BALANCE SHEET

 Financial Statement lists assets from the current to long term.

ASSET TURNOVER RATIO

 Ratio that explains how efficiently companies use their assets to generate revenue.

FINANCE
 the activities of a firm attempting to raise capital
 the science of managing and creating money, administration and operations of institutions

FINANCIAL MANAGEMENT

 Refers to the efficient and effective management of money (funds) in such a manner as to accomplish the
objectives of the organization.

BRANCHES OF FINANCE
PERSONAL FINANCE

 It covers an individual’s or family units’ budget in monetary spending or investment

PUBLIC FINANCE

 The study of the role of the government in the economy in which assesses the government revenue and
government expenditure

CORPORATE FINANCE

 Concerned with maximizing shareholder value through long-term & short term financial planning and the
implementation of various strategies

FINANCIAL MARKET AND INSTITUTION

 FINANCIAL MARKET - any marketplace where trading of securities including equities, bonds, currencies and
derivatives occurs
 FINANCIAL INSTITUTION – company engaged in the business of dealing with monetary transactions

INVESTMENTS

 INVESTMENTS – asset or item that is purchased with the hope that it will generate income or will appreciate in
the future

FINANCIAL SERVICES

 FINANCIAL SEVICES – are the economics services provided by the finance industry

MANAGERIAL (BUSINESS) FINANCE

 MANAGERIAL FINANCE - the assessment of finance techniques to determine how they affect the business
internally and externallly

FINANCIAL MARKETS & FINANCIAL INSTITUTIONS

FINANCIAL MARKET – Is a market in which people and entities can trade financial securities including equities, bonds,
currencies and derivatives occurs

DIRECT FINANCING

 Refers to lending by ultimate borrowers with no intermediary.

 Under this method, the ssu gives money to the dsu in exchange for financial claims on the dsu. the claims issued
by the dsu are called direct claims

METHODS OF DIRECT FINANCING

PRIVATE PLACEMENT

 selling securities by private negotiation directly to insurance companies, commercial banks, pension funds &
wealthy individual investors
BROKER & DEALERS

Broker - is one who acts as an intermediary between buyers & sellers but does not take title of the securities traded.

Dealers – is one who is in the security business acting as a principal rather than an agent. He makes profits by selling this
inventory of securities at a price higher than the acquisition cost.

Investment Brokers / Investment Banker – a person who provides financial advice and who underwrites & distributes
new investment securities

INDIRECT FINANCING

 also called financial intermediation

 refers to lending by an ultimate lender to a financial intermediary that then relends to the ultimate borrower

CLASSIFICATION OF FINANCIAL MARKETS

 PRIMARY MARKET
- This is where the newly issued primary and secondary securities are traded for the first time.
 SECONDARY MARKET
- a market where the investors purchase securities or assets from the other investors, rather than from
issuing companies themselves
 MONEY MARKET
- financial market on which debt securities with the original maturity of one year or less are traded
 BOND MARKET
- is a financial market in where the participants are provided with the issuance and trading of debt securities

 STOCK MARKET
- financial market where the common and preferred stocks issued by the corporations are traded
 OVER-THE-COUNTER MARKET
- OTC transactions are carried out by direct inquiries and negotiations among the buyers and sellers through
the use of mail, telephone, telegraph, teletype, or other forms of communications (PSE)
 SPOT MARKET
- this is where securities are traded for immediate delivery & payment
 FOREIGN EXCHANGE MARKET
- Market where people buy & sell foreign currencies.

FINANCIAL INSTITUTION

 An institution that provides financial services for its clients or members.

FINANCIAL INTERMEDIARY

 is an entity that acts as the middlemen between two parties in a financial transaction, such as a commercial
banks, investment banks, mutual funds and pension funds

BANKS: it is a financial institution licensed to receive deposits and make loans. Banks may also provide financial services,
such as wealth management, currency exchange and safe deposit

CLASSIFICATION OF BANKS

CENTRAL BANKS

 The most important bank in country is the central banks.

 the main aim of a central bank is to maintain monetary and economic stability of a country

COMMERCIAL BANKS

 Financial institution that provides services, such as accepting deposits, giving business loans and auto loans,
mortgage lending and basic investments products like savings.

UNIVERSAL BANKS

 Universal banks are also authorized to engage in underwriting and other functions of investment house, and to
invest in equities of non-allied undertakings.
 UNDERWRITING -bearing the risk of not being able to sell a security at the established price by virtue of
purchasing the security for resale to the public
THRIFT BANKS

 engaged in accumulating savings of depositors and investing them.

 provide short-term working capital & medium- and long term financing businesses engaged in agriculture,
services, industry & housing.

INVESTMENT BANKS

 investment banks purchase & sell shares, bonds, & securities.

COOPERATIVE AND RURAL BANKS

 promote & expand the rural economy in an orderly and effective manner by providing the people in the rural
communities with basic financial services
 rural banks are privately owned and managed
 cooperative banks are organized/owned by cooperative or federation of cooperatives

INDUSTRIAL BANKS

 Industrial banks sell certificates that are labelled as investment shares and also accept customer deposits. they
then invest the proceeds in instalment loans for consumers and small businesses

CREDIT UNION

 Similar to banks, but they are not-for profit organization

INSURANCE COMPANIES

Insurance

 Is a contract in which one party (the "insured") pays money (called a premium) and the other party promises to
reimburse the first for certain types of losses (illness, property damage, or death) if they occur.

TYPES OF INSURANCE

 Life Insurance - is a protection against the loss of income that would result if the insured passed away.
 Health Insurance - is a type of insurance coverage that pays for medical and surgical expenses incurred by the
insured. Health insurance can reimburse the insured for expenses incurred from illness or injury, or pay the care
provider directly.
 Long-Term Disability Insurance - is an insurance policy that protects an employee from loss of income in the
event that he or she is unable to work due to illness, injury, or accident for a long period of time.
 Auto Insurance - is a policy purchased by vehicle owners to mitigate costs associated with getting into an auto
accident

Pre-need Companies

 Any corporation registered with the Commission and authorized/licensed to sell or offer to sell pre-need plans

What are Pre-need Plans?

 Contracts which provide for the performance of future service/s or payment of future monetary consideration at
the time of actual need

Offers three main products:

1.) Educational Plan

Educational Plans are classified into two:

 Traditional Educational Plan – upon maturity, pre-need firms pays the tuition of the beneficiary regardless of
amount (checks are paid to the school)

 Fix Valued Educational Plan – upon maturity, pre-need firms pays the beneficiary an agreed amount (checks are
paid to the plan holder)

2.) Pension Plan

 is designed as a tool to accumulate funds for your retirement it can actually be used to save for other goals
3.) Life Plan or Memorial Plan

 is a product that enables the plan holder pre-pay future memorial services at a lower cost today

Several points to consider between Insurance and Pre-need companies

Life Insurance

 Scope: Global Industry Worldwide

 Experience: Over 100+ years Worldwide and in the Philippines
 Purpose: Addresses financial needs (protection, savings, estate creation, wealth management, education
dividends, retirement cash value, asset value, illness and disability)
 Differences: Provides fixed guaranteed face amounts; and non-guaranteed dividends or fund values of
investments

 Regulation Body: Life Insurance companies are regulated by Insurance Commission has stringent rules for
approval and maintenance of a life insurance policy.

No record that a life insurance company did not pay/fulfil its obligation to a valid claim.

Pre-need

 Scope: Local Industry; Only in the Philippines

 Experience: Started only 1966 in the Philippines
 Purpose: Addresses specific financial needs, focusing on individual needs on specific time (college education,
retirement) or specific contingencies (death, illness, disability)
 Differences: Open-ended plans e.g. Promises to pay whatever tuition fee at a future time
 Regulation Body: Previously regulated by SEC but because of problems that arose, now being transferred and
regulated by the Insurance Commission; many Pre-need companies are distressed and cannot pay its promises

NOTE! FOCUS ON STUDYING THE FORMULAS

Profit and Loss Statement

Revenue XX
Cost od Good Sold (XX)
Gross Profit XX
OperatingExpense (XX)
Operating Profit XX
Other Revenue/Expense, Net (XX)
Earnings Before Interest and Taxes XX
Interest Expense (XX)
Earnings Before Taxes XX
Income Tax Expense (XX)
Net Income XX

3 Approach in Analysing Financial Statement

Horizontal Analysis/Trend Analysis

Vertical Analysis/Common Size Financial Statement

Ratio Analysis

I. LIQUIDITY RATIO
Ratios Formulas Indicator
Net Working 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 Indicating the ability to pay currently maturing
−
Capital 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 debts
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 Indicating the ability to pay currently maturing
Current Ratio
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 debts
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 Indicates the ability to pay current liabilities by the
or use if quick assets; more stringent measure of
Quick Ratio
𝐶𝑎𝑠ℎ + 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 + 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 liquidity
𝑇𝑜𝑡𝑎𝑙 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 NOTE! IDEAL CR IS 2:1
 II. LEVERAGE RATIO
Ratios Formulas Indicator

This ratio measures the proportion of total assets financed by

𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Debt Ratio total liabilities or money provided by creditors.
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 Indicates the proportion of the capital that are financed with
Debt-to-equity- debt (short and long term debt).
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
ratio

Interest
coverage ratio Provides information if a company has enough operating
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑠 𝑡𝑎𝑥𝑒𝑠 (𝐸𝐵𝐼𝑇)
or income to cover interest expense.
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
Times Interest
Earned

III. EFFICIENCY/ASSET MANAGEMENT

Ratios Formulas Indicator
Accounts
𝑆𝑎𝑙𝑒𝑠 Indicates the efficiency of collection of receivables. A high accounts
Receivables
𝐴𝑣𝑒. 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 receivable turnover means efficient management of receivables.
Turnover
Average 365 𝑑𝑎𝑦𝑠 Indicates the quickness in collecting trade receivable measures the
Collection Period 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 liquidity of receivables.
Inventory 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 𝑜𝑟 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠 Indicates the efficiency of acquiring and selling inventory; the
Turnover 𝐴𝑣𝑒. 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 number of times inventories are acquired and sold during the year.
Average Age of 365 𝑑𝑎𝑦𝑠
Indicates the number of days to sell inventory.
Inventory 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟

IV. PROFITABILITY
Ratios Formulas Indicator

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 Measures the amount of net income earned in relation to

Return on Equity
x 100 stockholder’s equity.
(ROE) 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦

Return on Asset 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 The ability of the company to generate income out of its
(ROA)
x 100 resources/assets.
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡
Shows how many pesos of gross profit is earned for every peso of
Gross Profit 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 sales. It provides information regarding the ability of a company
Margin 𝑆𝑎𝑙𝑒𝑠 to cover its manufacturing cost from its sales.

Shows how many pesos of operating profit is earned for every

Operating Profit 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 peso of sales. Measures the amount of income generated from
Margin 𝑆𝑎𝑙𝑒𝑠 the core business of a company.

How much net profit a company generates for every peso of sales
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
Net Profit Margin or revenues that it generates.
𝑆𝑎𝑙𝑒𝑠