1ST QUARTER FLASHCARDS
What is finance?
It is concerned with the sourcing and allocation of scarce resources, which includes money. In business, it is the function or area which is responsible for managing the aspect of the operations that deals with money matters.
What is financial management?
It covers the planning, organizing, leading, and controlling of all financial activities of an organization. It puts emphasis on managing the funds of an organization which includes day-to-day operations, investments, decisions, and financing of those investments.
3 Branches of Finance
- Public Finance - is a field of finance which deals with the collection of taxes and the budget allocation for programs
- Personal Finance - is a field of finance that gained popularity especially among the younger generation of income earners. It encompasses everything that pertains to personal financial planning.
- Corporate Finance - is primarily concerned with the management of all the financial activities of an enterprise or a business organization.
Finance vs Accounting
Finance - it involves the preparation of reports which are intended to aid internal users in decision-making ; the reports should emphasize sound decision-making to ensure good or better performance in the future
Accounting - keeps track of all the historical transactions of a business which will then be used in the preparation of reports intended for the use of external parties such as government, investors, and creditors.
It incorporates bookkeeping, projections, financial statements, and financing, which forms the base for attaining your goals through sound business decisions.
Financial Management in Business
They are involved in planning wherein they contribute in identifying goals and objectives, setting targets, and establishing control measures in order to monitor performance.
Financial Managers
They rely heavily on financial information prepared, processed, and analyzed by financial managers.
Decision-makers
It is generated by different departments. It also serves as an effective communication tool across departments.
Financial Information
What are Financial System?
- a set of institutions, such as banks, insurance companies, and stock exchanges, that permit the exchange of funds.
- also includes sets of rules and practices that borrowers and lenders use to decide which projects get financed, who finances projects, and the terms of financial deals.
They facilitate the flow of funds between savers and demanders of funds in an economy. They are organizations that handles financial transactions for individuals, groups, and other organizations
Financial Institution
Purpose: Deposits, loans; debit card; retirement plans, investment plans; Payment centers as they partner with commercial establishments.
Commercial Banks
They are also referred to as S&L or thrift banks. ; Dedicated to residential Mortgages.
Savings and Loans
They do not deal with the general public. ; May facilitate buying and selling of stocks.
Investment Banks
They provide individuals and organizations a way to manage risk. They operate on the principle of pooling of risks wherein premiums are collected from clients.
Insurance Companies
Earns through commission. ; Facilitates buying and selling of securities. ; Helps in managing one’s investment portfolio.
Brokerage
It is a collection of financial products owned by a single investor.
Investment Portfolio
Also called Financial Product, a document that signifies a legal or binding agreement between two parties. They have monetary values associated with them.
Financial Instrument
It is an account where an investor earns minimal interest.
Savings
Regular account vs Time-deposit account
- Regular account – one where the depositor is issued a Passbook.
- Time Deposit (long-term basis) – one where the depositor is issued a Time Deposit Certificate.
What do banks do with deposits?
They loan them to individuals and organizations that need funds.
What is a collateral?
A collateral is an asset that is attached to a loan. In case of default in payment, the lending institution may take ownership of the collateral in place of money.
It is a loan granted to other organizations by individuals and organizations with excess funds.
Bonds
When an investor has _______, this means that he/she has a financial instrument signifying ownership of stocks of a publicly-traded company or a bond issued by a government agency.
security
These are issued financial instruments or securities of the government to the public
Treasury Bills
These are bought by policyholders from insurance companies as protection of both life and property.
Insurance Products
These are invested in different financial products such as securities, stocks, and bonds.
Mutual Funds
It is a means for buying and selling of stocks, bonds, and other financial instruments. It is also a means where individuals and organizations who need funds find investors and lenders
Financial Market
Two types of Financial Market
MONEY MARKETS are the markets where transactions involving short term debt securities take place.
CAPITAL MARKETS are where transactions involving long term debt happen. The buying and selling of stocks issued by the corporations also take place in capital markets.
It is an entity that acts as the middleman between two parties in a financial transaction, such as a commercial bank, investment bank, mutual fund, or pension fund.
Financial Intermediaries
What are Financial Projections?
✓ help to see if a business is feasible, or more importantly sustainable.
✓ it is a great tool in making decisions - business expansion, improvements, modernization, or purchase of new pieces of machinery and equipment.
It is the grand plan of any organization wherein specific programs are created in support of the overall objectives
Strategic Plan
Elements included in the Strategic Plan:
- Vision Statement (aspires to be)
- Mission Statement (purpose)
- Corporate Objectives (outline the specific goals)
- Corporate Strategies (concrete programs)
- Departmental Plans and Programs (operational plans)
- Financial Forecasts and Budgets (tie everything together)
STRENGTHS, WEAKNESSES, OPPORTUNITIES, THREATS
- Strengths, weaknesses, opportunities, and threats are all factored in during the process of making financial projections.
- The key is for the firm to use its strengths to take advantage of opportunities, counter the threats, and do something to improve on its weaknesses.
FINANCIAL STATEMENTS
Income Statement, Balance Sheet, Statement of Cash Flows
Income Statement
➢ Revenues and Expenses over a certain period.
➢ Revenues – Expenses = Income or Net Profit (Loss)
➢ Operating Income or EBITDA = Sales (Revenues) – Operating Expenses
Balance Sheet
➢ Assets represent all investments
➢ Liabilities represent the enterprise’s debts
➢ Equity represents the investors’ investment in the stock or shares of the business.
➢ Balance Sheet Equation is: Assets = Liabilities + Equity
Statement of Cash Flows
➢ Cash received and Cash spent by the firm over a specified time
➢ Cash Inflows and Outflows from Operating, Investing, Financing Activities of the firm
➢ Results to; Increase/Decrease; Favorable/Not Favorable
These are projections of sales of a product or service expressed either in units or absolute monetary value.
Sales Forecast
What are projected financial statements?
It is a financial projection that presents the entity’s expected financial positions, results of operation, and cash flows.
All Financial Statement projections begin with _________ _______.
projected sales
Factors considered in preparing projected financial statements:
a. market conditions, b. economy, c. investment climate, d. the competitive position of the firm in the industry
Budget
✓ It is a statement of projected sales, expenses, income, and other financial transactions for the coming period.
✓ It is a firm’s financial plan.
It is a detailed projection of all income and expenses for a given period of time, which is usually one year.
Operating Budget
It indicates the number of units a firm expects to sell. The determinant of all other budgets included in the master budget.
Sales Budget
Production Budget
Expected Production Volume = Planned Sales + Desired Ending Inventory - Beginning Inventory
It is a summary of the quantity of direct materials required to meet production requirements.
Direct Materials Budget
It estimates or projections on how much to produce (production budget) will be used to come up with the estimates for the labor requirements and how much to budget for the direct labor cost.
Direct Labor Budget
These are manufacturing expenses other than direct materials and direct labor.
Factory Overhead Budget
These are necessary for constructing budgeted income statement and budgeted balance sheet
Ending Inventory Budget
These are operating costs that are not associated with production. These are operating costs incurred in selling and managing the business.
Selling and Administrative Expense Budget
It shows the impact of the planned operations and capital investments on a firm’s assets, liabilities, and owner’s equity. It also shows the flow of cash and other funds in the business.
Financial Budget
Financial Budget includes the following:
✓ Cash budget - essential to sustain operations of the business.
- it must be managed well, shortage of cash can cause the firm to lose a lot of opportunities, on the other hand, idle cash could mean inefficient use of company resources.
- helps the firm manage cash inflow and outflow.
✓ Balance sheet
It is a document that contains assumptions made by those involved in financial planning, a review of past financial performance and trends in the industry, and projected financial statements and ratios.
Financial plan
They ensure the proper timing of the inflow and outflow of funds. They make sure that amount of cash held is neither too little.
Finance Managers
A firm’s working capital is its…
current assets
Working capital is essential as firms are required to:
▪ Pay Bills
▪ Purchase Supplies
▪ Provide funding for contingencies such as breakdown of equipment.
The working capital of a firm normally consists of the following:
- Cash on Hand and in Bank
- Cash Equivalents (Checks for encashment, Marketable Securities)
- Accounts Receivable
- Inventories and Supplies
- Prepaid Expenses and Deferred Items
A firm uses working capital for the following purposes:
- Replenishment of Inventories – keeping the amount of the inventory that will suffice in supporting the production of a firm.
- Provision for Operating Expenses – firm’s working capital will enable them to pay short term obligations and support programs for its development.
- Support for Credit Sales – Not all of the firm’s sales will be in cash. Inventory and supplies will have to be supplied and expenses will have to be paid.
- Provision for Contingencies – In any business, there are unforeseen events or occurrences that are beyond anyone’s control.
Net Working Capital formula
Net Working Capital = Current Asset – (Payables+ Accruals)
fixed, regular or permanent working capital vs. variable or fluctuating working capital
Fixed working capital refers to the portion of working capital requirements that are constantly needed by the firm. The fluctuating portion of working capital results from factors like – seasonality, changes in demand, and inflation, that cause the requirements of the firm to change.
Quantity Discount
reduces the cost of raw materials, supplies and other types of inventories.
Investment Inventory
average amount of investment.
Carrying Costs
cost associated with the holding of inventory (warehousing, insurance, taxes, and opportunity cost).
Ordering Costs
cost associated with the placement and receipt of orders (Shipping and Administrative cost).
Economic Order Quantity (EOQ)
helps finance managers in determining the optimal level of inventory every time an order is placed.
Reorder Point
determines the time when to place an order.
ABC Warehousing and Inventory Control
under this system, all items in the warehouse are classified into three categories: A, B, C. Items are classified from the most important to the least important.
First in, First out Inventory Control (FIFO)
system wherein the oldest stock is used first.
Just in Time Inventory Management System
it is used by companies to help them ensure efficiency and reduce waste that results from spoilage and obsolescence.
