquidity and
efficiency ratios.
INTRODUCTION/REVIEW (15 MINS)
1. Review profitability and leverage ratios. Ask learners what profitability and leverage mean. Write the names of the different types of ratios
and their formulas on the board.
2. Explain that business cases are used to discuss certain issues and problems of a specific company. Learners will take the point-of-view of
owners/managers in analyzing the case.
3. Discuss the mechanics of the case discussion:
• The class will be divided in groups of 4 to 6 learners.
• Learners will discuss and analyze the business case among their groups. They will then need to summarize their analysis in an essay/paper.
The paper will have the following outline: Case Background/Story, Analysis (including computations), and Recommendation. The paper can
be one to two pages of yellow sheet or bond paper. They must do this within 45 minutes.
• Two groups will be asked to present. Presenting groups do not need to submit an essay/paper. Instead, they need to prepare their
presentation with materials like manila paper, transparencies, or PowerPoint. Groups can volunteer or the teacher can also assign who will
present. Assignments should be finalized before learners start their case analysis.
• Presentation time is 10 minutes for each group. After the presentation, there will be a 5-minute Q&A session.
4. Distribute the printed cases to the learners.
CASE ANALYSIS (60 MINS)
1. Allow the learners to break into groups. From time to time, update them with the remaining time to do the analysis and their essay/
presentation.
2. Make sure to remind them that they will take on the shoes of the owner/manager in solving the case.
Below is the business case. You may look for or make another business case as long as it highlights the same topics.
Zapatoes, Inc
Anthony Cruz owns Zapatoes, Inc., a home-grown Filipino shoe company. His company has experienced
tremendous growth since it has started its operations in 2009. With a growing demand for his products, Anthony
Cruz is considering expanding his operations by opening his first production facility. Currently, he pays another
company to manufacture the shoes he designs. He is contemplating to produce the shoes Zapatoes, Inc. facility,
with the hope of lowering the cost of production.
The company needs PHP10 million to finance this expansion and is at a tight cash position. Anthony Cruz is now
wondering where to get the funds needed – invite an investor or personally borrow from a bank?
Here are the comparative financial statements of Zapatoes, Inc.:
Statement of Financial Position
2015
2014
2013
180,000.00
210,000.00
270,000.00
Accounts Receivable
7,800,000.00
5,400,000.00
3,900,000.00
Inventory
3,400,000.00
3,000,000.00
2,000,000.00
11,380,000.00
8,610,000.00
6,170,000.00
2,000,000.00
1,800,000.00
1,000,000.00
400,000.00
400,000.00
-
2,000,000.00
2,000,000.00
2,000,000.00
4,400,000.00
4,200,000.00
3,000,000.00
200,000.00
200,000.00
200,000.00
6,780,000.00
4,210,000.00
2,970,000.00
6,980,000.00
4,410,000.00
3,170,000.00
11,380,000.00
8,610,000.00
6,170,000.00
Cash
TOTAL ASSETS
Accounts Payable
Short-term Loans Payable
Long-term debt
Total Liabilities
Capital Stock
Accumulated Profit
Total Equity
TOTAL EQUITY AND LIABILITIES
Statement of Financial Performance
2015
2014
2013
Sales
9,219,747.90
6,856,235.83 5,040,300.00
Cost of Goods Sold
2,950,319.33
2,536,807.26 1,915,314.00
Operating Expenses
2,350,000.00
2,300,000.00 2,100,000.00
Operating Income
3,919,428.57
2,019,428.57 1,024,986.00
Interest Expense
248,000.00
248,000.00
-
Net Income before Taxes
3,671,428.57
Taxes
1,101,428.57
531,428.57
307,495.80
2,570,000.00
1,240,000.00
717,490.20
NET INCOME
1,771,428.57 1,024,986.00
Zapatoes, Inc. sold 3,300 pairs on 2013, 4,500 pairs on 2014, and 6,200 pairs in 2015. With the brand’s target
market – young professionals and college students, it can only sell it at the PHP1,000 to PHP2,000 price range per
pair.
Anthony is wondering whether owning his own manufacturing facility can really improve its profitability. Currently,
he is producing his shoes at PHP475 pesos per pair. He expects that he can lower production costs to as much as
PHP300 per pair if he will manufacture it himself. However, opening a new production facility will increase operating
expenses (including depreciation) by 30%. Currently, most of his operating expenses are marketing and distribution
costs.
To finance the PHP10 million facility, he has three options:
• Accept a PHP10 million equity investment from his friend, Alex. Alex will hold 45% percent ownership of the
business afterwards. Alex does not demand any specific return.
• Short-term loan for 1 year for PHP10 million at 6% per annum from Shortime Bank.
• Long-term loan for 5 years for PHP10 million at 10% per annum from Longly Bank.
Anthony is very confident that his sales volume will still grow for the next 5 years. However, his confidence is tainted
by his uncertainties over the impact of opening a new production facility. What must he do?
PRESENTATION (30 MINS)
1. Time each presentation. Ask groups to stop presenting after 10 minutes. Be strict with the time.
2. After each presentation, ask the presenting group some questions or clarifications. You can also challenge the computations/
recommendations of the learners. You may also provide general comments of the presentation flow and aesthetics. Ask other groups to also
provide comments and questions to the presentations. This should take 5 minutes.
ENRICHMENT AND SUMMARY (15 MINUTES)
1. Write on the board the main points raised by the presenting groups.
2. Provide your own analysis.
• Start by pinpointing the main issues relevant to the case.
• Provide the correct figures for the profitability and leverage ratios.
• Discuss how you arrive at your decision. Highlight important recommendations/changes that must be
done to the operations of Zapatoes, Inc.
Teacher Tip:
Guide Questions:
1. What is the Zapatoes Inc’s capital
structure? What is the effect of an
additional debt? Additional equity?
2. Assess the profitability of Zapatoes Inc’s.
What is the effect of issuing debt to its
profitability? Effect of equity?
3. What factors are considered in deciding
whether to take long-term or short-term
financing?
4. What financing should Anthony Cruz
take?
Business Finance
Review of Financial Statement
Preparation, Analysis,
LESSON OUTLINE
and Interpretation
180MINS
Introduction Brief review of the contents of a financial
/Review
10
Motivation
20
statement and introduce the four types
of financial ratios.
Content Standards
The learners demonstrate an understanding of the process of preparing
financial statements as well as the methods or tools of analysis of financial
statements, including horizontal analysis, vertical analysis, and financial ratios
to test the level of liquidity, solvency, profitability, and stability of the business.
Discuss stories about households borrowing
from a sari-sari store.
Instruction/ Define liquidity ratios and solve sample
Delivery
90
Practice
Board work/exercises and presentation
15
Performance Standards
The learners will be able to solve exercises and problems that require financial
statement preparation, analysis, and interpretation using horizontal and vertical
analyses, and various financial ratios.
Enrichment Analyze and interpret liquidity ratios for
45
Learning Competencies
The learners shall be able to perform vertical and horizontal analyses of
financial statements. (ABM_BF12-IIIb08)
Resources
problems.
various companies from different industries.
Materials
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex
Bookstore.
(2) Gitman and Zutter. Principles of Managerial Finance.
Specific Learning Outcomes
At the end of the unit lesson, the learners will be able to:
•
•
• Calculators
• Laptops
Explain why managers analyze financial statements.
Perform horizontal and vertical analysis of balance sheets and income statements.
INTRODUCTION/REVIEW (10 MINS)
1. Communicate learning objectives.
•
Introduce the following learning objectives using any of the suggested protocols (verbatim, own
word, read-aloud):
•
I will be able to explain why managers analyze financial statements.
•
I will be able to perform horizontal and vertical analysis of balance sheets and income
statements.
2. Review the previous lessons.
• Ask learners what are the different types of financial statements.
• Ask learners what the contents are of the financial statements.
MOTIVATION (20 MINS)
Show the following Financial Statements of ABC, Inc. and ask the learners the following questions:
•
•
•
Is ABC, Inc. profitable?
Is the company’s financial performance improving based on the two year data presented?
Is the company heavily financed by debt or equity?
Teacher Tip:
The purpose of this activity is to expose the
learners to the financial statements and for
them to come up with useful conclusions on
the company’s financial results and status.
The learners are assumed to be already
familiar with different financial statements.
Elicit as many opinions as possible.
ABC, INC.
Condensed Balance Sheets
December 31
(In millions)
Assets
2014
2015
1,902.0
1,617.1
Plant Assets
2,952.8
2,526.9
Other Assets
5,513.8
742.0
P
10,368.6
4,886.0
P
2,017.6
2,482.3
Long-term liabilities
7,289.5
1,506.2
Total libailities
9,497.1
3,988.5
195.3
205.8
1,013.3
1,065.7
(337.1)
(374.0)
871.5
897.5
P 10,368.6
P 4,886.0
Current Assets
Total Assets
P
Liabilities and Stockholders’ Equity
Current liabilities
Stockholders’ equity
Common stock
Retained earnings
Treasury stock
Total stockholders’ equity
Total liabilities and stockholders’ equity
ABC, INC.
Condensed Income Statement
For the Years Ended December 31
(In millions)
2014
2015
8,853.3
6,954.7
Cost of goods sold
4,128.5
3,327.0
Gross Profit
4,724.0
3,627.7
Selling & Admin.
3,523.6
2,551.4
33.3
86.5
1,167.9
989.8
351.5
137.5
(expense), net
(12.3)
15.4
Income before taxes
804.1
867.7
Income tax expense
322.1
280.0
P 482.0
P 587.7
Net sales
Nonrecurring charges
Income from operations
Interest Expense
P
Other income
Net income
• Ask the learners to compute the percentage share of each Balance Sheet account vis a vis total
assets.
• Ask the learners to compute the percentage share of each Income Statement vis a vis Net Sales.
Teacher Tip:
Ask the learners if their answers to previous
questions have changed.
INSTRUCTION/DELIVERY (60 MINS)
After discussing the answers of the learners, introduce financial statement analysis with emphasis on
common size and horizontal analyses. Discuss the following to the learners.
1. Analysis and Interpretations of Financial Statements
•
•
•
•
•
To guide different users of financial statements, i.e. creditors, investors, regulators and managers, in
their decisions, financial statement analysis tools can be used.
These are financial ratios, common size financial statements, and trend or horizontal analyses.
For the purposes of this course, four major categories of financial ratios will be covered: liquidity
ratios, efficiency or turnover ratios, profitability ratios, and leverage ratios.
To be more specific, financial statement analysis is undertaken to serve the following purposes
(objectives):
• To assess the current profitability and operational efficiency of the firm as a whole as well as
its different departments so as to judge the financial health of the firm.
• To ascertain the relative importance of different components of the financial position of the
firm.
• To identify the reasons for change in the profitability/financial position of the firm.
• To judge the ability of the firm to repay its debt and assess the liquidity and solvency
position of the firm.
For this module inform the learners that focus will be on common size or vertical analysis and trend
or horizontal analysis.
2. Vertical Analysis or common size analysis.
• This is a technique for evaluating the data of financial statements that express each item within a
financial statement in terms of a percent of a base amount.
• For the Statement of Financial Position or Balance Sheet, all accounts are presented as a percentage
of total assets.
• For the statement of Profit or Loss or Income Statement, all accounts are presented as a percentage
of net sales.
• In using this type of analysis, attention must be focused on items with significant changes from one
period to another. Depending on the nature of the business, it is possible that even a slight change in
Teacher Tip:
Remind the learners that the activity they
did before was actually common size
analysis.
the percentage may warrant the attention of top management.
• For example, a reduction of 0.5% in the gross profit margin of a consumer based company with
annual sales of PHP 200 billion translate to a PHP 1 billion in gross profit.
3. Horizontal Analysis
• This allows the learners to see the trend for the different accounts in the Financial Statements.
• This is also known as trend analysis.
• To establish the trend, percentage changes of accounts from one period to another have to be made.
To compute:
Amount of change = Current year amount – Base (earlier) year amount
Percent of change = Amount of change/Base (earlier) year amount
Some of the more important accounts to monitor when doing trend analysis are the following:
• Sales
• Operating profits
• Total assets
• Interest bearing liabilities
• Interest expense
Horizontal Analysis of a Balance Sheet:
AC CORPORATION
Condensed Balance Sheets
December 31
Teacher Tip:
2014
2015
Increase
(Decrease)
Percentage Change
from 2011
P 74,000
P 80,000
P (6,000)
(7.5%)
Property, plant & equipment (net)
99,000
90,000
9,000
10.0%
Intangibles
27,000
40,000
(13,000)
(32.5%)
P 200,000
P 210,000
P (10,000)
(4.8%)
Assets
Current assets
Total Assets
Show the sample financial statements with
the computed vertical and horizontal
analyses. Discuss how to perform the
horizontal and vertical analyses with the
learners. Compute with them the example
numbers. This will help them easily see how
to go through the process.
2014
2015
Increase
(Decrease)
Percentage Change
from 2011
Liabilities and stockholders’ equity
Current liabilities
P 42,000
P 48,000
P (6,000)
(12.5%)
Long-term liabilities
143,000
150,000
(7,000)
(4.7%)
Stockholders’ equity
15,000
12,000
3,000
25.0%
P 200,000
P 210,000
P (10,000)
(4.8%)
Total liabilities and stockholders’
equity
Horizontal Analysis of an Income Statement:
AC CORPORATION
Condensed Balance Sheets
For the Years Ended December 31
Increase or (Decrease)
During 2011
2014
Net sales
2015
Amount
Percentage
P 600,000
P 500,000
P 100,000
20.0%
Cost of goods sold
483,000
420,000
63,000
15.0%%
Gross profit
117,000
80,000
37,000
46.3%%
57,200
44,000
13,200
30.0%
P 59,800
P 36,000
P 23,800
66.1%%
Operating expenses
Net income
Vertical Analysis of a Balance Sheet:
AC CORPORATION
Condensed Balance Sheet
December 31, 2012
Amount
Percent
Assets
Current Assets
P
74,000
37.0%
Property, plant, and equipment (net)
99,000
49.5%
Intangibles
27,000
13.5%
P
200,000
100.0%
P
42,000
21.0%
Long-term liabilities
143,000
71.5%
Stockholders’ equity
15,000
7.5%
200,000
100.0%
Total Assets
Liabilities and Stockholders’ Equity
Current liabilities
Total liabilities and stockholders’ equity P
Vertical Analysis of an Income Statement:
AC CORPORATION
Condensed Income Statements
For the Years Ended December 31
2012
Amount
Net sales
2011
Percent
Amount
Percent
P 600,000
100.0%
P 500,000
100.0%
Cost of goods sold
483,000
80.5%
420,000
84.0%
Gross profit
117,000
19.5%
80,000
16.0%
57,200
9.5%
44,000
8.8%%
P 59,800
10.0%
P 36,000
7.2%
Operating expenses
Net income
PRACTICE (15 MINUTES)
Teacher Tip:
Ask the learners to practice computing the
horizontal and vertical analyses on the given
practice sets.
Provide these practice exercises:
Horizontal Analysis:
Increase or (Decrease)
Dec. 31, 2012
Dec. 31, 2011
Amount
Percentage
Accounts receivable
PHP 520,000
PHP 120,000
400,000
30.0%
Inventory
PHP 840,000
PHP 240,000
600,000
40.0%
PHP 3,000,000
PHP 2,500,000
500,000
20.0%
Total Assets
Vertical Analysis:
Dec. 31, 2012
Amount
Dec. 31, 2011
Percentage*
Amount
Percentage**
Accounts receivable
P 520,000
17.3%%
P 400,000
16.0%
Inventory
P 840,000
28.0%
P 600,000
24.0%
P 3,000,000
100.0%
P 2,500,000
100.0%
Total Assets
ENRICHMENT (45 MINUTES)
1. Group the learners for a group work. Ask them to compute the Horizontal and Vertical Analyses of
ABC Inc’s financial statement shown above in the motivation section.
2. After the groups have computed the Horizontal and Vertical Analyses, ask them the same question
about their opinions about the company’s profitability, the ability pay debt obligations, and how
well it is manage financially.
Teacher Tip:
Refer to the answers of the learners above
in the Motivation section. Ask them to make
opinions and a conclusion about the
company after they have used the
horizontal and vertical analyses tools. Make
them compare their answers in the
Motivation and Enrichment sections. This
will make them realize the importance of
using the horizontal and vertical analyses for
judgement and making better decisions.
Below are the computed Horizontal and Vertical Analyses:
ABC, INC.
Condensed Balance Sheets
December 31
(In millions)
Increase (Decrease)
during 2015
Assets
2014
2015
Amount
Percent
PHP 1,902.0
PHP 1,617.1
PHP 284.9
17.6%
Plant Assets
2,952.8
2,526.9
425.9
16.9
Other Assets
5,513.8
742.0
4,771.8
643.1
Total Assets
10,368.6
4,886.0
PHP 5,482.6
112.2
PHP 2,017.6
PHP 2,482.3
PHP (274.7)
(11.1)%
Long-term liabilities
7,289.5
1,506.2
5,783.3
384.0
Total libailities
9,497.1
3,988.5
5,508.6
112.2
195.3
205.8
(10.5)
(5.1)
1,013.3
1,065.7
(52.4)
(4.9)
(337.1)
(374.0)
36.9
9.9
871.5
897.5
(26.0)
(2.9)
P 10,368.6
P 4,886.0
P 5,482.6
112.2%
Current Assets
Liabilities and Stockholders’ Equity
Current liabilities
Stockholders’ equity
Common stock
Retained earnings and other
Treasury stock
Total stockholders’ equity
Total liabilities and stockholders’
equity
ABC, INC.
Condensed Balance Sheets
December 31
(In millions)
Increase (Decrease)
during 2015
2014
2015
Amount
Percent
PHP 8,853.3
PHP 6,954.7
PHP 1,898.6
27.3%
Cost of goods sold
4,128.5
3,327.0
801.5
24.1
Gross Profit
4,724.0
3,627.7
1,097.1
30.2
Selling & Admin.
3,523.6
2,551.4
972.2
38.1
33.3
86.5
(53.2)
(61.5)
1,167.9
989.8
178.1
18.0
351.5
137.5
214.0
155.6
(expense), net
(12.3)
15.4
(27.7)
(179.9)
Income before taxes
804.1
867.7
(63.6)
(7.3)
Income tax expense
322.1
280.0
42.1
15.0
P 482.0
P 587.7
PHP (105.7)
(18.0)%
Net sales
Nonrecurring charges
Income from operations
Interest Expense
Other income
Net income
ABC, INC.
Condensed Balance Sheets
December 31
(In millions)
2015
Assets
Current Assets
Amount
2014
Percent
Amount
Percent
PHP 1,902.0
18.3%
PHP 1,617.1
33.1%
Property Assets
2,952.8
28.5%
2,526.9
51.7%
Other Assets
5,513.8
53.2%
742.0
15.2
PHP 10,368.6
100.0%
PHP 4,886.0
100.0%
PHP 2,207.6
21.3%
PHP 2,482.3
50.8%
Long-term Liabilities
7,289.5
70.3%
1,506.2
30.8%
Total Liabilities
9,497.1
91.6%
3,988.5
81.6%
195.3
1.9%
205.8
4.2%
1,013.3
9.8%
1,065.7
21.8%
(337.1)
(3.3)
(374.0)
(7.6)
871.5
8.4%
897.5
18.4%
PHP 10,368.6
100.0%
PHP 4,886.0
100.0%
Total Assets
Liabilities and Stockholders’
Equity
Current liabilities
Stockholders’ equity
Common stock
Retained earnings and other
Treasury stock
Total stockholders’ equity
Total liabilities and stockholders’
equity
*Percentages may be rounded up or down
ABC, INC.
Condensed Income Statement
For the Years Ended December 31
(In millions)
2015
Amount
Net sales
2014
Percent
Amount
Percent
PHP 8,853.3
100.0%
PHP 6,954.7
100.0%
Cost of goods sold
4,128.5
46.6%
3,327.0
47.8%
Gross profit
4,724.8
53.4%
3,627.7
52.2%
Selling & admin.
3,523.6
39.8%
2,551.4
36.7%
33.3
0.4
86.5
1.3%
1,167.9
13.2%
989.8
14.2%
351.5
4.0%
137.5
2.0%
(expense), net
(12.3)
(0.1)
15.4
0.2
Income before income taxes
804.1
9.1%
867.7
12.4%
Income tax ex.
322.1
3.6%
280.0
4.0%
PHP 482.0
5.5%
PHP 587.7
8.4%
Nonrecurring charges
Income operations
Interest expense
Other income
Net income
*Percentages may be rounded up or down
EVALUATION (30 MINUTES)
Below are the Statement of Financial Position and Statement of Result of Operation of JFC for the Years 2012 to 2014. Perform a Horizontal and
Vertical analyses on both statements.
2014
2013
2012
ASSETS
Current Assets
Cash
7,618.0
9,903.0
8,848.0
Receivables
7,479.0
3,128.0
2,715.0
Inventories
5,972.0
3,560.0
2,630.0
Other current assets
2,952.0
1,793.0
1,430.0
24,012.0
18,384.0
15,623.0
13,363.0
11,772.0
11,059.0
3,410.0
3,353.0
3,139.0
13,324.0
12,517.0
11,947.0
30,097.0
27,642.0
26,145.0
54,118.0
46,026.0
41,768.0
6,576.0
6,007.0
4,714.0
182.0
155.0
79.0
865
-
-
11,468.0
9,457.0
11,828.0
19,091.0
15,619.0
16,621.0
Long-term Debt
716
4,063.0
855
Other Liabilities
6,234.0
2,984.0
2,561.0
6,950.0
7,047.0
3,416.0
26,041.0
22,666.0
20,037.0
Non-current Assets
Property, plant, and equipment
Financial Investments
Other non-current assets
TOTAL ASSETS
LIABILITIES
Current Liabilities
Accounts Payable
Income Tax Payable
Short-term Debt
Other current liabilities
Non-current Liabilities
TOTAL LIABILITIES
2014
2013
2012
EQUITY
Capital stock
1,064.0
1,051.0
1,047.0
Additional Paid-in Capital
4,452.0
3,640.0
3,284.0
22,646.0
19,017.0
17,871.0
(84)
(347)
-471
TOTAL EQUITY
28,078.0
23,361.0
21,731.0
TOTAL LIABILITIES AND EQUITY
54,119.0
46,027.0
41,768.0
Sales Revenue
90,671.0
80,283.0
71,059.0
(73,728.0)
(65,285.0)
(58,435.0)
16,943.0
14,998.0
12,624.0
(10,806.0)
(9,067.0)
(8,279.0)
6,137.0
5,931.0
4,345.0
748.0
431.0
567.0
(126.0)
(116.0)
(51.0)
6,759.0
6,246.0
4,861.0
(1,271.0)
(1,523.0)
(1,149.0)
5,488.0
4,723.0
3,712.0
Retained Earnings
Other Equity Accounts
Cost of Sales/Service
Gross Margin
Operating Expenses
Operating Profit
Other Income
Other Expenses
Net Income Before Tax
Income Tax
NET INCOME AFTER TAX
Answer Key:
Vertical Analysis:
2014
2013
2012
ASSETS
Current Assets
Cash
14.08%
21.52%
21.18%
Receivables
13.82%
6.80%
6.50%
Inventories
11.04%
7.73%
6.30%
5.45%
3.90%
3.42%
44.39%
39.94%
37.40%
24.69%
25.58%
26.48%
6.30%
7.29%
7.52%
24.62%
27.20%
28.60%
55.61%
60.06%
62.60%
100.0%
100.0%
100.0%
12.15%
13.05%
11.29%
Income Tax Payable
0.34%
0.34%
0.19%
Short-term Debt
1.60%
0.00%
0.00%
21.19%
20.55%
28.32%
35.28%
33.93%
39.79%
Long-term Debt
1.32%
8.83%
2.05%
Other Liabilities
11.52%
6.48%
6.13%
12.84%
15.31%
8.18%
48.12%
49.25%
47.97%
Other current assets
Non-current Assets
Property, plant, and equipment
Financial Investments
Other non-current assets
TOTAL ASSETS
LIABILITIES
Current Liabilities
Accounts Payable
Other current liabilities
Non-current Liabilities
TOTAL LIABILITIES
2014
2013
2012
EQUITY
Capital stock
1.97%
2.28%
2.51%
Additional Paid-in Capital
8.23%
7.91%
7.86%
Retained Earnings
41.84%
41.32%
42.79%
Other Equity Accounts
-0.16%
-0.75%
-1.13%
TOTAL EQUITY
51.88%
50.75%
52.03%
TOTAL LIABILITIES AND EQUITY
100.0%
100.0%
100.0%
Sales Revenue
100.0%
100.0%
100.0%
Cost of Sales/Service
81.31%
81.32%
82.23%
18.69%
18.68%
17.77%
11.92%
11.29%
11.65%
6.77%
7.39%
6.11%
Other Income
0.82%
0.54%
0.80%
Other Expenses
0.14%
0.14%
0.07%
7.45%
7.78%
6.84%
Income Tax
1.40%
1.90%
1.62%
NET INCOME AFTER TAX
6.05%
5.88%
5.22%
Gross Margin
Operating Expenses
Operating Profit
Net Income Before Tax
Horizontal Analysis:
2014
Amount
2013
Percent
Amount
Percent
ASSETS
Current Assets
Cash
-2,285.00
-23.07%
1,055.0
11.92%
Receivables
4,351.00
139.10%
413.00
15.21%
Inventories
2,412.00
67.75%
930.00
35.36%
Other current assets
1,159.00
64.64%
363.00
25.38%
5,637.00
30.66%
2,761.00
17.67%%
1,591.00
13.52%
713.00
6.45%
57.00
1.70%
214.00
6.82%
807.00
6.45%
570.00
4.77%
2,455.00
8.88%
1,497.00
5.73%
8,092.00
17.58%
4,258.00
10.19%
569.00
9.47%%
1,293.00
27.43%
27.00
17.42%
76.00
96.20%
2,011.00
21.26%
-2,371.00
-20.05%
3,472.00
22.23%
-1,002.00
-6.03%
Long-term Debt
-3,347.00
-82.38%
3,208.00
375.20%
Other Liabilities
3,250.00
108.91%
423.00
16.52%
-97.00
-1.38%
3,631.00
106.29%
3,375.00
14.89%
2,629.00
13.12%
Non-current Assets
Property, plant, and equipment
Financial Investments
Other non-current assets
TOTAL ASSETS
LIABILITIES
Current Liabilities
Accounts Payable
Income Tax Payable
Short-term Debt
Other current liabilities
865.00
Non-current Liabilities
TOTAL LIABILITIES
2014
Amount
2013
Percent
Amount
Percent
EQUITY
Capital stock
13.00
1.24%
4.00
0.38
812.00
22.31%
356.00
10.84%
3,629.00
19.08%
1,146.00
6.41%
263.00
-75.79%
124.00
-26.33%
TOTAL EQUITY
4,717.00
20.19%
1,630.00
7.50%
TOTAL LIABILITIES AND EQUITY
8,092.00
17.58%
4,259.00
10.20%
Sales Revenue
10,388.00
12.94%
9,224.00
12.98%
Cost of Sales/Service
-8,443.00
12.93%
-6,850.00
11.72%
1,945.00
12.97%
2,374.00
18.81%
-1,739.00
19.18%
-788.00
9.52%
206.00
3.47%
1,586.00
36.50%
Other Income
317.00
73.55%
-136.00
-23.99%
Other Expenses
-10.00
8.62%
-65.00
127.45%
513.00
8.21%
1,385.00
28.49%
Income Tax
252.00
-16.55%
-374.00
23.55%
NET INCOME AFTER TAX
765.00
16.20%
1,011.00
27.24%
Additional Paid-in Capital
Retained Earnings
Other Equity Accounts
Gross Margin
Operating Expenses
Operating Profit
Net Income Before Tax
Business Finance
Sources and Uses of Short-Term and
Long-Term Funds Pt. 1
160MINS
LESSON OUTLINE
Content Standards
The learners demonstrate an understanding of the sources and uses of shortterm and long-term funds, and the requirements, procedures, obligation to
creditor, and reportorial necessities.
Introduction Communicate the learning objectives
/Review
15
Motivation
35
Performance Standards
The learners shall be able to:
•
•
Distinguish debt and equity financing as well as the risks associated with
each source of financing.
Identify the bank and non-bank institutions in the vicinity that are possible
sources of funds.
Learning Competencies
The learners will be able to:
•
•
Cite bank and nonbank institutions in the locality that would serve as
possible sources of funds for business operations. (ABM_BF12-IIIe-f-13)
Identify uses of funds. (ABM_BF12-IIIe-f-17)
Specific Learning Outcomes
At the end of the unit lesson, the learners will be able to:
•
•
Know the advantages and disadvantages of using debt and equity
financing.
Distinguish the different sources and uses of funds available in the
Philippines and their applicability in different situations.
A. Share news articles that feature actual
companies that avail of debt and equity
financing.
B. Discuss potential liquidity problems or
higher default risk if company does not
use appropriate source of financing.
Instruction/ Discussion proper
Delivery
60
Practice
Seatwork on matching the company
objectives with either short or long-term
financing
20
Essay questions about the lesson.
30
Evaluation
Materials
• Projector, if available
• Board and writing materials will suffice
Resources
(1) Brealey, R. Myers, S., & Marcus, A. (2004). Fundamentals of corporate
finance. Boston, Mass.: McGraw-Hill Irwin.
(2) Cayanan, A. Manuscript.
(3) Gitman, L. (2009) Principles of managerial finance. Boston: Pearson
Prentice Hall.
(4) Roque, R. (1990). Management Advisory Services. Malabon: Roque
Press, Inc.
INTRODUCTION (15 MINS)
Communicate learning objectives
•
Define financing - It means to provide funding for a particular need.
•
Ask the students what they think the possible sources of funds for a small business are (i.e. small
sari-sari store).
Sample Responses:
•
Equity Infusion from investors/business partners
•
Start-up capital from owner
•
Loan from a bank
•
Loan from other financial institutions, etc.
•
Loan from family members/friends, etc.
MOTIVATION/ENRICHMENT (20 MINS)
1. Ask the students to read news articles relating to financing used by companies.
•
•
Possible articles: (see APPENDIX)
• Filinvest Land raises P8 billion from debt sale. (2015). InterAksyon.com. Retrieved 5 April
2016, from http://www.interaksyon.com/business/116404/filinvest-land-raises-php8-b-frombond-issue-to-boost-recurring-business
• Jonsson, A. (2013). JG Summit raises $200 million from placement. FinanceAsia. Retrieved 5
April 2016, from http://www.financeasia.com/News/365482,jg-summit-raises-200-millionfrom-placement.aspx
Companies can choose between two sources of financing, either debt or equity.
2. Discuss the articles using the following guide questions (EASY TO AVERAGE):
•
•
•
•
What are the subject companies? What are their main activities?
What do they need financing for?
How much did they raise through financing? In what manner did they manage to raise funds?
What are the companies’ plans after achieving their proposed funding?
Definitions:
Settlement Risk – risk that the bank may
not be able to give back their deposit.
Philippine banks are normally insured by the
Philippine Deposit Insurance Corporation
(PDIC). Depositors may recover up to
PHP500,000 per depositor from PDIC in
case of bank default/bankruptcy.
Misconceptions:
Emphasize to the students that it is a
common misconception that all of these
investments will earn for certain. Clarify that
each investment type has inherent risks
involved, which nevertheless can be
mitigated.
INSTRUCTION (25 MINS)
1. Ask the learners which they think is more expensive, debt, or equity financing?
•
•
Learners will usually answer that equity financing is less expensive since equity uses their own funds
and they do not pay interest.
Discuss that equity financing also has costs that may be more expensive than the cost of debt.
Why? Because there is no guaranty on the returns. Even if the cost of equity is more expensive,
companies still utilize equity due to its benefits such as no maturity, and other advantages which will
be further discussed.
2. Definitions
• Debt Financing - borrowing money from lenders and not giving up ownership.
• Equity Financing - the method of raising capital by selling company stock to investors (stockholders)
in exchange of ownership interests in the company.
• Discuss the advantages and disadvantages of debt financing and equity financing.
DEBT FINANCING
Advantages
Cost
It is limited to interest
payments.
Control
Lender has no control
over operations and
investment decisions.
Disadvantages
There is a specified
maturity date or periodic
amortization payments.
Risk
There is a risk of not
meeting the obligation
(default risk)
Interest expense is tax
deductible (it can
minimize tax expense).
Advantages
Disadvantages
It does not require
a fixed dividend
payment.
It has the highest cost
(see discussion on risk).
It may limit cash dividend
declaration by
management.
Maturity
Tax
EQUITY FINANCING
There is no
maturity date. It is
perpetual.
Among the sources of
financing, it is the
riskiest.
Dividends are not tax
deductible.
Teacher Tip:
This is in the point of view of the Company.
Note that if debt is cheaper, why doesn’t
the company avail of 100% debt financing?
Possible answer: No bank/creditor will
provide 100% debt financing. Creditors
evaluate the paying capacity of borrowers
which means the amount of loans they will
tend depends on the ability of the company
to serve the debt. Normally, this is based on
the projected cash flows of the borrower.
Note that it is risky because:
• Stockholders are not guaranteed of
returns unlike creditors which have
guaranteed interest and principal
payment.
• Under the corporation code, creditors
have to be paid first in case of
liquidation before anything is paid to
the stockholders
• If the company is losing, it’s the
stockholders who bear the loss.
Table 1: Comparison of Advantages and Disadvantages of Debt Financing vs. Equity Financing
MOTIVATION (15 MINUTES)
1. Consider the following situations:
• Fabrics Inc. put up a clothing outlet worth PHP10 million and funded the entire amount using a one-year short-term loan. The company’s
average annual operating cash flows for the last three years is PHP 1.5 million.
Ask the learners what they think would happen to the company.
Sample Response:
• Given the average annual operating cash flows of the company of only PHP1.5 million, there is a very high probability that Fabrics
Inc. will not be able to pay the loan within one year.
• Given the amount of the loan in relation to operating cash flows, management may be become very stressed thinking about how to
settle this loan. This will adversely affect the executive time they spend in managing the core business of the Company.
• Dragon Inc. is in the business of fireworks production. Their peak season is usually during the holidays, especially during Christmas and New
Year. The company needs additional PHP500,000 to finance their working capital needs during the holiday season.
Ask the learners how this should be financed. Should it be financed using short-term loan, long-term loan, or through equity?
Sample Response:
• This should be financed by short-term loan. Long-term loan and equity financing are not recommended for this temporary financing
requirement because of the following reasons:
• The need for financing is limited to the holiday season.
• Equity financing is the most expensive, as previously discussed, while interest rates on long-term debt is also generally higher as
compared to interest rates on short-term debt. Also, if the funds are needed only for a limited period, there is no need for the
company to secure a long-term source of funds.
2. Ask the students if they can think of other scenarios where a mismatch for financing could be a problem for a business.
• Sample response: Financing a long-term investment through a short-term loan. Let us say you are a
restaurant owner and you are planning to open another branch which will cost you PHP8 million.
The returns on this investment will be realised over a number of years. Therefore, financing it
through a short-term loan, say one year, will give you too much pressure to pay the loan because
the new branch may not have generated enough cash flow within the year to cover the PHP8
million.
Teacher Tip:
If the learners are passive, cite a few more
examples, such as a small lending company
with collections that have mismatched when
giving out loans, to give them more insights
on the topic at hand.
INSTRUCTION (35 MINUTES)
1. Differentiate long-term and short-term financing.
Short term financing is debt scheduled to be paid within a year while long-term financing is debt to be
paid in more than a year.
2. Recap on liquidity risks and liquidity ratios.
Liquidity risk typically refers to the inability of an investor to buy or sell an asset to avoid financial loss. It
can also refer to the inability to meet obligations since assets are tied up with investments or inventory.
Ratios such as the current ratio and quick ratio measure the institution’s liquidity. There should be a
balance between liquid funds and investments. Too high liquidity ratios will have opportunity costs
since these funds could have been invested to yield earnings. Too low liquidity ratios, however, may
cause the institution to default on payments should emergency situations arise. Enough liquid assets
should be available to meet short term obligations.
3. Enumerate and describe the sources and uses of short-term funds. Provide actual examples under
each type of source, if applicable.
•
Suppliers Credit – refers to the extension of payment due date by suppliers.
• Discuss the effects of stretching payables and show the computation for interest effects of
not taking discounts.
• For example, the terms 2/10 (2% discount if paid within 10 days) with the due date of
60 days will result in annual interest of (2/98)*(360/50 days), or 14.69%. Therefore, by
Teacher Tip:
You may ask the learners to identify the
sources of short-term and long-term funds
in class or in groups. This activity may be
performed before enumerating the sources
on the teaching guide. The objective of this
activity is to get the learners’ interest about
the subject.
•
•
•
•
•
•
•
not availing of the discount, the one who ordered the supplies from the supplier in
effect borrowed at 14.69%. It may also be viewed as the opportunity cost forgone.
Advances from stockholders or other owners – personal funds advanced by a stockholder to a
company that usually requires interest. These usually require little to no interest on advances,
especially if the owner is advancing funds to assist the company in sudden liquidity crisis. This
source, however, is depended on the availability of funds of an individual.
Credit cooperatives – provided lending services to its members. Members usually pay
contributions to the cooperative.
Banks – provides several loan products catering to different types of needs.
Credit Cards – just take note of the high interest rates on this source of funds.
Lending Companies – companies that are dedicated to lending. They usually charge higher interest
than banks but their credit requirements are more lenient compared to banks.
Pawnshops – provides funds in exchange for collateral, usually jewellery, or other items of value.
Informal lending sources (5/6)
• Describe the actual interest paid for this type of lending
• Interest is usually paid per month, and monthly interest is (6-5)/5 or 20%. Annual
interest is actually 20%*12 or 240%.
4. Discuss the factors considered in selecting the source of short-term financing.
•
•
•
•
Cost (Interest)
• Informal lending sources like 5/6 may be the most expensive.
Availability of short-term funds
• Informal lending sources like 5/6 is most available because there are no formal requirements
to avail of the facility.
Risk
• Whatever the source of fund is, if the company defaults, the lenders may foreclose some of
the company’s properties or even the entire business itself to settle the loan.
Flexibility
• This pertains to the ability of the company to access funds.
• or example, a bank loan may be cheaper but the bank may reject the loan application of the
borrower because he/she did not pass the credit evaluation process of the bank.
• This financial flexibility can be influenced by:
• Nature of the Company’s business
Teacher Tip:
There are other sources of short-term funds.
Single proprietors and rich members of
family and friends can be taped. Tell the
learners that should they decide to do this
in the future, everything has to be
documented to avoid a fall out or a family
feud. The ones listed in this teaching guide
are the most commonly used. Add personal
experiences and ask the learners whether
they have encountered or have utilized
funds from these sources.
•
• Leverage ratio
• Stability of operating cash flows
Restrictions (Debt covenants)
• Some lenders like banks may require a minimum deposit balance with their branch for as
long as the loans remain outstanding.
• The bank’s approval may also be secured before cash dividends can be declared.
5. Enumerate and describe the sources and uses of long-term funds.
•
•
•
•
•
Equity investors – these are the individuals/corporations which are issued common stock. They
share in the ownership of the company. There are also equity investors who do not have voting
rights in the company but have a share in dividends, usually a fixed percentage. These investors are
issued preferred stock. Holders of preferred shares are first to receive dividends than common stock
holders.
Internally generated funds – not all profits are distributed to stockholders. Most of the profits are
re-invested and used by companies to finance their needs.
Banks – they provide long-term loans, depending on the nature of the need. For example, a 5-year
to 10-year loan may be granted if the purpose of the loan is construction of an office building.
Bonds – these are debt investments where an investor loans money to an entity which borrows the
funds.
Lending companies – they can also provide long-term loans.
6. The company’s capital structure is a major consideration for deciding which long-term sources of
funds to utilize. The target would be to balance debt and equity and come up with the minimum
cost of capital.
PRACTICE (20 MINUTES)
1. Group the class into 4 teams
2. Have them identify whether the following are short-term or long-term sources of financing. (EASY)
Teacher Tip:
In times of liquidation, this is the order of
payment priority:
• Creditors
• Preferred stockholders
• Common stockholders
3. Provide scenarios and let them decide whether long-term or short-term financing is needed.
(AVERAGE TO DIFFICULT)
Need/Activity
Answer Key
Acquisition of equipment
Long-term
Franchise of a fast-food outlet
Long-term
Purchase of inventory for a clothing shop
Short-term
Loan for agricultural needs (i.e. palay production,
mango, etc.)
Short-term
Loan for purchase of a commercial space
Long-term
Development of a subdivision
Long-term
Auto-loan
Long-term
Loan for sari-sari store supplies
Short-term
Housing Loan
Long-term
Emergency loans (advances)
Short-term
Teacher Tip
In addition, define the so-called revolving
line of credit. It allows the borrowers to
renew their loans with a certain limit
whenever they need it.
4. Provide a time limit for them to write their answers on a piece of paper.
5.
After the activity, ask the class ‘Why is it important to distinguish between long-term or short term
financing?’
•
It is important so that the sources or funds are matched with the needs of the company/business.
Matching of sources and uses of funds saves the business from encountering defaults on
obligations and incurring losses, and at the same time, use the funds at hand to earn profits.
EVALUATION (30 MINUTES)
SELF-TEST QUESTIONS (RECITATION – MEDIUM TO DIFFICULT)
1. What are the advantages and disadvantages of long term debt financing? Give at least 3. Explain.
Teacher Tip
This exercise is given to make sure the
learners understand the lessons. Self-test
questions may be discussed through class
recitation or you may opt to give these
questions as an essay quiz. Since time is
limited, if you opt an essay quiz, choose at
most 3 questions for them to answer. If
given as a recitation, make sure that all
notes are kept before proceeding.
2. What are the advantages and disadvantages of equity financing? Give at least 3. Explain.
3. Identify the different sources of short-term funds and long-term funds. Give at least 3 and define.
4. Discuss when to use short-term funds in business.
5. Discuss when to use long-term funds in business.
Appendix
Filinvest Land raises P8 billion from debt sale
By Philippines News Agency
August 21, 2015 11:15 PM
MANILA - Property developer Filinvest Land, Inc. (FLI) has raised P8 billion from a bond issue to partially fund new projects that can triple its
retail and office space portfolio in the next five years. FLI president Josephine Gotianun-Yap said the company had budgeted P24 billion in
capital expenditures this year. FLI listed successfully its seven- and 10-year peso fixed-rate bonds in the Philippine Dealing and Exchange Corp.
on Thursday. The bonds attained the highest PRS Aaa rating from the Philippine Rating Services Corp. (PhilRatings). The Gotianun-owned
property arm's fixed-rate bonds due 2022 and 2025 had an oversubscription of almost thrice the base amount of P5 billion, enabling the
company to exercise the P3 billion oversubscription option approved by the Securities and Exchange Commission. “With this bond issuance,
FLI is now in full-gear for office and retail space expansion. We are tripling our office and retail rental portfolio to hit close to one million square
meters of gross leasable area in the next five years. We tap the long-term bond market to match our funding sources with our project horizons,”
said Gotianun-Yap. FLI launched P6 billion worth of projects in the first half of 2015 while it targets a total of P16 billion for the entire 2015. It
has developed over 2,400 hectares of land and more than 600,000 square meters of prime office, residential and retail spaces. “With the
country’s real estate sector experiencing a continued robust growth, in line with the Philippine economy, FLI is in the best position and time to
address the needs of a flourishing economy,” Gotianun-Yap said.
JG Summit raises $200 million from placement
By Anette Jönsson
26 November 2013
JG Summit, the Philippine conglomerate controlled by the Gokongwei family, has raised Ps8.8 billion ($200 million) from a share placement that
it will use partly to fund its purchase of a stake in power producer Manila Electric Co (Meralco).
The deal was completed after the market closed on Monday, ahead of JG Summit’s inclusion in the MSCI Philippines index from the close of
trading on Tuesday. The entry into the index was announced on November 7 and, according to a source, is estimated to result in $60 million to
$85 million of additional buying of the company’s shares by passive index funds.
JG Summit’s share price jumped 12.1% in the first three days after the MSCI announcement to match the record closing high of Ps49 that it hit
in April this year. It has given up all those gains since then, however, as the Philippines have been dealing with the fall-out from Typhoon Haiyan,
which is known to have killed at least 4,000 people.
The share price fell 4.9% on Monday as there may have been some leaks in the market that a placement was coming. Sources said the
bookrunners built a shadow order book in the run up to the transaction and the base deal was largely covered at launch.
JG Summit offered 220 million shares, which accounted for 3.2% of the existing share capital and consisted of approximately 98.1 million
treasury shares and 121.9 million common shares that were sold through a top-up placement.
They were marketed at a price between Ps40 and Ps41 apiece, which translated into a discount of 1.7% to 4.1% versus Monday’s close of
Ps41.70.
According to a source, there was pretty good demand, with orders from more than 40 investors when the books closed after about three-and-ahalf hours, but the price was fixed at the bottom for the maximum 4.1% discount. Even in light of the drop earlier in the day that is still a fairly
tight discount for the Philippines, though.
The bookrunners clearly felt that was the case as the term sheet listed the discount range versus Monday’s volume-weighted average price
rather than versus the close. Since the VWAP, at Ps42.50, was higher than the closing price, the implied discount listed on the term sheet was
3.5% to 5.9%.
Most investors are unlikely to have been fooled by that though and it was no real surprise that the price was fixed at the bottom of the range.
After all, the deal accounted for more than 60 days of trading based on the average daily volume in the past three months, or 35 days based on
the more active trading in the past month.
By comparison, the most recent overnight placement of size in a Philippine-listed company in early October, which was actually a sell-down by
JG Summit in its food and beverage subsidiary Universal Robina, raised $280 million and was priced at a 6.5% discount. A $173 million
placement of treasury shares in Universal Robina in July came at a 4.8% discount.
JG Summit was also unable to exercise the upsize option of up to 110 million common shares, which could have increased the total deal size to
as much as $300 million.
The deal attracted a mix of long-only funds, passive index funds and hedge funds, the source said. The index funds will have to buy JG Summit
before it goes into the MSCI index in order to keep their exposure intact. The MSCI announcement did not include any information about the
weighting, but analysts estimate the conglomerate will account for between 5.5% and 6% of the index.
JG Summit is the only stock to go into the MSCI Philippine index following the latest semi-annual index review. No stocks will be removed.
The Philippine conglomerate said on October 1 that it has agreed to buy the San Miguel Group’s 27.1% stake in Meralco for approximately
Ps72 billion ($1.6 billion). This is the Gokongwei family’s first move into the power sector and, while the deal has yet to be completed, it seems
to have received the thumbs up from investors.
Confirmation of the acquisition helped to propel JG Summit’s share price from a low of Ps35 in mid-September to the November 12 close at
Ps49 – a gain of 40%.
Aside from getting a sizeable stake in a high dividend-paying company that supplies electricity to a quarter of the Philippine population, the
acquisition will give JG Summit a foothold in the country’s power industry, which is in the process of ramping up capacity to meet the needs of a
strongly growing economy.
The deal will also cement the company’s relationship with First Pacific. The Hong Kong-listed investment company owns just under 50% of
Meralco following a battle for control of the Philippine utility with the San Miguel group in 2009. After losing out to JG Summit, the San Miguel
Group has been trying to get out of its holdings in Meralco and after the sale of this 27% stake, the group will own no more shares in the
company.
When announcing the deal, JG Summit said that it intends to fund the acquisition through a combination of debt and equity, and president
Lance Gokongwei later told reporters in Manila that about two-thirds of the financing will come from debt.
The company has already sold $280 million worth of shares in Universal Robina in early October and, together with the $200 million raised from
this latest placement, it now has enough fresh cash to cover the equity portion.
Aside from food and beverage, JG Summit is also involved in hotel and property development, airlines, telecommunications, banking and
petrochemicals. In the first nine months this year, the company posted a 9.4% increase in revenues to Ps110.9 billion and a 17.4% improvement
in Ebitda to Ps25.9 billion.
According to local media reports, JG Summit and First Pacific’s Philippine infrastructure unit (Metro Pacific) plan to team up to bid for a $400
million airport project in Cebu province.
The placement was arranged by CLSA and UBS.
(A) Investment Asset
(B) Description
___1
Stocks (Equity)
A. An investment that is made up of a pool of funds collected from
many investors for the purpose of investing in stocks, bonds, and
similar assets.
___2
Bank Deposits (Fixed
Income)
B. Land and any improvements on it.
___3
Mutual Funds
C. Type of security that signifies ownership in a corporation and
represents a claim on part of the corporation's assets and earnings.
___4
Real Estate
D. A contract (policy) in which an individual or entity receives financial
protection or reimbursement against losses from an insurance
company.
___5
Insurance
E. Money placed into a banking institution for safekeeping
(A) Investment Asset
(B) Advantage/Disadvantage
___1
Stocks (Equity)
A. Disadvantage: On some of traditional plans, no sickness/death until
a certain age may mean not getting any benefits at all
___2
Bank Deposits (Fixed
Income)
B. Advantage: Shorter, if any, holding period vs. bonds
___3
Mutual Funds
C. Advantage: Can be a source of recurring rental income
___4
Real Estate
D. Disadvantage: Riskiest of all assets (can lose as much as 50% of
their money in one day)
___5
Insurance
E. Disadvantage: Pay management fees
Business Finance
Sources and Uses of Short-Term and
Long-Term Funds Pt. 2
90MINS
LESSON OUTLINE
Content Standards
The learners demonstrate an understanding of the sources and uses of shortterm and long-term funds, and the requirements, procedures, obligation to
creditor, and reportorial necessities.
Introduction Communicate the learning objectives
/Review
Motivation
A. Connect the lesson to real life situations.
B. Share the importance of the banking
industry.
5
15
Performance Standards
The learners shall be able to identify the bank and non-bank institutions in the
vicinity that are possible sources of funds.
Instruction/ Discussion proper
Delivery
30
Enrichment Discussion of the research homework.
30
Learning Competencies
The learners will be able to:
Evaluation
10
•
•
•
Self-test questions regarding the 5 Cs of
Credit
Materials
Show the steps in loan application (ABM_BF12-IIIe-f-15)
• Projector, if available
Compare and contrast the loan requirements of the different bank and non• Board and writing materials will suffice
bank institutions (ABM_BF12-IIIe-f-14)
Resources
List down obligations of entrepreneurs to creditors (ABM_BF12-IIIe-f-16)
(1) Brealey, R. Myers, S., & Marcus, A. (2004). Fundamentals of corporate
finance. Boston, Mass.: McGraw-Hill Irwin.
Specific Learning Outcomes
At the end of this lesson, the learners will be able to:
•
•
Know the basic requirements in loan application of different types of
borrowers; and
Define the 5C’s of credit and their applicability in loan approval.
(2) Cayanan, A. Manuscript.
(3) Gitman, L. (2009) Principles of managerial finance. Boston: Pearson
Prentice Hall.
(4) Roque, R. (1990). Management Advisory Services. Malabon: Roque
Press, Inc.
INTRODUCTION (5 MINS)
Communicate learning objectives.
MOTIVATION (15 MINS)
1. Option A: Remind the learners of an example discussed previously regarding the restaurant
expansion worth PHP8 million.
•
•
•
Financing a long-term investment through a short-term loan. Let us say you are a restaurant owner
and you are planning to open another branch which will cost you PHP8 million. The returns on this
investment will be realised over a number of years. Therefore, financing it through a short-term
loan, say one year, will give you too much pressure to pay the loan because the new branch may
not have generated enough cash flow within the year to cover the PHP8 million.
Pose this question to the learners: How do you plan to finance the PHP 8 million?
Answer Key: Since this is a long-term investment where the expected benefits are going to be
realized over a couple of years, this investment should be financed by long-term sources. Assuming
that both long-term debt and equities are accessible, part of the requirements must be financed by
long-term debt. The question is how do you obtain long-term debt.
2. Option B: Connect to real-life situations.
•
•
Ask whether the learners have family businesses and whether they have witnessed the application
for loans of their respective businesses/families from financial institutions.
In addition, inquire whether they are aware of business partnerships. Their respective family
businesses might have experiences of equity infusion from investors or business partners.
INSTRUCTION (25 MINS)
1. Ask the students what the usual loan products from banks they encounter are.
• Sample Responses
• Auto-Loan
Teacher Tip:
If the learners do not have any such firsthand experience in loan applications and
business partnerships, share personal
experiences or witnessed practices.
Teacher Tip:
If you have access to the internet, go to the
website of some of our banks (eg. BDO,
BPI, Metrobank) and look for their loan
products. These loan products can be
presented in class for the learners to
appreciate.
• Housing Loan
• Credit Card loan
• Working Capital Loan, etc.
2. Discuss the importance of Know-Your-Customer (KYC) initiatives. Banks are required to verify the
identity of their customers to ensure that the funds will not be used for illegal activities such as, but
not limited to, money laundering and terrorist financing.
3. Explain the 5C’s of Credit - the institution’s primary consideration in approving loan applications.
•
•
•
•
•
Character –the willingness of the borrower to repay the loan
Capacity – a customer’s ability to generate cash flows
Collateral – security pledged for payment of the loan
Capital – a customer’s financial resources
Condition – current economic or business conditions
4. Discuss the following example/case:
Mr. Joe Salazar applied for a PHP1.5 million loan in behalf of his business, “Joe’s Restaurant”, for
additional capital in 2015. He is the Chairman of the Board of Joe’s Restaurant. In their meeting, the
Board decided to open an additional branch for the restaurant. Joe’s Restaurant currently has 3
branches in Metro Manila and would like to open up a small branch in Quezon City. Joe’s Restaurant
has been in the business for 12 fruitful years and has been a previous borrower of the bank. The
company had previous late payments before but the reasons are usually justifiable, and the balance of
the loan, along with any penalties, if any, is paid. The three branches earn a net income of PHP900,000/
year. The lot where the main restaurant is located is pledged as collateral to the bank. This property is
valued at PHP2 million. Shown below is an excerpt from Joe’s Restaurant’s 2014 consolidated audited
financial statements.
Teacher Tip:
Ask the students to read the case out loud.
Involve them in the analysis of the 5C’s of
credit. Ask them what other considerations
they could think of in analysing whether to
grant the loan or not. Take note that the
feasibility of the new project is yet to be
established. Otherwise, the loan analysis is
incomplete. Collateral in itself is not enough
to ensure repayment. The loan should be
long-term to accommodate the project as
well as the company’s cash flow and profit.
As of 31 December 2014
As of 31 December 2013
Current Assets
1,200,000
900,000
Long-term Assets
4,400,000
4,200,000
Short-term Liability
500,000
460,000
Long-term Liability
2,300,000
3,500,000
Equity
2,800,000
1,140,000
Net Income
900,000
950,000
Cash Flow from Operations
500,000
450,000
Table 1: Sample Consolidated Audited Financial Statements
Ask the students to identify the information to be used in analysing the 5C’s of Credit. (AVERAGE TO DIFFICULT)
• Character: Check Joe’s Restaurant’s payment history and experience in the business. The fruitfulness of the business proves Mr. Salazar and
the BOD’s ability to manage the business well.
• Capacity: The positive income from the business and positive cash flows from operations proves the borrower’s capacity. Current assets also
show that the borrower has funds easily available for repayment if necessary. The term of the loan, should be adjusted to the cash flow of the
borrower.
• Collateral: The property pledged serves as collateral. Its value is usually greater than the loan to provide the bank security for sudden
changes in value of the collateral, as well as to compensate the bank for the collateral’s illiquid nature.
• Capital: The audit financial statements give a preview of the borrower’s resources.
• Condition: The income statement shows that the business is earning and is even growing. The business has already grown to 3 branches.
This shows a preview of the growth in the food industry. Learners may also research on other business growth trends to know about
macroeconomic conditions.
5. Discuss the duties of the Borrower to Creditors.
• Pay the creditors based on the payment schedule agreed upon. If you cannot pay on time, notify the creditors ahead of time. But as much as
possible, pay on time.
• Provide the collaterals as agreed upon in the loan negotiation with proper documentation, if necessary and if applicable (e.g. annotation of
the TCT or CCT). Ensure that these collaterals are in the physical condition perceived by the creditors in determining the loanable value of the
loans.
• Comply with the provisions of loan covenant such as maintaining certain liquidity and leverage ratios. These conditions are supposed to
benefit the borrower so that his company will not be over-exposed to borrowing or he will monitor the liquidity position on a more regular
basis.
• Notify the creditor if the company is acquiring another company or the company is now the subject of acquisition. The interest of creditors
may be jeopardized if new owners take over the company or if the company is going to acquire another company.
• Do not default on the loans as much as possible. Aside from the creditors, there may be other parties such as the guarantors of the loan who
will be put at a disadvantage if the borrower defaults.
MOTIVATION (10 MINUTES)
Share the importance of the banking industry.
• Provision of Credit and Liquidity – Banks provide credit facilities to borrowers which allow them to address their liquidity concerns.
• Risk Management Services – Banks provide advisory service on asset-liability management and can also provide recommendations regarding
the appropriate financing schemes for a company’s funding requirement.
• Money Remittance – Banks can act as conduits or intermediaries for money remittances.
• Economic Development
Banks provide a mechanism for people to save which in
• Channel for Saving and Investment
turn is used by entrepreneurs and corporations. This
• Promotion of Entrepreneurship
function of the bank enhances economic activity.
}
ENRICHMENT (30 MINUTES)
A. Ask the students to visit a bank before the class. Have them inquire on the different loan requirements and steps in loan application, and
compare the different rates for the different loan products. Give them ample time to prepare for a report on what they have researched.
Divide the class into groups and assign each a topic to report on.
• Different Loan requirements for small business loan, loans to corporation, personal consumption loans, and other desired loan products.
• Steps in Loan Application for secured and unsecured loans.
B. Assign two groups to report on the requirements of the following institutions:
• Pawnshop
• Lending company
Teacher Tip
Evaluate the reports based on content,
especially on the interview part. Have the
other non-reporting groups turn-in a written
report.
C. Ask the learners to discuss the general steps on Loan Application. Make them prepare a flowchart.
(AVERAGE TO DIFFICULT)
Sample responses of the learners research on the general steps are as follows:
• Loan applicant inquires with the loan officer to apply for a loan.
• The loan officer provides the loan applicant a loan application form and interviews the client.
• The loan officer then decides what type of loan product the borrower qualifies in, and then provides
them a list of requirements.
• The applicant then submits the requirements along with the loan application form.
• If collateral is required, the corresponding mortgage documents are made ready.
• The loan officer then forwards the documents to the credit evaluation department.
• The credit evaluation department checks whether the applicant provided the complete documents.
• Credit investigation is done, and the credit worthiness of the loan applicant is evaluated.
• The credit analyst prepares a recommendation and will present the recommendation before a loan
committee who approves the loan application. The loan committee is generally composed of top
executives from the bank.
• If the loan is approved, then the post-approval requirements will be sent to the loan applicant for
compliance.
D. Let the learners enumerate the different requirements for a sole proprietorship, consumption loans,
and loans to corporations, as well as the requirements for non-bank financial institutions. (AVERAGE
TO DIFFICULT)
Here is a sample of bank requirements for your reference:
Teacher Tip
References to this material are actual
requirements from different institutions
List of Bank Requirements for Loan Application for a Corporation
(Arthur S. Cayanan)
Pre-approval Requirements:
• Duly accomplished application form
• Securities and Exchange Commission (SEC) registration
• Articles of incorporation and by-laws
• List of elected officers
• Board resolution or corporate secretary’s certificate regarding loan application
• Company profile or business background
• List of major suppliers and customers with contact information
• Audited financial statements (2 to 5 years depending on the bank)
• Bank statements (most banks require bank statements for the past 6 months)
• Collateral documents such as the following:
• Copy of transfer certificate of title (TCT) or condominium certificate of title (CCT)
• Copy of tax declaration
• Appraisal Fee with official receipt
• For construction loan
• Building plan or floor plan
• Bill of materials and labor cost
• Building specifications certified by architect/civil engineer
• Development permit
• Copy of lease contracts (if applicable)
Post-approval Requirements:
• Original owner’s duplicate copy of TCT/CCT
• Original certified true copy of latest tax declaration on land and improvement
• Master deed of declaration (for condominium)
• Electronic-certified true copy of TCT/CCT with original official receipt
• Original certified true copy of tax clearance
• Original real estate tax receipts
• Mortgage redemption insurance
• Fire insurance
Teacher Tip
This may be given as recitation and
questions may be asked per group or
individually.
EVALUATION (10 MINUTES)
Self-Test Questions:
1. Enumerate the 5C’s of credit (EASY)
2. What do you think is the most important consideration of banks in approving a loan? (AVERAGE TO
DIFFICULT)
‘Character and Capacity are the most important factors a bank considers in approving a loan. They go
hand-in-hand because without willingness to repay, the available funds to pay the loan will not in itself
guarantee payment.’
3. Why is it important for banks to collect all the loan requirements? Which requirements are meant to
be used to evaluate each of the 5C’s of credit? (AVERAGE TO DIFFICULT)
Sample Responses:
• Documents are required to provide support on the analysis of the borrower’s existence and
creditworthiness.
• Character – Interview, Fully filled out loan application form, NBI clearance, Police Clearance, etc.
• Capacity – Income documents (Certificate of employment, Audited financial statements, Income tax
return, etc.)
• Collateral – Copy of TCT, Tax declaration, Building plan, etc.
• Capital – Statement of Assets and Liabilities, Audited financial statements, etc.
• Condition – Latest news articles relating to the company (if listed), Trends in the financial statements,
Business Background/Company Profile, etc.
Teacher Tip
This may be given as recitation and
questions may be asked to a group or an
individual.
Business Finance
Review of Financial Statement
Preparation, Analysis,
LESSON OUTLINE
and Interpretation Pt.5
Content Standards
The learners demonstrate an understanding of the process of preparing
financial statements as well as the methods or tools of analysis of financial
statements, including horizontal analysis, vertical analysis, and financial ratios
to test the level of liquidity, solvency, profitability, and stability of the business.
Performance Standards
The learners will be able to solve exercises and problems that require financial
statement preparation, analysis, and interpretation using horizontal and vertical
analyses, and various financial ratios.
Introduction Introduce the learning objectives and
/Review
15
Case
Analysis
45
review financial ratios, focusing on
liquidity and efficiency ratios. Introduce
the case study.
Ask learners to analyze and discuss the case
in groups.
Presentation Ask assigned groups to present their case
analysis to the whole class.
Enrichment Discuss important points of the case and
and
provide commentaries to the groups’
Summary
analysis.
Materials
Learning Competencies
The learners shall be able to:
• Define the measurement levels, namely, liquidity, solvency, stability, and
profitability. (ABM_BF12-IIIb-7)
• Compute, analyze, and interpret financial ratios such as current ratio, working
capital, gross profit ratio, net profit ratio, receivable turnover, inventory
turnover, debt-to-equity ratio, and the like. (ABM_BF12-IIIb-9)
120MINS
• Calculators
• Laptops
• Projectors
• Textbook
Resources
(1) Several copies of case to distributed to learner-groups
Specific Learning Outcomes
At the end of the lesson, the learners will be able to:
• Apply their knowledge on liquidity and efficiency ratios in tackling real life business problems.
• Pinpoint business problems and formulate relevant recommendations and strategies.
30
30
PRE-WORK
Provide copies of the financial statement of the subject company to the learners a day before the class. Ask them to compute for liquidity and
efficiency ratios.
INTRODUCTION/REVIEW (15MINS)
1. Review profitability and leverage ratios. Ask learners what liquidity and efficiency mean. Write the names of the different types of ratios and
their formulas on the board.
2. Explain that business cases are used to discuss certain issues and problems of a specific company. Learners will take the point-of-view of
owners/managers in analyzing the case.
3. Discuss the mechanics of the case discussion:
• The class will be divided in groups of 4 to 6 learners.
• Learners will discuss and analyze the business case among their groups. They will then need to summarize their analysis in an essay/paper.
The paper will have the following outline: Case Background/Story, Analysis (including computations), and Recommendation. The paper can
be one to two pages of yellow sheet or bond paper. They must do this within 45 minutes.
• Two groups will be asked to present. Presenting groups do not need to submit an essay/paper. Instead, they need to prepare their
presentation with materials like manila paper, transparencies, or PowerPoint. Groups can volunteer or the teacher can also assign who will
Presentation time is 10 minutes for each group. After the presentation, there will be a 5-minute Q&A session.
4. Distribute the printed cases to the learners.
CASE ANALYSIS (60 MINS)
1. Allow the learners to break into groups. From time to time, update them with the remaining time to do the analysis and their essay/
presentation.
2. Make sure to remind them that they will take on the shoes of the owner/manager in solving the case.
3. Below is the business case. You may look for or make another business case as long as it highlights the same topics.
Chloe’s Closet
Chloe Mendez owns a clothing company, Chloe’s Closet. She has a team of tailors who work for 8 hours every day
from Monday to Saturday. Demand for her business is strong but there seems to be something preventing her from
meeting the demands of her customers.
Chloe sells to both big department stores and small boutique stores under the brand Chloe’s Closet. Some brands
also ask her to manufacture their own designs. Business for Chloe has been good since it started last 2014. In fact,
despite the tough competition from cheaper manufacturers abroad, she still manages to grow her customer base.
On December 4, 2015 Chloe received a billing statement from a raw material supplier for an amount of
PHP400,000 which will be due in 5 days. She is also scheduled to pay her employees’ monthly salary of PHP70,000
the following day. Upon checking her bank account, she only has a PHP67,000 balance. She knew she had
exceeded her sales target last October and November so she is wondering why she only has this amount of cash in
her bank account. Was her money stolen? Being a CPA, she checked the bank statement and her financial records
and found no mistakes.
Here is the latest financial statement of Chloe’s Closet as of November 30, 2015:
Statement of Financial Position
Nov 30, 2015
Cash
Dec 31, 2014
60,000.00
270,000.00
Accounts Receivable
740,000.00
500,000.00
Inventory
600,000.00
400,000.00
Machinery
800,000.00
850,000.00
2,200,000.00
2,020,000.00
Accounts Payable
400,000.00
500,000.00
Salaries Payable
150,000.00
150,000.00
400,000.00
500,000.00
200,000.00
200,000.00
1,600,000.00
1,320,000.00
1,800,000.00
1,520,000.00
2,200,000.00
2,020,000.00
TOTAL ASSETS
Total Liabilities
Capital Stock
Accumulated Profit
Total Equity
TOTAL EQUITY AND LIABILITIES
Statement of Financial Position
Nov 30, 2015
Dec 31, 2014
Sales
800,000.00
600,000.00
Cost of Goods Sold
300,000.00
225,000.00
Operating Expenses
100,000.00
105,000.00
Operating Income
400,000.00
270,000.00
Machinery
120,000.00
81,000.00
280,000.00
189,000.00
NET INCOME
What’s wrong with Chloe’s Closet?
PRESENTATION (30 MINS)
1. Time each presentation. Ask groups to stop presenting after 10 minutes. Be strict with the time.
2. After each presentation, ask the presenting group some questions or clarifications. You can also
challenge the computations/recommendations of the learners. You may also provide general
comments of the presentation flow and aesthetics. Ask other groups to also provide comments and
questions to the presentations. This should take 5 minutes.
ENRICHMENT AND SUMMARY (15 MINUTES)
1. Write on the board the main points raised by the presenting groups.
2. Provide your own analysis.
• Start by pinpointing the main issues relevant to the case (AR, Inventory, Payables).
• Provide the correct figures for the profitability and leverage ratios.
• Discuss how you arrived at your decision. Highlight important recommendations/changes that must
be done to the operations of Chloe’s Closet.
Teacher Tip:
Guide Questions for the Case:
1. Did learners check the efficiency of AR
management? What was AR turnover
between 2014 and 2015?
2. Did learners check the efficiency of
Inventory management? What was
Inventory turnover between 2014 and
2015?
3. What was the payable turnover for
Chloe’s Closet? How did it affect the
problem?
4. What factors lead to the low cash
balance for Chloe’s Closet?
Business Finance
Review of Financial Statement
Preparation, Analysis,
LESSON OUTLINE
and Interpretation Pt.1
120MINS
Introduction Brief review of the contents of a financial
/Review
20
Motivation
10
statement and introduce the four types
of financial ratios.
Content Standards
The learners demonstrate an understanding of the process of preparing
financial statements as well as the methods or tools of analysis of financial
statements, including horizontal analysis, vertical analysis, and financial ratios
to test the level of liquidity, solvency, profitability, and stability of the business.
Performance Standards
The learners will be able to solve exercises and problems that require financial
statement preparation, analysis, and interpretation using horizontal and vertical
analyses, and various financial ratios.
Learning Competencies
The learners shall be able to:
Discuss stories about households borrowing
from a sari-sari store.
Instruction/ Define liquidity ratios and solve sample
Delivery
30
Practice
Board work/exercises and presentation
20
Enrichment Analyze and interpret liquidity ratios for
20
problems.
various companies from different industries.
Materials
• Calculators
• Laptops
Resources
(1) Copies of sample financial statements
• Define the measurement levels, namely, liquidity, solvency, stability, and profitability. (ABM_BF12-IIIb-7)
• Compute, analyze, and interpret financial ratios such as current ratio, working capital, gross profit ratio, net profit ratio, receivable turnover,
inventory turnover, debt-to- equity ratio, and the like. (ABM_BF12-IIIb-9)
Specific Learning Outcomes
At the end of the lesson, the learners will be able to:
• Define liquidity
• Solve liquidity ratios (current and quick)
• Analyze, interpret, and compare the liquidity ratios of sample companies
INTRODUCTION/REVIEW (20 MINS)
1. Communicate learning objectives
•
Introduce the following learning objectives using any of the suggested protocols (verbatim, own
word, read-aloud):
•
Introduce financial ratios
•
Define liquidity
•
Solve for liquidity ratios (current and quick)
•
Analyze, interpret, and compare the liquidity ratios of sample Philippine companies
Teacher Tip:
Make sure they remember the rules on
current and non-current classifications.
2. Review
•
•
•
•
Ask learners what the contents are of the financial statements.
Ask them how the contents of the financial statements are classified.
Ask them what they remember about current and non-current classifications for assets and liabilities.
Emphasize what accounts are considered current assets and liabilities.
MOTIVATION (10 MINS)
1. Ask them if they have tried buying from sari-sari stores on credit.
2. Ask them what the implications are if you or your household don’t pay your obligations to your
neighbor’s sari-sari store.
3. Write their answers on the board.
4. Ask them, if a business does not pay its obligations on time, will it also have the same experiences
like the household not paying its obligations? What could possibly happen to the business? Shortrun? Long-run?
Teacher Tip:
Emphasize that not paying your obligations
in time will result to the following for a
household:
• Bad reputation
• Lost credit line
• Can’t purchase necessities
• Hunger
Possible effects to businesses:
• Business will incur additional costs such as
penalties, interest and surcharges
• Suppliers will stop selling
• Increased prices from suppliers
• Suppliers giving less priority when supply
is low
• Unfulfilled sales orders
• Eventual business closure
INSTRUCTION/DELIVERY (30 MINS)
1. Introduce the four main categories of financial ratios:
•
•
•
•
Liquidity
Profitability
Efficiency
Leverage
•
Ask them what the uses of financial ratios are. Say that for this session we will just focus on liquidity.
2. Define liquidity.
• Liquidity refers to the company’s ability to satisfy its short-term obligations as they come due. Refer
back to the household example to emphasize the meaning of liquidity.
3. Define the types of liquidity ratios and write the formulas on the board. Current ratio and quick
ratio.
Current Ratio =
Quick Ratio =
Teacher Tip:
Emphasize the accounts needed in solving
the ratios. Note that accounts receivable
can have a non-current portion. Make sure it
is removed from the current portion in
computing the liquidity ratios. Marketable
securities are short-term investments. Add
that for receivables to be considered
current, they should be collected within a
year. Cite that property developers can be
examples of companies which can have
accounts receivable-trade beyond one year.
Current Assets
Current Liabilities
Cash + Marketable Securities + Accounts Receivable
Current Liabilities
4. Show a sample financial statement and ask the learners to compute for the ratios:
Answer Key:
Current ratio: 2.64
Quick ratio: 1.60
Sample Company Statement of Financial Position as of December 31, 2014
Assets
Liabilities and Stockholders’ Equity
P 120,000.00
Accounts Payable
P 70,000.00
Marketable Securities
P 35,000.00
Short-term notes
P 55,000.00
Accounts receivable
P 45,000.00
Cash
Inventories
P 130,000.00
Current assets
P 330,000.00
Current liabilities
Long-term debt
Total liabilities
Equipment
P 2,970,000.00
Common stock
Buildings
P 1,600,000.00
Retained earnings
P 125,000.00
P 2,700,000.00
P 2,825,000.00
P 500,000.00
P 1,575,000.00
Fixed Assets
P 4,570,000.00
Stockholders’ equity
P 2,075,000.00
Total Assets
P 4,900,000.00
Total liabilities and equity
P 4,900,000.00
PRACTICE (20 MINUTES)
Provide exercises. Here are sample questions:
• Current assets is PHP2,000, current liabilities is PHP3,500. What is current ratio?
• Inventory is PHP150. Accounts payable is PHP450. Cash and accounts receivable total PHP800. What
is the current ratio? Quick ratio?
• If current ratio is 1.7, what is the total accounts receivable if cash is PHP20,000, inventory is PHP7,500,
and accounts payable is PHP30,000.
• Cash is 30% of total current assets. If current ratio is 2.3, what is the new current ratio if total non-cash
current assets grow by 50%?
Teacher Tip:
By this time, the learners should’ve
mastered the computation of liquidity
ratios.
Answer Key:
• Current ratio: 2,000/3,500 = 0.57
• Current ratio: (800 + 150)/450 = 2.11
Quick ratio: 800/450 = 1.78
• Total receivables: 1.7= (X+20,000+7500)/
30,000 = 23,500
• Current ratio: 2.3 = (6,900 + 16,100)/
10,000
Assuming an increase in noncurrent
assets of 50%
New current ratio:(6,900 + 24,150)/
10,000 = 3.105
Use hypothetical numbers to compute.
ENRICHMENT (20 MINUTES)
1. Summarize and recap the relationship of the accounts in computing the ratios.
2. Ask the learners to discuss what they think the ratios mean and their applications may be. Some
reflection questions:
•
•
•
•
•
What is a good current ratio? 1? 2? 0.5?
Can a current ratio be lower than the quick ratio?
Is a high current ratio always good? Is a low current ratio always bad?
What factors affect company’s decisions in managing current ratio?
If company A has current ratio of 1.3 while company B has a current ratio of 2.3, which is a better
company?
Teacher Tip:
A high current ratio is not necessarily good.
Although a high current ratio would mean
that there is a higher probability that the
company can meet its short-term
obligations, its assets may not be earning as
much and the company may have given up
long-term investment opportunities.
High receivable balances increase liquidity
ratios however, the collectability of these
receivables might not be assured. Quality of
receivables should also be considered in
analyzing liquidity. This can be explained in
the discussion of efficiency ratios where the
average collection period is computed.
3. Show the statement of financial position of three companies: Jollibee, Petron, and Globe. You may
project the financial statements using LCD projector or overhead projector or provide printed
copies. These financial statements can be used for the succeeding topics. You may also select other
companies as examples. Just make sure to simplify and condense the financial reports before
presenting them to class.
Here are the condensed financial statements of the three companies as of December 31, 2014
Teacher Tip:
Learners might give various answers to this
question.
JFC
Petron
Globe
ASSETS
Current assets
Cash
7,619
90.602
16,757
Receivables
7,621
17,927
23,543
Inventories
5,972
53,180
3,186
Other current assets
2,810
57,320
3,256
24,022
219,029
46,742
13,364
153,650
117,299
3,410
1,613
451
13,323
17,032
15,015
30,097
172,295
132,765
54,119
391,324
179,507
2,455
29,496
12,458
182
73
1,587
1,865
133,388
0
14,589
39,630
46,305
19,091
202,587
60,350
Long-term Debt
4,428
66,269
59,146
Other Liabilities
2,522
8,776
5,473
6,950
75,045
64,619
26,041
277,634
124,969
Non-current Assets
Property, plant and equipment
Financial Investments
Other non-current assets
TOTAL ASSETS
LIABILITIES
Current Liabilities
Accounts Payable
Income Tax Payable
Short-term debt
Other current liabilities
Non-current Liabilities
TOTAL LIABILITIES
Jollibee Foods Corporation (JFC) – JFC
has a relatively high current and quick ratio.
This is driven by its high cash and receivable
balances. With its mass market operations
and expansion plans, high liquidity ratios
make sense. It can also be attributed to
relatively low levels of current liabilities. This
can be explained later on when efficiency
ratios are computed and when operating
cycle and cash conversion cycles are
computed. These cycles will also show later
on why JFC’s operating cash flows are high
and which allows the company to pay its
maturing obligations on time.
Petron Corporation - As an established
company operating in a stable oil industry,
Petron’s liquidity ratios can be acceptable.
What made Petron’s liquidity ratios low is
the PHP133 billion short-term debt. If this is
taken out, Petron’s liquidity ratios will be
much higher. But this is a decision made by
the management of the company. Later in
the course when working capital financing
policies are discussed, this is an indicator
that the company has adopted a more
aggressive working capital financing policy.
Globe Corporation – Globe’s liquidity
ratios are relatively low compared to the
other two companies. This means that
Globe might need to get more financing to
meet its short-term obligations. However,
since Globe is an established company, it
won’t be difficult for it to get more credit
from the bank or funding from investors.
Emphasize that there are other financial
ratios that need to be considered in
determining the credit worthiness of Globe,
not just liquidity ratios.
Before you end this section, summarize the
importance of liquidity ratios, how they are
computed and the issues behind them such
as high liquidity ratios are not necessarily
good.
JFC
Petron
Globe
EQUITY
Capital Stock
1,064
9,485
8,429
Additional Paid-in Capital
4,452
19,653
36,049
22,646
40,815
10,852
(84)
43,739
(792)
Total Equity
28,078
113,692
54,538
TOTAL LIABILITIES AND EQUITY
54,119
391,324
179,507
Sales Revenue
90,671
482,535
103,235
(73,728)
(463,100)
(10,661)
16,943
19,435
92,574
(10,806)
(11,830)
(59,506)
6,137
7,605
33,068
748
1,736
1,255
(126)
(5,528)
(14,940)
6,759
3,813
19,383
(1,271)
(804)
(6,011)
5,488
3,009
13,372
Retained Earnings
Other Equity Accounts
Cost of Sales/Service
Gross Margin
Operating Expenses
Operating Profie
Other Income
Other Expenses
Net Income Before Tax
Income Tax
Net Income After Tax
4.
Ask the learners to compute the ratios of the sample companies and ask them to compare the three companies using the ratios computed.
JFC
Petron
Globe
Current Ratio
1.26
1.08
0.77
Quick Ratio
0.80
0.54
0.67
5. Ask the learners the possible reason why the sample companies have different ratios. What could have possibly caused these differences?
What are the implications?
6. Summarize the discussion for today. Focus on how to interpret the liquidity ratios.
EVALUATION (20 MINUTES)
1. Provide a written true-or-false or multiple-choice quiz similar to the Practice exercises above.
2. Include an essay question in the quiz. Possible questions would be:
• Which ratio is more relevant - quick ratio or current ratio?
• What other factors would a bank or supplier look into in deciding whether to lend short-term credit? (Reflection question as pre-cursor for
next topics)
Business Finance
Review of Financial Statement
Preparation, Analysis,
LESSON OUTLINE
and Interpretation Pt.2
120MINS
Introduction Introduce the learning objectives and
/Review
15
Motivation
20
review the concept of ‘profit’ and
computation.
Content Standards
The learners demonstrate an understanding of the process of preparing
financial statements as well as the methods or tools of analysis of financial
statements, including horizontal analysis, vertical analysis, and financial ratios
to test the level of liquidity, solvency, profitability, and stability of the business.
Performance Standards
The learners will be able to solve exercises and problems that require financial
statement preparation, analysis, and interpretation using horizontal and vertical
analyses, and various financial ratios.
Learning Competencies
The learners shall be able to:
Ask learners to give real-life business
examples.
Instruction/ Define profitability ratios and solve sample
Delivery
25
Practice
10
problems.
Board work/exercises and presentation
Enrichment Analyze and interpret profitability ratios for
various companies from different industries.
Materials
• Calculators
• Laptops
Resources
(1) Copies of sample financial statements
• Define the measurement levels, namely, liquidity, solvency, stability, and profitability. (ABM_BF12-IIIb-7)
• Compute, analyze, and interpret financial ratios such as current ratio, working capital, gross profit ratio, net profit ratio, receivable turnover,
inventory turnover, debt-to-equity ratio, and the like. (ABM_BF12-IIIb-9)
Specific Learning Outcomes
At the end of the lesson, the learners will be able to:
• Define profitability.
• Solve profitability ratios (return on equity, return on assets, gross profit margin, operating profit margin, net profit margin).
• Analyze, interpret, and compare the profitability ratios of sample companies.
30
INTRODUCTION/REVIEW (15 MINS)
1. Communicate learning objectives
•
Introduce the following learning objectives using any of the suggested protocols (verbatim, own
word, read-aloud):
•
Define profitability.
•
Solve profitability ratios (return on equity, return on assets, gross profit margin, operating
profit margin, net profit margin).
•
Analyze, interpret, and compare the profitability ratios of sample companies.
Teacher Tip:
Teacher Tip: There are different levels of
measuring profit:
• gross profit
• operating profit
• net profit or net income
2. Review
• Ask learners what they understand with the concept of ‘profit’.
• Review how the gross profit margin, operating profit margin, net profit or net income is computed.
Write down the formulas. (Refer to the sample financial statements in the Instruction/Delivery part.)
MOTIVATION (20 MINS)
1. Ask learners to give examples of businesses which they think are very profitable and examples of
businesses that they think are not profitable. Answers can range from specific company names to
general type of businesses.
2. Take a pick from the examples given by the learners – one very profitable and one that is not so
profitable. Discuss what factors affect their profitability. Factors could include pricing, costs,
operating expenses, etc.
3. Ask learners to reflect why businesses have different levels of profitability?
Teacher Tip:
Before proceeding to this part, make sure
that the learners still remember the concept
of profit or net income.
INSTRUCTION/DELIVERY (20 MINS)
1. Define profitability.
•
Profitability refers to the company’s ability to generate earnings. It is one of the most important
goals of businesses.
2. Define the profitability ratios and write the formulas in the board.
Teacher Tip:
• These are the return on equity, return on assets, gross profit margin, operating profit margin, net
profit margin.
In discussing the formula of the ratios, make
sure learners know how the components are
computed or where they are taken. For
example, emphasize that stockholder’s
equity should include all of its components
including retained earnings.
• Return on equity measures the amount of net income earned in relation to stockholders’ equity.
• ROE (return on equity) = Net income ÷ Stockholders’ equity
• Return on assets measures the ability of a company to generate income out of its resources/assets.
• ROA (return on asset) = Operating income ÷ Total assets
• Gross profit margin shows how many pesos of gross profit is earned for every peso of sale. It provides
information regarding the ability of a company to cover its manufacturing cost from its sales.
Remember that gross profit is just sales less cost of goods or cost of services.
• Gross profit margin = Gross profit ÷ Sales
• Operating profit margin shows how many pesos of operating profit is earned for every peso of sale. It
measures the amount of income generated from the core business of a company.
• Operating profit margin =Operating income ÷ Sales
• Net profit margin measures how much net profit a company generates for every peso of sales or
revenues that it generates.
• Net profit margin = Net income ÷ Sales
In computing ROE and ROA, some authors
would prefer that the average stockholder’s
equity and average total assets be used in
the computation. The idea is that since net
income is earned over the year, average
equity and asset balances should be used. A
simple way to compute for the average is
just to add the beginning and ending
balances then divide the sum by two. For
ease, you may just use ending balances in
computing the ratios.
Note also that some authors use net
income, instead of operating income as the
numerator for ROA. Some use net income
plus interest expense multiplied by (1-tax
rate) in the numerator. The idea is to be
consistent in the application of the formula.
Answer Key:
PRACTICE (10 MINUTES)
Show a sample financial statement and ask learners to compute for the financial ratios. Ask them to
present in front of the class.
Sample Company Statement of Financial Position as of December 31, 2014
ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
P 120,000.00
Accounts Payable
P 70,000.00
Marketable Securities
P 35,000.00
Short-term notes
P 55,000.00
Accounts Receivable
P 45,000.00
Cash
P 130,000.00
Inventories
Current Assets
P 330,000.00
Current Liabilities
Long-term debt
Total Liabilities
Equipment
P 2,970,000.00
Common stock
Buildings
P 1,600,000.00
Retained earnings
P 125,000.00
P 2,700,000.00
P 2,825,000.00
P 500,000.00
P 1,575,000.00
Fixed Assets
P 4,570,000.00
Stockholders’ equity
P 2,075,000.00
Total Assets
P 4,900,000.00
Total liabilities and equity
P 4,900,000.00
Return on equity = 16.98% =
352,240/2,075,000
Return on assets = 7.19% =
352,240/4,900,000
Gross profit margin = 35% =
700,000/2,000,000
Operating profit margin = 25.05%
= 501,000/2,000,000
Net profit margin = 17.61% =
352,240/2,000,000
The ROE of 16.98% means that for every
PHP1 of stockholders’ equity, PHP0.1698 or
16.98 centavos was earned in 2014. To be
more meaningful, this rate of return is
compared with the returns on alternative
investments such as the returns on time
deposits and other fixed income
instruments. For example, if the interest on
time deposits is only 2%, then the 16.98%
ROE seems better. However, before a
conclusion is made that the 16.98% ROE is
better than the time deposit rate of 2%, the
risks associated with this company earning
16.98% has to be assessed. Generally, the
2% time deposit rate is guaranteed while
the 16.98% ROE is not. In 2014, ROE of
Sample Company was high, but what if in
the future, it will earn a negative ROE. Is
this possible for a company? Yes! No
manager in his/or sound mind will
guarantee a specific rate of return,
especially when that rate is relatively high.
Why? Because in business, there are always
risks. A company which is doing so well this
year may find itself with too many
competitors in the future and these
competitors may eat its share of the
business in the market and can make a
profitable company today a losing company
in the future.
Sample Company Statement of Financial Performance for the Year Ended December 31, 2014
Sales Revenue
P 2,000,000.00
Cost of Sales/Service
P (1,300,000.00)
Gross Margin
Operating Expenes
Operating Profit
P 700,000.00
P (199,000.00)
P 501,000.00
Other Income
P 5,000.00
Other Expenses
P (2,800.00)
Net Income before Tax
Income Tax
Net Income after Tax
P 503,200.00
P (150,960.00)
P 352,240.00
ENRICHMENT (30 MINUTES)
1. Summarize and recap the relationship of the accounts in computing the ratios.
2. Show the statement of financial position and statement of financial performance of the three companies: Jollibee, Petron, and Globe. You
may project the financial statements using LCD projector or overhead projector or provide printed copies. These financial statements can be
used for the succeeding topics. You may also select other companies as examples. Just make sure to simplify and condense the financial
reports before presenting them to class.
Here is an extract of the statements of financial position of the three companies as of December 31, 2014. (Please refer to the previous teaching
guide on liquidity ratios for the detailed statement.)
JFC
Petron
Globe
Total Assets
54,119
391,324
179,507
Total Liabilities
26,041
277,632
124,969
Total Equity
28,078
113,692
54,538
Here is the condensed statement of financial performance of the three companies for the year ended December 31, 2014.
JFC
Sales Revenue
Cost of Sales/Service
Gross Margin
Operating Expenses
Operating Profit
Other Income
Other Expenses
Net Income before Tax
Income Tax
Net Income after Tax
Petron
Globe
90,671
482,535
103,235
(73,728)
(463,100)
(10,661)
16,943
19,435
92,574
(10,806)
(11,830.00)
(59,506)
6,137
7,605
33,068
748
1,736
1,255
(126)
(5,528)
(14,940)
6,759
3,813
19,383
(1,271)
(804)
(6,011)
5,488
3,009
13,372
3. Ask learners to compute the ratios of the sample companies and ask them to compare the three
companies using the ratios computed.
JFC
Petron
Globe
Return on equity
19.55%
2.65%
24.52%
Return on assets
10.14%
0.77%
7.45%
Gross profit margin
18.69%
4.03%
89.67%
Operating profit margin
6.77%
1.58%
32.03%
Net profit margin
6.05%
0.62%
12.95%
4. Ask the learners the possible reasons why the sample companies have different ratios. What could
have possibly caused these differences? What are the implications?
5. Summarize the discussion for today. Focus on how to interpret the profitability ratios.
Teacher Tip:
Ask whether the high net income would
mean high net cash inflows to the business.
This is not necessarily the case. High net
income might not result to high cash flows
for the company. Remember that we use
accrual method and not cash method in
accounting for net income. This concept
(quality of earnings) will be discussed in
detail in the following modules.
EVALUATION (20 MINUTES)
• Provide a written true-or-false or multiple-choice quiz about solving and interpreting profitability
ratios.
1. Which of the following statements is true?
A. Gross profit margin is always less than net profit margin
B. Gross profit margin is always greater than net profit margin
C. Gross profit margin is can be less than or greater than net profit margin
2. A business has a decreasing gross profit however, gross margin percentage is constant. What could
be the possible reason?
A. Sales is increasing, but cost of sales is decreasing
B. Sales and cost of sales increase by the same percentage
C. Sales and cost of sales decrease by the same percentage
• Include an essay question asking why it is important to use profitability ratios.
Answer Key:
1.C
2.C
Business'Finance
180 MINS
Basic Long-Term Financial Concepts
Content Standards
The learners demonstrate an understanding of the basic concepts of risk and
return, and the time value of money.
Performance Standards
The learners shall be able to:
LESSON OUTLINE
Introduction Communicate learning objectives
Motivation
• Distinguish simple and compound interest.
• Solve exercises and problems in computing for the time value of money with
the aid of present and future value tables.
Learning Competencies
The learners will be able to:
• Calculate future value and present value of money. (ABM_BF12-IIIg-h-18)
• Compute for the effective annual rate. (ABM_BF12-IIIg-h-19)
Specific Learning Outcomes
At the end of this lesson, the learners will be able to:
• Define the concepts regarding the time value of money.
35
Instruction/ Discussion Proper
Delivery
95
Practice
25
Exercises regarding solving for the present
value
Enrichment Short case regarding which payment
methods to choose in order to optimize
receipts using concepts learned in present
value and future value
Materials
• Compute the present value and future values with the aid of formulas and
tables.
• Apply the concepts in real life scenarios.
a. Connect to real life situations
b. Present a short scenario relating the
importance of interest and compounding
c. Present a scenario showing the use of
future value and present value
5
• Projector, if available. Board and writing
materials will suffice.
• Scientific calculator
• PV and FV tables
Resources
(1) Brealey, R., Myers, S., & Marcus, A. (2004). Fundamentals of
corporate finance. Boston, Mass.: McGraw-Hill Irwin.
(2) Gitman, L. (2009). Principles of managerial finance. Boston:
Pearson Prentice Hall.
(3) Roque, R. (1990). Management Advisory Services. Malabon:
Roque Press, Inc.
20
INTRODUCTION (5 MINS)
Communicate learning objectives
• Ask the learners to define ‘interest’.
• Interest - the cost of holding money. It is the amount charged by the lenders to the borrowers/
users of money, and is usually paid at regular intervals.
MOTIVATION (15 MINS)
1. Ask the learners one or two of their experiences in investing their money. Let them share their
experiences.
2. Have the learners read the story below: (Appendix A)
One day, the Master was going on a trip and decided to entrust his wealth to three of his most
trusted servants. The wealth shall be given to each servant based on the Master’s assessment of
their talents. To his first servant, he entrusted PHP500,000. To his second servant, believing that
he can make wise choices as well, he also gave an amount of PHP500,000. Finally, he called on
his third servant and gave him PHP500,000. The Master then went on his journey and told the
servants he will not be back for a long time. Since the first servant was a very smart person, he
decided to invest the PHP500,000 given to him. He was very pleased that he was quoted a
long-term investment for 5 years at 8% per annum compounded annually, and decided to invest
the money in that institution. The second servant saw what the first servant did and also decided
to invest the money. However, when given the choice by the investment firm, he did not
understand simple and compound interest. In the end, he accepted the quote at 8% per annum
simple interest. The third servant saw them and thought that they were being too much of a
risk-taker and decided just to keep the money locked in a vault in his home.
The Master returned after 5 years. He then called on the servants and asked them what has
become of the wealth he had entrusted them. The first servant presented his PHP500,000 plus
the interest he earned worth PHP500,000 x (1.08)5 – 500,000 = 234,664.04 . The second servant
Teacher Tips
If the learners are passive, be able to share
personal experiences in investing money.
Time deposits and bank savings can also be
a type of investment although it only has a
small yield. The objective is to show the
concept of interest in real-life scenarios
Teacher Tips
This story is based on the Parable of talents
from the Bible. It has been modified for the
purpose of discussion. In this story, the risk
of losing money due to the failure of a
financial institution is not taken into
consideration. Give the learners a copy of
the material which is included in the
appendix of this teaching guide for their
reference.
presented his PHP500,000 along with the interest earned at 500,000 x .08 x 5 = 200,000 Lastly
the third servant returned his PHP500,000.
SERVANT 1 SERVANT 2 SERVANT 3
Principal
500,000.00
500,000.00
500,000.00
Interest
234,664.04
200,000.00
0.00
Total Returned
734,664.04
700,000.00
500,000.00
3. Ask the learners ‘Which servant will make the Master most pleased?’
INSTRUCTION (35 MINS)
1. Differentiate simple and compounded interest.
• Simple Interest – the charging interest rate r based on a principal P over T number of years.
Teacher Tips
Learners have the option to use calculators
or the present value and future value tables
provided at the end of this module .
Interest = P x r x T
In the story above,
Principal = PHP500,000
Rate = 8%
Time = 5 years
Thus,
Interest = 500,000 x .08 x 5 = PHP200,000
• Compound Interest - the interest in the first compounding period is added on the principal, which
will then be the basis for the interest to be computed for the next period. So in our earlier example,
the interest to be earned on the first year is equal to 500,000 x .08 = 40,000. The 40,000 interest
will be added to the 500,000 principal which will then be the basis for interest computation for the
Teacher Tips
Usual compounding will make use of annual
compounding. This simplifies the formula
to:
Interest = P x (1+r)T – P
second year; 540,000 x .08 = 43,200, and so on. The formula below shows the summary of the
effects of adding on the interest, where m is the compounding frequency.
Interest = ( P x (1 +
r
m
) (T x m) ) - P
In the story above,
Principal = PHP500,000
Rate = 8%
Time = 5 years
Compounding frequency = annually
Thus,
Interest = 500,000 x (1 + (0.08/1))(5x1) – 500,000 = PHP234,664.04
2. Discuss the use of compounding frequency and provide illustrations.
• Compounding Frequency - the number of times interest is computed on a certain principal in one
year.
• If the investment pays annually, the interest is the same as computed above since m=1.
• If the investment pays semi-annually, the total interest will be equal to:
Interest = 500,000 x (1+(0.08/2))(5x2) – 500,000 = PHP240,122.14
3. Ask the learners to compute the interest earned over the 5 year term with PHP500,000 as principal
using the following compounding periods. (EASY)
• Quarterly: PHP242,973.70
• Monthly: PHP244,922.85
• Semi-monthly: PHP245,416.34
• Daily (365 days): PHP245,879.66
Teacher Tips
Interest rates when quoted without any
qualification is assumed to be an annual
rate.
Note that with more compounding, interest
income can be higher as shown in the
illustrative example. Banks offer time
deposit products with different types of
compounding, thus affecting the interest to
be earned.
4. Introduce the Effective Annual Rate (EAR).
So far, we have discussed about interest earned on investments. It is also important to look at interest
rates from the point of view of borrowers. Both businesses and investors need to make an objective
comparison of loan costs or investment returns over different compounding periods. The effective
annual rate allows this comparison because it is the actual interest actually paid or earned. It should be
distinguished from the nominal rate, or the stated contractual rate which is the interest charged by a
lender or promised by a borrower. It does not reflect the effect of compounding frequency.
The formula for computing the EAR is as follows:
EAR = ( 1 +
r
m
) m) - 1
This is very similar to the formula for computing for interest earned using compounded interest. The
only difference is that EAR only takes into consideration the actual interest for one year.
5. Discuss the following illustrative example:
Mr. Lopez wishes to find the effective annual rate for his loan in BOD bank with a 5% nominal annual
rate when interest is compounded (1) annually, (2) semi-annually, and (3) quarterly.
• For annual compounding: 5%
• For semiannual compounding: 5.06%
• For quarterly compounding: 5.09%
Ask the learners to compute for the EAR for the following: (AVERAGE)
• For monthly compounding: 5.12%
• For daily compounding: 5.13%
The effective annual rate increases with increasing compounding frequency, up to a limit that occurs
Teacher Tips
Walkthrough the process of getting each
EAR using the formula provided.
with continuous compounding, which is almost equivalent to daily compounding.
The Truth-in-Lending act for Banks and other financial institutions requires that they disclose the
effective interest rates for loan products to borrowers. The effective rates should reflect the service
charges and other deductions from the loan proceeds.
MOTIVATION (20 MINS)
1. Ask the learners which is more valuable to them, to receive PHP1,000 today or receive PHP1,000
five months from now.
• Sample Response: PHP1,000 today, because there is uncertainty with regard to the receipt of the
PHP1000 five months from now. The student can be indifferent if he will be compensated by
receiving more 5 months from now, which is in the form of interest income.
• Recall the following saying: ‘A bird in the hand is worth two in the bush’ – Miguel de Cervantes
2. Read the following story in class.
Consider the case of Lola Clara. When she was 24 years old, her Papa gave her PHP50,000. She was
very happy and was immediately planning on spending the money. However, before she could spend
the money, her Mama taught her the importance of saving. Not wanting to disappoint her Mama, she
invested her money in a bank time deposit with an interest rate of 5% at that time.
Lola Clara became a very successful career woman but she somehow forgot that she placed PHP50,000
in the bank. She suddenly remembered and was shocked at what had happened to her money after 50
years.
It is now valued at 50,000 x (1.05)50 = 573,369.99.
This example is something of an exaggeration, of course. Nevertheless, it is important to note that
money grows through time.
Teacher Tips
This story shows how money grows over
time. Its worth in the future is dependent on
the amount invested today, which would be
a prelude to our discussion in future and
present value.
INSTRUCTION (60 MINS)
A. Differentiate future value and present value.
• Future Value - the amount to which an investment will grow after earning interest. In our previous
examples, it is the principal plus total interest earned over a stated period. So the future value of an
investment of PHP500,000.00 yielding an interest of 8% for a 5-year period compounded annually is
PHP734,664.04.
• Present Value - the amount you have to invest today if you want to have a certain amount of cash
flow in the future.
• These definitions can better be illustrated in a timeline.
0
1
2
Teacher Tips
3
4
Initial Investment T-0
(PV): Php 500,000
5
Value of investment at T-5
(FV): Php 734,664.04
Figure 1: Growth of Value over 5-year period
• The time value of money analysis helps managers and investors compare cash flows today versus
cash flow in the future. It answers questions such as what amount in the future is equal to
PHP500,000.00 today or what amount today is equivalent to PHP734,664.04 in the future. The
future value is computed using compounding while the present value is computed using
discounting. In practice, when making investment decisions, investors usually adopt the present
value approach.
B. Differentiate the basic patterns of cash flow.
• Single Amount (Lump Sum) - a single cash outflow is made and the total receipts will be at a single
future date.
• Annuity - periodic stream of equal cash flow at equal time intervals (annually, monthly, etc.). For
example, payment for a certain item shall be for 12 equal monthly instalments of PHP1,000.
• Mixed Stream - unequal periodic cash flows that reflect no particular pattern. For example,
Show the timeline to better explain the
concept.
Write the equations on the board and solve
the problems.
payments made by a customer are in 3 unequal instalments.
TIME
AMOUNT
Year 1
1,500
Year 2
3,000
Year 3
2,500
Table 1: Sample of Mixed Stream
C. Ask the learners to compute for what amount they will receive (what is the future value) if PHP150,000 is invested at 6% per annum
compounded semi-annually for 3 years.
0.06 (3x2)
Answer: 150,000 x (1+
)
= PHP179,107.8
2
Reminder: Future value is simply the principal multiplied by the FV factor.
D. Discuss the present value of a single amount.
• Present Value - answers the question: How much must be invested today to produce a certain amount in the future. Since future value is
calculated by multiplying the present investment by 1 + interest rate compounded by the number of periods, we shall just reverse the
process. This method is called discounting
FV = PV x (1 + r)T
PV =
FV
(1 + r)T
• Illustration: You need P25,000.00 to buy a laptop when you enter into college 2 years from now. How much must you invest now if the
interest rate is at 6% per annum?
PV = 25,000/(1.062) = PHP22,249.91
You need to invest PHP22,249.91 to have PHP25,000.00 by the end of 2 years.
E. Illustrate how to calculate future value and present value of mixed streams of cash flows.
• Future Value: Suppose that you choose to put your savings annually in MRI bank at 8% per annum.
For today, you put PHP1,200, on the second year PHP1,400, and PHP1,000 for the third year. How
much will you have available at the end of three years?
Factor multiplied by the Amount Deposited
Future Value
(1.08)3 = 1.2597
PHP1,200
1,511.65
(1.08)2 = 1.1664
PHP1,400
1,632.96
(1.08)1 = 1.08
PHP1,000
1,080.00
Total FV
P4,224.61
Table 2: Sample Computation to Identify Future Value
• The FV factor can either be computed or looked up in the FV table.
• This timeline illustrates the timing of cash flows:
0
1
2
3
-1,200
-1,400
-1,100
4,224.61
Figure 2: Timing of Cash Flows
• (Present Value) Suppose that you can buy a phone for PHP8,000 down payment with 4,000 for
each of the next two years or pay PHP15,500 cash today. Given an interest rate of 8%, which is a
cheaper alternative?
Teacher Tips
Distinguish when the amounts are paid. If
payments are made on the last day or
maturity date, the amount is already the
future value.
Teacher Tips
Present Value
PHP8,000
8,000.00
PHP4,000/(1.081)
3,703.70
PHP4,000/(1.082)
3,429.36
Total PV
PHP15,133.06
Distinguish when the amounts are paid. If
payments are made on day 1, the amount
no longer needs to be discounted, and is
already the present value.
Table 3: Sample Computation for Present Value
0
1
2
-8,000
-4,000
-4,000
PV = 15,133.06
Figure 3: Sample Timeline for Computation of Present Value
It shows that the installment plan is cheaper. The present value of a stream of future cash flows is
the amount you have to invest today to generate the stream.
F. Discuss how to compute for present value and future value of annuity payments. Illustrate how the
present and future values are used.
• An annuity is a stream of equal periodic cash flows over a specified period. First, you have to
distinguish between ordinary annuity and annuity due. Ordinary annuity payments are made at the
end of each period (usually annually), while for annuity due, the cash flow occurs at the beginning of
each period. We shall first illustrate ordinary annuities.
• (Future Value of an Ordinary Annuity) The formula for computing the future value of an ordinary
annuity is as follows:
Cash flow x {[(1+r)t - 1)]/r} Cash flow x
or
[(1+r)t - 1]
r
Cash flow multiplied by the FV factor seen on the table.
To use the table provided, look for the rate of interest at the uppermost row and the number of periods on the left most column. The
intersection will be the factor to be multiplied to the cash flow.
Illustration: Mr. Mendoza wishes to determine how much the value of his savings in 5 years will be if he will put PHP1,000 per year in a bank
which provides 7% interest per annum.
FV = 1,000 x (FVA factor: 5.7507 period=5, rate=7%) = PHP5,750.70
• (Present of an Ordinary Annuity) The formula for computing the present value of an ordinary annuity is as follows:
Cash flow x
or
1-
1
(1+r)t
r
Cash flow multiplied by the PV factor seen on the table
Illustration: Mr. Yusoph wants to buy a pair of shoes worth PHP10,500. He has the option of paying it today for PHP10,500 or buying them in
instalment where he has to pay a down payment of PHP4,000 today, and the balance will be paid in two equal payments of PHP4,000 each
for the next two years. Given an interest rate of 10%, which is the better option?
PV = 4,000 + 4000 x (PVA factor: 1.7355 period=2, rate=10%) = PHP10,932.00 for buying on instalment vs. PV PHP10,500 for buying today.
The 4,000 down payment is not multiplied by the annuity factor because it is paid today.
Since buying on instalment would be more expensive, Mr. Yusoph should buy the pair of shoes today.
PRACTICE (25 MINS)
Give these questions to the learners in the form of a graded quiz/exercise.
(EASY)
1. You deposited PHP1,500 in a bank with an interest rate of 5% for 1 year. What is the future value of your deposit?
Answer Key
FV = 1,500 x (1+0.05) = 1,575
2. You need to save up for P1,500 in 1 year. How much should you save now if the bank offers a rate of 5%? (Find the present value)
Answer Key
PV = 1,500/(1+0.05) = 1,428.57
(AVERAGE TO DIFFICULT)
1. FNB pays 6% interest compounded semi-annually. SNB pays 6% compounded monthly. Which bank offers the higher effective annual rate?
Answer Key
FNB = (1+(0.06/2))2 - 1 = 6.090%
SNB = (1+(0.06/12))12 = 6.168%
Therefore, SNB offers the higher effective annual rate. For equal rates, the more compounding the better.
2. Compute the present value and future value of PHP100 cash flow for the following combination of discount rates and times:
a. r = 8%, t = 5 years
b. r = 8%, t = 10years
c. r = 5%, t = 5years
d. r = 5%, t = 10 years
Answer Key
r
t
PV
FV
0.08
5
68.05832
146.9328
0.08
10
46.31935
215.8925
0.05
5
78.35262
127.6282
0.05
10
61.39133
162.8895
3. You deposit PHP1,000 in your bank account. If the bank pays 4% simple interest, how much interest will you accumulate in your account
after 10 years? What if the bank pays compound interest?
Answer Key
Simple Interest = 1000 x .04 x 10 = 400
Compound Interest = 1000 x (1.0410) – 1000 = 480.24
4. Mario will be making a lump sum payment of PHP1.6 million on the condominium he is buying two years from now. If he wants to set aside
funds from now and invest it that will earn interest of 3%, net of taxes every year and this amount is compounded annually, how much does
he need to invest today? What if the interest is compounded semi-annually, how much does he need to invest today?
Answer Key
• PHP1,600,000/(1.03)2 = 1,508,153.45
• PHP1,600,000/(1.015)4 = 1,507,494.77
5. What is the present value of the following cash flow stream if the interest is 6%?
Year
Cash Flow
1
300
2
400
3
500
Answer Key
PV = 300/1.06 + 400/(1.062) + 500/(1.063) = 1,059.827
6. What is the present value of a 3-year annuity of PHP100 if the discount rate is 6%?
Answer Key
PVA = 100 x PVA factor(2.673) = 267.3
7. What is the present value of a 5-year annuity payment of PHP1,000 with a discount rate of 5% if the
first payment will be made today?
Answer Key
PVA = (1000 x PVA factor(4.329))/1.05 = 4,122.87
ENRICHMENT (20 MINS)
Discuss the following scenario:
Mr. Sotto won PHP10 million in the lottery. He was very excited to collect his winnings and had several
plans for his PHP10 million. He would buy his dream house, car, and a lot more. However, he was very
disappointed when the officers from PCSO said that he will not get his PHP10 million pesos upfront.
Teacher Tips
Give this exercise if the time permits. This
medium length problem shows the
importance of compounding and future
value. Have the learners answer in groups
on their best option. This will allow them to
discuss among themselves and develop
their understanding on time value.
He, however, has the following options:
• Get 8.1 million upfront
• Receive 1 million every year for 10 years
• Receive 1.8 million every year for 5 years
The current government bonds have a yield of 5% per annum. Which is the best option?
Answer Key
Option 1 = PV is 8.1 million
Option 2 = PV = 1 million x PV factor (7.721) = 7.721 million
Option 3 = PV = 1.8 million x PV factor (4.329) = 7.792 million
Option 1 is the best option.
Appendix
Table 4: Present Value of Ordinary Annuity
AccountingExplanation.com,. Present Value of Ordinary Annuity. Retrieved from http://www.accountingexplanation.com/present_value_ordinary_annuity_table.PNG
Table 5: Future Value of Ordinary Annuity
PrinciplesofAccounting.com,. Future Value of Ordinary Annuity. Retrieved from http://www.principlesofaccounting.com/ART/fv.pv.tables/futurevalueofordinaryannuity.PNG
Appendix A
One day, the Master was going on a trip and decided to entrust his wealth to three of his most trusted servants. The wealth shall be given to
each servant based on the Master’s assessment of their talents. To his first servant, he entrusted PHP500,000. To his second servant, believing
that he can make wise choices as well, he also gave an amount of PHP500,000. Finally, he called on his third servant and gave him PHP500,000.
The Master then went on his journey and told the servants he will not be back for a long time. Since the first servant was a very smart person, he
decided to invest the PHP500,000 given to him. He was very pleased that he was quoted a long-term investment for 5 years at 8% per annum
compounded annually, and decided to invest the money in that institution. The second servant saw what the first servant did and also decided
to invest the money. However, when given the choice by the investment firm, he did not understand simple and compound interest. In the end,
he accepted the quote at 8% per annum simple interest. The third servant saw them and thought that they were being too much of a risk-taker
and decided just to keep the money locked in a vault in his home.
The Master returned after 5 years. He then called on the servants and asked them what has become of the wealth he had entrusted them. The
first servant presented his PHP500,000 plus the interest he earned worth PHP500,000 x (1.08)5 – 500,000 = 234,664.04 . The second servant
presented his PHP500,000 along with the interest earned at 500,000 x .08 x 5 = 200,000 Lastly the third servant returned his PHP500,000.
Business Finance
70 MINS
Basic Long-term Financial Concepts Pt.
2
LESSON OUTLINE
Content Standards
Basic concepts of risk and return, and the time value of money.
Motivation
Performance Standards
The learners shall be able:
•
•
Distinguish simple and compound interest
Solve exercises and problems in computing for time value of money with
the aid of present and future value tables
Learning Competencies
Instruction/ Discussion proper
Delivery
Materials
The learners:
•
•
Calculate future value and present value of money (ABM_BF12-IIIg-h-18)
Compute for the effective annual rate (ABM_BF12-IIIg-h-19)
Specific Learning Outcomes
At the end of the unit lesson, the learners shall be able to:
•
•
•
Define the concepts regarding the time value of money;
Compute the present value and future values with the aid of formulas and
tables; and
Apply the concepts in real life scenarios.
Connect to real-life situations; short scenario
relating the importance of interest and
compounding; scenario showing the use of
future value and present value
projector, of available; if projector not
available, board and markers will suffice;
scientific calculators; PV Tables
Resources
(1) Fundamentals of Corporate Finance by Brealey, Marcus and Myers,
Management Advisory Services by Rodelio S. Roque, Principles of
Managerial Finance by Lawrence J. Gitman
(2) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City.
Rex Bookstore.
15
60
MOTIVATION (20 MINS)
Ask the learners which is more valuable to them, to receive P1,000 today, or receive P1,000 five months
from now.
•
•
Possible answer: P1,000 today, because there is uncertainty with regard to the receipt of the P1000
five months from now. The student can be indifferent if he will be compensated by receiving more 5
months from now, which is in the form of interest income.
Recall the following saying:
A bird in the hand is worth two in the bush–Miguel de Cervantes
Read the following story in class.
Consider the case of Lola Clara. When she was 24 years old, her Papa gave her PHP50,000. She was
very happy and was immediately planning on spending the money. However, before she could spend
the money, her Mama taught her the importance of saving. Not wanting to disappoint her Mama, she
invested her money in a bank time deposit with an interest rate of 5% at that time.
Lola Clara became very successful career woman but she somehow forgot that she placed PHP50,000
in the bank. She suddenly remembered and was shocked at what had happened to her money after 50
years.
It is now valued at 50,000 x (1.05)50 = 573,369.99.
This example is something of an exaggeration, of course. Nevertheless, it is important to note that
money grows through time.
Teacher Tip
If the learners are passive, be able to share
personal experiences in investing money.
Time deposits and bank savings can also be
a type of investment although it only has a
small yield. The objective is to show the
concept of interest in real-life scenarios
Teacher Tip
This story is based on the Parable of talents
from the Bible. It has been modified for the
purpose of discussion. In this story, the risk
of losing money due to the failure of a
financial institution is not taken into
consideration. Give the learners a copy of
the material which is included in the
appendix of this teaching guide for their
reference.
INSTRUCTION (50 MINS)
Differentiate future value and present value
•
Future value is the amount to which an investment will grow after earning interest. In our
previous examples, it is the principal plus total interest earned over a stated period. So the
future value of an investment of PHP500,000 yielding an interest of 8% for a 5-year period
compounded annually is PHP734,664.04.
•
In contrast, the present value is the amount you have to invest today if you want to have a
certain amount of cash flow in the future.
•
These definitions can better be illustrated in a timeline.
0
1
Ini$al'Investment'T=0'
(PV):'PHP500,000'
•
2
3
4
Learners have the option to use calculators
or the present value and future value tables
provided at the end of this module
5
Value of investment at
T=5 (FV): PHP734,664.04
The time value of money analysis helps managers and investors compare cash flows today
versus cash flow in the future. It answers questions such as what amount in the future is equal
to PHP500,000 today or what amount today is equivalent to PHP734,664.04 in the future.
The future value is computed using compounding while the present value is computed using
discounting. In practice, when making investment decisions, investors usually adopt the
present value approach.
Differentiate the basic patterns of cash flow
Teacher tip:
Teacher tip:
¬
Usual compounding will make use
of annual compounding. This simplifies the
formula to:
Interest = P x (1+r) T – P
•
Single amount (Lump sum): a single cash outflow is made and the total receipts will be at a
single future date.
•
Annuity: periodic stream of equal cash flow at equal time intervals (annually, monthly, etc.). For
example, payment for a certain item shall be for 12 equal monthly instalments of PHP1,000.
•
Mixed stream: Unequal periodic cash flows that reflect no particular pattern. For example,
payments made by a customer are in 3 unequal instalments.
Time
Amount
Year 1
1,500
Year 2
3,000
Year 3
2,500
Ask the learners to compute for the amount they will receive (what is the future value?) if PHP150,000 is
invested at 6% per annum compounded semi-annually for 3 years.
Answer:
Reminder: Future value is simply the principal multiplied by the FV factor.
Discuss the present value of a single amount.
•
Present value answers the question how much must be invested today to produce a certain amount in
the future. Since future value is calculated by multiplying the present investment by 1 + interest rate
compounded by the number of periods, we shall just reverse the process. This method is called
discounting
Teacher tip:
Interest rates when quoted without any
qualification is assumed to be an annual
rate.
Note that with more compounding, interest
income can be higher as shown in the
illustrative example. Banks offer time
deposit products with different types of
compounding, thus affecting the interest to
be earned.
•
Illustration: You need PHP25,000 to buy a laptop when you enter college 2 years from now.
How much must you invest now if the interest rate is at 6% per annum
PV = 25,000/(1.062) = PHP22,249.91
You need to invest PHP22,249.91 to have PHP25,000 by the end of 2 years.
•
Illustrate how to calculate future value and present value of mixed streams of cash flows.
(Future Value) Suppose that you choose to put your savings annually in MRI bank at 8% per annum. For
the today, you put PHP1,200; second year PHP1,400, and PHP1,000 for the third year. How much will you
have available at the end of three years?
Factor multiplied by the Amount Deposited
Future Value
(1.08)3 = 1.2597
PHP1,200
1,511.65
Teacher tip:
(1.08)2 = 1.1664
PHP1,400
1,632.96
(1.08)1 = 1.08
PHP1,000
1,080.00
Interest rates when quoted without any
qualification is assumed to be an annual
rate.
Total FV
•
The FV factor can either be computed or looked up in the FV table.
•
This timeline illustrates the timing of cash flows:
P4,224.61
Note that with more compounding, interest
income can be higher as shown in the
illustrative example. Banks offer time
deposit products with different types of
compounding, thus affecting the interest to
be earned.
•
0
1
-1,200
-1,400
2
3
-1,000
4,224.61
(Present Value) Suppose that you can buy a phone for PHP8,000 down payment with 4,000 for
each of the next two years or pay PHP15,500 cash today. Given an interest rate of 8%, which is a
cheaper alternative?
Present Value
PHP8,000
8,000.00
PHP4,000/(1.081)
3,703.70
PHP4,000/(1.082)
3,429.36
Total PV
PHP15,133.06
-8,000
-4,000
-4000
Teacher Tip
PV = 15, 133.06
It shows that the installment plan is cheaper. The present value of a stream of future cash flows is the
amount you have to invest today to generate the stream.
Walkthrough the process of getting each
EAR using the formula provided.
Discuss how to compute for present value and future value of annuity payments. Illustrate how the
present and future values are used.
An annuity is a stream of equal periodic cash flows over a specified period. First, you have to
distinguish between ordinary annuity and annuity due. Ordinary annuity payments are made at the end
of each period (usually annually), while for annuity due, the cash flow occurs at the beginning of each
period. We shall first illustrate ordinary annuities.
(Future Value of an Ordinary Annuity) The formula for computing the future value of an ordinary
annuity is as follows:
Cash flow x {[(1+r)t - 1)]/r}
or
Cash flow multiplied by the FV factor seen on the table
To use the table provided, look for the rate of interest at the uppermost row and the number of periods
on the on the first column (leftmost). The intersection will be the factor to be multiplied to the cash
flow.
Illustration:
Mr. Mendoza wishes to determine how much will be the value of his savings in 5 years if he will put
PHP1,000 per year in a bank which provides 7% interest per annum.
FV = 1,000 x (FVA factor: 5.7507 period=5, rate=7%) = PHP5,750.70
(Present Value of an Ordinary Annuity). The formula for computing the present value of an ordinary
annuity is as follows:
'''''''''''''''''''''''''''''''''''Cash'flow'mul$plied'by'the'PV'factor'seen'on'the'table'
Teacher Tip
Walkthrough the process of getting each
EAR using the formula provided.
Illustration:
Mr. Yusoph wants to buy a pair of shoes worth P10,500. He has the option of paying it today for
PHP10,500 or buying in instalment where he has to pay a down payment of PHP4,000 today, and the
balance will be paid in two equal payments of PHP4,000 each for the next two years. Given an interest
rate of 10%, which is the better option?
PV = 4,000 + 4000 x (PVA factor: 1.7355 period=2, rate=10%) = PHP10,932.00 for buying on
installment vs. PV PHP10,500 for buying today.
The 4,000 down payment is not multiplied by the annuity factor because it is paid today.
Since buying on instalment would be more expensive, Mr. Yusoph should buy the pair of shoes today.
Teacher Tip
Walkthrough the process of getting each
EAR using the formula provided.
Business Finance
50 MINS
Basic Long-term Financial Concepts Pt.
3
LESSON OUTLINE
Content Standards
Basic concepts of risk and return, and the time value of money.
Performance Standards
The learners shall be able:
•
•
Distinguish simple and compound interest
Solve exercises and problems in computing for time value of money with
the aid of present and future value tables
Learning Competencies
Practice
Enrichment Short case regarding which payment
methods to choose in optimizing
receipts using concepts learned in
present value and future value
Materials
The learners:
•
•
Calculate future value and present value of money (ABM_BF12-IIIg-h-18)
Compute for the effective annual rate (ABM_BF12-IIIg-h-19)
Specific Learning Outcomes
At the end of the unit lesson, the learners shall be able to:
•
•
•
Define the concepts regarding the time value of money;
Compute the present value and future values with the aid of formulas and
tables; and
Apply the concepts in real life scenarios.
Exercises regarding solving for the
present value.
projector, of available; if projector not
available, board and markers will suffice;
scientific calculators; PV Tables
Resources
(1) Fundamentals of Corporate Finance by Brealey, Marcus and Myers,
Management Advisory Services by Rodelio S. Roque, Principles of
Managerial Finance by Lawrence J. Gitman
(2) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City.
Rex Bookstore.
25
25
PRACTICE (25 MINS)
Give these questions to students in a form of a graded quiz/exercise.
(EASY)
•
You deposited PHP1,500 in a bank with an interest rate of 5% for 1 year. What is the future value
of your deposit?
Answer:
FV = 1,500 x (1+0.05) = 1,575
•
You need to save up for P1,500 in 1 year. How much should you save now if the bank offers a
rate of 5%? (Find the present value)
Answer:
PV = 1,500/(1+0.05) = 1,428.57
(AVERAGE TO DIFFICULT)
•
FNB pays 6% interest compounded semi-annually. SNB pays 6% compounded monthly. Which bank
offers the higher effective annual rate?
Answer:
FNB = (1+(0.06/2))2 - 1 = 6.090%
SNB = (1+(0.06/12))12 = 6.168% (Therefore, SNB offers the higher effective annual rate. For equal rates,
the more compounding the better)
•
Compute the present value and future value of P100 cash flow for the following combination of
discount rates and times:
A. r = 8%, t = 5 years
B. r = 8%, t = 10years
C. r = 5%, t = 5years
D. r = 5%, t = 10 years
Answer:
•
r
t
PV
FV
0.08
5
68.05832
146.9328
0.08
10
46.31935
215.8925
0.05
5
78.35262
127.6282
0.05
10
61.39133
162.8895
You deposit PHP1,000 in your bank account. If the bank pays 4% simple interest, how much interest
will you accumulate in your account after 10 years? What if the bank pays compound interest?
Answer:
Simple Interest = 1000 x .04 x 10 = 400
Compound Interest = 1000 x (1.0410) – 1000 = 480.24
•
Mario will be making a lump sum payment of PHP1.6 million on the condominium he is buying two
years from now. If he wants to set aside funds from now and invest it that will earn interest of 3%, net
of taxes every year and this amount is compounded annually, how much does he need to invest
today? What if the interest is compounded semi-annually, how much does he need to invest today?
Answer:
i.
PHP1,600,000/(1.03)2 = 1,508,153.45
ii.
PHP1,600,000/(1.015)4 = 1,507,494.77
•
What is the present value of the following cash flow stream if the interest is 6%?
Time
Amount
Year 1
300
Year 2
400
Year 3
500
Answer:
PV = 300/1.06 + 400/(1.062) + 500/(1.063) = 1,059.827
•
What is the present value of a 3 year annuity of P100 if the discount rate is 6 percent?
Answer:
PVA = 100 x PVA factor(2.673) = 267.3
•
What is the present value of a 5 year annuity payment of P1000 with a discount rate of 5% if the first
payment will be made today?
Answer:
PVA = (1000 x PVA factor(4.329))/1.05 = 4122.87
ENRICHMENT (25 MINS) (DIFFICULT)
Discuss the following scenario:
Mr. Sotto won PHP10 million in the lottery. He was very excited to collect his winnings and had several
plans for his PHP10 million. He would buy his dream house, car, and a lot more. However, he was very
disappointed when the officers from PCSO said that he will not get his PHP10 million pesos upfront. He,
however, has the following options:
•
Get 8.1 million upfront
•
Receive 1 million every year for 10 years
•
Receive 1.8 million every year for 5 years
The current government bonds have a yield of 5% per annum. Which is the best option?
Answer:
Option 1 = PV is 8.1 million
Option 2 = PV = 1 million x PV factor (7.721) = 7.721 million
Option 3 = PV = 1.8 million x PV factor (4.329) = 7.792 million
Option 1 is the best option.
Teacher tip:
Give this exercise if the time permits. This
medium length problem shows the
importance of compounding and future
value. Have the learners answer in groups
on their best option. This will allow them to
discuss among them and develop their
understanding on time value.
http://www.accountingexplanation.com/present_value_ordinary_annuity_table.PNG
http://www.principlesofaccounting.com/ART/fv.pv.tables/futurevalueofordinaryannuity.PNG
Business Finance
120 MINS
Basic Long-term Financial
Concepts Pt. 4
Content Standard
The learners demonstrate an understanding of the basic concepts of risk and
return, and the time value of money.
Performance Standard
The learners shall be able to prepare loan/bond amortization tables
Learning Competency
The learners compute loan amortization using mathematical concepts and the
present value tables (ABM_BF12-IIIg-h-20)
Specific Learning Outcomes
At the end of the unit lesson, the learners shall be able to:
•
•
• Define the relationship of present value and future value in loan/bond
pricing; and,
Prepare amortization schedules.
LESSON OUTLINE
Introduction Communicate the learning objectives.
10
Motivation
15
Sharing of an article regarding bond
issuance; connecting to real-life situations
Instruction/ Discussion proper
Delivery
50
Practice
25
Research/Interview homework
Enrichment Quiz on preparation of amortization
schedules
Materials
20
projector, if available; if projector not
available, board and markers will suffice;
calculators; PV Tables
Resources
(1) Accounting Principles by Jerry J. Weygandt, Paul D. Kimmel, & Donald
E. Kieso; Financial Accounting Vol. 2 by Conrado T. Valix, Peralta, Valix
INTRODUCTION (10 MINS)
Teacher Tip
Communicate the learning objectives.
These terms will be relevant in loan/bond
pricing so it is best to recall the definitions
and formulas of present and future value.
Recall the definition of present value, future value, and the importance of the time value of money from
the previous lesson. Have the learners define the terms mentioned.
Give the learners a copy of the article.
MOTIVATION (15 MINS)
Ask the learners read the following article: (APPENDIX A)
http://www.abs-cbnnews.com/business/08/19/15/ictsi-raise-450-m-bonds
ICTSI to raise $450-M via bonds
Reuters
Posted at 08/19/2015 10:05 AM
MANILA - Philippines port operator International Container Terminal Services Inc. (ICTSI) said on
Wednesday it is raising $450 million through a bond issue.
In a disclosure to the local stock exchange, ICTSI said its board of directors approved on Tuesday night
the offering of new senior perpetual capital securities through subsidiary Royal Capital BV.
The corporate bonds would yield 5.5 percent per annum and would be guaranteed by ICTSI.
Citigroup Global Markets Ltd, Credit Suisse Securities (Europe) Ltd and Standard Chartered Bank were
the joint lead managers and bookrunners.
ICTSI, owned by the Philippines' third richest man, Enrique Razon, is into 30 terminal concessions and
port development projects in 20 countries.
Define what a bond/loan is.
A loan is money lent at an interest rate for a certain period of time. Loans are normally secured from
different financial institutions, the most common of which, are banks..
A bond is also a form of loan, but can be traded through Philippine Dealing and Exchange (PDEX) System.
Ask the learners whether they have experienced applying for loan from a bank, or have witnessed someone
from their family apply for one. Inquire whether they have seen an amortization schedule and are familiar
with the features of the loan (interest rates, term of payment, etc.)
Teacher tip
Refer back to lessons on loan discussed
under Sources and Uses of Cash
INSTRUCTION/PRACTICE (50 MINS)
Show the class a sample loan amortization (provided at the end of this teaching guide)
•
Enumerate the contents of a loan agreement:
•
Amount of principal
•
Maturity date and provision for repayment
•
Term of the loan (lump sum, monthly, etc.)
•
Grace period, if applicable
•
Interest rates
•
Loan/bond covenants (i.e. required ratios to be maintained)
•
Penalties for default
•
Collateral documents, if applicable
Discuss the relationship of time value of money in loan/bond pricing.
•
Present Value
•
To get the present value of a bond maturing a year from now, let us illustrate what we
have learned in the previous module regarding present value. The discussion follows the
viewpoint of the lender. Pricing for the loan/bond, will, nevertheless, be the same. Let’s
say that you are willing to invest a sum of money that will yield PHP100,000 at the end of
year 1, what amount should you invest today? If the investment earns 10%, then the
amount to be invested or the present value should be equal to PHP100,000 x (1/(1.101))
= PHP90,909.09
Teacher tip
Grace period is a provision in most loan and
insurance contracts which allows payment
to be received for a certain period of time
after the actual due date. During this period
no late fees will be charged, and the late
payment will not result in default or
cancellation of the loan.
(http://www.investopedia.com/terms/g/
grace_period.asp#ixzz408xF58xx)
It is best to draw diagrams to demonstrate
the importance of present value in loan/
bond pricing.
•
•
If this amount will be received in 2 years, then the present value is equal to P100,000
x (1/(1.10)2) = P82,644.63. We may also use the present value table.
Present Value of interest payments (annuities)
•
In addition to receiving the face value at maturity, the investor/lender also receives
periodic interest payments over the life of the bond. These periodic payments, as
mentioned in the previous module, are called annuities. To illustrate, assume that you
will receive P10,000 annually for 3 years and the interest rate is 10%.
Teacher tip
•
•
From the table (or by using the formula provided in the earlier module), we get that
the present value of annuity factor for 3 periods using 10% interest is 2.4869.
Multiplying this factor by PHP10,000 provides a present value of interest payments of
PHP24,868.6.
Present Value of a bond
•
To calculate the present value or the price of a bond, we need to combine both the
present values of the face value and the annuity payments. In our previous example,
suppose that a bond with face value of PHP100,000 pays interest of 10% annually
and matures in 3 years. What is the price of the bond?
•
First, we find the present value of the face value of the bond. That is equal to
PHP100,000 x (1/(1.10)3) = PHP75,131.40.
•
Next we compute for the present value of annuity payments of P10,000 annual
interest (100,000 x .1). This was computed earlier in our example, PHP24,868.6.
Take note of the frequency of
compounding. It matters for both the
interest payments and face value
discounting.
•
Therefore, the price of the bond is:
PHP100,000 Face Value at 10% for 3 years
75,131.40
PHP10,000 interest for 3 years
24,868.60
Price of the Bond
•
100,000.00
Take note that interest payments may be made semi-annually, or even monthly. In
this case, we need to adjust the interest rates and time periods accordingly.
Differentiate discount from premium bond pricing.
•
•
Bonds issued at a discount
•
When bonds are issued below the face or par value, they are said to be issued at a
discount. A discount occurs when the required rate of return is greater than the
nominal rate of return. For example, let’s say we have a PHP100,000 bond with a
stated rate of 10% and effective rate (required rate of return) of 12%, that pays
interest semi-annually and has a maturity of 3 years. At what price should the bond
be issued?
•
First, we need to compute for the amount of interest payment per semi-annual
period which is equal to 100,000 x 10% x 6/12 = 5,000. The total period is 6 (3 years
x 2) and the discount rate to be used is 6% (12%/2).
•
The price of the bond is as follows:
P100,000 Face Value at 6% for 6 periods
70,496.05
P5,000 interest for 6 periods
24,568.62
Price of the Bond
95,082.67
Bonds issued at a premium
•
When bonds are issued above par, they are said to be issued at a premium. It occurs
when the required rate (effective rate) is below the stated or nominal rate. Let us
recall our previous example but use 8% effective rate instead of 12%. It will result in
the following bond price:
PHP100,000 Face Value at 4% for 6 periods
79,031.45
PHP5,000 interest for 6 periods
26,210.68
Price of the Bond
•
105,242.13
Illustrate and define effective interest amortization.
•
The effective interest method distinguishes two types of interest rate, the nominal
rate or the stated rate and effective rate or the market rate. When the bond is sold at
a discount, the effective rate is higher than the nominal rate. On the other hand,
when the bond is sold at a premium, the effective rate is lower than the nominal rate.
Using this method, the amortization of bond discount or premium results in periodic
interest expense equal to a constant percentage of the carrying amount of the
bonds.
•
The following steps are required under the effective interest method.
1. Calculate the bond interest expense by multiplying the carrying amount of
the bonds at the beginning of the interest period by the effective interest
rate.
2. Calculate the bond interest paid (or accrued) by multiplying the face value of
the bonds by the contractual interest rate.
3. Calculate the amortization amount by determining the difference of (1) and
(2).
•
Amortization of bonds issued at a discount
•
Let us use the previous example of a bond issued at a discount.
Teacher Tip:
Best to discuss by showing the amortization
table and how it is computed line by line as
stated in the tip below.
Period: 6 semi-annual periods (3 years)
Effective interest: 12%
Stated rate: 10%
Face Value: 100,000
Issue Price: 95,082.68
Period
Interest to be paid
=100,000 x 5%
Interest Expense
=carrying amount x 6%
Amortization of
Discount
=Int exp. - Int paid
Carrying Balance
Teacher Tip:
95,082.68
1
5,000.00
5,704.96
704.96
95,787.64
2
5,000.00
5,747.26
747.26
96,534.90
3
5,000.00
5,792.09
792.09
97,326.99
4
5,000.00
5,839.62
839.62
98,166.61
5
5,000.00
5,890.00
890.00
99,056.61
6
5,000.00
5,943.40
943.40
100,000.00
•
Amortization of bonds issued at a discount
•
Let us use the previous example of a bond issued at a premium.
Period: 6 semi-annual periods (3 years)
Effective interest: 8%
Stated rate: 10%
Face Value: 100,000
Issue Price: 105,242.14
Show the preparation of the amortization
schedules step by step, beginning with
taking note of the given data. Ensure that
the frequency of compounding is reflected
in both effective and nominal rates.
Period
Interest to be paid
=100,000 x 5%
Interest Expense
=carrying amount x 4%
Amortization of
Premium
=Int exp. - Int paid
Carrying Balance
105,242.14
1
5,000.00
4,209.69
(790.31)
104,451.83
2
5,000.00
4,178.07
(821.93)
103,629.90
3
5,000.00
4,145.20
(854.80)
102,775.09
4
5,000.00
4,111.00
(889.00)
101,886.10
5
5,000.00
4,075.44
(924.56)
100,961.54
6
5,000.00
4,038.46
(961.54)
100,000.00
•
Amortization of the discount or premium brings the carrying value/balance to equal the face
value of the bond upon maturity.
•
Bond issue costs (direct loan expenses) are either added to the carrying value of the bond/
loan in case of a premium or subtracted from the carrying value of the bond/loan in case of
a discount.
Briefly discuss straight line amortization
This method is not allowed in our country’s accounting standards but is allowed in other
countries. The straight line method provides for an equal amortization of bond premium of discount.
The procedure is simply to divide the amount of the bond premium of bond discount by the life of the
bonds to arrive at the periodic amortization.
Teacher Tip:
Emphasize that the amortization of the
discount or premium brings the carrying
value/balance to equal the face value of the
bond upon maturity. It can be a way for the
learners to check if what they are doing is
correct.
PRACTICE (30 MINS)
Ask the learners answer the following as exercises/quiz.
(EASY)
1. Ms. Rodriguez invested in a PHP2,000 bond with a coupon rate and effective rate of 5%. How much
is the issue price?
2. You have a one year PHP1,000 bond with a coupon rate of 5% and was offered at an effective rate
of 6%. How much is the issue price?
3. Mr. Garcia invested in a P1,000 bond for one year with a coupon rate of 7% and was offered at an
effective rate of 5%. How much should he pay upfront? (Issue price)
(DIFFICULT)
4. On January 1, 2015, Mac Inc. issued 3,000,000 bonds with a coupon rate of 8% maturing in 4 years.
The interest is paid annually, and the market interest rate at the date of issue was 11%. What is the
issue price of the bond? Prepare the 4 year amortization schedule for the bond.
5. On January 1, 2014, Sonic Co. issued 4,000,000 12% bonds maturing in 5 years. The bonds pay
interest semi-annually. The market rate of interest as of the date of issuance is 10%. What is the
issue price of the bond? Prepare the 5 year amortization schedule for the bond.
Answer Key:
1. Since the coupon and effective rate are the same, the issue price stays at PHP2,000.
2. Issue price = (1,000 + 50 coupon)/1.06 = 990.56
3. Issue price = (1000 + 70 coupon)/1.05 = 1,019.05
4. Issue price: PHP2,720,779.89
Principal
Interest
1,976,192.92
744,586.97
2,720,779.89
Period
Interest to be paid
=3M x 8%
Interest Expense
=carrying amount x 11%
Amortization of Discount
=Int exp. - Int paid
Carrying Balance
2,720,779.89
1
240,000.00
299,285.79
59,285.79
2,780,065.68
2
240,000.00
305,807.22
65,807.22
2,845,872.90
3
240,000.00
313,046.02
73,046.02
2,918,918.92
4
240,000.00
321,081.08
81,081.08
3,000,000.00
Interest Expense
=carrying amount x 5%
Amortization of Discount
=Int exp. - Int paid
5. Issue price: PHP4,308,869.40
Principal
2,455,653.01
Interest
1,853,216.39
4,308,869.40
Period
Interest to be paid
=4M x 6%
Carrying Balance
4,308,869.40
1
240,000.00
215,443.47
(24,556.53)
4,284,312.87
2
240,000.00
214,215.64
(25,784.36)
4,258,528.51
3
240,000.00
212,926.43
(27,073.57)
4,231,454.94
4
240,000.00
211,572.75
(28,427.25)
4,203,027.68
5
240,000.00
210,151.38
(29,848.62)
4,173,179.07
6
240,000.00
208,658.95
(31,341.05)
4,141,838.02
7
240,000.00
207,091.90
(32,908.10)
4,108,929.92
8
240,000.00
205,446.50
(34,553.50)
4,074,376.42
9
240,000.00
203,718.82
(36,281.18)
4,038,095.24
10
240,000.00
201,904.76
(38,095.24)
4,000,000.00
ENRICHMENT (20 MINS)
Have the learners visit a bank or any other financial institution and get a sample quotation for a certain
type of loans (Auto-loan, Housing Loan, Working Capital Loan, etc.) to be assigned to a group. It is
best to divide the class in groups of 5 members. Learners may also utilize amortization schedules of
those who are in the business of selling apartments/condominiums. Have them discuss the specifics of
the loan in class, and have them validate the accuracy of the amortization schedules provided to them
by showing their own solutions.
Teacher tip
This is an optional activity, but can be a very
useful tool for the learners’ appreciation of
the learning competency. Should time not
permit it, increase the time allotted for the
practice exercises.
Give the learners ample time beforehand to
be able to collect the necessary information.
The purpose of this activity is to show the
learners of the actual use of amortization
schedules.
APPENDIX A
ICTSI to raise $450-M via bonds
Reuters
Posted at 08/19/2015 10:05 AM
MANILA - Philippines port operator International Container Terminal Services Inc. (ICTSI) said on Wednesday it is raising $450 million through a
bond issue.
In a disclosure to the local stock exchange, ICTSI said its board of directors approved on Tuesday night the offering of new senior perpetual
capital securities through subsidiary Royal Capital BV.
The corporate bonds would yield 5.5 percent per annum and would be guaranteed by ICTSI.
Citigroup Global Markets Ltd, Credit Suisse Securities (Europe) Ltd and Standard Chartered Bank were the joint lead managers and
bookrunners.
ICTSI, owned by the Philippines' third richest man, Enrique Razon, is into 30 terminal concessions and port development projects in 20
countries.
APPENDIX B
Sample Loan Amortization Schedule
Business Finance
180 MINS
Basic Long-term Financial
Concepts Pt. 5
Content Standards
The learners demonstrate an understanding of the basic concepts of risk and
return, and the time value of money.
Introduction Communicate the learning
objectives.
Motivation
Performance Standards
The learners shall be able:
•
•
Compute for the net present value of a project with a conventional cashflow pattern.
Describe the risk-return trade-off.
Learning Competencies
The learners:
•
•
Share an article related to capital
expenditure or business expansion; ask the
learners of possible means to evaluate the
viability of projects.
Instruction/ Discussion proper
Delivery
Practice
Exercise on investment problems.
Enrichment Short case on making investment decisions
Apply mathematical concepts and tools in computing for finance and
investment problems. (ABM_BF12-IIIg-h-21)
Explain the risk-return trade-off. (ABM_BF12-IIIg-h-22)
Specific Learning Outcomes
At the end of the unit lesson, the learners shall be able to:
•
LESSON OUTLINE
Compute payback period, net present value, and define internal rate of
Type to enter text
Materials
15
15
75
30
45
projector, of available; if projector not
available, board and markers will suffice;
calculators; PV Tables
Resources
(1) Brealey, R., Myers, S., & Marcus, A. (2004). Fundamentals of corporate
finance. Boston, Mass.: McGraw-Hill Irwin.
(2) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex
Bookstore.
(3) Gitman, L. (2009). Principles of managerial finance. Boston: Pearson
Prentice Hall. <http://sciencenetlinks.com/lessons/cells-2-the-cell-as-asystem/>
•
•
return.
Apply payback period and net present value in making investment decisions.
Analyse the risks and returns of long-term investments.
INTRODUCTION (15 MINS)
Communicate the learning objectives.
•
Ask the learners of the importance of interest and the time value of money.
•
Introduce the concept of risk. Ask the learners to identify the considerations taken and the risks
involved in venturing into a new business (e.g. restaurant business).
•
What are the considerations in entering a new business?
• Is there a market for the product/services you want to offer?
• Are the products/services you plan to offer basic necessities or not?
• Can you identify the players in the industry?
• What are the salient features/competitive edge of the product/services your plan to offer?
• Do you have the managerial competence and technical expertise to run the business?
• Do you have distribution channels by which you can sell you products/services?
• Do you have the financial resources to start and operate the business?
•
In entering a business or making expansion decisions, the question that stands to be answered shall
be, “Will the profits earned from the business for a given amount of time be enough to cover or
even be greater than the amount of capital invested?” The main objective is, of course, to maximize
shareholder’s wealth. This also applies to questions regarding business expansion.
•
Ask the learners to read the following scenario to further introduce the topic.
Teacher Tip
If the product/service is a basic necessity
demand will inelastic which means that
whatever the economic conditions will be,
there will be a minimum demand for the
product/service.
(APPENDIX A)
Eli Lilly and Company
Riding the Pipeline
by Lawrence J. Gitman
Companies spend money on new investments if they believe that those investments will later generate enough cash flow to justify the up-front
cost. For pharmaceutical companies like Eli Lilly, the average length of time from the discovery of a new drug until delivery to a patient is 10 to
15 years. After R&D produces a promising lead, a drug is still a long way from being ready for human testing. Researchers must probe further to
determine what dosage will be required and at what level it might be toxic to the patient. They also must explore practical issues such as
whether Lilly will be able to manufacture the compound on a large scale. The clinical trials themselves can take years. To help recoup its
investment, a drug manufacturer can get a 20-year patent that grants the company exclusive rights to the new drug. However, with the lengthy
research and approval process, companies may have fewer than 10 years to sell the drug while the patent is in force. Once patent protection
expires, generic drug manufacturers enter the market with low-priced alternatives to the name-brand drug.
For Eli Lilly, the cost of bringing a new drug to market runs from $800 million to $1.2 billion. To keep its drug pipeline full, Eli Lilly plows some
20 percent of sales back into the R&D programs on which its future depends. With large cash expenditures occurring years before any cash
return, the time value of money is an important factor in calculating the economic viability of a new drug.
MOTIVATION (15 MINS)
1. Share an article related to capital expenditure or business expansion. (APPENDIX B)
•
•
Agcaoili, L. (2015). Cebu Pacific buying 16 ATR planes for $673 M. philstar.com. Retrieved
11 April 2016, from http://www.philstar.com:8080/business/2015/06/17/1466623/cebupacific-buying-16-atr-planes-673-m
Use the following guide questions: (AVERAGE)
•
What was the company’s expansion plan?
•
How much was the cost of the long-term investment?
•
What were their expected returns on this expansion plan?
Teacher Tip
The main takeaway from this short story is
payoff. Provide the class a copy of the story.
2. Ask the learners what the company stands to gain in their expansion decision.
•
Sample Answer: Gain in market share, increase in profits, and increase in shareholder value.
3. Ask the learners of possible means to evaluate the viability of the expansion plan.
•
Sample Answer: Market research and feasibility study (on whether the expected capital
outlay can be outweighed by the expected profits from the additional demand the company
can cover, and whether a demand exists).
INSTRUCTION/PRACTICE (75 MINS)
Long-term investments need significant capital outlay thus careful analysis should be done. A company
needs tools that can be used in evaluating which investments to take, and which to forego. This
introduces us to our topic on Capital Budgeting.
Define Capital Budgeting
• It is the process of evaluating and selecting long-term investments that are consistent with the firm’s
goal of maximizing owners’ wealth.
Teacher Tip
You may opt to use a different article as
long as it shows expansion or capital
expenditure. The reading can be shared in
advance and be given as homework.
Differentiate long-term investment from operating expenses.
•
Long-term investment results in benefits to accrue to the company in excess of one year while
operating expenses benefits the company only within the operating period.
Enumerate examples of capital expenditure.
•
Expand or enter into a new line of business
Teacher Tip
The term “capital investment” and “longterm investment” have the same meaning.
•
Replace or renew fixed assets
•
Construct new premises
•
Opening a new branch
•
Acquisition of machineries and equipment
Discuss the steps in Capital Budgeting.
1. Investment Proposal. Proposals for capital expenditure come from different levels within a business
organization. These are submitted to the finance team for thorough analysis.
2. Review and Analysis. Financial personnel perform formal review and analysis to assess the benefits
and cost of the investment proposals. These personnel make use of several financial tools which they
see fit in evaluating the project.
3. Decision Making. Companies usually delegate capital expenditure decisions on the basis of value
limits. The analysis is presented to the proper approving body who will in turn make the decision on
whether to push through with the project or not.
4. Implementation. Release of funds and start of the project occurs after approval. Large expenditures
are usually released in phases.
5. Monitoring. Results are monitored and actual cost and benefits are compared with those that were
expected. Action may be required if deviations from the plan are significant in amount.
Explain the risk and return trade-off.
•
•
•
In making investment decisions, financial managers take note of the risk and returns of the projects
they are entering.
Recall the story of Jack and the Beanstalk. In the story, Jack trades his cow for three magic beans. This
is a very risky move for Jack since these beans may be fake and therefore, worthless. Luckily those
magic beans grew into beanstalk that gave Jack the opportunity to gather riches beyond his wildest
dreams, while fighting with a giant along the way. Jack gambled in this transaction. Should Jack
decide not to sell the cow for magic beans and instead sold it at the current market value, the story
would be different. As we can see, the higher the risk, the higher the returns, but of course, if turned
sour, the higher the losses as well.
This situation is also true for making financial decisions. Taking a higher risk gives you the opportunity
to earn higher returns. Low risk investments like treasury notes, also called risk-free instruments, earn a
Teacher tip
You may share cases in investment scams
(i.e. pyramiding) showing that high short
term profit is usually accompanied by high
risks. Whereas long term, hard-earned
income is less susceptible to loss.
low and steady income flow. In making investment decisions, financial managers ensure that the proposed business will earn more than the
risk-free rate since they need to compensate for the risk the investment will entail. This introduces us to the Required Rate of Return. It is
the minimum expected yield investors require in order to select a particular investment.
Ask learners on how the risk and return trade-off can be applied in real life.
•
Sample Answers
•
Fixed income vs. commission based income
•
Earning interest from time deposits vs. earning from stocks
•
Entering in a business with steady income vs. entering into seasonal high profit business
•
Investing in preferred vs. common stock
Enumerate and discuss the basic terminologies related to capital budgeting.
•
Independent vs. Mutually Exclusive Investments
•
•
Unlimited Funds vs. Capital Rationing
•
•
Independent Projects are those whose cash flows are independent of one another. The acceptance of one project does not eliminate
the others from further consideration. Mutually exclusive projects, on the other hand, are projects which serve the same function and
therefore compete with one another. The acceptance of one eliminates all other proposals that serve a similar function from further
consideration.
The amount and availability of funds affects the company’s decisions in capital outlays. If the company has unlimited funds, then all
projects which pass the risk-return criteria will be accepted and implemented. Otherwise, firms will operate under capital rationing
and will accept only projects which provide the best opportunity to increase shareholder wealth.
Accept-Reject vs. Ranking Approaches
•
The Accept-Reject approach is usually done for mutually exclusive projects where one project is favoured over the others. The
approach accepts projects which pass a certain criteria. Ranking is done when there are several projects passing the criteria and the
company is only able to fund so much. The highest ranking projects will be selected for implementation.
Introduce and explain the different techniques in capital budgeting
•
Before proceeding with discussion of techniques, let us first introduce the concept of relevant cash flows. Relevant cash flows include
the initial investment, cash inflows from income from the project, and the expected terminal value of the project, if any. These are the
cash flows considered in analysing whether an investment adds value to the firm. Cash flows
should be net of tax. However, to simplify our discussion, we shall not include tax in our
consideration.
•
For example, Mr. Alfonse is deciding on which of the 2 mutually exclusive projects he should
accept. Project A requires an initial outlay of PHP72,000 and is expected to receive
PHP17,000 annually for the next 5 years. Project B, on the other hand, requires an
investment of PHP80,000 but will earn PHP21,000 annually for the next 5 years. In this
example, we can see that the relevant cash flows are the upfront investment and the annual
income from investment.
Teacher Tip
Example of an independent project: Refer
to the PHP 8 million new restaurant outlet. If
opportunities arise and financial resources
permit, the company can open more outlets
(72,000)
17,000
17,000
17,000
17,000
17,000
in other geographical areas. All of these
new outlets can be considered independent
projects.
Example of a mutually exclusive projects: A
(80,000)
•
(21,000)
(21,000)
(21,000)
(21,000)
(21,000)
Payback Method
•
This is the simplest method used in capital budgeting. It measures the amount of time,
usually in years, to recover the initial investment. To illustrate this method, let us use our
previous examples for relevant cash flows.
•
For Project A, the initial cash flow is PHP72,000. In 4 years, Mr. Alfonse would have
generated a total cash flow of PHP68,000. To get the actual time period, let us divide the
big manufacturing company is
contemplating on providing its own energy
requirements. They are evaluating two
investment proposals: 1) Oil-fired power
generation plant or 2) Solar panels. Only
one alternative can be considered because
both plans will perform the same function.
remaining amount (4,000)* and divide it by the cash flow for year 5. We get .24, so the total
payback period for Project A is 4 + .24 = 4.24 years. Conversely, if the cash flows are equal,
you may derive the answer by dividing the initial cash flow by the annuity, 72,000/17,000 =
4.24 years. Using this method for Project B, we get the payback period of 80,000/21,000 =
3.81 years.
•
Let us also illustrate an example of computing the payback period for uneven cash flows.
Initial Investment = 15,000
Year 1 = 7,000
Year 2 = 4,000
Year 3 = 6,000
Year 4 = 3,000
For years 1 and 2, we have already recovered 11,000 of our investment. We need 4,000 more to
reach 15,000 thus for the third year, we have 4,000/6,000 = 0.67. The payback period is 2.67 years.
Notice that the cash flow for year 4 is already ignored.
•
•
Managers usually set an acceptable payback period for projects. For making accept-reject
decisions, projects which meet the set acceptable payback period shall be accepted and
those which not are discarded. It is a popular method used especially for small projects due
to its simplicity and consideration for the timing of cash flows. The criticism of this method,
however, it that it does not consider the time value of money. Also, it fails to consider the
cash flows after the payback period. For instance, in our previous example, we can see that
Project B is better compared to Project A due to the quick recovery of the investment. If
Project A has a cash flow of, let’s say PHP50,000 at year 5, we can easily deduce that Project
A is more profitable. However, the payback method only recognizes the gains during the
payback period.
Net Present Value (NPV)
•
This method is more sophisticated than the payback method since it considers the time
Teacher Tip:
Ask the learners recall their lessons in
computing the present value since the NPV
uses the same concept. Have their PV tables
ready.
value of money and it considers all the cash flows during the life of the project including the
terminal value. The NPV can be computed by comparing the present value of cash inflows
against the present value of cash outflows. Cash flows are discounted using the firm’s cost of
capital (cost of acquiring funding needs) to get the present values.
NPV = Present value of cash inflows – present value of cash outflows
•
If the NPV of a project is zero or positive, it should be accepted. In finance, if these
projected cash flows are realized, the NPV of the project should be equivalent to the
increase in total shareholder’s value.
•
Assuming that the cost of capital is 8%, let us compute the NPV for our previous example.
Project A = 17,000 x PVAF(3.993) – 72,000 = 67,881 – 72,000 = (4,119)
Ask the learners to compute for the NPV of Project B.
Project B = 21,000 x PVAF(3.993) – 80,000 = 83,853 – 80,000 = 3,853
We can see that Project A’s NPV is negative and Project B’s NPV is positive, thus, we only accept project
B.
•
Internal Rate of Return (IRR)
•
The IRR is one of the most widely used techniques in capital budgeting. It is defined as the
discount rate that equates the NPV of an investment to zero. If this method is used for
capital budgeting analysis, the project’s IRR is compared to the company’s cost of capital. If
the IRR is greater than the cost of capital, the project should be accepted otherwise, it
should be rejected. Manual computation of the IRR involves trial and error, however, this IRR
computation is a lot easier using computation applications like MS Excel.
Teacher tip
For this teaching guide, the computation of
IRR for more than one period will no longer
be covered.
•
For example, you are planning to build a branch for your business at PHP350,000 and
expect to receive PHP400,000 in 1 year. First, compute for the rate of return (profit/
investment).
Rate of return = 50,000/350,000 = 14.3%
•
We compute for the rate of return because the NPV of a project with cost of capital equal to
the rate of return is equal to zero. To illustrate:
NPV = 400,000/(1+0.143) – 350,000 = 0
•
The IRR can easily be computed using MS Excel using the IRR function.
•
The NPV and IRR are interrelated techniques. An IRR greater than the cost of capital equates
to a positive NPV and vice versa. On a purely theoretical view, NPV is the better measure
since it measures the actual cash value a project creates for shareholders. However, IRR is
also a widely used tool since financial managers usually like to think in terms of ratios and
percentages.
Teacher tip
PRACTICE (30 MINS)
Notice that Payback period does not
change even if cash flows are added.
Ask the learners to answer the following exercise. This can be given as a short quiz at your discretion.
(EASY)
Year
Project Pizza
0
(100,000)
1
50,000
2
50,000
1. Given the cash flows above and a discount rate of 5%, compute the payback period and NPV of Project
Pizza.
2. If PHP50,000 is earned on the 3rd year of the project, what is the new NPV of the project? What is the
payback period?
Answers Key:
1. NPV = (100,000) + 50,000/(1.05) + 50,000/(1.052) = PHP (7,029.48; Payback Period = 2 years
2. NPV = (100,000) + 50,000/(1.05) + 50,000/(1.052) + 50,000/(1.053) = PHP36,162.40; Payback Period =
2 years
(AVERAGE TO DIFFICULT)
Year
Project A
Project B
0
(200,000)
(200,000)
1
80,000
100,000
2
80,000
100,000
3
80,000
100,000
4
80,000
3. If the opportunity cost of capital is 11%, which of these projects is worth pursuing? Find the NPV of both
projects.
4. Suppose that you can only choose one of these projects. Which is more favourable to the firm given that
the discount rate remains at 11%? (Which has the higher NPV)
5. Which project would you choose if the opportunity cost of capital were 16%? (NPV/IRR)
6. What is the payback period for each project?
Answers Key:
3. Both. NPV is computed as follows.
Year
Project A
NPV
Project B
NPV
0
(200,000)
(200,000.00)
(200,000)
(200,000.00)
1
80,000
72,072.07
100,000
90,090.09
2
80,000
64,929.79
100,000
81,162.24
3
80,000
58,495.31
100,000
73,119.14
4
80,000
52,698.48
Total
48,195.66
44,371.47
4. Project A, since it has a higher NPV.
5. Project B. NPV is computed as follows.
Year
Project A
NPV
Project B
NPV
0
(200,000)
(200,000.00)
(200,000)
(200,000.00)
1
80,000
68,965.52
100,000
86,206.90
2
80,000
59,453.03
100,000
74,316.29
3
80,000
51,252.61
100,000
64,065.77
4
80,000
44,183.29
Total
23,854.45
24,588.95
6. Payback is computed as follows:
Teacher Tip:
Year
Project A
Cumulative
Project B
Cumulative
0
(200,000)
(200,000.00)
(200,000)
(200,000.00)
1
80,000
(120,000.00)
100,000
(100,000.00)
2
80,000
(40,000.00)
100,000
-
3
80,000
40,000.00
100,000
100,000.00
4
80,000
120,000.00
Project A = 2 years + 40,000/80,000 = 2.5 years or 200,000/80,000
Project B = 2 years or 200,000/100,000
ENRICHMENT (45 MIN) (DIFFICULT)
Divide the class into groups with not more than six people each. Let them read and discuss the
following case amongst themselves then discuss their answers in class. You can pick at least two groups
to discuss their answers. Give them at most 30 minutes to prepare and discuss amongst them before
discussing the correct answer in class.
•
You are the investment manager of an appliance company. The industry is currently in the expansion
face and the CEO would like to capture as much of the market share as possible. You asked your
analysts to submit project proposals as summarized below.
Project
Discount Rate
Investment
Annual Cash Flow
Project Life (Years)
A
B
C
D
E
10
12
8
8
12
3M
4M
5M
3M
3M
1M
1M
2M
1.5M
1M
5
8
4
3
6
The best way to appreciate this topic is
through the use of several exercises. This
activity allows the learners to discuss among
themselves. The case integrates what they
have learned in present value and payoff
Which projects should the manager choose? If you were given unlimited capital, which projects should be implemented?
Answer key:
Project
Discount Rate
Investment
Annual Cash Flow
Project Life
(Years)
NPV
Rank
A
B
C
D
E
10%
12%
8%
8%
12%
3,000,000
4,000,000
5,000,000
3,000,000
3,000,000
1,000,000
1,000,000
2,000,000
1,500,000
1,000,000
5
8
4
3
6
790,786.77
967,639.77
1,624,253.68
865,645.48
1,111,407.32
5
3
1
4
2
If there is no budget constraint, all projects can push through since the NPV of all projects is positive. However, if there are budget constraints,
projects will be chosen based on the highest NPVs in which case Projects C & E should be considered if you’re asked to choose two.
APPENDIX A
Eli Lilly and Company
Riding the Pipeline (Lawrence J. Gitman)
Gitman, L. (2009). Principles of managerial finance. Boston: Pearson Prentice Hall.
Companies spend money on new investments if they believe that those investments will later generate enough cash flow to justify the up-front
cost. For pharmaceutical companies like Eli Lilly, the average length of time from the discovery of a new drug until delivery to a patient is 10 to
15 years. After R&D produces a promising lead, a drug is still a long way from being ready for human testing. Researchers must probe further to
determine what dosage will be required and at what level it might be toxic to the patient. They also must explore practical issues such as
whether Lilly will be able to manufacture the compound on a large scale. The clinical trials themselves can take years. To help recoup its
investment, a drug manufacturer can get a 20-year patent that grants the company exclusive rights to the new drug. However, with the lengthy
research and approval process, companies may have fewer than 10 years to sell the drug while the patent is in force. Once patent protection
expires, generic drug manufacturers enter the market with low-priced alternatives to the name-brand drug.
For Eli Lilly, the cost of bringing a new drug to market runs from $800 million to $1.2 billion. To keep its drug pipeline full, Eli Lilly plows some
20 percent of sales back into the R&D programs on which its future depends. With large cash expenditures occurring years before any cash
return, the time value of money is an important factor in calculating the economic viability of a new drug.
APPENDIX B
Cebu Pacific buying 16 ATR planes for $673 M
By Lawrence Agcaoili (The Philippine Star)
Agcaoili, L. (2015). Cebu Pacific buying 16 ATR planes for $673 M. philstar.com. Retrieved 11 April 2016, from http://www.philstar.com:8080/
business/2015/06/17/1466623/cebu-pacific-buying-16-atr-planes-673-m
MANILA, Philippines - Budget airline Cebu Air Inc. (Cebu Pacific) of taipan John Gokongwei is spending $673 million to acquire 16 more brand
new aircraft from Toulouse-based turboprop aircraft maker ATR to meet the growing demand for inter-island services in the Philippines.
Lance Gokongwei, president and chief executive officer of Cebu Pacific, said the acquisition of 16 ATR72-600 is in line with the low cost carrier’s
vision of providing affordable air travel.
”This order is an affirmation of our commitment to extend the convenience of affordable air travel to even more communities. We are very
pleased to be the launch customer of this new configuration of the ATR 72-600, as this will allow us to offer our customers more seats at even
lower fares,” he said.
He pointed out Cebu Pacific has been operating ATR aircraft since 2008 enabling the budget airline to bring safe, reliable, and affordable air
transport to smaller cities and islands throughout the Philippines.
According to Cebu Pacific, the transaction would double the airline’s turboprop fleet size. It currently operates a fleet of eight ATR 72-500
aircraft that would be retired as the new aircraft enter service.
Gokongwei said the entry into service of the ATR 72-600 would see Cebu Pacific with new generation aircraft to meet a growing demand in the
Philippines for inter-island services.
The aircraft were ordered from European turboprop aircraft maker ATR at the Paris Air Show.
The deal also includes options to acquire an additional 10 ATR72-600. The aircraft is equipped with the high density Armonia cabin, the widest
cabin in the turboprop market.
The aircraft features 78 slim-line seats and wider overhead bins with 30 percent more stowage space. These new technological innovations
further enhance space and comfort for passengers.
ATR aircraft enjoy a high reputation not only for versatility, but also for their ability to operate on short runways allowing Cebu Pacific to expand
its operations not only on main airports but also to several other airports around the country.
About 330 ATRs are currently operated by 55 airlines in the Asia-Pacific region. The ATR 72-600 has the lowest cost per seat mile in the 70-seat
segment, with significantly lower fuel and maintenance costs compared to similar class aircraft.
ATR chief executive officer Patrick de Castelbajac said the aircraft manufacturer is ”very happy to continue our partnership with one of the
leading airlines in Southeast Asia and to contribute to the expansion of its network throughout the islands of the archipelago.
”Cebu Pacific will also be able to benefit from the vast support network for ATR operators in Asia. When their first ATR 72-600 arrives, there will
be five ATR pilot training centers in the region,” he said.
Cebu Pacific is undertaking a $4-billion fleet renewal program. It is scheduled to take delivery of seven more Airbus A320 and 30 A321neo
between this year and 2021. It has a fleet of 55 aircraft composed of 10 A319, 31 A320, six Airbus A330, and eight ATR-72 500 aircraft.
Meanwhile, the low cost carrier arm of national flag carrier Philippine Airlines Inc. (PAL) of taipan Lucio Tan is set to fly to Saipan in Northern
Marianas two times a week using the 156-seater Airbus A320 aircraft.
PAL Express said it intends to attract Saipan residents to fly to Manila and interconnect to any of the PAL Group;s domestic and international
destinations. There are about 19,000 Filipinos living and working in Saipan.
”Our goal is to address the clamor for new routes in order to best serve the needs of the market. As we tap new markets and build on existing
ones, we aim to ensure connectivity across the route network of the PAL Group by providing the required flight frequencies and schedules,” the
airline said.
Business Finance
240MINS
Introduction to Investment
Content Standards
The learner demonstrates an understanding of the definition, purpose, kinds,
advantages and disadvantages, and the risks of investment.
Performance Standards
The learners shall be able to:
•
•
•
Identify the types of investments particularly bank deposits, insurance, real
estate, hard assets, mutual funds, and stocks and bonds.
Indicate the advantages and disadvantages of each type of investment.
Explain the risks inherent in each type of investment.
Learning Competencies
The learners will be able to:
•
•
Compare and contrast the different types of investments. (ABM_BF12IVm-n-23)
Classify investments according to its type, features, and advantages and
disadvantages. (ABM_BF12-IVm-n-24)
LESSON OUTLINE
Introduction Identify essential questions and
communicate learning competencies
and objectives.
Motivation
Present historical returns of different types of
Instruction/ Discussion proper
Delivery
Materials
projector, of available; if projector not
available, board and markers will suffice;
scientific calculators; PV Tables
Resources
(1) Finance Websites
(2) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City.
Rex Bookstore.
Specific Learning Outcomes
At the end of the unit lesson, the learners shall be able to:
•
•
Describe how they want to allocate their savings on different types of investments.
Explain why they want such investment allocation based on the advantages and disadvantages of each chosen investment type.
5
15
40
INTRODUCTION (15 MINS)
1. Identify the essential questions:
• Ask the learners if they have savings
• Why do they save?
• Where will they put their savings?
• Supposing they have PHP1 million, where will they put it?
• Are they aware of alternative investment options (stocks, bonds, mutual funds, etc.)?
• Are they familiar with investment scams (double-your-money, high-yield investments, etc.)?
2. Transition by saying that these questions will be answered by meeting the following objectives
throughout the discussion.
3. Communicate learning competencies and objectives
• Enumerate the learning competencies.
• Identify the types of investments particularly bank deposits, insurance, real estate,
hard assets, mutual funds, and stocks and bonds.
• Indicate the advantages and disadvantages of each type of investment.
• Explain the risks inherent in each type of investment.
• Enumerate the specific learning outcomes.
• Describe how they want to allocate their savings on different types of investments.
• Explain why they want such investment allocation based on the advantages and
disadvantages of each chosen investment type.
MOTIVATION (15 MINS)
Teacher Tip
• Emphasize that the discussion offers a
change in perspective. During the 3rd
quarter, the learners took on the
perspective of a borrower. For the 4th
quarter, the learners will take on the
perspective of a lender or investor.
• On the essential questions, try to get as
many insights from the learners as
possible.
• On question 6, say that investment scams
normally offer returns too good to be
true.
Teacher Tip
Investment Type
Holding Period
Value of PHP 10,000
Today
% Return
Bank (Time deposit)
10 years
PHP14,000
40%
Stocks (Universal Robina Corporation “URC”)
10 years
PHP140,500
1,305%
Stocks (DMCI Holdings, Inc. “DMC”)
12 years
PHP3,204,878
31,949%
Mutual funds (Philequity PSE Index Fund)
5 years
PHP23,426
134%
Mutual funds (Sunlife Prosperity Philippine
Equity Fund)
5 years
PHP20,805
108%
Make the students appreciate the difference
between investing in assets that appreciate
versus things that depreciate in value over
time.
1. Show how the learners’ savings (i.e. PHP10,000) could have grown under different types of investments.
Table 1: Comparison of Investment Types Over Time with Sample Results
Sources:
(1) Funds, M. & Tour, A. (2016). Philpad - Your pad on anything Filipino.... Philpad. Retrieved 2 May 2016, from http://philpad.com; (2) Home |
Thomson Reuters. (2016). Thomsonreuters.com. Retrieved 2 May 2016, from http://thomsonreuters.com/en.html; (3) Welcome to the Bangko
Sentral ng Pilipinas Website!. (2010). Banko Sentral ng Pilipinas. Retrieved 2 May 2016, from http://www.bsp.gov.ph/; (4) Writer Estimates
Bank (Time Deposit)
Stocks (Universal Robina Corporation “URC”)
Stocks (DMCI Holdings, Inc. “DMC”)
Mutual funds (Philequity PSE Index Fund and Sunlife Prosperity Philippine Equity Fund)
Teacher Tip
If you are successful in motivating them, you
should get more students raising their
hands to volunteer their answers for assets
that grow their money over those which
lose their value.
2. Describe how money loses value in buying material things such as toys, gadgets, etc.
Item
Purchase Price
Holding Period
Value Today
% Return
iPhone 4 32gb
PHP29,200 (October 2011)
3.5 years
PHP8,900
-70% return
PlayStation 4
PHP22,500 (November 2013)
1.5 years
PHP18,000
–20% return
Toyota Vios
PHP850,000 (December 2007)
7.5 years
PHP300,000
-65% return
Table 2: The Decline of the Monetary Value of Material Items
Sources:
(1) Business 2 Community - Top Trends, News & Expert Analysis. (2016). Business 2 Community.
Retrieved 2 May 2016, from http://www.business2community.com/#MBqWp2Ki7czkuqWl.97; (2)
GSMArena.com - GSM phone reviews, news, opinions, votes, manuals and more.... (2016).
Gsmarena.com. Retrieved 2 May 2016, from http://gsmarena.com ; (3) OS X Daily - News and Tips for
Mac, iPhone, iPad, and Everything Apple. (2016). Osxdaily.com. Retrieved 2 May 2016, from http://
osxdaily.com; (4) Writer Interviews
3. Ask the learners which would they prefer, those which grow their money or those which lose value?
Survey the students by asking them to raise their hands on the option they prefer.
Definitions:
INSTRUCTION (120 MINS)
1. Introduction (5 minutes)
Say that for the discussion, the different types of investments will be grouped into three: (1) fixed
income and equities, (2) alternatives to fixed income and equities, (3) other investment assets
2. Fixed Income and Equities (35 minutes)
Investment Type
Advantages
Settlement Risk – risk that the bank may
not be able to give back their deposit.
Philippine banks are normally insured by the
Philippine Deposit Insurance Corporation
(PDIC). Depositors may recover up to
PHP500,000 per depositor from PDIC in
case of bank default/bankruptcy.
Misconceptions:
Disadvantages
Stocks (Equity)
“Type of security that signifies
ownership in a corporation and
represents a claim on part of the
corporation's assets and
earnings”
• Unlimited Upside
• No guaranteed returns.
• Riskiest of all assets (can lose even
more than 50% of their money in one
day)
Bank Deposits (Fixed Income)
“Money placed into a banking
institution for safekeeping”
• Known income based on
• Lower interest income vs. bonds
outstanding principal and
• Settlement risk if the bank closes
current interest rate
• Shorter, if any, holding period
vs. bonds
Bonds (Fixed iIcome)
“Debt investments where an
investor loans money to an entity
which borrows the funds for a
defined period of time at a
variable or commonly, fixed
interest rate”
• Known periodic payments for • If not held until maturity and prea certain period of time
terminated, investor can gain or lose
depending on the prevailing interest
• Can’t lose money if bond
investment is held until
rates at the time of pre-termination. If
maturity
interest rates are higher, investor in
bonds can lose in the pre-termination
Emphasize to the students that it is a
common misconception that all of these
investments will earn for certain. Clarify that
each investment type has inherent risks
involved, which nevertheless can be
mitigated.
Table 3: Advantages and Disadvantages of Fixed Income and Equities
Sources:
(1) Investopedia - Sharper Insight. Smarter Investing.. (2016). Investopedia. Retrieved 2 May 2016, from http://investopedia.com; (2) Writer
Inputs
• Ask the learners which would they prefer, equity or fixed income?
• Supposing they have PHP1 million, how will they allocate it?
• Explain how they can access these investment assets through the following:
• Stocks
• Go to a stock brokerage firm (i.e. COL Financial, AB Capital Securities, etc.) or a bank with a stock brokerage arm (i.e. BPI Trade, First
Metro Securities, etc.) and open a stock market account by signing the necessary account opening forms.
• Minimum capital amount, depending on the broker, will be required to be deposited to successfully open the account (i.e. PHP5,000 for
BPI Trade, PHP10,000 for AB Capital Securities, etc.).
• Most of these stock brokerage firms now provide online access to their client’s stocks account (i.e. www.colfinancial.com,
www.bpitrade.com, www.abcapitalsecurities.com.ph, etc.).
• Bank Deposits
• Go to a bank (BDO, BPI, Metrobank, etc.) and open a bank account (savings, time deposit, etc.) by signing the necessary account opening
forms.
• Minimum amounts will also be required depending on which bank and the type of bank deposit they want to open.
• Some banks also now offer online access to their client’s bank accounts (i.e. www.bpiexpressonline.com, www.bdo.com.ph,
www.lbpiacces.com, etc.) where they can monitor their account, pay bills, transfer funds, etc. via internet.
• Bonds
• Same as bank deposits, go to a bank and sign the necessary bond acquisition forms.
• Minimum purchase of bonds is normally higher relative to stocks and bank deposits.
• Clients may also view their bond’s performance online depending from which bank they bought it from.
3. Alternatives to fixed income and equities (25 minutes)
Investment Type
Advantages
Definitions:
Disadvantages
Mutual funds
“An investment that is made up
of a pool of funds collected from
many investors for the purpose of
investing in stocks, bonds, and
similar assets”
“Give small investors access to • Pay management fees
professionally managed,
• Values can also fluctuate just like the
diversified portfolios of
stock market
equities, bonds and other
securities, which would be
quite difficult (if not impossible)
to create with a small amount
of capital”
Unit investment trust fund (UITF)
Similar to a mutual fund but is
managed by banks.
• Same as mutual funds.
• Easier access because clients
can open an account in any
branch of the bank near
them.
• No entry and management
fees.
No shareholder rights for investors such
as dividends and voting rights.
Table 4: Advantages and Disadvantages of Alternative Investments
Sources:
(1) Funds, M. & Tour, A. (2016). Philpad - Your pad on anything Filipino.... Philpad. Retrieved 2 May
2016, from http://philpad.com; (2) Investopedia - Sharper Insight. Smarter Investing.. (2016).
Investopedia. Retrieved 2 May 2016, from http://investopedia.com; (3) Writer Inputs
• Ask the learners if they would prefer these alternatives over equity or fixed income and why.
• Would they prefer experts managing their money for them for a fee over investing on their own?
• Explain how they can access these investment assets through the following:
• Mutual funds
• Go to an insurance company or a financial institution that offers mutual funds (i.e. Philequity,
Sunlife, Manulife, etc.) and sign the necessary account opening forms.
• As with stocks, minimum amounts will be required to successfully open the account.
• Management Fee – the amount clients
pay to the professionals who manage their
mutual funds, normally a certain
percentage of portfolio value.
• Dividends – distribution of the company’s
income to its shareholders.
• Voting Rights – right to be heard on
certain policies that the company wants to
implement.
• Some of these financial institutions also provide online access to monitor their mutual fund performance.
• Unit Investment Trust Fund
• Same procedures as a mutual fund except that UITF’s are accessed through banks.
4. Other investment assets (45 minutes)
Investment Type
Advantages
MUST READ FIRST
Disadvantages
Currencies
“Generally accepted form
of money, including coins
and paper notes, which is
issued by a government
and circulated within an
economy” (i.e. USD, EUR,
JPY)
• Largest market in the world in
terms of trading volume, so
much liquidity
• Unlike stocks, commodities,
etc., currency asset itself is a
medium of exchange which
people can use to transact
• Volatile and trades 24-hours a day (must
be closely monitored)
• Generally uses margin trading which
allows clients to bet more than their
capital (may also be an advantage)
Commodities
“A basic good used in
commerce that is
interchangeable with other
commodities of the same
type” (i.e. gold, nickel, oil)
• Natural hedge against inflation
• Negatively correlated with
equities and bonds (may be
used for diversification)
• Hedge against geopolitical
risks
• Same as currencies
• Impractical to invest directly considering
storage, transportation and insurance
costs involved
Real Estate
“Land and any
improvements on it” (i.e.
land, house and lot,
condominiums)
• Generally appreciates over
time because land gets scarce
• Have relatively low correlations
with other asset classes (may
be used for diversification)
• Can be a source of recurring
rental income
• May also be a hedge against
inflation because of inflationlinked rent escalation clauses
• Huge capital needed, financing can be
difficult
• Maintenance of the property needed to
preserve its value
• Illiquid or difficult to sell
Insurance
• Gives the insured individual/
“A contract (policy) in which
entity the cash/capital to deal
an individual or entity
with unforeseen adverse
receives financial protection
financial consequences
or reimbursement against
• May provide certain tax
losses from an insurance
benefits (i.e. tax deductibility,
company” (i.e. life
tax-free provisions)
insurance, educational
plans, VUL)
• Insurance premiums may be costly
• On some of traditional insurance plans,
no sickness/death until a certain age may
mean not getting any benefits at all
(that’s why VUL’s are now very prevalent)
• Some insurance companies can go
bankrupt (i.e. College Assurance Plan) if
companies fail to factor significantly
adverse unforeseen circumstances
Definitions:
• Liquidity – ability to be converted into
cash, the higher the liquidity the better.
• Margin Trading – allows clients to trade
more than their capital. It can magnify
both earnings and losses.
• Inflation – general increase in prices.
• Hedge – investment that reduces the risk
of adverse price movements in an asset.
• Diversification – process of investing in
different kinds of assets to lessen
exposure in market/price volatility.
• Geopolitical risks – “risks of one
country's foreign policy influencing or
upsetting domestic, political, and social
policy in another country or
region” (Source: Columbia Threadneedle
Blog. (2016). Columbia Threadneedle
Blog. Retrieved 2 May 2016, from http://
blog.columbiathreadneedleus.com)
• Correlation – how price of an asset moves
with respect to another asset (i.e. positive
correlation if both assets move in the
same direction, negative correlation if
both assets move in the opposite
direction)
• Escalation Clause – agreement to raise
prices in the future depending on certain
circumstances (i.e. increase in inflation
leading to higher rental rates).
• Insurance Premium – the amount paid on
a regular basis to the insurance company
in return for the insurance/protection
provided.
• VUL – Variable Universal Life insurance or
a life insurance that offers both death
benefit and investment features.
Table 5: Advantages and Disadvantages of Other Investment Types
Sources:
(1) Gateway Financial | Gateway Financial. (2016). Gatewayfinancial.biz. Retrieved 2 May 2016, from
http://gatewayfinancial.biz; (2) Home Guides | SF Gate. (2016). Homeguides.sfgate.com. Retrieved 2
May 2016, from http://homeguides.sfgate.com; (3) Investopedia - Sharper Insight. Smarter Investing..
(2016). Investopedia. Retrieved 2 May 2016, from http://investopedia.com; (4) Saad, Y. & Slachevsky, A.
(2016). From The Markets - eToro Blog. eToro Blog. Retrieved 2 May 2016, from http://etoro.com/blog/
markets; (5) Writer Inputs
• Ask the learners which among these investment assets would they consider and why.
• Explain how they can access these investment assets through the following:
• Currencies and Commodities
• Open a foreign currency/forex account (i.e. oanda, fxcm, cboe, etc.) online.
• Minimum amount required for forex accounts vary and are usually higher vs. stocks and usually in
USD.
• Investments may also be monitored online.
• Real Estate
• Contact/visit real estate companies directly (i.e. Ayala Land, Megaworld, SM Prime, etc.).
• Contact real estate brokers.
• Insurance
• Contact/visit insurance companies directly (i.e. Sunlife, Prulife, Manulife, etc.).
• Contact insurance agents.
5. Investment Scams (10 minutes)
• Tell the learners the following characteristics of investment scams (Source: financialmentor.com):
• Unexpected and unsolicited phone calls, emails, letters, or personal visits from strangers who are
offering investments
• Above market returns
• Low risk, no risk, or a guarantee
• Giving custody and possession of invested capital to the investment manager
• Aggregating assets into a pool with other investors
Teacher Tip:
Emphasize the importance of contacting
licensed real estate brokers and insurance
agents.
Teacher Tip:
Show samples of investment scams like email scam or even text scams. You may visit
this website for an example: > http://
www.motherjones.com/politics/2014/03/
what-i-learned-from-nigerian-scammers.
• Investing on the spot
• Special connections, secrets, or inside information not available to the public
• Invitations to join exclusive investment organizations
• Opportunities for the “next big thing” or a “once in a lifetime” deal
• Sophisticated terminologies
• Investments offered from overseas
• No prospectus/offering memorandum
• Investments that cannot be verified
• Sold by unlicensed/unregistered people
• Troubles cashing out of the investment
• Salespeople discouraging second opinion
• Salespeople encouraging investing on the basis of trust
• Salespeople asking potential clients to put their life savings into a single investment
• Salespeople encouraging potential clients to borrow money for it
• Salespeople requesting for the client’s bank account details
Ask
how they can prevent themselves from becoming victims to investment scams
•
PRACTICE (30 MINUTES)
(AVERAGE)
Group portfolio management exercise.
1. Group the students into teams of four to five.
2. Provide the students with investment options based on current market prices (sample presented
below).
3. Ask each group to allocate a fund of PHP1,000,000 among the different investment options
provided and why.
4. (Optional) Tell the students that each group’s fund will be evaluated after 2-3 weeks based on the
funds’ updated market value.
5. (Optional) Give a prize or grade incentive to the team with the highest portfolio value.
Teacher Tip
The objective of this activity is to make the
learners rationalize the composition of their
chosen portfolio.
Updated prices of the investment options
can be taken from the following websites:
• For URC, DMC and PSEi-linked mutual
fund, www.pse.com.ph
• For time deposit, it should be the same
for the next 2-3 weeks
• For gold, www.kitco.com
Sample Investment Options Sheet
Instructions: Allocate your PHP1,000,000 among the following investment alternatives (in multiples of 10% i.e. 10%, 20%, 30%, etc.). Allocations
should total 100%. Below the table, justify your chosen allocations.
Allocation
Investment Asset
Market Price
(September 17, 2015)
5-Year Average Annual
Return
___%
URC (Stocks)
PHP191.0
68.6%
___%
DMC (Stocks)
PHP12.9
36.1%
___%
Time deposit
1.18%
2.3%
___%
PSEi-linked mutual fund
7,123.99
17.3%
___%
Gold (Commodity)
$1,118.6
-59.3%
Source:
(1) Home | Thomson Reuters. (2016). Thomsonreuters.com. Retrieved 2 May 2016, from http://thomsonreuters.com/en.html; (2) Kitco: Live Gold
Prices | Gold News | Gold Market Insights. (2016). Kitco.com. Retrieved 2 May 2016, from http://kitco.com; (3) THE PHILIPPINE STOCK
EXCHANGE, INC.. (2016). Pse.com.ph. Retrieved 2 May 2016, from http://pse.com.ph; (4) Welcome to the Bangko Sentral ng Pilipinas
Website!. (2010). Banko Sentral ng Pilipinas. Retrieved 2 May 2016, from http://www.bsp.gov.ph/
Justification:
ENRICHMENT (30 MINUTES)
1. Share the story of Warren Buffett through a biography video (Warren Buffett: Bio of the World's Greatest Businessman. (2016). YouTube.
Retrieved 2 May 2016, from https://www.youtube.com/watch?v=yUfUMymDVyo)
2. Emphasize to the learners that at their age, they have the most valuable asset in investing – time (cite Warren Buffet who started investing at
the age of nine, and felt it was even too late. He is now one of the richest men in the world.)
3. Ask them if they want to be like Warren Buffett.
4. Encourage them to invest as early as now.
EVALUATION (30 MINUTES)
QUIZ
Teacher Tip
1. (EASY) Match the investment asset in column A with its description in column B by writing the capital
letter on the left side of column A.
Sample Matching Type Quiz
(A) Investment Asset
Depending on the reception of the students
of the lesson, essay questions may be given
instead of multiple choice.
Answer Key
(B) Description
___1
Stocks (Equity)
A. An investment that is made up of a pool of funds collected from
many investors for the purpose of investing in stocks, bonds, and
similar assets.
___2
Bank Deposits (Fixed
Income)
B. Land and any improvements on it.
___3
Mutual Funds
C. Type of security that signifies ownership in a corporation and
represents a claim on part of the corporation's assets and earnings.
___4
Real Estate
D. A contract (policy) in which an individual or entity receives financial
protection or reimbursement against losses from an insurance
company.
___5
Insurance
E. Money placed into a banking institution for safekeeping
If Matching Type
Part 1: C, E, A, B, D
Part 2: D, B, E, C, A
2. (EASY) Match the investment asset in column A with its advantage/disadvantage in column B by
writing the capital letter on the left side of column A.
Sample Matching Type Quiz
(A) Investment Asset
(B) Advantage/Disadvantage
___1
Stocks (Equity)
A. Disadvantage: On some of traditional plans, no sickness/death until
a certain age may mean not getting any benefits at all
___2
Bank Deposits (Fixed
Income)
B. Advantage: Shorter, if any, holding period vs. bonds
___3
Mutual Funds
C. Advantage: Can be a source of recurring rental income
___4
Real Estate
D. Disadvantage: Riskiest of all assets (can lose as much as 50% of
their money in one day)
___5
Insurance
E. Disadvantage: Pay management fees
3. (Optional) Essay
(DIFFICULT)
Sample Essay Questions
1. Why would a risk-taker (likes to take risks) type of investor prefer equities over fixed income?
2. Why would a risk-averse (likes to avoid risks) type of investor prefer fixed income over equities?
3. How do mutual funds differ from UITFs?
4. If let’s say you have PHP1,000,000 today which you can invest for the next 10 years, where will you
put it and why?
Answer Key
If Essay (Suggested Answers)
1. Equities are the riskiest of all assets
because of their price volatility. In the
Philippine Stocks Exchange, clients can lose
as much as 50% on a stock in one day.
Reasons why stock prices are volatile
include uncertainties in company’s earnings,
negative or positive market sentiment of
investors, etc. And with these great risks
comes the potential for great upside for the
risk-taker investor.
2. Fixed income assets are low-risk
investments. Even if potential returns are
low relative to equities, it gives the riskaverse investor known income/periodic
payments. Note however that this is only
true if the security is held until maturity.
Default risk, which is the risk of the
counterparty not fulfilling his obligation is
also present in fixed income assets.
Therefore, an investor must carefully analyze
the issuer and must be convinced about its
financial stability before buying its debt
security.
3. Mutual funds are offered by non-bank
institutions while UITFs are offered by
banks. Given that UITFs are offered by
banks, they are more accessible than mutual
funds. Mutual funds on the other hand
require management fees but provide the
investors with shareholder rights such as
dividends and voting rights. Since the
underlying asset of mutual funds can also
be equity, returns are not guaranteed and
an investor can also lose.
4. Note to teacher: They can put it in one
investment instrument or it can be a
portfolio. Whatever the answer is, there has
to be an explanation.
Business'Finance
120 MINS
Introduction to Investment
Content Standards
The learners demonstrate an understanding of the definition, purpose, kinds,
advantages and disadvantages, and the risks of investment.
Performance Standards
The learners will be able to:
• Identify the types of investments particularly bank deposits, insurance, real
estate, hard assets, mutual funds, and stocks and bonds.
• Indicate the advantages and disadvantages of each type of investment.
• Explain the risks inherent in each type of investment.
LESSON OUTLINE
Introduction Identify essential questions and
communicate learning competencies and
objectives
Motivation
Present how volatile some investments can
become and ask learners if they are willing to
take such risk on their money
10
10
Instruction/ Give a lecture on the different ways on
Delivery
60
Learning Competencies
The learners shall be able to measure and list ways to minimize or reduce
investment risks in simple exercises. (ABM_BF12-IVm-n-25)
Enrichment Share accounts of erroneously quantified
10
Specific Learning Outcomes
At the end of this lesson, the learners will be able to:
Materials
• Measure the risk of different types of investments
• Identify ways on how to reduce investment risk and define how risk is
lessened
quantifying investment risk and how to
reduce it
risks and how terrible the effects can be
Evaluation
Quiz
• LCD projector
• Laptop with Microsoft Office Powerpoint or
• Overhead Projector
• Acetates
Resources
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon
City. Rex Bookstore.
(2) Finance Books and Websites
30
INTRODUCTION (10 MINS)
1. Identify the essential questions
• Ask the learners what are the different types of investments that they have learned (this will also
serve as a review).
• Do they understand the risks of each investment?
• Do they know how to measure these risks?
• Which will they choose, a stock which they can expect to go up by 25% in one year, or a 1-year
treasury bill which will give them 1.5% return? Note that if the economy turns bad, they can lose
10% on the stock.
• If there is a way to minimize these risks, will that help them in investing?
Teacher Tips:
On the essential questions, try to get as
much insights from the learners as possible
The previous module recognized the
rewards/returns of the various investments.
Emphasize that this module will focus on
the risks particularly on equity investments.
2. Transition by saying that these questions will be answered by meeting the following objectives
throughout the discussion.
3. Communicate learning competencies and objectives.
• Explain that the learning competencies will be the same as the previous module but this module
will focus more on the quantification of risks in each investment.
• Enumerate the specific learning outcomes.
- Measure the risks of different types of investments.
- Identify ways on how to reduce investment risks and define how risk is lessened.
MOTIVATION (10 MINUTES)
1. Show how the learners’ savings (i.e. PHP10,000) could have changed value over time if placed in a
bank time deposit and an equity investment.
Teacher Tips:
Let the students appreciate the difference
between low-risk low-return investments
and high-risk high-return investments.
The PSEi is composed of the 30 biggest
companies in the Philippines. These
companies are as follows (Source: The
Philippine Stock Exchange, Inc.. (2012). The
Philippine Stock Exchange, Inc.. Retrieved 8
May 2016, from http://www.pse.com.ph/
stockMarket/home.html):
Bank (Time Deposit)
Table 1: Sample Performance of PHP 10,000 in Time Deposit
Stocks/Equities (Philippine Stock Exchange Index “PSEi”)
Table 2: Sample Performance of PHP 10,000 in Stocks/Equities
1. Ayala Corp. (AC)
2. Aboitiz Equity Ventures, Inc. (AEV)
3. Alliance Global Group, Inc. (AGI)
4. Ayala Land, Inc. (ALI)
5. Aboitiz Power Corp. (AP)
6. BDO Unibank, Inc. (BDO)
7. Bloomberry Resorts Corp. (BLOOM)
8. Bank of the Philippine Islands (BPI)
9. DMCI Holdings, Inc. (DMC)
10. Energy Development Corp. (EDC)
11. Emperador Inc. (EMP)
12. First Gen Corp. (FGEN)
13. Globe Telecom, Inc. (GLO)
14. GT Capital Holdings, Inc. (GTCAP)
15. International Container Terminal
Services, Inc. (ICT)
16. Jollibee Foods Corp. (JFC)
17. JG Summit Holdings, Inc. (JGS)
18. LT Group, Inc. (LTG)
19. Metropolitan Bank & Trust Company
(MBT)
20. Megaworld Corp. (MEG)
21. Manila Electric Company (MER)
22. Metro Pacific Investments Corp. (MPI)
23. Petron Corp. (PCOR)
24. Robinsons Land Corp. (RLC)
25. Semirara Mining and Power Corp. (SCC)
26. SM Investments Corp. (SM)
27. San Miguel Corp. (SMC)
28. SM Prime Holdings, Inc. (SMPH)
29. PLDT (TEL)
30. Universal Robina Corp. (URC)
2. Explain the concept of risk and return.
• Investments follow a high-risk, high-return principle.
• Inform the learners that stocks are volatile and that they can lose significantly from their investments
especially if their investment timeframe is short.
• If the stock investments of a good company is invested over a much longer period of time however,
stock investments can be financially rewarding as shown in the PSEi returns.
• The value of a bank investment on the other hand, follows a relatively straight upward line, but only
gives low returns (CAGR of 3.4% for the period 2004-2014) due to the low risk taken by the investor.
Teacher Tips:
Optional: Illustrate how the learners’
PHP10,000 could have changed value over
time if placed in Jollibee Foods Corp.
(“JFC”) and Philex Mining Corporation
(“PX”).
3. Discuss that some will choose bank time deposit and others will prefer stocks. Emphasize that there
is no right or wrong answer because the choice of an investor depends not just on returns but also
on his/her risk appetite.
4. Ask the learners: If they have savings, would they put it in stocks or in a time deposit? Survey the
students by asking them to raise their hands on the option they prefer.
5. Ask the learners: If there is a way to measure the risk, will it help them decide whether to place their
money in an investment or not?
Company description: JFC is a multinational
chain of fast food restaurants famous for its
Chickenjoy, Jolly Spaghetti, and Peach
Mango Pie. PX on the other hand, is the
largest mining company in the Philippines
with gold and copper mining properties in
Benguet and Surigao.
It is advisable for the teacher to read more
about risk.
If the learners are motivated, they should be
curious about how to quantify risk.
INSTRUCTION/DELIVERY (60 MINS)
1. Definition of risk.
• “Risk is the chance that an investment’s actual return will be different than expected. Risk includes
the possibility of losing some or all of the original investment.” (Source: Investopedia - Sharper
Insight. Smarter Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://
investopedia.com)
2. Systematic and Non-Systematic Risk (10 minutes)
Definition
Also Known As
Examples
Measurement
Systematic
Uncertainty inherent
to the entire market
Market risk,
undiversifiable risk
Changes in interest
rates, recession,
wars
Beta (β)
Uncertainty that
Specific risk,
comes with the
diversifiable risk,
company or industry residual risk
Explain that there are other ways of
measuring risk but focus will be on standard
deviation and beta.
Teacher Tips:
Risk
Non-systematic
Teacher Tips:
Rumors of a
Standard deviation
potential default,
(σ) less beta
labor strikes,
landslide in a mining
company that
disrupted the
operations
Table 3: Differentiating Risks
Source: Investment Strategies, Education & News | InvestingAnswers. (2016). Investinganswers.com.
Retrieved 8 May 2016, from http://investinganswers.com; Investopedia - Sharper Insight. Smarter
Investing. | Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com
Emphasize that systematic risk is nondiversifiable while non-systematic risk is
diversifiable.
Note that total risk = systematic + nonsystematic risk.
3. Measuring Systematic and Non-Systematic Risk (40 minutes)
Measurement
Risk it
Measures
Definition
Beta (β)
Systematic risk
• Measure of the systematic risk
of an investment or portfolio
vs. the market as a whole.
• Tendency of an investment's
returns to respond to swings
in the market.
Standard deviation (σ)
Total risk
Formula
• Sum of systematic and nonsystematic risk.
• Total volatility of an
investment.
Table 4: Measuring Risks
Source: Investopedia. (2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com
• Explain that the formula for beta is the covariance of the investment asset’s returns with the returns of
the market divided by the variance of the market. Beta can be easily computed through Microsoft
Office Excel but due to the complexity of the formula in terms of manually computing beta, sources
will be cited instead on where beta can be found.
• Emphasize that in getting an estimate of the non-systematic risk, the total risk will be computed first
then from this, the systematic risk will be deducted.
• Clarify the components of the σ formula:
- xi – return
- x̄ – average of returns
- n – no. of data points
EASY
for xi and x̄, AVERAGE for (xi-x̄)2, DIFFICULT for σ: Practice by computing the volatility (σ) of
•
the following stocks (equity investments):
Teacher Tips:
Note: Guide on β interpretation below:
• =1 – investment’s price will have the same
volatility as the PSEi
• >1 – investment’s price will be more
volatile than the PSEi
• <1 – investment’s price will be less volatile
than the PSEi
Example: A company with a β of 1.3 means
that if the PSEi goes up by 10%, this
company’s stock price, on the average, will
go up by 13%. The reverse is true which
means that if the PSEi goes down by 10%,
this company’s stock price, on the average,
will go down by 13%.
Based on the example, it is illustrated that a
company with higher beta is more volatile
and a company with lower beta is less
volatile.
Clarify to the learners that the β computed
using the formula given on the table may
not be reliable if data points used are for a
short period of time only. Using data
covering five to ten years is suggested
because such period will often cover the
booms and busts of an economic cycle.
JFC
GLO
Year
Stock
Price
Return xi x̄
(xi-x̄)2
Teacher Tips:
Year
Stock
Price
30/1/2014
152.00
30/1/2014
1,710.00
28/2/2014
171.00
28/2/2014
1,700.00
31/3/2014
171.00
31/3/2014
1,664.00
30/4/2014
172.00
30/4/2014
1,657.00
30/5/2014
179.10
30/5/2014
1,690.00
30/6/2014
176.00
30/6/2014
1,600.00
31/7/2014
176.80
31/7/2014
1,735.00
29/8/2014
180.00
29/8/2014
1,800.00
30/9/2014
196.00
30/9/2014
1,623.00
31/10/2014
196.00
31/10/2014
1,685.00
28/11/2014
207.00
28/11/2014
1,750.00
29/12/2014
215.00
29/12/2014
1,730.00
σ
σ
Return xi
x̄
(xi-x̄)2
Note: Beta of investments assets,
particularly of stocks, can be found on
research engines such as Bloomberg and
Thomson Reuters and studies of finance
professors such as Aswath Damodaran of
the NYU Stern School of Business.
Solutions are given in a separate
spreadsheet included in this pack.
Company Description: Globe Telecoms
(“GLO”) is the telecommunications
company of the Ayala group with products
such as Globe Tattoo and promos such as
Unli-text and Unli-surf. Universal Robina
Corporation (“URC”) is the retail/consumer
goods company of the Gokongwei group,
famous for Jack and Jill chips and C2 green
tea. DMCI Holdings (“DMC”) is the largest
construction company in the Philippines
owned by the Consunji family. It also has
businesses in coal mining and power
generation, property development, and
nickel mining. Petron Corporation (“PCOR”)
is the biggest oil refinery in the country
owned by the Ang group. Some of its
gasoline products include Petron Blaze and
Petron Diesel Max.
Emphasize that σ computed represents
total risk.
Note that formula for return should be:
stock price current divided by stock price
previous less 1.
Clarify that n-1 is used as divisor because
only a sample of data is used.
While total risk can be broken down to
systematic and non-systematic risk, the
breakdown formula is beyond the scope or
coverage of this course.
URC
DMC
Year
Stock
Price
Return xi x̄ (xi-x̄)2
Year
Stock
Price
30/1/2014
116.000
30/1/2014
11.768
28/2/2014
139.000
28/2/2014
13.657
31/3/2014
141.000
31/3/2014
13.775
30/4/2014
145.000
30/4/2014
14.129
30/5/2014
148.000
30/5/2014
14.021
30/6/2014
153.000
30/6/2014
14.562
31/7/2014
161.000
31/7/2014
14.375
29/8/2014
161.000
29/8/2014
15.743
30/9/2014
186.000
30/9/2014
15.536
31/10/2014
185.000
31/10/2014
15.939
28/11/2014
194.000
28/11/2014
16.038
29/12/2014
195.000
29/12/2014
15.447
σ
σ
Return xi
x̄ (xi-x̄)2
PCOR
Teacher Tips:
Year
Stock
Price
30/1/2014
13.98
28/2/2014
13.74
31/3/2014
11.74
30/4/2014
12.28
30/5/2014
11.98
30/6/2014
12.74
31/7/2014
12.32
29/8/2014
11.66
30/9/2014
11.78
31/10/2014
11.82
28/11/2014
11.10
29/12/2014
10.60
Return xi x̄
(xi-x̄)2
σ
4. Diversification (10 minutes)
• To minimize investment risk, an investor has to have a diversified portfolio. The composition of the
portfolio depends on the risk appetite of the investor. A more conservative investor (i.e. investor
who has less appetite for risk) may have a portfolio which is more skewed to fixed income
instruments like time deposits. On the other hand, an investor who has a higher appetite for risk
(i.e. an investor who is more willing to take risk) may have a portfolio which is more skewed to
equity investments.
• Define diversification.
Alternative Presentation: Show the 3 sample
portfolios and ask the learners to compare
σ and allow them to discuss what it means.
Emphasize the effect of diversification.
Diversification is a risk management technique that combines a wide variety of investments within a portfolio to reduce risk. A welldiversified portfolio can eliminate non-systematic risk.
• Cite examples of how a more diversified portfolio can reduce the standard deviation of the portfolio:
Five-Stock PHP 10,000 Portfolio (JFC, GLO, URC,
DMC, and PCOR)
Two-Stock PHP 10,000 Portfolio (JFC and DMC)
Year
Portfolio
Value
Return
xi
x̄
30/1/2014
10,000.00
28/2/2014
11,427.60
14.3%
2.9%
31/3/2014
11,477.74
0.4%
30/4/2014
11,661.04
30/5/2014
(xi-x̄)2
Year
Portfolio
Value
Return
xi
x̄
(xi-x̄)2
30/1/2014
10,000.00
1.3%
28/2/2014
10,921.56
9.2%
2.9%
0.4%
2.9%
0.1%
31/3/2014
10,647.87
-2.5%
2.9%
0.3%
1.6%
2.9%
0.0%
30/4/2014
10,859.22
2.0%
2.9%
0.0%
11,848.70
1.6%
2.9%
0.0%
30/5/2014
10,981.69
1.1%
2.9%
0.0%
30/6/2014
11,976.59
1.1%
2.9%
0.0%
30/6/2014
11,122.52
1.3%
2.9%
0.0%
31/7/2014
11,923.45
-0.4%
2.9%
0.1%
31/7/2014
11,337.00
1.9%
2.9%
0.0%
29/8/2014
12,609.95
5.8%
2.9%
0.1%
29/8/2014
11,593.20
2.3%
2.9%
0.0%
30/9/2014
13,048.32
3.5%
2.9%
0.0%
30/9/2014
12,009.73
3.6%
2.9%
0.0%
31/10/2014
13,219.55
1.3%
2.9%
0.0%
31/10/2014
12,139.22
1.1%
2.9%
0.0%
28/11/2014
13,623.45
3.1%
2.9%
0.0%
28/11/2014
12,428.98
2.4%
2.9%
0.0%
29/12/2014
13,635.51
0.1%
2.9%
0.1%
29/12/2014
12,356.12
-0.6%
2.9%
0.1%
1.7%
σ
4.2%
0.9%
σ
3.1%
PSEi-invested PHP 10,000 Portfolio
Year
Value
Return
xi
x̄
(xi-x̄)2
30/1/2014
10,000.00
28/2/2014
10,635.31
6.4%
1.7%
0.2%
31/3/2014
10,641.46
0.1%
1.7%
0.0%
30/4/2014
11,103.62
4.3%
1.7%
0.1%
30/5/2014
11,003.88
-0.9%
1.7%
0.1%
30/6/2014
11,329.41
3.0%
1.7%
0.0%
31/7/2014
11,363.36
0.3%
1.7%
0.0%
29/8/2014
11,671.36
2.7%
1.7%
0.0%
30/9/2014
12,055.69
3.3%
1.7%
0.0%
31/10/2014
11,944.22
-0.9%
1.7%
0.1%
28/11/2014
12,074.41
1.1%
1.7%
0.0%
29/12/2014
11,968.78
-0.9%
1.7%
0.1%
0.6%
σ
2.4%
• Show that the standard deviation computed for a portfolio goes down as the component stocks increase in number. Notice that the PSEi has
the least volatility because it is composed of 30 stocks.
ENRICHMENT (10 MINS)
1. Describe investment risk through this video (https://www.youtube.com/watch?v=3qv7E2yIiw4).
2. Emphasize that volatility can also be an opportunity.
3. Explain the value of properly understanding the risk of the product they are investing in.
EVALUATION (30 MINS)
Quiz: Compute the standard deviation of the following stocks and the PSEi.
(EASY) For xi and x̄ (AVERAGE) for (xi-x̄)2 (DIFFICULT) for σ
Teacher Tips:
Solutions are given in a separate
spreadsheet included in this pack.
Sample Quiz
AC
The list can be modified depending on the
preference of the teacher. Historical stock
prices can be found on www.pse.com.ph.
JGS
Year
Stock
Price
Return xi x̄ (xi-x̄)2
Year
Stock
Price
30/1/2014
524.00
30/1/2014
39.400
28/2/2014
575.50
28/2/2014
46.900
31/3/2014
578.00
31/3/2014
49.500
30/4/2014
624.00
30/4/2014
50.600
30/5/2014
618.00
30/5/2014
49.300
30/6/2014
647.50
30/6/2014
51.250
31/7/2014
658.00
31/7/2014
53.000
29/8/2014
700.50
29/8/2014
51.450
30/9/2014
740.00
30/9/2014
57.900
31/10/2014
690.00
31/10/2014
63.800
28/11/2014
694.00
28/11/2014
61.650
29/12/2014
694.00
29/12/2014
66.000
σ
σ
Return xi
x̄ (xi-x̄)2
AGI
SM
Year
Stock
Price
Return xi x̄ (xi-x̄)2
Year
Stock
Price
30/1/2014
27.100
30/1/2014
704.500
28/2/2014
30.000
28/2/2014
694.000
31/3/2014
28.500
31/3/2014
705.000
30/4/2014
31.150
30/4/2014
725.000
30/5/2014
29.650
30/5/2014
786.000
30/6/2014
29.100
30/6/2014
816.000
31/7/2014
26.350
31/7/2014
797.000
29/8/2014
24.600
29/8/2014
772.000
30/9/2014
26.000
30/9/2014
803.500
31/10/2014
25.300
31/10/2014
783.500
28/11/2014
24.800
28/11/2014
804.500
29/12/2014
22.550
29/12/2014
815.000
σ
σ
Return xi
x̄ (xi-x̄)2
PSEi
Year
Stock
Price
30/1/2014
6,041.19
28/2/2014
6,424.99
31/3/2014
6,428.71
30/4/2014
6,707.91
30/5/2014
6,647.65
30/6/2014
6,844.31
31/7/2014
6,864.82
29/8/2014
7,050.89
30/9/2014
7,283.07
31/10/2014
7,215.73
28/11/2014
7,294.38
29/12/2014
7,230.57
σ
Return xi x̄ (xi-x̄)2
Business Finance
240MINS
Managing Personal Finance
Content Standards
The learners demonstrate an understanding of the philosophy and practices in
personal finance.
Performance Standards
The learners will be able to:
•
•
Identify money management philosophy
Apply basic personal finance principles and practices in earning, spending,
saving, and investing money
Learning Competencies
The learners shall be able to enumerate money management philosophies.
(ABM_BF12-IVo-p-26)
Specific Learning Outcomes
At the end of the unit lesson, the learners will be able to:
•
•
•
Define personal finance
Enumerate and define the personal financial planning process
Describe the six key areas of personal financial planning
LESSON OUTLINE
Introduction Identify essential questions and
10
Motivation
10
communicate learning competencies
and objectives.
Present how famous personalities became
bankrupt because of overspending.
Instruction/ Give a lecture on personal finance, the
Delivery
60
Enrichment Share the four simple habits for personal
10
personal financial planning process, and its
six key areas.
finance success.
Evaluation
Materials
Quiz
• LCD Projector
• Laptop with Microsoft Office Powerpoint
OR
• Overhead Projector
• Acetates
Resources
(1) Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City.
Rex Bookstore.
(2) Finance websites
30
INTRODUCTION (10 MINS)
Teacher Tip
1. Identify the essential questions:
On the essential questions, try to get as
much insights from the learners as possible.
•
•
•
Ask the learners how much they spend every day. Ask them also what do they spend it for.
How much is their daily allowance from parents?
Make them compute: daily allowance from parents less daily expenses
• Are they able to save from their allowance?
• If yes, what do they do with their savings? Which investments can they put
their savings into?
• If no, how do they address the deficit? Do they ask from their parents? Is this
a good practice?
2. Transition by saying that these questions will be answered by meeting the following objectives
throughout the discussion.
3. Communicate learning competencies and objectives
•
•
Enumerate the learning competencies.
• Enumerate money management philosophies.
Enumerate the specific learning outcomes.
• Define personal finance
• Enumerate and define the personal financial planning process.
• Describe the six key areas of personal financial planning.
MOTIVATION (10 MINS)
1. Share the story of top celebrities who went broke through a video: Top 10 Celebrities Who Went
Broke. (2015). YouTube. Retrieved 8 May 2016, from https://www.youtube.com/watch?
v=eh3TgZ_V_S8
2. Emphasize to the learners that these people have successfully reached career peaks accompanied
Teacher Tip
Let the learners appreciate that even some
of the biggest and richest celebrities can
still go bankrupt if they have poor money
management practices.
If you can’t access the video, refer to the list
below:
by huge fortune. However, because of poor personal financial planning, they still went broke due to
overspending practices and lack of appropriate investments.
3. Ask them if they want to be like these celebrities.
4. Encourage them to appreciate the value of financial planning as early as now so they are able to
internalize it and make it part of their system so that, when it’s their turn to reach fame and fortune,
they will know how to manage their finances well and not go broke.
1. Toni Braxton – earned approximately
USD170 million. He was a shopaholic,
diagnosed with Angina and Lupus, and
filed for bankruptcy twice.
2. Nicolas Cage – one of the highest paid
actors in Hollywood, made bizarre
purchases such as castles, islands, and
dinosaur skulls. He ended up with a
USD14 million debt to the Internal
Revenue Service (IRS).
3. Mike Tyson – earned approximately
USD300 million over his entire boxing
career but got into a divorce and various
addictions, squandered his money on
homes, cars, parties, and tigers, and
filed for bankruptcy in 2003.
If the learners are successfully motivated,
they will be more curious about what
personal finance is.
INSTRUCTION/DELIVERY (60 MINS)
1. Personal Finance. (10 MINUTES)
• Define Personal Finance. (Source: Investopedia - Sharper Insight. Smarter Investing. | Investopedia.
(2016). Investopedia. Retrieved 8 May 2016, from http://investopedia.com)
• Personal finance includes all financial decisions and activities of an individual including budgeting,
insurance, mortgage planning, savings, and retirement planning.
• It involves analyzing current financial positions, projecting short-term and long-term funding needs,
and executing a plan to fulfil those needs considering individual financial constraints.
• It is primarily dependent on one’s earnings, cost of living, and personal goals and wants.
• Encourage participation through posing the following questions to the learners:
• Who of them has done or does personal budgeting? How did/do they do it?
• What are their personal goals and wants at their age? Do they have the financial capacity to fulfil
them?
2. Personal financial planning process. (25 minutes)
• Show the chart below. (Source: Private Financial Design. (2016). Privatefinancialdesign.com. Retrieved
8 May 2016, from http://privatefinancialdesign.com)
• Explain each step of the personal financial planning process. (Source: Private Financial Design. (2016).
Privatefinancialdesign.com. Retrieved 8 May 2016, from http://privatefinancialdesign.com)
A. Objective Setting
• Quantify monetary objectives with definite time frames.
• Prioritize objectives.
• Examine these objectives with an individual’s resources and limitations.
B. Data gathering
• Use surveys, questionnaires, and interviews to gather quantitative and qualitative information from
the individual.
• Quantitative – for assessing financial status (i.e. investments, cash flow, liabilities, etc.)
• Qualitative – to identify individual’s goals and objectives, lifestyle, risk-tolerance, etc.
C. Data Analysis
• Analyze the individual’s financial position and cash flows.
Teacher Tips:
Examples:
• Objective Setting – A mom wants to have
PHP1 million after 10 years for her
daughter’s education.
• Data Gathering – Interview the mom to
know how much savings she has and her
current sources of income.
• Data Analysis – Map the mom’s net cash
flows and compute her required return to
reach her target of PHP1 million after 10
years.
• Financial Plan Recommendation – Identify
stocks, mutual funds or other assets which
can generate the mom’s required return.
• Plan Implementation – Help the mom
open an account so she can invest in the
recommended financial plan.
• Plan Monitoring – Check regularly
whether the fund is growing as planned.
Consider other alternative assets if
performance is not good.
• Review legal papers (i.e. insurance policies, trust agreements, wills, etc.).
• Evaluate objectives vis-à-vis the individual’s resources and economic conditions.
D. Financial Plan Recommendation
• Propose financial products.
• At this point, the individual can comment on the proposed solutions.
E. Plan Implementation
• Assist the individual in the execution of the recommended financial plan.
• Implementation may involve other entities so assist the individual in dealing with the parties involved in the execution of the financial plan.
F. Plan Monitoring
• Review the financial plan periodically to evaluate changing market conditions (i.e. economic conditions, taxes, interest rates, etc.).
• Evaluate the financial plan regularly to see if it effectively meets the individual’s goals and objectives.
3. Six Key Areas of Personal Financial Planning. (25 minutes)
• Show chart below (Source: World’s Largest Professional Network | LinkedIn. (2016). Linkedin.com. Retrieved 8 May 2016, from https://
www.linkedin.com/)
(a) Financial
Position
(b) Adequate
Protection
(c) Tax Planning
(d) Investment
and Accumulation
Goals
(e) Retirement
Planning
(f) Estate Planning
• Explain each key area of personal financial planning (Source: AdvisorNet Financial — Index. (2016). Advisornet.com. Retrieved 8 May 2016,
from http://www.advisornet.com/; World’s Largest Professional Network | LinkedIn. (2016). Linkedin.com. Retrieved 8 May 2016, from https://
www.linkedin.com/)
A. Financial Position
•
•
•
•
•
•
B.
•
•
•
•
Understanding of personal resources by checking an individual’s net worth and cash flow.
Net worth = assets less liabilities at a point in time
Cash flow = expected sources of income less expected expenses within a period (i.e. year)
Helps in determining the time frame to which personal goals can realistically be met.
May need to answer the following questions:
Do they have a clear understanding of their goals?
• How do they track their income, expenses, and net worth?
• What financial benefits do they get from their employer?
Adequate Protection
Analysis of protection needed for unforeseen risks.
Includes risks of liability, property, death, disability, health, and long-term care.
Some insurance plans enjoy some tax benefits.
May need to answer the following questions:
• What things can they not afford to lose?
• How will they take care of their dependents?
• How have they planned for financial risks such as disability, illness, long-term care, and death?
C. Tax Planning
• Management of when and how much taxes will be paid.
• Understanding possible tax incentives, deductions, rebates, etc. can have a significant impact on managing personal finances given the
magnitude of taxes paid by an individual.
• May need to answer the following questions:
• How do they manage their taxes?
• How do they plan the timing of income and deductions for tax purposes?
• Are they comfortable with the tax environment applicable to them?
D. Investment and Accumulation Goals
• Planning on wealth accumulation for large purchases such as house, educational expenses, investments for retirement, etc.
• May need to answer the following questions:
• What are their goals for wealth accumulation? (i.e. education, home, business, retirement comfort, etc.)
• How are their current investments performing to meet their goals?
• How much will they need? When will they need it?
E. Retirement Planning
• Understanding the cost of retirement.
• Analysis of cash flows to come up with investment plans that will meet the costs of retirement in the
future.
• May need to answer the following questions:
• How are they preparing for their retirement?
• How are their liabilities affecting their retirement objectives?
• Do they think they can maintain their standard of living during their retirement?
F. Estate Planning
• Planning for disposition of one’s assets after death.
• Estate taxes paid to the government are huge, so avoiding these taxes can significantly impact
one’s personal finances.
• May need to answer the following questions:
• How should their assets be distributed upon death?
• How will their intentions be carried out? (i.e. will, trust, power of attorney, etc.)
ENRICHMENT (10 MINUTES)
A. Share the four simple habits for personal finance success through this video: “Four Simple Habits
for Personal Finance Success” (Patzer, A. (2009). Four Simple Habits for Personal Finance Success -Mint Featured on ABC News Money Matters. YouTube. Retrieved 8 May 2016, from https://
www.youtube.com/watch?v=R0TznyjIZxA)
B. Emphasize to the learners that at their age, they should start internalizing these habits to imbibe in
them the good practices of personal finance. This will greatly help them avoid going broke.
C. Ask the learners to enumerate the four simple habits for personal finance success.
D. Encourage them to make these their habits as well.
Teacher Tips:
If you can’t access the video, refer to the list
below:
1. Save money – spend less than what they
earn.
2. Avoid debt – manage their credit and
debt wisely.
3. Invest – invest what they save.
4. Don’t lose it – protect their downside by
diversification or insurance.
EVALUATION (30 MINUTES)
Answer Key:
QUIZ
Part 1: C, E, A, B, D
Part 2: D, B, E, C, A
1. (EASY) Match the step in the personal financial planning process in column A with its description in
column B by writing the capital letter on the left side of column A (Source: Private Financial Design.
(2016). Privatefinancialdesign.com. Retrieved 8 May 2016, from http://privatefinancialdesign.com.)
Sample Matching Type Quiz
(A) Personal Financial Planning Process Step
(B) Description
___1
Data Gathering
A. Periodic review of the financial plan to evaluate
changing market conditions (i.e. economic
conditions, taxes, interest rates, etc.).
___2
Financial Plan Recommendation
B. Quantifying monetary objectives with definite
time frames. Prioritizing objectives.
___3
Plan Monitoring
C. Using surveys, questionnaires and interviews to
gather quantitative and qualitative information from
the individual.
___4
Objective Setting
D. Analysis of the individual’s financial position and
cash flows. Review of legal papers. Evaluation of
objectives vis-à-vis the client’s resources and
economic conditions.
___5
Data Analysis
E. Financial products will be proposed. At this point,
the individual can comment on the solutions
proposed.
2. (AVERAGE) Match the key area of personal financial planning in column A with its description in column B by writing the capital letter on the
left side of column A (Source: World’s Largest Professional Network | LinkedIn. (2016). Linkedin.com. Retrieved 8 May 2016, from https://
www.linkedin.com/).
Sample Matching Type Quiz
(A) Key Area of Personal Financial Planning
(B) Description
___1
Financial Position
A. Planning on wealth accumulation for large
purchases such as house, educational expenses,
investments for retirement, etc.
___2
Tax Planning
B. Management of when and how much taxes will
be paid.
___3
Retirement Planning
C. Analysis of protection needed for unforeseen
risks.
___4
Adequate Protection
D. Understanding of personal resources by checking
an individual’s net worth and cash flow.
___5
Investment and Accumulation Goals
E. Understanding the cost of retirement. Analysis of
cash flows to come up with investment plans that
will meet the costs of retirement in the future.
3. Essay: (DIFFICULT) Assume you are 18 years old and you were able to save PHP50,000. Given what you’ve learned on portfolio
diversification, how will you allocate your savings to bank time deposit and stocks (i.e. 100%-0%, 50%-50%, etc.)? Explain your answer.