Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

COLLEGE OF ACCOUNTANCY AND FINANCE
DEPARTMENT OF BANKING AND FINANCE

CHAPTER 1:

INTRODUCTION TO THE

FINANCIAL MANAGEMENT

Reported by:
GROUP 1

Members:

CASITAS, JOSHUA S.
SERRANO, TRISHIA MAE
BITANCUR, MIRACLE
BULA, JANE ROSE L.
BATINGA, DANICA FERRIS

Course Year and Section:

BACHELOR OF SCIENCE IN BUSINESS ADMINISTRATION IN

FINANCIAL MANAGEMENT (BSBAFM)
2 – 9S
TOPIC OUTLINE
Chapter 1: INTRODUCTION TO FINANCIAL MANAGEMENT

Contents Reporter
Casitas, Joshua S.
 Finance
Serrano, Trishia Mae
 Fields Under Finance
 Financial Management/ Corporate Finance/
Managerial Finance
 Capital Markets
 Investments
 Career Opportunities Under Finance
 Financial Services
 Managerial Finance
 Professional Certifications in Finance
 Three Financial Management Decision Areas
 Capital Budgeting
 Capital Structure
 Working Capital
The firm and it’s manager
 Review of Forms of Business
 Sole Proprietorship
 Partnership
 Corporation
 Corporation by another name (nature)
 Organizational chart of the firm
 Finance within the business
 Organizational Chart
 Roles of the Financial Management Staff
Learning Outcomes:

1.

FINANCE
 is a field that is broad and dynamic. (Gitman & Zutter, 2013, p.57)

 defined as science and art of managing money. (Gitman & Zutter, 2013, p.57)

 the term has many facets which makes it difficult to provide a clear and concise
definition (Brigham 2014, p.4)

Fields In Finance
There are three fields taught in the universities under the field of finance. (Brigham
2014, p.4)

1. Financial Management (aka Corporate Finance/ Managerial Finance) - focuses

on decisions relating how much and what type of assets to acquire, how to raise
the capital needed to purchase assets, and how to run the firm so as to maximize
its value. (This field of finance is the core of this course but somehow, this course
going to connect with the other fields finance for more understanding it.)

As to definition of corporate finance of Ross et al (2016), it is the study of ways to

answer the three questions. These ways are capital budgeting, capital structure
and working capital management that will be revealed as discussion proceeds.

2. Capital Markets - relate to the markets where interest rates along with the stock
and bond prices, are determined. - also studied here are the financial institutions
that supply capital to businesses.

3. Investment- relate to decisions concerning stocks and bonds and include a

number of activities
 3.1 Security Analysis - deals with finding the proper values of individual securities
(i.e. stocks and bonds)

3.2 Portfolio Theory - deals with the best way to structure portfolios, or "baskets",
of stocks and bonds.

3.3 Market Analysis - deals with the issue whether the stock and bonds markets
at any time are "too high", "too low", and "about right" 3.3.1. Behavioral
Finance- is a part of market analysis where investor psychology is examined
in an effort to determine stock prices have been bid up to unreasonable
heights in a speculative bubble or driven down to unreasonable lows in a fit
irrational pessimism.

Financial Management Decision Areas

The financial manager must be concerned with the three basic types of
questions. (Ross et al., 2016, p.2)

The three basic questions:

1. What long-term investments should you take on?

*That is what lines of business will you be in and what sorts of buildings,
machinery and equipment will you need?

2. Will you bring other owners or will you borrow the money?

3. How will you manage your everyday financial activities such as collecting from
customers and paying suppliers?

 Capital Budgeting - is the process of planning and managing long-term financing

investments and is, the concern of financial manager to answer the first question.
In this process, the financial manager tries to identify investment opportunities
that are worth more to the firm than they cost to acquire. This means that the
cash flow generated by an asset exceeds the cost of that asset.
  Capital Structure - is the mixture of equity and debt maintained by the firm and is
the concern of financial manager to answer the second question. The firm is
consist of creditors (where we borrowed long-term assets) and shareholders
(who invests in the firm) where the cash is distributed among them but according
to their manner of distribution where the financial manager enters. Firms have a
great deal in choosing financial structure and question of whether one structure is
better than any other is the heart of capital structure issue.

 Working Capital Management - process of managing the short-term assets (e.g.

inventory and the credit given to customers (A/R)) and liablilities (e.g. money
owed to suppliers) of the firm. It is a day-to-day activity that ensures that the firm
has sufficient resources to continue its operations and avoid costly interruptions.
It also involves number of activities related to the firm's receipt and disbursement
of cash.

Career Opportunities Under Finance

Careers in finance typically falls under 2 broad categories. Workers in both
areas rely on a common analytical "tool kit", but the types of problems to which that tool
kit is applied is applied vary a great deal from one career path to the other. (Gitman &
Zutter, 2013, p.56)

1. Financial Services is the area concerned with the design and delivery of advice
and financial products to individuals, businesses, and governments. It involves a
variety of interesting career opportunities within the areas of banking, personal
financial planning, investments, real estate and insurance.

2. Managerial Finance is concerned with the duties of the financial manager.

Financial manager administer the financial affairs of all types of businesses -
private and public, large and small, profit seeking and not for profit. They perform
such varied tasks as developing a financial plan or budget, extending credit to
 customers, evaluating proposed large expenditures, and raising money to fund
the firm's operations.

Career opportunities under managerial finance. (Gitman & Zutter, 2013, p.62)

 Financial Analyst - prepares firm's financial plans and budgets. Other duties
include forecasting, performing financial comparisons, and working closely with
accounting.

 Capital Expenditures Manager - evaluates and recommends long-term

investments. May be involved in the financial aspects of implementing approved
investments.

 Project Finance Manager - arranges financing for approved investments.

Coordinates consultants, investments, bankers, and legal counsel.

 Cash Manager - Maintains and controls the firm's daily cash balances.
Frequently manages the firm's cas lh collection and disbursement activities and
short-term investments and coordinates short-term borrowing and banking
relationships.

 Credit Analyst/Manager - administers the firm's credit policy by evaluating credit

applications, extending credit, and monitoring and collecting accounts receivable.

 Pension fund manager - oversees or manages the assets and liabilities of the
employees' pension fund.

 Foreign Exchange Manager - manages specific foreign operations and the firm's
exposure to fluctuations in exchange rates.

Professional Certifications In Finance

 Chartered Financial Analyst (CFA) – Offered by the CFA Institute, the CFA
program is a graduate-level course of study focused primarily on the investments
side of finance. To earn the CFA Charter, students must pass a series of three
 exams, usually over a 3-year period and have a 48 months of professional
experience. Although this program appeals primarily to those who work in the
investment field, the skills developed in the CFA program are useful in a variety
of corporate finance jobs as well.

 Certified Treasury Professional (CTP) – The CTP program requires student to

pass a single exam that is focused on the knowledge and skills needed for those
working in a corporate treasury department. The program emphasizes topic such
as liquidity and working capital management, payment transfer systems, capital
structure, managing relationships with financial service providers, and monitoring
and controlling financial risk.

 Certified Financial Planner (CFP) – To obtain CFP status, students must pass a
10-hour exam covering a wide range of topics related to personal financial
planning. The CFP program also requires 3 years of full-time relevant
experience. The program focuses primarily on skills relevant for advising
individuals in developing their personal financial plans.

 American Academy of Financial Management (AAFM) – The AAFM administers a

host of certification programs for financial professionals in a wide range of fields.
Their certifications include the Chartered Portfolio Manager, Certified Risk
Analyst, Certified Cost Accountant, Certified Credit Analyst, and many other
programs.

 Professional Certifications in Accounting – Most professionals in the field of

managerial finance need to know a great deal about the accounting to succeed in
their jobs. Professional certifications in accounting include the Certified Public
Accountant (CPA), Certified Management Accountant (CMA), Certified Internal
Auditor and many other programs.

FIRM’S ORGANIZATIONAL STRUCTURE UNDER FINANCE

Stockholders or shareholders

 the owners of the corporation, whose ownership, or equity takes

the form either common stock (ordinary share) or preferred stock
(preference share).

Board of Directors (BOD)

 group elected by the firm's stockholders and typically

responsible for approving strategic goals and plans, setting
general policy, guiding corporate affairs, and approving major
expenditures. (Gitman & Zutter, 2013, p. 60)

 top governing body and the chairperson of the board is generally

the highest ranking individual (Brigham, 2014, p.4)

Chief Executive Officer (CEO)

 the corporate official responsible for managing the firm's day-to-

day operation carrying out the policies established by board of
directors. (Gitman & Zutter, 2013, p.61)

 the position is often occupied by the chairperson of the board.

(Brigham, 2014 p.4)

Chief Operations Officer (COO)

 often as firm's president, directs the firm operations which

include marketing, manufacturing and other operating
departments. (Brigham, 2014 p.4)
Chief Financial Officer (CFO) or Vice President of Finance (VP of
Finance)

 the top officer in the firm and one does financial management
function. It is shown in the figure that the CFO coordinates
activities of treasurer and controller. (Ross et al, 2016 p. 2)

 senior vice president and third highest ranking officer. (Brigham,

2014, p.4)

Treasurer's Office

 responsible for managing the firm's cash and credit, its financial
planning and capital expenditures. (Ross et al, 2016 p. 2)

Treasurer

 chief financial manager of the firm.

Controller's Office

 handles cost and financial accounting, tax payments, and

management information systems.(Ross et al, 2016 p. 2)

Controller

 chief accountant of the firm.

GOAL OF THE FIRM

The financial management's have only a single goal which encompasses
all the goals we can think- the maximization of the stockholder's wealth. Development of
this goal is based from the stockholder's view on the function of existence of financial
management in firm- to provide decision. This question is "what is a good financial
management decision?". Stockholder's mindset is to gain on their stocks and through
financial management decision has impact to their wealth. Therefore, decisions has
direct effect to the stock price on distribution of earnings. Good decisions increase the
value of stock and poor decisions decreases value of the stock.
Shareholder's Wealth Maximization is the primary goal for managers of publicly
owned companies implies that the decisions should be made to maximize the long- run
value of the firm's common stock. (Brigham, 2014 p.10).

According to Brigham (2014), managers know this goal does not mean maximize value
"at all cost". Managers have an obligation to behave ethically, and they must follow the
laws and other society- imposed constraints. (p.10)

The finance department's principal task is to evaluate proposed decisions and judge
how they will affect stock price and thus shareholder's wealth. (Brigham, 2014, p.10)
A common misconception is that “when firms strive to make their shareholders happy,
they do so at the expense of other constituencies such as customers, employees, and
suppliers”. The line of thinking ignores the fact that in most cases, “to enrich
shareholders, managers must first satisfy the demands of this interest groups”. (Gitman
& Zutter, 2013, p. 63)

Sarbanes- Oxley Act (2002) or Sabox

 The law that intends to protect investors from corporate abuses.

Section 404. Each company's annual report have an assessment of the

company's internal control structure and financial reporting. The auditor must
then evaluate and attest to management's assessment of these issues.

Agency relationship

 therelationship between the stockholders and the management.

 relationship exists whenever someone

Agency problem

 The possibility of conflict of interest between the stockholders and management

of the firm.

Agency cost
  The costs of conflict of interest between manager and the stockholder, which can
be indirect or direct.

1. Indirect Agency Cost- the opportunity lost by the conflict of interest between
managers and stockholders.

2. Direct Agency Cost - consist of two forms:

a. As a corporate expenditure that benefits the management but cost to

stockholders.

b. As an expense that arises from the need to monitor management actions.

Managerial Compensation