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Fundamental Concepts and Tools of Business Finance
Transcript of Fundamental Concepts and Tools of Business Finance
- study of the acquisition and investment of cash
- deals with the allocation of assets and liabilities over time under conditions of certainty and uncertainty
- the science of money management.
- provision of money for commercial use
-effective use of funds
-covers the financial management of private profit-seeking
-procurement and administration of funds with the view of
achieving the objectives of the business.
- is a formal record of the financial activities of a business, person, or other entity.
Categories of Finance:
1. PUBLIC FINANCE
- category of general finance
- deals with the revenue and expenditure patterns of
the government and their various effects on the economy.
*non taxable sources
2. PRIVATE FINANCE
- deals with the area of general finance not classified under public
*Personal Finance - own personal money affairs
*Finance of non-profit organizations - includes private
* Business finance - acquisition & conservation of capital
concerned with three aspects
1. Small business finance
2. Corporation finance
3. Multinational business finance
GOALS OF BUSINESS FINANCE
1. Maximizing Profit
- realizing the highest possible peso or dollar income.
2. Maximizing Profitability
- obtaining a higher rate of return on its investment.
3. Maximizing Profit Subject to Cash Constraint
- the ideal set-up is to maximize profits while at the
same time maintaining a cash balance.
4. Maximizing Net Present Worth
- maximize the current value of the company to its
5. Seeking an Optimum Position Along a Risk-Return Frontier
- firm can set a goal of achieving the best possible
combination of risk and return.
Return of Investment or Net Worth
- the net income generated by the use of investments or net worth of a firm
rate of return
- expressed in percentage
- potential incurrence of loss of money
Calculation of Expected Value Using Risk and Return Factors
= ( Return on Net Worth * Probability )
Return on Net Worth
= ( Expected value / Probability )
= ( Expected Value / Return on Net worth ) * 100
a. Balance Sheet
b. Income Statement
- is the statement produced periodically showing an organization's assets, liabilities and interests of the owners.
- show everything that the firm owns and which has monetary values
- cash, bank deposits, item readily
convertible into cash
- investments in subsidiary or
- properties owned by firm and all
valued at cost less depreciation written off
- present goodwill, patents,
copyrights which are attributed to the firm
- shows the profile of the debts of the company.
- debts that are payable within a few days,
weeks or months
Loans and Notes Payable
- debts evidenced by promissory
notes and oftentimes backed up by collaterals.
Advances from Customers
- downpayments from customers
before orders are processed and this is not yet earned
by the companies
- obligations which have been incurred but
not yet paid
- borrowings and other sources of funds
and longer debts
- issued to every denominations of a large
amount of long-term debt
- interest of the owner or owners in the company
- revenues realized for the sale of commodities and services, cost and expenses
- also referred to as
profit and loss statement
- refers to the gross income from the
production and sale firm's product and service
- include cash collections, receivables or unpaid sale
- monetary values of the goods and services used
in the production and delivery process in order to obtain
Cost of goods Manufactured and Sold
- summary of the
cost of raw materials, labor and various overhead cost involved in the manufacturing process
- represent marketing, general and
- interest expenses and sales discounts
- non-operating income such as interest
income and purchases discounts.
Net Profit or Net Loss
Net Profit or Net Income
- difference between revenues
less period expenses and product costs
- result when expenses and costs are greater
than the revenues
- estimate of income and expenditures for a future period
- contrasted with the income statement and and balance sheet
- completes the financial picture by referring to the future
- are essential elements in the planning and control of financial
affairs of the business
- large corporations place so much emphasis in the annual budget
which is normally broken down to monthly, weekly periods or several
PREPARATION OF BUDGET
- starting point of company budgets.
- shows an estimate of sales in units
and dollars or pesos for each major
subdivision of sales
Materials and Purchases Budget
- estimate of the materials required
by the firm, specified in quantities,
costs, timing of purchase, required
- estimate of the quality of products
that should be produced in accordance
with the sales budget
- shows the monthly breakdown of
quantities of firm's seasonal sales index
SIGNIFICANCE OF FINANCIAL STATEMENTS AND BUDGETS
- provide most of the information required by interested parties.
- could provide the initial information for customers who would want
to establish long-term relationship with the firm
- useful for employees who want to consider long-term employment
with the firm
Five groups interested in knowing the financial standing of the firm:
- primarily concerned with receiving information on the anticipated
- they need to know whether it is wise or not to continue their
relationship with the firm as owners
- concerned with the effective planning and control of the activities of
- useful to management
- the financial statements will help them find out the answer
is the firm is credit worthy.
- for tax and regulatory purposes.
- interested in the protection of their investments and earnings they require over the period of years.
*balance sheet and income statement
Importance of Budgets to Management:
1. anticipate asset needs
2. plan for necessary financing
3. establish standards to test current operating performance
- report sent out yearly by the company to its stockholders or members
1. Balance Sheet
2. Income Statement
3. Auditor's report
4. Chairman's report