Department of Education

REGION IX
Zamboanga Peninsula
Aurora Pioneers Memorial College
(FORMERLY: Cebuano Barracks Institute)
Bonifacio St. Pob. Aurora Zamboanga Del Sur
Tel. No. : (062) 331-2332

M ODULE IN BASIC FINANCE

COURSE INFORMATION
Couse Course
Number ABM301 Title Basic Finance
Course Joan Mae A. Villegas
Code Instructor
Course Email Consultation
Credit 3 units Address Hours
School Class Daily
Year 2020-2021 Schedule Room
COURSE DESCRIPTION

This is a three unit course encompasses the basic course of Finance. This will focus on what business
firms should do to achieve their financial goal, which optimize the owner’s wealth. The course will include
discussions on the finance function, operational environment of finance, key concepts such as time value
of money, risk, and return, tools of financial analysis and planning, and utilization and acquisition of funds.

COURSE LEARNING OUTCOMES

At the end of the course, students will be able to:

1. Describe and interpret the whole scope of a simple financial management.
2. Plan their own way of handling business firms in order to achieve financial goals by
optimizing their wealth.
3. Interpret financial statements which gives cue to a business’ financial status.
4. Classify financial system through institutions/intermediatries as sources of business
capitall.
5. Analyze the government’s role through monetary policy that governs financial
institutions/intermediaries.

TEACHING STRATEGIES/DELIVERY MODES

Blended (Asynchronous
Online (Hybrid Model) Model) Offline (Flex Model)

Online teleconferencing There will be no classroom Classroom lectures and

lecture/discussion is meet-ups. discussions meet-ups is
conducted only once a week conducting only once a week
every Friday. However, web content every Monday.
resources are provided at
regular intervals.
Self-directed learning and/or A self-directed learning and/or
home assignments are to be home assignments are to be
spent with allocated two (2) Assessment and evaluation spent with allocated two (2)
hours per week. will be done at regular hours per week.
intervals depending on the
promptness of the compliance
of students to every
The remaining two (2) hours assignments given. The remaining two (2) hours
per week is to be devoted in per week is to be devoted in
checking the materials checking the materials
submitted/sent by the students submitted/sent by the students
and giving feedbacks, and giving feedbacks,
discussions and clarifications. discussions and clarifications.

GRADING SYSTEM
Blended Offline (Flex
Description Online (Hybrid Model) (Asynchronous Model)
Model)

Attendance/Class Participation
Quizzes/Assignments/Oral 10% 10% 10%
Presentation/Reporting
Projects/Portfolio/Reports/ 30% 30% 30%
Research/FS/etc.
Major Examinations 20% 20% 20%
Prelim
Midterm 10% 10% 10%
Semi-Final 10% 10% 10%
Final 10% 10% 10%
TOTAL 10% 10% 10%
100% 100% 100%

COURSE OUTLINE
Preliminary Term Mid Term Semi-Final Term Final Term
(21 hours)
W eek 4-5 W eek 6-7 W eek 8-9
W eek 1-3
Finance of The Interest
Orientation/ Accountin
Introduction of g Financial
the course, Environment Financial Assets
source book, authors, Understanding
methods, Financial Statements Financial
requirements,
schedules of Financial System
classes Statements: Tools for
and examination and Decision- Making Financial
grading Intermediation
system/Overview
The Concept and
Development

of Money
Introduction
to Finance References:
Introduction to Norman Dy
Managerial Finance Lopez-Mariano,
References: Ph.D.
References: Norman Dy References:
Norman Dy Lopez- Lopez-Mariano, Norman Dy
Mariano, Ph.D. Ph.D. Lopez-Mariano,
Ph.D.
P RELIMINARY
T OPIC (WEEK 1-3)

 The Concept and Development of Money

 Introduction to Finance
 Introduction to Managerial Finance

Abstract:
These chapters focus on the study concept and development of money and introduction to managerial
finance.

Lesson Objectives:
 Discuss the concept of money and its origin
 Explain the system of coinage as an important stage in the history and development of money
 Differentiate the different types of money and apply their utility in modern-day finance
 Analyze the role of credit cards/plastic money being used in today’s world.
 Elaborate on the functions of money and how it serves men.
Differentiate a check from a draft and discuss the parties involved in them

 Define finance and rationalize the importance of finance in the business world
 Discuss the different types of business according to nature, purpose, and ownership
 Elaborate on the advantages and disadvantages of the different types of business according to ownership
Explain the difference between the different classes of stocks

 Explain the meaning of the different areas of finance

 Discuss the meaning of management and appreciate its importance in business
 Relate finance and management as they operate in the business world
 Illustrate the role of financial management in business
Explain the different career opportunities open to graduates of finance

Module Guide:

1. Study topic content presented below.

2. Answer the exercises presented after the topic content below.
3. Do not write anything on this module.
4. Write your answers on a separate sheets.
5. For online activities, send it to me through my gmail account:
[email protected].
6. For questions or clarrifications you can contact me through my gmail account or
Messenger account : Joan Mae Angot-Villegas.
7. Contact No.: 09106959298

CHAPTER 1

THE CONCEPT AND DEVELOPMENT OF MONEY

 This chapter will discuss the evolution of money, starting with barter in the early years, to the use of
different forms of money—from shells to metals, until coinage came into being followed by paper money.

Origin of the Word ‘’Money’’

The development of the concept of money begun with the problem of men with regard to the medium of
exchange. Money was derived from the Latin word moneta, surname of the Roman goddess Juno. Moneta
refers to a mint or a place for coining money. According to etymonline.com, it also comes from the Old French
monoie and the Modern French monnaie, meaning money, coin, currency, or change. Relative to a tribute of
Juno Moneta as the guardian of the finances of the Roman Empire, it could also have been the Latin monere,
meaning advise or warn. In ancient Greece, the word moneta meant advisor, one who warns, or makes
people remember.
Another term for money is ‘’bucks’’, which came from the word ‘’buckins’’,meaning deer hides, a
medium of exchange used by settlers during the early times.

Money Definition

Money is defined by Meriam-Webster as something generally accepted as a medium of exchange, a

measure of value, or a means of payment. Money is commonly defined anything authorized by law to be
generally accepted as legal tender, as a medium of exchange, and a standard of value in payment of goods and
services without reference to the general standing of the person who offers it. In short, money is the lawful
token used in our society to pay for goods, services, and debt.
From the foregoing definition of money, it can be noted that money is:
1. Medium of exchange
2. Legal tender
3. Measure of value
4. Means of payment
5. Standard of value

Barter
This is defined as the exchange of things for other things. This was the system used by men to get the
goods they wanted in exchange of what they had before money was developed, It is the exchange of a good
service for another good or service.
As a medium of exchange during the early times, people used items such as:
 Cowrie shell – which had only agreed upon or symbolic worth but with no intrinsic value, this was first
used in China during the Shang Dynasty. It is the shell of a mollusk in Indua and Africa used cowries as
the form of currency.
 Wampum – used widely in Americans and by the North American Indians in the 16 th century, an oblong
shaped clamshell sawed into beads, polished and strung together and used as ornament. This is an Indian
word which means ‘’white’’ the color of the beads.
 Cattle – are probably the oldest of all forms of money as domestican of animals tended to precede the
cultivation of crops. The earliest evidence of of banking is found in Mesopotamia when temples were
used to store grains and other valuables used in trade.
 Metals – were also used commodity money because of their intrinsic value.

Coinage
This is the conversion of metals to coins. The place where metals are made into coins is known as mint.
A coin is an ingot of metal, the weight and fineness of which are certified by the integrity of the design in its
surface and the power of the issuing authority. Only the government, specifically the central bank of the
country, is given the power to mint coins and print bills or paper money. In the Philippines, Bangko Sentral ng
Pilipinas, which has its own mint, is the only government agency solely vested with the power to mint coins.
Kinds of Coinage
1. Gratuitous Coinage – a system whereby metals may be brought to the government mint and converted
into standard money without any charge for minting except for the delay involved in the process.
2. Brassage – this is the lind of coinage where fee charged by the government to mint metals into coin is
just sufficient to cover the cost of minting. The government does not earn anything.
3. Seignorage – this is the kind of coinage where the fee charged by the government is more than the cost
of minting so the government earns a profit.
4. Limited Coinage – this type of coinage is one wherein the government converts metals into coins only at
its option.
Paper Money
Other than paper, plastic/polymer is also used by some countries as currency. While it is more durable, it
has a permanent crease when folded and sticks together when wet.
Plastic Money
This is hard plastic card used for exchange transactions. They can be;
a. Credit Card – used like money, but with credit limits and accompanying charges. Amounts charged to
the card are paid at a later date.
b. Debit Card – also used like money, but the amount used is immediately deducted from the account of
the holder held with the bank issuing the card.
c. Prepaid Cash Card – purchased from stores or financial institutions. It can be used like money, but the
card can only be used up to the amount paid upon purchase. This includes store cards, gift cards and gift
certificates.
Barter Exchange
This is a network of business owners who trade products and services to increase sales and profits
online. Barter exchange members are given a plastic card called barter card that is credited with barter money or
trade points plus a line of credit which the members use to purchase from the exchange.
Money has Several Functions which include:
a. Medium of exchange – used to purchase goods and services
b. Standard value – used as the common denominator or basis for comparison of goods and services
c. Store of value – to be used in the future
d. Means of deferred payment – to be used in the future in payment of debt or other obligation
e. Conveyance – used to transfer ownership from seller to buyer
Forms of Money include:
a. Commodity money – cowries, wampuns, cattle, and other items used as a medium of exchange
b. Currency – bills and coins issued by the government asa medium of exchange
c. Check –
1. Personal check – issued by individuals with checking/ current account in a bank
2. Business Check – issued by businesses with checking/current account in a bank
3. Cashier’s/manager’s check – purchased from a bank
4. Certified check – personal or business check certified by the bank that funds are available to
pay the same
5. Bank Draft – also purchased from the bank, like cashier’s or management check; it can be:
a. Sight or demand draft- to be paid upon presentation
b. Time draft – to be paid at a future date
c. Traveler’s check – can be purchased from certain stores or financial institutions
generally used by travelers; and
d. Money order – can be purchased from the post office, certain stores or financial
institutions than can be used like money for payment of any obligation
Warehouse Receipts Act
Act No. 2137 was enacted to a full and complete treatise on the subject. It all covers warehouses,
whether public or private, bonded or not. A warehouse receipt is adocument of title to goods used as roof of
possession or control of the goods covered by the receipt and an authorization to the processor or the warehouse
receipt to transfer or receive either by endorsement or by delivery of goods represented by such warehouse
receipt. The Warehouse Receipt System has a long history of use in trade and finance.
Other Classifications of Money;
a. Fiat/fiduciary money – issued by the government without any gold/precious metal or dollar backup
and in which face value is higher than the material of which it is made of ; also called fiat because
money is given value by a government edict o decree as the medium of exchange, which is legal
tender
b. Representative Money – issued by the government backed up either by precious metal or dollar

Characteristics of a Good Medium of Exchange;

a. Scarcity – hard to find or rare that makes it valuable
b. Divisibility – quality of being broken down into small units
c. Portability – ease in handling or carrying
d. Durability – quality of lasting long
Activity 1
1. Explain barter and how it works.
2. Is barter still applicable in today’s modern world? Discuss.
3. Define Money.
4. Is a check money? Discuss.
5. Which of the different types of money is the most advantageous? Why? (coin, paper money, plastic
money or cards)
6. Discuss the origin of the word money.
7. Discuss the functions of money.
8. Discuss the forms of money.
9. What characteristics will you look for a good medium of exchange?
10. What are the advantages of using barter exchange?
11. How does warehouse receipt help businessmen?
12. Discuss the different types of check.
13. Discuss the different types of draft.
14. What is the difference between a check and a draft?
15. What is coin? What is coinage? Why should coinage and printing bills be done by the government
solely?
16. What are the kinds of coinage? Discuss.
17. Where did paper money originate? Discuss how it developed to the paper money used today.
18. What are the disadvantages of plastic money?
19. Discuss the pros and cons of the use of credit card.
20. Who are the parties of check?
21. Who are the parties of a traveler’s check? Discuss.
22. Discuss the benefits of the Warehouse Receipt System.
23. Discuss how barter exchange works.
Activity 2.
Find someone with a credit card and ask for a copy of the credit card statement. Note the details on the credit
card, including the back, and ask him or her what they mean. Note the details in the statement and highlight the
charges on the card. Ask him or her its advantages and disadvantages and its benefits and charges. In gathering
informations will be done through facebook messenger. All the details you’ve gathered will be discussed and
presented through a video presentation and will be sent to the gmail account of the instructor
[email protected]
 CHAPTER 2
INTRODUCTION TO FINANCE

Finance
This is the efficient acquisition, allocation, and utilization of funds.
Finance Functions entail the:
a. Allocation of available funds
b. Acquisition of needed funds
c. Utilization of funds to achieve set goals
Fiannace can be classified into:
a. For of negotiations:
a. Direct Finance- involves direct borrowing, direct negotiation netween borrower and lender
b. Indirect Finance – involves the use of financial intermediaries (financial institutions acting as
middlemen),hence, also called financial intermediation
b.User
a. Public Finance – involves the government, deals with sources and uses of funds of the
government
b. Private finance – involves individuals and entities.
1. Personal finance – concerned with individuals and households
2. Finance of non-profit organizations – concerned with charitable organizations which
are not concerned with profit-making
3. Business Finance- concerned with entities and individuals engaged in business.
Productivity is efficiency plus effectiveness. Efficiency is accomplishing something at the least cost. E
ffectiveness is getting things done at attaining objectives.
Business Organizations are Classified as to:
a. Nature/Purpose
 a. Service – rendering services as catered in barber shops, spa and massage clinics,
dental/,medical clinics, laundry shops among others
b. Trading/Merchandising – buying and selling goods like sari-sari store, hardware stores,
construction supply stores, department stores among others
c. Manufacturing – converting raw materials into finished products like in shoes and bags
manufacturing, furniture manufacturing, chicharon or native delicacies manufacturing. They
buy lumber to be converted into furniture, leather into bags and shoes, among others
d. Banking and Finance – deals with institutions involved in lending and borrowing
e. Mining/Extractive Industries – extract natural resources like the gold mining companies,
gravel and sand quarrying
f. Construction companies – engaged in road building, house building
g. Genetic Industries – involved in the production, multiplication and reproduction of certain
species of plants and animals like agriculture
b. Ownership
a. Sole proprietorship – owned by only one person
b. Partnership – association of two or more partners who agreed to contribute money,
property, or industry to a common fund for the purpose of dividing the profits among
themselves
c. Corporation – an artificial being created by operations of law, having the right of succession
and the powers, attributes, and properties expressly authorized by law or incident to its
existence
d. Cooperative – organization established by members to provide themselves with goods and
services or to produce and dispose of the products of their labor
Advantages of a sole proprietorship include:
a. Ease of formation
b. Minimum capitalizations
c. Sole decision maker
d. Ease of termination
Disadvantages of a sole proprietorship include:
a. Unlimited liability
b. Limited access to capital
c. Limited skills, talents, and capabilities
d. Inability to attract or retain good employees
e. Limited term of existence
f. Difficulty in measuring success
g. Personal problems may hinder operation/success

Essential requisites of a Partnership

a. Contract of partnership
b. Two or more persons with legal capacity to enter into a contract
c. Valuable contribution to a common fund
d. Intention to divide the profits between or among the partners
e. Lawful purposes
Characteristics of a Partnership
a. Mutual agency – every partner is an agent of the partnership, their actions so long as it is within the
scope of the partnership, bind the partnership
b. Voluntary association – being a partner is voluntary. Each partner is etitled to choose his partners
c. Based on contract- there must be an agreement which can be oral or written that will bind the
partnership
d. Limited Life – the partnership is dissolved once a partner withdraws, dies or becomes bankrupt,
becomes legally incapacitated or a new partner is admitted into a partnership
e. Unlimited liability – a general partner and an industrial partner are liable to partnership debts up to
the extent of their personal assets after partnership resources have been exhausted.
f. Division of profits/losses- profits and losses are divided between among partners in accordance
with their agreement, or in the absence of such an agreement, in accordance with their capital
balances.
g. Co-ownership of contributed assets- partners become co-owners in assets contributed by any
partner to the partnership
Advantages of a partnership include:
a. Ease of formation
b. Allows pooling of financial resources
c. Allows pooling of skills, expertise, and experience of partners
d. Less government control, supervision, and intervention than corporations
Disadvantages of a partnership include:
a. Limited life
b. Unlimited liability
c. Mutual agency
The written agreement of partnership often filed with the Securities and Exchange Commision is called
the Articles of Co-Partnership
Types of partnerships as to liability of partners are;
1. General partnership – all partners are general partners
2. Limited partnership – there is at least one limited partner and at least one general partner

Types of partners as to liability are:

a. General partner – liable for partnership debts up to the extent of their personal assets
b. Limited partner- liable for partnership debts up to the extent of their interest in the partnership.
Creditors cannot run after their personal assets.
Types of partners as to investment in the partnership are:
a. Capitalist partner- a partner who contributes money or non-cash assets in the partnership
b. Industrial partner – a partner who contributes skill or industry in the partnership
c. Capitalist-industrial partner – a partner who contributes cash plus other assets and industry or skill
in the partnership
Characteristics of a corporation include:
a. Separate legal existence
b. Created by operation of law
c. Transferable units of ownership
d. Limited liability of stockholders
e. Continuity of existence
f. Centralized management by the Board of Directors
Advantages of a Corporation include:
a. Artificial being
b. Limited liability of shareholders
c. Transferability of shares
d. Greater ability to acquire funding
Parties to a Corporation are:
a. Corporators – stockholders or members including incorporators
b. Incorporators – founders of the corporation; are signatories to the Articles of Incorporation;must be
at least five but not more than fifteen members;need to be natural persons;partnerships and
corporations cannot be incorporators;need to own at least one share of stock
c. Stockholders – owners of shares of stock in a corporation;can be natural or artificial persons
d. Members- corporators of a non-stock corporation, the counterpart of shareholders/stockholders of a
stock corporation
e. Promoters – persons who undertake to form and organize a corporation bringing together the
incorporators or persons interested in the corporation
f. Board of directors – stockholders voted into the position as a director;promulgate policies to be
executed by the officers;should be at least five but not more than fifteen members
g. Corporate officers – are those elected by the Board of Directors to run the corporation;include the
president, the vice presidents in charge of specific divisions of the company, the corporate
secretary, the treasurer, among others
There are three steps in the Organization of the Corporation. These are:
a. Promotion
 b. Incorporation
c. Formal organization and commencement of business operation

The Articles of Incorporation is called the charter of the corporation. It is the document that establishes the
formal organization of the corporation. It is the counterpart of the Articles of Co-Partnership for the
partnership. These two documents correspond to the birth certificate of a natural person.
The By-laws of a corporation contain the rules and regulations for the internal government of the
corporation and for the government of the corporate officers and stockholders or members.

Corporations may be classified as to:

a. Nature
a. Public – for the government of a portion of the government or state. They can be called local
government (barangay), municipal government, provincial government, and national
government.
b. Private – all corporations other than government are private. They are composed of entities
engaged in business formed as corporations.
b. Purpose (private Corporations)
a. For profit
b. Non-profit
c. Charitable
i. Ecclesial/religious
ii. Eleemosynary/public charity
d.Foundation
c. Others
a. quasi-public
b.government-owned or government controlled
d. Membership
a. stock corporations
b. non-stock corporations

e.State of incorporation
a. domestic
b. foreign
a. resident
b. non-resident foreign
c. multinational
f. number of persons composing the corporation
a. corporation sole
b. corporation aggregate
g. legal right to corporate existence
a. de jure
b. de facto
h. relation to other corporations
a. parent or holding company
b. subsidiary or sister company
Classes of shares/kinds of stocks can be classified as to:
 a. Value on the stock certificates
a. Par value shares
b. No-par value shares
a. With stated value
b. Without stated value
b.Rights to dividends
a. common or ordinary shares
b.preference or preferred shares
a. as to assets
b. as to dividends
a. cumulative
b. non-cumulative
c.participating
d.non-participating

Activity 1
1. What is finance? Discuss the origin of the word.
2. Discuss the role of finance in the business world.
3. What are the different classifications of fiannce? Explain each.
4. What are the types of business organization as to nature or purpose? Differentiate each.
5. What are types of business organization as to ownership? Differentiate each.
6. Discuss the advantages and disadvantages of a sole proprietorship.
7. Discuss the advantages and disadvantages of a partnership.
8. Discuss the advantages and disadvantages of corporation.
9. Discuss the advantages and disadvantages of a cooperative.
10. How do you form a sole proprietorship?
11. How do you form a partnership?
12. How do you form a corporation?
13. How do you form a cooperative?
14. What are the different types of partnership? Discuss each.
15. What are the different types of partners? Discuss each.
16. What are the different types of corporations? Discuss each.
17. If you were to put up a business, what type of business as to nature and ownership would you
form? Why?
18. Discuss the contents of the Articles of Co-Partnership.
19. Discuss the contents of the Articles of Incorporation.
20. Discuss the contents of the corporate by-laws.
21. Discuss the contents of the Certificate of Registration of a Cooperative.
22. What is capital stock? What are the different classes of stocks? Discuss each.
Activity 2
Interview a small owner and ask him/her about how he/she started his/her business, how the business
is doing, what he/she did to make the business succeed, and ask for pointers for aspiring entrepreneurs. The
same goes with other group as follows:
a. A service owner business
b. A trading business owner
c. A small manufacturing business owner

CHAPTER 3
INTRODUCTION TO MANAGERIAL FINANCE
Finance consists of three interrelated areas. These are:
a. Managerial economics
b. Investment
c. Money and capital markets
Management is concerned with utilizing the scarce resources of the organization to maximize
the attainment of the organization’s goals and objectives. It has four basic components:
a. Achievement of goals and objectives
b. Working with and through people
c. Maximization of limited resources by achieving productivity through efficiency and
effectiveness
d. Coping with a changing environment
The 8Ms of management are:
Money
a. Materials
b. Methods
c. Machine
d. Market
e. Moment
f. Media
Productivity is the output-input ratio (output/input) within a time period taking into consideration quality.
Productivity = efficiency + effectiveness. Efficiency is the quality of attaining desired objectives with the
least amount of resources. Effectiveness is the attainment of goals on a continuing basis.
Financial Management, also called managerial finance, is concerned with management of funds. It
is the efficient and effective allocation, acquisition, and utilization of funds. It aims to maximize:
a. Wealth
b. The value of the company
c. The value of stakeholders
Goals of the Fianancial Manager Include:
a. Acquisition of funds with the least cost from the right sources at the right time
b. Effective cash management
c. Effective working capital management
d. Effective inventory management
e. Effective investment decisions
f. Proper asset selection
g. Proper risk management
Tools of the Fianncial Manager Include:
 a. Financial policy-making – selecting financial goals, developing financial policies, and
designing the finance organization
b. Financial planning and budgeting – preparing plans to attain set goals, preparing forecasts
and budgets, and comparing actual performance with budgets to determine variances and
determine actions needed to correct such variances
c. Financial analysis – evaluating results of operation and financial condition, investment
options, and other finance-related activities
Careers in Finance include:
a. Managerial finance
b. Investment;and
a. Sales
b. Analysis of individual securities
c. Portfolio management
c. Money and capital markets

Activity 1
1. What is finance? Why is it important?
2. What are the areas of finance? Discuss each.
3. Define Management. How is it related to finance?
4. What are the 8Ms of management? Discuss each.
5. Which do you think is the most important resource? Why?
6. Define financial management. Discuss the basic functions of the financial manager.
7. What are the goals of financial managers? Discuss.
8. What are the different tools of financial managers? Discuss.
9. Explain the different careers open to graduates of finance.
10. If you were a finance graduate, which career is more attractive to you? Why?

Activity 2
Interview a finance manager of a small retail business.
Ask the manager about :
a. His career
b. His job – how he deals with daily problems, how he helps the company to succeed,
how he meets the company’s objectives, what tools he uses, what his goals are as a
finance manager, among others
c. What he thinks lies ahead for the Philippines Economy
Note: This activity will be done through online.

M ID-TERM

T OPIC (WEEK 4-5)

 Finance and Accounting

 Understanding Financial Statements
 Financial Statements: Tools for Decision-Making

Abstract:
These chapters focus on the study of finance and accounting and understanding its financial statements.

Lesson Objectives:
 Discuss the purpose of different financial statement
  Illustrate how to prepare the different financial statements Appreciate the importance of financial
analysis as an analytical process
 Discuss the three basic decision areas dealt with by managers and the items involved in these decisions
 Explain the steps in analyzing financial statements Appreciate the importance of financial analysis as an
analytical process
 Discuss the three basic decision areas dealt with by managers and the items involved in these decisions.
 Explain the steps in analyzing financial statements.
 Differentiate horizontal analysis from vertical analysis and appreciate their importance in business
decision-making.
 Demonstrate how to prepare a common size balance sheet and income statement and analyze the
changes therein
 Explain the different profitability ratios and their importance in decision-making and solve problems
using them
o Discuss the limitations of financial statements and financial statement analysis.

e Guide:

opic content presented below.

the exercises presented after the topic content below. 3.Do not write anything on this module.
our answers on a separate sheets.
ne activities, send it to me through my gmail account: .
stions or clarrifications you can contact me through my gmail account or Messenger account : Lorisa Kupa Ceniza.

CHAPTER 4
FINANCE AND ACCOUNTING
 Finance and accounting are interrelated –both involve funds.

While finance is concerned with acquisition, allocation, and utilization of funds, accounting is
concerned with recording what is done with funds to earn profit and maintain stability and liquidity of
firms. Accounting is an information system providing quantitative financial information to assist those
concerned with decision-making. Such provision of financial information is a service activity in itself.
Similarly, it is an art because it follows certain requirements for recording.
The financial statements of a company include the income statement which shows the results of
operation (profit or loss); the balance sheet or statement of financial condition or position, detailing the
assets, liabilities, and owners/partners/stockholders equity; the statement of changes in
owner’s/partners/stockholders equity, detailing the investment at the beginning of the period, any
additional investments made by the owners and the profit or loss of the business for the period; and the
cash flow statement or statement of sources and uses of cash/funds, detailing where cash/funds came
from and where they were spent.

Financial Accounting is the branch of accounting which deals with the recording of business transaction
with the basic purpose of preparing the financial statements.
Managerial Accounting is the branch of accounting which deals with providing internal users, primarily
the managers, with the financial information they need to be able to perform their duties efficiently and
make the necessary decisions to improve operation.
Financial Management is the branch of management entrusted with managing the financial resources
of the firm to attain organizational objectives.
Financial accounting, managerial accounting, and financial accounting and financial management
are all interrelated and interdependent helping those entrusted with governance in the effective
discharge of their responsibilities.

Activity
1
1. What is finance?
2. What is accounting?
3. Discuss the relationship between finance and accounting.
4. What are the financial statements produced by accounting? Discuss each.
5. How do financial statements help in decision-making?
6. Who are the users of financial statements? Give examples and discuss how each
is interested in the financial statements?
7. What is financial accounting?
8. What is managerial accounting?
9. What is financial management?
10. How are financial accounting, managerial accounting, and financial management
interrelated?
Activity 2 – This will be done through online.
1. Interview a chief accountant. Ask about:
a. Their company
b. Their job- duties, challenges, problems
c. Their markets
d. Advice to finance students
2. Find sample financial statements (income statement and balance sheet) for the following:
a. Service firm
b. Trading firm
c. Manufacturing firm
 CHAPTER 5
UNDERSTANDING FINANCIAL STATEMENTS

Financial statements, the product of financial accounting, show the results of operation ( income
statement), financial position (balance sheet), changes in the owner’s equity, and the sources and uses of
funds (cash flow statement).
Income statement (also known as statement of comprehensive income ) shows the results of operation.
It details operating revenues ( service income or any other appropriate income account for a service enterprise,
sales for a trading/merchandising and manufacturing firm) and operating expenses for trading firms), and other
income and other expense ( non-operating ) like interest income and interest expense. It shows the profitability
of the firm.
The income statement of a service enterprise is a simple statement with operating expenses deducted
from the main revenue to arrive at the operating profit. Other income is added and other expenses are
deducted to arrive at the net income/net profit.
The income statement of a trading/merchandising firm is a bit complicated. The computation of cost of
goods sold is complex with beginning inventory added to the net cost of purchases to arrive at the total goods
available for sale. From the total goods available for sale is deducted the ending inventory to arrive at the cost
of goods sold/cost of sales, which is deducted net sales to arrive at the gross profit. From gross profit,
operating expenses are deducted to arrive at the operating profit. Other income is then added and other
expenses are deducted to arrive at net income.

For a manufacturing concern, the income statement is the most complicated. The basic components are:
a. Total manufacturing cost
b. Cost of goods manufactured
c. Cost of goods available for sale
d. Cost of goods sold
Details of these components follow:
Direct Materials Phpxxx
Direct Labor xxx
Manufacturing Overhead xxx
Total Manufacturing Cost Phpxxx
 To the total manufacturing cost is added the beginning work in process inventory and from the total,
thus, obtained is deducted the ending work in process to yield total cost of goods manufactured.
Total Manufacturing Cost Phpxxx
Work in Process, Beginning xxx
Work in Process, End (xxx)
Total Cost of Goods Manufactured P hpxxx
To the cost of goods manufactured is added the beginning finished goods inventory to arrive at
the total goods available for sale and from the total, thus, obtained is deducted the ending finished
goods inventory to arrive at the cost of goods sold obtained as follows;
Total Cost of Goods Manufactured Phpxxx
Finished Goods Inventory, Beg. xxx
Total Goods Available for Sale xxx
Finished Goods Inventory, End ( xxx)
Cost of Goods Sold P hpxxx

Product Costs relate to the products manufactured by a manufacturing firm. Included in the product costs are
the costs of direct materials, direct labor, and manufacturing overhead. These costs are called manufacturing
costs. Direct materials and direct labor are variable costs (changes with volume of products manufactured).
Manufacturing overhead includes both variable costs like indirect materials and indirect labor and fixed costs (
do not change with volume) like the rent and depreciation for manufacturing plant and equipment.
Period costs refer to operating expenses and other expenses(non-operating like interest expense) incurred by
the business for the current period. Like product costs, they could be variable (ex. Income taxes, commission
expense, utilities expense, among others) or fixed (ex. Officer’s salaries, office rent depreciation for office
building and office equipment, among others).

Balance sheet, also known as statement of financial position or statement condition, contains the
asseys(resources) of the firm, its liabilities (obligation) and owner’s equity. It shows the liquidity and solvency of
the firm.

Statement of retained earnings support the statement of changes in stockholders equity. Retained earnings
(accumulated profits) are divided into unappropriated or free retained earnings and appropriated retained
earnings. Only the free retained earnings can be declared as dividends. Appropriated retained earnings are set
aside for purposes such as bond retirement, plant expansion, or land acquisition.

Statement of changes in owner’s equity shows the investments made by the owner reduced by his withdrawals
and increased by net profit (or reduced by net loss) for a sole proprietorship or partnership. For a corporation,
the statement of changes in stockholders equity shows the capital shtock at the beginning of the period
increased by any additional issue of shares. The next section is the additional paid in capital starting with the
beginning balance. Additional premiums for the new issues of shares are added to the beginning balance to
arrive at the additional paid-in-capital balance at the end of the period. Adding total capital stock and total
additional paid in capital plus the balance of the retained earnings at the end of the period (obtained from the
statement of retained earnings) will give the total stockholders’ equity at the end of the period.

Cash flow statement, also known as statement of sources and uses of cash, details all sources or inflow of
cash and expenditures or outflows of cash to show the net increase or decrease in cash. A more complicated
form of the statement lists three basic activities of the firm:
a. Operating activities
b. Investing activities
c. Fianancing activities
 The preparation of this type of cash flow statement needs comparative balance sheets because details
about changes in certain accounts in the balance sheet are incorporated in the statement.

Activity 1
1. What are the basic financial statements of a business firm? Discuss each.
2. What are the contents of each of these statements?
3. Discuss the reason why the balance sheet is often referred to as the statement of financial condition
or fianancial position.
4. Why is the owners equity termed as the residual interest of the owners in the asset of the firm?
5. What are the basic divisions of the statement of retained earnings?
6. What is the difference between the unappropriated ir free retained earnings and the appropriated
retained earnings?
7. Does an appropriation mean that the company has enough cash for the purpose?
8. Which of the retained earnings can be declared as dividends for the stockholders? Why?
9. Discuss the content of the statement of changes in owner’s equity for a sole proprietorship or a
partnership.
10. Discuss the content of the statement of changes in stockholder’s equity for a corporation.
11. What is premium on capital stock?
12. What is the diufference between capital stock and additional paid in capital stock?
13. How are dividends treated in the statement of retained earnings?
14. What is the effect of profit on the company’s owner’s equity loss?
15. Discuss the nature of a cash flow statement.
16. Differentiate the following: operating, investing and financing activities.
17. Why are non-cash expenses like depereciation and amortization added back to net income in the
income statement? What makes the difference between the net income and the cash position?

Activity 2
Interview a loans department manager or a credit manager and ask about loan processing. Ask the
requirements needed for a loan application and what it takes for the manager to approve a loan. Report your
findings through a video presentation that will be sent to the email account of the instructor.

Chapter 6

FINANCIAL STATEMENTS: TOOLS FOR DECISION-MAKING

Financial Statements

Are indispensable tools in making financial decisions for everyone individuals, households, business
enterprises, non-profit organizations and even government. They highlight the connection, relation and
importance of accounting to financial management in particular and to finance in general.

Financial Analysis

Deals with the understanding of the relationship between financial concepts and daily decision-making.
It is both an analytical and a judgmental process used in a managerial context.

Economic trade-offs between benefits and costs are always involved in any financial or economic decision-
making. They should be effectively and efficiently managed on a consistent basis to achieve long-term
profitability.
The basic decision areas are:

a. Operation
b. Investment
c. Finance

Operating Decisions

Deals with the day-to-day operations of the firm. They include decisions such as pricing, selecting
markets, choosing the appropriate process or technology, outsourcing payroll, among other.

Operating Leverage

Involves the determination of the profitable level and proportion of fixed costs of operation of operation
versus the amount and nature of variable costs incurred in any of manufacturing, trading and service operations.

Break-even Analysis

Determines the volume of business a company needs to reach where the income equals expenses; profits
is zero.

Investment Decision

Refers to deciding on what assets to acquire or projects to pursue

Financing Decision

Refers to decisions that involve funding investments and operations over the long run. It is concerned
with capital structure, debt-equity mix, funding sources, dividend policies, costs, cost of capital, among others.
Whether to lease or to buy is a financing decision.

Steps in analyzing the financial steps consists of:

(a) Understanding the information provided in the financial statements.

(b) Drawing logical conclusion based on the data presented
(c) Making the appropriate decision of the course of action to take

Horizontal Analysis

Refers to comparative analysis of the financial statements. Financial statements of the current period are
compared with the past period or periods. It reveals trends; hence, it is also called trend analysis.

Vertical Analysis

Refers to comparing an item with another item, which may come from the income statement only or
from both the income statement and the balance sheet. This is the reason it is also referred to as ratio analysis.
Common0size statements and percentage analysis are also products of vertical analysis.

Common-size statements
 Are a type of ratio analysis where an element of the financial statement is chosen as the base (basis of
comparison) like sales for the income statement and total assets for the balance sheet. In short, it analyzes the
components or elements of the financial statements.

Ratio analysis compares one figure to another. Also, it compare one period with another period. Ratio analysis
can yield the following:

A. Profitability ratios indicate whether the company is earning or not.

(1) Return of Owner(s) Investment (ROI) = Income After Income Tax

Average Owner(s) /

Stockholders’ Equity

(2) Profit Margins (ROS) = Income

Net Sales

(3) Return on Assets (ROA) = Income

Average Total Assets

B. Liquidity ratio indicates if the company is able to pay its maturing obligations.

(1) Current ratio indicates the short-term solvency or liquidity of the firm. Short-term solvency or
liquidity refers to meeting obligations currently or in the short run.

Current Ratio = Current Assets

Current Liabilities
(2) Quick ratio/ acid-test ratio is a more stringent measure of liquidity. It excludes inventories and
prepaid expenses. Only cash, cash equivalents, marketable securities, and receivables are termed quick assets.

Quick Ratio = Quick Assets

Current Liabilities

(4) Working capital is not a ratio but is the difference between current assets and current liabilities.
(Current Assets – Current Liabilities)

C. Long-term debt ratio indicates the ability of a firm to pay the liabilities in the long run. Solvency is the
ability to pay liabilities in the long run.

(1) Debt ratio relates total liabilities to total assets

 Debit ratio = Total Liabilities

Total Assets

(2) Stockholder’s ratio relates total stockholder’s equity to total assets.

Stockholder’s Ratio = Total Stockholder’s Equity

Total Assets

(3) Stockholders ratio relates the total liabilities to total stockholder’s equity.

Debt-Equity Ratio = Total Liabilities

Total Stockholder’s Equity

(4)Interest coverage ratio indicates the company’s ability to pay its interest on its obligations.

Interest Coverage Ratio = Operating Income

Interest Expense

Financial statements, however useful, have certain limitations including:

a. Data are reported at historical costs

b. Data are all in monetary terms
c. Financial statements use estimates
d. Financial statements use judgments
e. Financial statements are interim in nature
f. Financial statements assume stable monetary unit

Activity 1

1. Discuss the results of financial analysis that are dependent on the objective of the analysis, the
perception of the analyst, and the context within which the decisions is to be made.
2. Discuss the three basic decision areas dealt with by managers. What are the items involved in these
decisions?
3. Discuss the steps in analyzing financial statements?
4. What is horizontal analysis? What purpose will it serve?
5. What is vertical analysis? How is it useful?
6. What is meant by profitability ratio? Why is it important?
7. What is common size statement? Discuss its importance in financial analysts?
8. Differentiate ROI, ROS and ROA. Discuss the importance of these ratios. Which of these do you
think is better gauge of profitability? Support your answer.
9. What is meant by liquidity or short-term solvency? Why would users of financial statements be
interested in the liquidity or short-term solvency of a firm?
10. Discuss the different liquidity ratios.
 11. What is meant by long-term debt ratio? Why is it important?
12. Discuss the different long-term debt ratios?
13. Discuss the different limitations of financial statements and financial statement analysis.

S EMI-FINAL

T OPIC (WEEK 6-7)

 The Financial Environment

 The Financial System
 Financial Intermediation

Abstract:
These chapters focus on the study of financial enivironment in the business. Its financial system and
intermediation.

Lesson Objectives:
 Discuss financial markets and their different types.
 Appreciate the role financial markets play in the domestic economy and in the international company.
 Explain the difference between money market instruments and capital market instruments.
 Differentiate securities market from negotiated or non-securities market and the importance of each in
domestic and foreign trade.
 Solve for the various measures calculated for stocks.
 Distinguish the different types of stocks including the different types of preferred shares and analyze how
they affect the decision of an investor
 Differentiate the different types of bonds. Define what a financial system is and illustrate the role it plays
in the economy of a nation
 Discuss on the roles the different participants in a financial system play
 Elaborate on the role of BSP in the economic development of the Philippines
 Explain monetary policy and the role it plays in the economic development of a country
 Discuss the relationship between monetary policy and the financial system
 Illustrate how the tools of monetary policy are used to influence money supply and interest rates. Discuss
financial intermediation and identify the different financial intermediaries
 Differentiate bank supervision from bank regulation
 Appreciate the role financial intermediaries play in the socio-economic development of a nation.
 Explain the economic bases for financial intermediaries.
 Detail the changing nature of financial intermediaries

 Discuss the different types of risk faced by financial intermediaries and investors in the business world
Module Guide:
Study topic content presented below.
Answer the exercises presented after the topic content below. 3.Do not write anything on this module.
Write your answers on a separate sheets.
For online activities, send it to me through my gmail account: .
For questions or clarrifications you can contact me through my gmail account or Messenger account : Lorisa Kupa Ceni

Chapter 7
THE FINANCIAL ENVIRONMENT

Financial Environment
Is composed of individuals and entities (financial system participants) who/which need financing in one
form or the other and the financial markets and financial instruments that paly a major role in the financial
system of a country.

Financial Markets
Are institutions and systems that facilitate transactions in all types of financial claims. They act as the
bridge between those with excess funds (saving units) and those who need funds (borrowing units).

Financial markets and financial instruments can be classified into:

a. As to term or maturity
(1) Money market/ money market instruments – short term
(2) Capital market/ capital market instruments – long term

b. As to type of issue
(1) Primary market/ primary market instruments – original issue
(2) Secondary market/ secondary market instruments – re-acquired or previously owned securities.

Marketable Securities or Trading Securities

Is another term used to indicate securities that are held for the short term to be sold as the need for cash
arises.
Security brokers act only as agents and therefore, buy securities for resale to others. Brokers ear commission.
Security dealers, on the other hand buy securities for their own account; they can either keep them as their
assets or sell them for a profit.

Philippine Stock Exchange (PSE)

Is the Philippines organized stock market where companies and traders buy and sell stocks. Stock
market monitors performance of stocks, reporting opening and closing prices of different stocks and high and
lows, indicating lowest and highest prices are the indices for selected stocks, monitored by investor and traders.

There are various measures calculated for stocks, among which are:

a. Yield or cash yield – ratio of cash dividends to stock price.

b. Price earnings (PE) ratio – ratio of stock price to earnings per share
c. Value of the stock – ratio of benefits (dividends) to cost price; this is synonymous to the yield.

Money market institutions include:

a.Cash management bills

- Government issued securities with maturities of less than 91 days.

b.Treasury bills (T-bills)

- Government issued securities with maturities of 91, 182, and 364 days.

c.Commercial Papers (CPs)

- marketable securities issued by highly financially secure firms ranging from 30-
270 days.

d.Banker’s Acceptance

- bank drafts issued by banks to help traders and other customers to raise funds to
pay for current expenditures using their (the bank’s) credit; they are short –term drafts or time drafts that
mature on a certain date; most banker’s acceptances are used in connection with letters of credit.

e. Negotiable certificates of deposits

- a negotiable time deposit with a definite maturity date up to one year, when the
investor receives the face amount together with the interest.

f. Repurchase agreement or repos (RPs)

- agreements involving the sale of securities by one party to another with a

promise to repurchase the securities at a specified date and price.

g. Money market deposit accounts (MMDAs)

 - a type of savings account with check writing privileges offers by banks and
other financial institutions which pay interests that are equivalent to and competitive with money market
mutual funds (MMMFs).

h. Money market mutual funds (MMMFs)

- investment pool that buy safe, short-term securities such as T-bills, CDs, and
CPs offered by investment companied; the yield is generally a little higher than those offered by
MMDAs

i. Certificates of assignments

- an agreement that transfers the right of the seller over a security in favor of the
buyer, the underlying security carries a promise to pay a certain sum of money on a fixed date just like
in a promissory note; the underlying security is like a collateral to the certificate

j. Certificate of participation

- an instrument that gives the buyer a share in a security that promises to a pay a
certain sum of money on a fixed date just as in a certificate of assignment; the underlying security us of
big amount and the certificate of participation is only a portion; the owner of the certificate participates
in the bigger amount underlying security.

Capital market instruments are divided into:

a. Non-negotiable or non-marketable
(1) Loans – result from one-to-one arrangement between a lender and a borrower/
(2) Leases – an arrangement where the owner of the property (lessor) leases/rents the property out to
the user of the property (lessee) for a fixed monthly lease payment. Usually, properties can be
ultimately owned by the lessee if the lease agreement is a lease-to-buy.
(3) Mortgage – involve using real properties as collateral for a loan.
(4) Letters of credit – letters of a bank guaranteeing payment of a transaction like purchase of
merchandise or other items either domestically or internationally

b. Negotiable or marketable
(1) Corporate stocks – evidences ownership in a corporation the benefit of which is in terms of
dividends.
(2) Corporate Bonds – evidences obligations of the issuing corporation the benefit if which is in
terms of interests paid on such bonds.
(3) T-notes and T-bonds – securities issued by the treasury of the country.
(4) Municipal bonds – securities issued by municipalities
(5) Mortgage-backed bonds – bonds issued collateralized by mortgages

Activity 1
 1. What are financial markets? Differentiate the different types of financial markets
2. What is the importance of financial markets in a nation’s economy? Discuss fully
3. Differentiate securities market from negotiated or non-securities market. Give at least three
examples for each and define each example of the different instruments dealt with in both markets.
4. Discuss the importance of negotiability as it relates to financial instruments.
5. What is foreign exchange market? Discuss how it operates.
6. What is an option? What is an options market?
7. Differentiate over-the-counter market from organized market?
8. What are the types of dividends?
9. What are the types of shares according to dividends
10. What are the types of share according to value?

Chapter 8
THE FINANCIAL SYSTEM

Financial Systems

-encompasses financial markets, participants and instruments dealt with in the said markets.

The functions of the financial system include:

(a) Channeling the funds from saving units to deficit units

(b) Providing a medium of exchange
(c) Providing a mechanism for risk-sharing
(d) Providing a channel through which the central bank can influence the economy in general and the
financial system in particular

There are six participants or sectors in the financial system. They are:
 (a) Households or consumers
(b) Financial institutions/ intermediaries
(c) Non-financial firms
(d) The government
(e) The central bank
(f) Foreign participants

Household or Consumers

Are the wage/salary earners whose income is spent on goods and services, and if there is something left
to save, they save it. Gross savings are equal to current income less current expenditures. Consumption is what
is spent and can be for non-durables (consumed within the current period) and durables (goods that will last
more than a year).

Financial Institutions/ Intermediaries

Are firms that act as the bridge between surplus units/ lenders and deficit units/borrowers. Other than
acting as a bridge (intermediaries), they also act as lenders or borrowers at certain times.

Non-financial institutions

Are businesses other than financial institution/ intermediaries like trading, manufacturing, mining and
other businesses.

The Governments

Includes all levels of government from the barangay up to the national government. All government
units act as either lenders or borrowers at one time or another.

The Central Bank of Any Country

Is generally made in charge of the financial system of any country. Bangko Central ng Pilipinas is the
agency in charge of the Philippine monetary and financial system.

The Philippine Monetary System Organization is organized as follows:

Bangko Central ng Pilipinas

I. Banking Institutions
A. Private Banking Institutions
1. Commercial Banking Institution
 • Ordinary Commercial Banks
• Universal Banks
2. Thrift Banks
• Savings and Mortgage Banks
• Private Development Banks
• Savings and Loan Associations
B. Government Banking Institutions
1. Philippine National Bank
2. Development Bank of the Philippines
3. Land Bank of the Philippines
4. Philippine Amanah Bank
II. Non-Bank Financial Institutions
C. Private Non-Bank Financial Institutions
1. Investment Banks/Companies
2. Finance Companies
3. Securities Dealers/ Brokers
4. Pawnshops
5. Lending Investors
6. Fund Managers
7. Trust Companies/ Departments
8. Insurance Companies

D. Government Non-Bank Financial Institutions

1. Government Service Insurance Systems
2. Social Security System

Internally, BSP is structured as follows:

(a) The Monetary Board

(b) The Monetary Stability Sector
(c) The Supervision and Examination Sector
(d) The Resource Management Sector

Objectives of the BSP include:

(a) Maintaining the monetary policies conducive to a balanced and sustainable growth of the economy.
(b) Maintaining price stability in the country
(c) Promoting and maintaining monetary stability and convertibility of the peso
(d) Maintaining stability of the financial system
(e) Providing payment and other financial services to the government, the public, financial institutions, and
foreign official institutions
 (f) Supervising and regulating depository institutions

Functions of BSP include:

(a) Bank of issue

(b) Government’s banker, agent and adviser
(c) Custodian of the nation’s reserves of banks
(d) Custodian of the nation’s reserves of international currency
(e) Bank of rediscount and lender of last resort
(f) Bank of central clearance and settlement
(g) Controller of credit

Monetary Policy

Refers to regulations that will affect supply to benefit the economy. Among the tools of monetary policy
are money supply, open market operations, resent requirements on banks, discount rate, interest rate, credit
control, among others

Activity 1

1.Discuss the meaning of financial system. What is its importance in the nation?

2.Discuss the role of each participant in the financial system

3.What is BSP? What is its role in the well-being of the Philippines?

4.How is BSP structured relative to the financial system? Discuss

5.Hos is BSP structured relative to its organizational chart as an organization?

6.What is monetary policy? What is its importance in the economy?

7.Discuss the relationship between monetary policy and financial system?

8.What are the different tools of monetary policy? Discuss how the tools of monetary policy influence money
supply and interest rates.

9.Discuss the role of BSP in the economic development of the country?

10.Discuss the role of BSP as manager of banks and of non-banks?

 Chapter 9

FINANCIAL INTERMEDIATION

Financial Intermediaries

Are financial institutions that act as the bridge between savings units (lenders) and deficit units
(borrowers). Other than market specialists who do not issue their own securities, financial intermediaries issue
their own financial instruments, which are considered as secondary securities.

Original issues of securities (corporations which issue stocks or bonds) issue what is termed as primary
securities.

Direct Finance

Involves a one-on-one relationship between a lender and a borrower. Those who buy original issues or
primary securities have a direct finance relationship with the issuers of the said securities. Similarly for the non-
negotiable primary security like a direct loan, the relationship between the lender, say a bank, and the borrower
is a direct finance relationship in the same manner that the relationship between the depositor and the bank is
direct finance.

For secondary securities or previously owned securities

The relationship between the original saving units and the deficit unit is indirect finance. In the same
manner, the relationship between the bank depositor and the one who borrows from the bank is indirect finance.
The bank, as an intermediary, pools the savings of depositors and lends to them to borrowers.

Financial Intermediaries cab be divided into two groups

(a) The Depository Institutions

(b) The Non-Depository Institutions
Depository Institution

Refer to financial institutions that accept deposits from surplus or savings units. The assets of depository
institutions are the loans that they grant borrowers. On the other hand, these loans are the liabilities of the
financial and non-financial entities, including households. For depositors and investors, which are the financial
and non-financial entities, their deposits or investments in securities are their assets. These assets are the
liabilities of the depository institutions or other security issuers acting as borrowers.

Depository institutions are classified as:

a) Commercial banks
(1) Ordinary commercial banks
(2) Expanded commercial or Universal banks

b) Thrift banks
(1) Savings and mortgage banks
(2) Private development banks
(3) Savings and loan associations
(4) Microfinance thrift banks
(5) Credit unions
(6) Rural banks

Ordinary Commercial Banks

Perform the more simple functions of accepting deposits and granting loans. Expanded commercial
banks or universal banks (also called unibanks) perform investment services. It is expanded because of its
function as an investment house and investing in stocks and bonds of non-allied businesses. In addition, they
render financial services , payment processing, securities transactions, underwriting, and financial analysis.

A Branch

Is an independent unit of the head office performing all the functions and offers the service facilities of
the head office. An extension office operates like a branch, but us under the supervision and administrative
control of the nearest branch of the head office or the head office, if the head office is the one nearest it.

Banks are government-regulated

Bank supervision deals with ensuring the soundness and safety of banks. Bank regulation consists of the
administration of laws in the form of rules and regulations that govern the conduct of banking and the structure
of the banking industry.
Prior to 1994, the MACRO rating was used by regulatory agencies to gauge credit standing of banks though
the MACRO rating:

M – Management

A – Asset quality

C – Capital adequacy

R – Risk management

O – Operating results

In 1994, the CAMELS rating was used:

C – Capital adequacy

A – Asset quality

M – Asset quality

E – Earnings

L – Liquidity

S – Sensitivity to risk

Thrift Banks

Are banks which encourage the habit of thrift and savings and provide loans at reasonable rates. They
include savings and mortgage banks, private development banks, savings and loana associations, and
microfinance thrift banks.

Saving and Mortgage banks

Are bank specializing in granting mortgage loans other than the basic functions of accepting deposits.

Private Development Banks

Cater to the needs of agriculture and industry providing them with reasonable rate loans for medium and
long term purposes.

Savings and loan association (SLAs, S&Ls)

Accumulate savings of their depositors/ stockholders (the depositors are the stockholders) and use these
accumulated savings, together with their capital for the loans that they grant and for investments in government
and private securities. These associations provide personal finance and long-term financing for home building
and improvement.
Microfinance Thrift Banks

Are small thrift banks that cater to small, micro and cottage industries, hence, the term “micro”. They
grant small loans to small, micro and cottage businesses.

Credit Unions

Although not belonging to banks, are cooperatives principally functioning to pool savings and grant
loans like depository institutions. Loans granted are multiples (two or three times) of the member’s savings with
the unions.

Rural and Cooperative Banks

Are the banks in the rural communities which help in the development of the countryside by providing
them with loans and other basic financial services.

Non-depository institutions include:

a) Insurance companies
(1) Life insurance companies
(2) Property/casualty insurance companies
b) Fund managers
c) Investment banks/ houses/ companies
d) Finance companies
e) Securities dealers and brokers
f) Pawnshops
g) Trust companies and departments
h) Lending investors

Life insurance companies

Provide protection over a contracted period of time or over the life of the insured in exchange of
premiums paid. Life insurance policies have face values, the amount to be received if the insured dies. Life
insurance policies also have loan values, amount that can be borrowed against the policy. In addition they have
cash surrender values, amount to be received if the policy is cancelled or surrendered.

Property/casualty insurance companies

Provide protection against injury or property loan resulting from accidents, work-related injuries,
malpractice , and natural calamities.
Fund managers

Include pension fund companies and mutual fund companies. Pension fund companies sell contracts to
provide income to policyholders, upon retirement. Mutual fund companies accept investments in small amounts
to be pooled together to buy securities that will form the portfolio of investments.

Investment banks

Underwrite new issues of stocks and bonds. They are also called merchant banks.

Finance companies borrow and lend funds to households and businesses. They engage in borrowing and
lending, but they are not banks. They could be sales finance companies providing installment credit to
purchasers of big items like cars and appliances, consumer finance companies granting credit to consumers, or
commercial finance companies granting credit to businesses,

Lending Investors

Are like finance companies, but usually smaller, that grant loans to households

Financial Intermediaries

Play an important role in the socio-economic development of countries by providing the financial
services that uplift the society and the economy.

Financial Intermediaries

Spread risks by pooling funds which is called diversification. Because small investments are used to buy
securities, any loss in these securities is spread to many owners rather than one investment bearing the loss.

The nature of financial intermediation has changed from the old, more regulated and specialized institutions to
the newer, more diversified institutions we now have.

Financial intermediaries face various ricks, including:

a) Interest rate/ market value (price) risk

b) Reinvestment rick/ refinancing risk
c) Default/credit risk
d) Inflation/ purchasing power risk
e) Political risk
f) Off-balance sheet risk
g) Technology/ operation risk
h) Liquidity risk
i) Currency/ foreign exchange risk
 j) Country/ sovereign risk

Activity 1

1. What is financial intermediaries? What are financial intermediaries?

2. Discuss the asset transformation role of the financial intermediary by giving specific examples.
3. Differentiate savings units from deficit units. Give examples.
4. Differentiate primary securities form secondary securities. Give examples
5. Differentiate direct finance from indirect finance. Give examples
6. What are market specialist? How are they different from investment or merchant banks?
7. What is spread? Illustrate
8. What is disintermediation? Explain
9. What is diversification? How does it work in relation to foreign exchange risk? Explain
10. What is securitization? How do financial intermediaries perform it? Explain
11. Discuss the relationship between market price and interest rate. Give example
12. Discuss the relationship between inflation and purchasing power. Give example.
13. What are the basic risks faced by financial intermediaries? Discuss each thoroughly.
14. What is risk? Discuss and give examples
15. What are the off-balance sheet transactions? What is a contingent asset? What is a contingent
liability?

F INAL

T OPIC (WEEK 8-9)

 Interest
 Financial Assets

Abstract:
These chapters focus on the study of interest and the financial assets of the business’s owner/s.

Lesson Objectives:
 Discuss the concept of interest rate
 Differentiate interest rate from rate of return; interest from discount
 Solve for the different measures of interest rate
 Appreciate the role of interest rate in financial and in the economy
 Discuss each theory regarding interest rate determination and cite their limitations
 Explain the determinants of interest rate and how they affect interest rate. Explain what assets are and
discuss the different types of assets a business can own
 Discuss what financial assets encompass
 Demonstrate the difference between debt claims and equity claims
 Elaborate on the different forms of debt claims
  Discuss the receivables arising from business transactions and demonstrate the different ways of using
accounts and note receivable as a source of financing
 Discuss what bonds are and the different terms associated with the bonds
 Explain the meaning of the different types of equity claims
Module Guide:

Study topic content presented below.

Answer the exercises presented after the topic content below. 3.Do not write anything on this module.
Write your answers on a separate sheets.
For online activities, send it to me through my gmail account: .
For questions or clarrifications you can contact me through my gmail account or Messenger account : Lorisa Kupa Ceni

Chapter 10

INTEREST

Interest Rate

Is the cost of borrowing or lending money. As such, it can be said that it is the cost of credit. It is
expressed as the ratio of interest to amount borrowed or lent.

Transaction Demand

Refers to the demand for money to pay for current expenditures like water and electricity bills, tuition
fees, house rent, among others.

Precautionary Demand

Refers to demand for money for unforeseen additional unforeseen caused by unexpected events like
sickness, accident, natural calamities, among others.

Speculative Demand

Refers to demand for money with the intention of using it when an opportunity to earn more arises.

Rate of Return (ROR)

Is a yield term that considers not only interest earned but also gain or loss arising from change in value
(capital gain or loss) to determine the total net yield to investors. Any capital gain is added to the interest earned
and any capital loss is deducted from the interest earned to determine the ROR.
While simple interest is paid at the maturity date, discount is interest deducted in advance, meaning interest is
paid on the date the loan is taken. Banks discount loans they grant such that borrowers receive proceeds from
the loan lesser than the face value of the loan.

Compounding pays interest on interest, meaning for every compounding period, the principal accumulates
interest earned.

Effective Annual Rate (EAR)

Is the rate which would produce the same future value if annual compounding is used. Therefore, it is
higher than the nominal interest rate.

Effective Interest Rate (EIR)

Is measured based on the kind of credit and is term. This includes interest on trade credit or open
account granted by businesses and bank loans in the form of lines of credit.

Yield to Maturity (YM)

Is the interest rate which equates the present value of all cash flows from the debt instrument to the
current value. For a simple loan, YM is equal to the simple interest rate. For bond the yield is computed through
interpolation to arrive at the exact yield or for more simple computation, the current yield is used by simply
dividing the yearly coupon payment by the price of the security.

Real risk-free rate of interest (k*)

Is the interest rate that is adjusted for inflation.

The interest rate theories are the following:

a) classical theory of Fisher Hypothesis

b) loanable Funds Theory
c) Liquidity Preference Theory
d) Rational Expectations Theory

The classical theory views interest rate as the interplay of supply of savings and the demand for

investment. The Loanable Funds Theory

Expounded on the classical theory by theorizing that borrowers create the demand for loanable funds
and the lenders, on the other side, seek to provide the loanable funds needed by borrowers. This interplay of
supply and demand for loanable funds determines the interest rate.
The Liquidity preference theory

Maintains that the interest rate is determined in the money markets by the money demand and the money
supply.

The Rational Expectations Theory

Is based on the premise that financial markets are highly efficient in digesting new information is
translated by investor into borrowing or investment decisions.

Interest rates are determined by several factors including:

a) Savings
b) Investment demand
c) Money supply
d) Money demand
e) Inflation expectations
f) Monetary policy
g) Business cycle
h) Government budget deficits

Activity

1. What is interest rate? Explain its role in fiancé and in the economy.
2. What are the different reasons or purposes why people hold on to money? Explain each?
3. How does interest rate affect the three kinds of demand for money?
4. How does interest rate affect the investment decision of businesses?
5. How does the government use interest rate in controlling money supply?
6. What are the factors which affect the behavior of interest rate?

Chapter 11

FINANCIAL ASSETS

Financial Assets
 Are intangible assets representing claims to future cash in terms of earnings, and principal. They include
cash, receivables, and financial securities or instruments like bonds, stocks, commercial papers, among others.

Financial assets can be debt claims or equity claims. Bank deposits, receivables and bonds are examples
of debt claims. Equity claims include stocks and partner’s interest in a partnership.

1. Appreciate the role financial intermediaries play in the socio-economic development of a nation.
2. Explain the economic bases for financial intermediaries.
3. Detail the changing nature of financial intermediaries
4. Discuss the different types of risk faced by financial intermediaries and investors in the business world.

Accounts Receivables

Are open accounts granted by buyers or customers and cab be used as a source of financing through
pledge, assignment (with recourse or without recourse), and factoring. Notes receivables can also be a source of
financing through discounting

Assignment of receivables uses receivables as collateral for a loan. It the assignment is without recourse,
the assignee (lender) collects the receivables directly and bears any loss on bad debts or non-payment by the
customers. If the assignment is with recourse even if the assignee collects directly from the customers, it has the
recourse to run after the owner of the receivables if the customers are in default.

Factoring is an outright sale of receivables. The factor pays the seller of the receivables only a certain
percentage of the total amount if the receivables

Notes Receivables

Are also a source of financing through discounting. When note are discounted with the bank, the bank
pays the owner of the notes the face value of the notes less discount fees and other service or finance charges.

Interest in bonds yields interest. Investment in stocks yields dividends. Partners share in the profits of
the partnership.

Activity 1

1. What is asset? What is the difference between tangible asset and intangible asset?
2. Give examples of personal asset and business asset?
3. What is financial asset? Why is it considered as intangible asset?
4. What are the two types of claim to asset? Differentiate the two?
5. What are the different types of cash deposits with bank? Explain the features of each deposits.
6. What is account receivable? What is note receivables?
7. What are the different ways in which account receivables can be used as source of financing?
Explain each.