BUSINESS FINANCE - 1ST QUARTER

-> FINANCE
 Study of how the players in a financial system acquire, spend, manage and make other sound financial decisions
concerning money and other financial resources
1. Money - Anything generally accepted as a means of paying for goods and services and for paying of debts or
liabilities

 FUNCTIONS OF MONEY
1. Medium of Exchange - Used to pay for items bought
2. Store of Value - Money can be saved
3. Standard of Value - Money becomes the standard for the things we buy

 CONCEPTS IN MAKING SOUND FINANCIAL DECISIONS

1. More value is preferred than less
2. The sooner the cash is received, the more valuable it is
3. Less risky assets are more valuable than riskier assets

 WHY STUDY FINANCE?

1. To be able to manage money or financial resources
2. To be able to make sound economic decisions
3. To be able to arrive at sound personal and business investment decisions
4. To be able to understand the career path available to finance professionals

 CAREERS IN FINANCE
1. Commerce and Industry
 Financial Analyst, Cash Management Analyst, Capital Expenditures Analyst, Loan Analyst, Bank Teller,
Investment Researcher, Insurance Agent, Real Estate Agent, Stock Broker
2. Government
 Administrative Clerk, Examiner
3. Academe
 Lecturer, Research Assistant

 THREE AREAS OF FINANCIAL ENVIRONMENT

1. Financial Institutions and Markets
 FINANCIAL INSTITUTIONS
 Organizations or intermediaries that help the financial system operate efficiently and transfer funds from
depositors and investors to individuals, business, and governments that seek to spend or invest the
funds in tangible assets
 FINANCIAL MARKET
 Broad term that describes any market place where trading of securities such as shares, bonds, and
currency occurs
2. Investments
 Focuses on the decisions made by the business or individuals as they choose securities for their
investment portfolios
 Involves the sale or marketing of securities, the analysis of securities, and the management of investment
risks through portfolio diversification
3. Financial Management
 Involves financial planning, asset management, and decisions to increase the value of the stakeholders
 Often attributed to business finance because it deals with decisions concerning cash flows, including both
inflows and cash flows
 FINANCIAL INSTRUMENTS AND SECURITIES
1. Financial Instruments
 Any physical or electronic document that has intrinsic monetary value or transfers value.
 Gives rise to an asset or liability depending upon which entity you are taking
*Gives rise to an asset on the side of the holder or investor, and a liability on the side of the issue
2. Securities
 Are primarily issued by corporations to generate cash or to acquire an asset
 Could either take the form of a debt security or an equity security
 Debt Security - Corporate Bonds; Liability Securities
 Equity Security - Corporate Shares

 FINANCIAL INSTITUTIONS OR INTERMEDIARES

1. Bank
 Supervised and regulated by the Banko Sentral ng Pilipinas (BSP), an establishment for the deposit,
custody, and issue of money, for making loans and for making the exchange of funds easier
 TYPES OF BANK
1. Universal and Commercial Bank
 Represents the largest single group, resource-wise of financial institutions in the Philippines
 Accept deposits and make loans to individuals and businesses
 Are authorized to engage in underwriting and other functions of investment houses, and to invest in
equities of non-allied undertakings
2. Thrift Banks
 Represents non-commercial banks composed of savings and mortgage banks, private development
banks, stock saving and loan associations and microfinance thrift banks
 Accumulate savings of depositors and invest them
 Also provide short term working capital and medium and long-term financing
3. Savings Banks
 Accept the savings of individuals and lend pooled savings to individuals primarily in the form of
mortgage loan
4. Rural and Cooperative Banks
 Represent the more popular type of banks in the rural communities
 To promote and expand the rural economy in an orderly and effective manner by providing the
people in the rural communities with basic financial services
2. Insurance Companies
 Supervised and regulated by the insurance commission, these are companies that offer insurance policies
to the public, either by selling directly to an individual or through another source
3. Lending Institutions
 Similar to non-banks with quasi-banking functions, they make loans available to individuals and businesses

 FINANCIAL MARKETS
 Physical or electronic media that facilitate the flow of funds among individuals, businesses, and governments
 TYPES OF FINANCIAL MARKETS
1. Money Markets
 Are the markets in which debt securities with maturities of one year or less are traded
2. Capital Markets
 Are the markets in which debt securities with maturities longer than one year and equity securities
are traded
3. Primary Markets
 Are the markets in which financial instruments and securities are initially offered or sold with the
proceeds going to the issuer
4. Secondary Markets
 Are markets in which previously issued instruments or securities are traded
 Proceeds go to the current seller which is not necessarily the issuing corporation
  Securities Market - Where previously issued debt and equity securities are sold and traded
 Mortgage Market - Where mortgage instruments or loans, backed by real property in the form
of buildings and houses, are originated and traded.
 Derivatives Market - Where derivative (future contracts) securities are purchased and sold
 Currency Exchange Market - Also called Foreign Exchange (FOREX) market where banks and
institutional traders buy and sell various currencies on behalf of businesses and other clients

-> ACCOUNTING CYCLE

1. Identifying and Analyzing the events to be recorded
2. Recording transactions to the journal
3. Posting journal entries to the ledger
4. Preparing the trial balance
5. Preparing the worksheet and adjusting entries
6. Preparing the financial statements
7. Journalizing and posting of adjusting entries
8. Journalizing and posting of closing entries
9. Preparing the post-closing journal trial balance
10. Journalizing and posting of reversing journal entries

-> ADJUSTING JOURNAL ENTRIES

 Entries used to update the accounts prior to the preparation of financial statements because they affect more than
one accounting period

 ACCOUNTS THAT NEED TO BE ADJUSTED

1. Accrued Expense (Accruals)
 The company received a Maynilad in the amount of 9,800 on Dec 26, 2016. The company intends to pay
on January 8, 2017

12/31/2016 DR CR
UTILITIES EXPENSE 9,800
UTILITIES PAYABLE 9,800

1/8/2017 DR CR
UTILITIES PAYABLE 9,800
CASH 9,800

2. Accrued Income (Accruals)

 A one year, 6% note receivable in the amount of P200,000 was received on June 1, 2016. The interest and
the principal are payable on maturity date
6/1/2016 DR CR
NOTES RECEIVABLE 200,000
SERVICE INCOME 200,000

12/31/2016 DR CR
INTEREST RECEIVABLE 7,000
INTEREST INCOME 7,000
3. Unearned Income (Deferrals)
 On August 1, Dr. Yee received P90,000for dental fees to be rendered in the next 6 months
 LIABILITY METHOD (Focuses on the amount of income)

8/1/2016 DR CR
CASH 90,000
UNEARNED SERVICE INCOME 90,000

12/31/2016 DR CR
UNEARNED SERVICE INCOME 75,000
SERVICE INCOME 75,000

 INCOME METHOD (Focuses on how much you owe)

8/1/2016 DR CR
CASH 90,000
SERVICE INCOME 90,000

12/31/2016 DR CR
SERVICE INCOME 15,000
UNEARNED SERVICE INCOME 15,000

 On December 1, 2016, Petit Co. Received P48,000 amount of advanced rentals for 6 months
 LIABILITY METHOD (Focuses on the amount of income)
12/1/16 DR CR
CASH 48,000
UNEARNED RENT INCOME 48,000

12/31/2016 DR CR
UNEARNED RENT INCOME 8,000
RENT INCOME 8,000

 INCOME METHOD (Focuses on how much you owe)

12/1/16 DR CR
CASH 48,000
RENT INCOME 48,000

12/31/2016 DR CR
RENT INCOME 40,000
UNEARNED RENT INCOME 40,000
4. Prepaid Expense (Deferrals)
 On April 30,2016, X Co. paid P36,000 worth of insurance premium for two years
 ASSET METHOD (Focuses on how much you used)
4/30/16 DR CR
PREPAID INSURANCE 36,000
CASH 36,000

12/31/16 DR CR
INSURANCE EXPENSE 12,000
PREPAID INSURANCE 12,000

 EXPENSE METHOD (Focuses on how much is left/did not use)

4/30/16 DR CR
INSURANCE EXPENSE 36,000
CASH 36,000

12/31/16 DR CR
PREPAID INSURANCE 24,000
INSURANCE EXPENSE 24,000

 On September 1,2016, X Co. Paid a one-year advance rent for P30,000.

 ASSET METHOD (Focuses on how much you used)
9/1/16 DR CR
PREPAID RENT 30,000
CASH 30,000

12/31/16 DR CR
RENT EXPENSE 10,000
PREPAID RENT 10,000

 EXPENSE METHOD (Focuses on how much is left/did not use)

9/1/16 DR CR
RENT EXPENSE 30,000
CASH 30,000

12/31/16 DR CR
PREPAID RENT 20,000
RENT EXPENSE 20,000
5. Depreciation Expense
 Allocation of plant asset cost over its estimated useful life
 Expense allotted for the wear and tear of property, plant and equipment (except land) due to passage of
time
 3 FACTORS CONSIDERED IN COMPUTATION
 Cost - Purchase price of the depreciable asset
 Salvage Value - Estimated value of the asset at the end of its useful life
 Estimated Useful Life - Estimation of the number of years, assets can be useful to the entity
 FORMULA FOR ANNUAL DEPRECIATION:
Cost - Salvage Value = Depreciable Cost
Depreciable cost/ Estimated Useful life = Annual Depreciation
---------------------------------------------------------------------------------------------------------------------
 Kothzki bought a laptop worth P44,000. After 4 years, the salvage value will be P5,000.’
44,000 - 5,000 = 39,000
39,000/4 = 9750
12/31/16 DR CR
DEPRECIATION EXPENSE 9,750
ACCUMULATED DEPRECIATION 9,750

 A building with an estimated useful life of 30 years finished construction on June 1, 2016. The
cost of the building is 4.8million with an estimated salvage value of P300,000.
4,800,000 - 300,000 = 4,500,000
4,500,000/30 = 150,000
150,000/12 = 12,500
12,500 x 7 months = 87,500
12/31/16 DR CR
DEPRECIATION EXPENSE 87,500
ACCUMULATED DEPRECIATION
87,500
6. Doubtful Accounts Expense
 Also called “Bad Debts Expense”
 Part of expenses
 Losses due to uncollectible accounts
 Equal to established percentage of uncollective accounts multiplied by the net credit sales during the
accounting period
* Net Credit Sales - Sales that were sold but they did not pay yet
---------------------------------------------------------------------------------------------------------------------
 “You are Great” records Doubtful Accounts Expense on December 31, the end of accounting calendar year.
Two percent of net credit sales are uncollectible. In 2017, net credit sales amount to P1,595,000.

12/31/17 DR CR
DOUBTFUL ACCOUNTS EXPENSE 31,900
ALLOWANCE FOR DOUBTFUL ACCOUNTS
31,900
12/31/17 DR CR
ALLOWANCE FOR DOUBTFUL ACCOUNTS 31,900
ACCOUNTS RECEIVABLE
31,900
-> TYPES OF MAJOR ACCOUNTS
1. Assets
 Company’s resources and things that the company owns
 CURRENT ASSETS
 Assets that can be realized (collected, sold, used up) one year after year-end date
 Cash - Money on hand, or in banks, and other items, considered, as medium of exchange in business
transactions
 Accounts receivable - Amounts due from customers arising from credit sales or credit services
 Notes receivable - Amounts due from clients supported by promissory notes
 Inventories - Assets held for resale
 Supplies - Items purchased by an enterprise which are unused as of the reporting date
 Prepaid expenses - Expenses paid in advance and are assets at the time of payment and become expenses
through the passage of time
 Accrued Income - Revenue earned but not yet collected
 Short term investment - Investments made by the company that are intended to be sold immediately
 NON-CURRENT ASSETS
 Assets that cannot be realized (collected, sold, use up) one year after year-end date
 Property, Plant and Equipment - Long-lived assets which have been acquired for use in operations
 Long term investments - Investments made by the company for long term-purposes
 Intangible Assets - Assets without a physical substance and the examples are franchise and copyright
 TANGIBLE ASSETS - Physical assets such as cash, supplies, furniture and fixtures
 INTANGIBLE ASSETS - Non-physical assets such as patent and trademarks
2. Liabilities
 Debts and obligations of the company to another entity and the amounts the company owes
 CURRENT LIABILITIES
 Liabilities that fall due (paid, recognized as revenue) within one year after year-end date
 Accounts Payable - Amounts due, or payable to, suppliers for goods purchased on account or for services
received on account
 Notes Payable - Amounts due to third parties supported by promissory notes
 Accrued Expenses - Expenses that are incurred but not yet paid and examples are salaries payable, and
taxes payable
 Unearned income - Cash collected in advance and the liability is the services to be performed or goods to
be delivered in the future
 NON-CURRENT LIABILITIES
 Liabilities that do not fall due (paid, recognized as revenue) within one year after year-end date
 Loans Payable - Amount payable to bank for the loan granted
 Mortgage Payable - Refers to a loan with collateral assets such as house and lot or vehicle
3. Owner’s Equity
 Residual interest of the owner from the business
 Amount leftover after liabilities are deducted from assets
 Reports the amounts invested into the company by the owners
 The cumulative net income of the company that has not been withdrawn or distributed to the owners
 Under Owner’s Equity are Capital, Drawings, Income and Expenses
 CAPITAL - Value of cash and other assets invested in the business by the owner of the business
 DRAWINGS - Account debited for assets withdrawn by the owner for personal use from the business
 INCOME - Increase in resources resulting from performance of service or selling of goods
 EXPENSES - Decrease in resources resulting from the operations of business