FIN 004: FINANCIAL MANAGEMENT

AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer

Made by: Angel Dela Cruz

FINANCIAL STATEMENTS
— Are written records that convey the business activities and the financial performance of a company.

COMPLETE SET OF FINANCIAL STATEMENTS

1. BALANCE SHEETS
— Provides an overview of assets, liabilities, and stockholders’ equity as a snapshot in time. Also known
as the Statement of Financial Position.

2. INCOME STATEMENT
— Primarily focuses on the company’s revenues and expenses during a particular period. It generated
during the operating period, the expenses incurred, and the company’s net earnings.

3. STATEMENT IF STOCKHOLDERS’ EQUITY

— Refers to the assets remaining in a business once all liabilities have been settled.

4. CASH FLOW STATEMENTS | STATEMENT OF CASH FLOW

— Measures how well a company generates cash to pay its debt obligations, fund its operating expenses,
and fund investment.

5. NOTES TO FINANCIAL STATEMENTS

— It compasses a summary of accounting policies and other explanatory notes.

TYPES OF ACTIVITY

1. OPERATING ACTIVITY - Has an impact on Profit or Loss.

2. INVESTING ACTIVITY - Has an impact on non-current assets and other non-operating assets
3. FINANCING ACTIVITY - Has an Impact on non-current liabilities, other non-operating liabilities and
equity.

FINANCIAL MANAGEMENT
— It is often mistakenly associated with accounting, however, financial management goes beyond
accounting. It is more concerned in raising, allocating and controlling a company’s funds.

FINANCIAL STATEMENT ANALYSIS

— It implicates the assessment of a company’s past performance, present condition, and business
potentials by way of analyzing the financial statements to gain information.

3 TECHINIQUES

1. HORIZONTAL ANALYSIS
— Also known as TREND ANALYSIS. It is a technique that involves the comparison of a line item
(account) over a number of period.

2. VERTICAL ANALYSIS
— Is the preparationof common-size financial statements. It is a technique that expresses each financial
statement line item as a percentage of a base amount.

3. RATIO ANALYSIS
— Is composed of a numerator and a denominator. It expresses the relationship between specific financial
statement data.
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

RATIO’S

1. LIQUIDITY RATIO
— Measures the capability of the business to quicken its operating cycle to meet operating obligations and
payments.

2. SOLVENCY RATIO
— Measures the capability of the business to pay its debts.

3. PROFITABILITY RATIO
— Is a measure of operating effectiveness. It measures the ability of the business to recover long-term
investment from money produced by its normal opearting activities.

FORMS OF BUSINESS ORGANIZATION

1. SOLE PROPRIETORSHIP
— This refers to a business legally owned by one person.

2. PARTNERSHIP
— A simple form of business entered into and invested in by two or more persons who contribute money,
property, time and labor or skill to operate a business, and divide profits among themselves.

3. CORPORATION
— This refers to a legal entity created by or composed of at least five and not more than 15 persons,
identified as the Incorporators.

4. Limited Liability Company (LLC)

— The LLC is a relatively new type of hybrid business structure that is now permissible in most states. It
is designed to provide limited liability features of a corporation and the tax efficiencies and operational
flexibility of a partnership.
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

FORMULAS

 HORIZONTAL ANALYSIS

PESO CHANGE = Current Year Amount - Previous Year or Balance of Prior Year
Previous Year or Balance of Prior Year

PERCENTAGE CHANGE = Peso Change balance of Prior Year X 100

Previous Year or Balance of Prior Year

 INVENTORY TURNOVER = Cost Of Goods Sold

Average Inventory

GROSS PROFIT MARGIN = Gross Profit X 100

Net Sales

 PROFIT MARGIN = Net Income X 100

Net Sales

 CASH BUDGET

Beginning Cash Balance

Add. Cash Receipts
Total Cash Available
Less: Cash Disbursement
Excess Cash:

Thank you so much, Irish Joy!!

 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

MIDTERM

MODULE 10

WORKING CAPITAL MANAGEMENT

— It deals with operating activities as they share the profitability and liquidity of the enterprise.
— Difference between current assets and current liabilities.
FORMULA: ALL CURRENT ASSETS - ALL CURRENT LIABILITIES WORKING CAPITAL

FINANCING POLICIES

1. MATCHING POLICY (also known as SELF-LIQUIDATING POLICY or

HEDGING POLICY) - Harmonizing the maturity of a financing resource with an asset's useful life:

SHORT-TERM Assets are financed with short-term liabilities

LONG-TERM Assets are funded by long-term financing resources.

2. CONSERVATIVE (RELAXED) POLICY - Operations are accompanied with too much working
capital; involves financing nearly all asset investments with long- term capital

3. AGGRESSIVE (RESTRICTED) POLICY - Operations are accompanied on a minimum amount

of working capital; uses short-term liabilities to finance, not only temporary, but also a portion or all of
the permanent current asset requirement

4. BALANCED POLICY - Balances the trade-off between risk and profitability in a way stable with
its approach toward bearing risk.
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

CASH CONVERSION CYCLE

— Also known as NET OPERATING CYCLE
— A metric expressing how many days it takes a company to convert the cash it spends on inventory
back into cash by selling its product.

FORMULA: AVERAGE COLLECTION PERIOD + AVERAGE AGE OF INVENTORY +

AVERAGE AGE OF PAYABLE

MODULE 11

CASH is a medium of exchange. It is the most convenient way to measure the value of assets received
and assets parted within an arm's length transaction. It consists of currencies (e.g., coins and bills),
checks, demand deposits, checking accounts and cash equivalents that are used for working capital
operations.

REASONS FOR HOLDING CASH:

1. TRANSACTION PURPOSES - Firms sustain cash balances that they can consume to conduct the
ordinary business transactions; cash balances are compulsory to meet cash outflow requirements for
operational or financial obligations.

2. COMPENSATING BALANCE REQUIREMENTS - A certain amount of cash that a firm must

leave in its checking accounts at all times as part of a loan agreement. These balances give banks
additional compensation because they can be used to satisfy reserve requirements.

3. PRECAUTIONARY RESERVES - Firms hold cash balances in order to handle unforeseen

problems or possibilities due to indeterminate patterns of cash inflows and outflows.

4. POTENTIAL INVESTMENT OPPORTUNITIES - Excess cash reserved are allowed to build up

in expectancy of a future investment opportunity such as a major capital expenditure project.

5. SPECULATION - Firms delay purchases and store up cash for use later to exploit possible
fluctuations in prices of materials, equipment, and securities, as well as variations in currency exchange
rates.

CONTROLLING CASH FLOWS is the foremost objective of cash management.

The following tools may be used for controlling cash flows:

1. Synchronizing cash flow
2. Cash floats on
a. Payments
b. Collections
3. Extending cash payments
4. Availing of cash discounts
5. Optimum transaction size
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

CASH RECEIPT MANAGEMENT AND "DEPOSIT FLOAT"

Cash inflows and outflows should be synchronized. Cash inflows should be accelerated and cash
outflows should be slowed down. One major variable that affects the cash inflows and outflows the
cash float.

CONCEPT OF FLOAT IN CASH MANAGEMENT

FLOAT - Difference between the bank's balance for a firm's account and the balance that the firm
shows on its own books.

TYPES OF FLOAT:

1. MAIL FLOAT - Peso amount of customers' payments that have been mailed by a customer but not
yet received by the seller.
— CASH ON DELIVERY
2. PROCESSING FLOAT - Peso amount of customers' payments that have been received by the
seller but not yet deposited.
— (SHOP NOW, PAY LATER)
3. CLEARING FLOAT - Peso amount of customers' checks that have been deposited but
not yet cleared.

For the issuer of the check, a FLOAT gives a considerable benefit to working capital. FIRMS that are
highly reliant on collection to upkeep their operations have to accelerate the clearing of checks.

CASH EQUIVALENTS are short-term, highly liquid assets that are quickly converted into cash.

MODULE 15

Companies that allow customers to purchase goods or services on credit will have receivables on their
Balance Sheet.

• Receivables are recorded at the time of a sale when a good or service has been delivered but
not yet been paid for.
• Receivables will decrease when payment from customers is received.
• The amount of Receivables estimated to be uncollectible is recorded in an Allowance for
Doubtful Accounts.

ACCOUNTS RECEIVABLE MANAGEMENT

— is the formulating and implementing account management plans and procedures, and ensuring that
receivables are retained at a predetermined amount and collectible as expected.
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

WAYS OF ACCELERATING COLLECTION OF RECEIVABLES

1. Shorten credit terms

2. Offer special discounts to customers who pay their accounts within a specified period
3. Speed up the mailing time of payments from customers to the firm
4. Minimize float, that is, reduce the time during which payments received by the firm remain
uncollected funds

RECEIVABLE MANAGEMENT STRATEGY

— Extending credit when incremental sales outweigh incremental costs or expanding credit sales to
the point that the marginal cost equals the marginal profit (Cost benefit analysis).

Consequences when relaxing Credit Terms:

— Increase in Credit Sales

— Increase in Accounts Receivable
— Increase in Bad Debts
— Increase in Collections cost
— Increase in Opportunity cost on incremental
— Investment in Receivables
— Increase in Sales Discounts
AIDS IN ANALYZING RECEIVABLES:

1. Ratio of receivables to net credit sale

2. Receivable turnover
3. Average collection period
4. Aging of accounts
Factors considered in making Accounts Receivable Policies

1. Credit Standard
THE FIVE C'S OF CREDIT:

CHARACTER - Customers' willingness to pay.

COLLATERAL - Customers’ asset pledged to secure debt
CAPITAL - Customers financial Resources.
CAPACITY - Customers' ability to generate cash flows Capital customers' financial sources.
CONDITIONS - Current economic or business conditions Collateral customers' assets pledged to
secure debt.

2. Credit Terms
— This describes the credit duration and discount given for prompt payment by customers.

3. COLLECTION PROGRAM
— Shortening the average collection period may prevent excessive investment in receivables (low
cost of opportunity) and excessive loss due to delinquency and defaults.

5. TRADE CREDIT is granted in order to increase the sales volume. Nevertheless, it also involves
spending or through the receivables of the company's accounts.

FLOAT occurs from the time of the selling of goods or the provision of services.

MODULE 16

• CREDIT POLICY or control is a business strategy that promotes the selling of goods or
services by extending credit to customers.
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

• Most businesses try to extend credit to customers with a good credit history so as to ensure payment
of the goods or services.
• Companies draft credit control policies that are either restrictive, moderate, or liberal.
• Credit control focuses on the following areas: credit period, cash discounts, credit standards, and
collection policy.

CREDIT POLICY
— The credit and collection functions are the responsibilities of the Treasurer.

COMPONENTS OF CREDIT POLICY

1. Term credit
2. Credit standards
3. Collection policy
TERM CREDIT

CREDIT PERIOD - duration of credit sales Cash DISCOUNTS - given to customers to entice prompt
payment.

The INCREMENTAL WORKING CAPITAL REQUIREMENT is the difference between the

expected increase and the actual requirement for working capital.

CREDIT STANDARDS
— The company's rules in offering credit sales to customers. This relates to the financial ability and
credit worthiness that a consumer needs to show to apply for credit.
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

The Five C's of Credit

1. CHARACTER - That refers to the moral and ethical standard of the person responsible for paying
the loan. It is focused on past credit reports.

2. CAPACITY - It is the willingness of the borrower to pay off the additional credit, as determined by
the analysis of the financial statements based on the cash flows available for paying debt obligations.

3. CAPITAL - This is the amount of financial capital that the organization requesting the loan may
access.

— CAPITAL ASSESSMENT includes a study of the debt-to-equity and the financial structure of
the company.

4. 6CONDITIONS - These are the existing general economic and industry-specific conditions and any
special circumstance involving a particular transaction.

5. COLLATERAL - It consists of customer pledged money. For the case of default, it also requires
the economic value of those properties.

COLLECTION POLICY
— Process starts by sending a billing statement when the due date is near.

CREDIT INFORMATION SOURCES:

FINANCIAL STATEMENTS - Financial ratios like liquidity ratio, asset utilization ratio, and
profitability ratio can give an initial impression if the company is capable of paying its credit.

CREDIT-RATING AGENCIES - sell information to subscribers containing the credit performance

of many companies from different industries.

COMMERCIAL BANKS - The customers simply have to make a formal request to the bank in
question.

TRADE CHECKING - could be done by asking the prospective customer their list of suppliers.
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

FORMULA:
WORKING CAPITAL:
FORMULA: ALL CURRENT ASSETS - ALL CURRENT LIABILITIES

CASH CONVERSION CYCLE:

FORMULA: AVERAGE COLLECTION PERIOD + AVERAGE AGE OF INVENTORY
+ AVERAGE AGE OF PAYABLE

ADDITIONAL FUNDS:
FORMULA:
Inventory ➗ 360 x Average of Inventory
+ Account Receivable ➗ 360 x Average Collection Period
= (THE TOTAL) - Accounts Payable ➗ 360 x Average Age of Payable =
(ADDITIONAL FUNDS)

DISCOUNT FORMULA:
DISCOUNT = LIST PRICE - SELLING PRICE
DISCOUNT = LISTED PRICE x DISCOUNT RATE
RATE OF DISCOUNT = DISCOUNT ➗ LISTED PRICE x 100
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

FINAL REVIEWER
MODULE 18

• Credit policy or control is a business strategy that promotes the selling of goods or services by
extending credit to customers.
• Inventory management refers to the process of ordering, storing and using a company's inventory.
This includes the management of raw materials, components and finished products, as well as
warehousing and processing such items.
• To achieve these balances, firms have developed two major methods for inventory management:
just-in-time (JIT) and materials requirement planning (MRP).

Topic #1 Inventory Management

Techniques:

Inventory Planning - involves deciding the correct quantity and quality, as well as the right time to
order, in order to reduce costs while meeting sales demand.

Inventory Control
— Involves inventory management at a defined level; sufficient stocks should be capable of meeting
business requirements but inventory expenditure should be at a minimum.

The Philippine Accounting Standards (PAS) No. 2 defines inventories as "assets which are held for
sale in the ordinary course of business, in the process of production for such sale, or in the form of
materials or supplies to be consumed in the production process or in the rendering of services."

Inventory is one of the corporations' most expensive and significant properties, contributing as
much as 50 per cent of overall capital invested.

CLASSES OF INVENTORIES

1. Raw materials inventory. It consists of basic materials purchased from other companies to be used
in the production of goods or products.
2. Work-in-process inventory. It consists of partially finished goods requiring additional work before
they become wholly completed.
3. Finished goods inventory. This inventory consists of completely manufactured goods that are not
yet sold.
4. Supplies. These are materials regularly used by the company but do not form part of the finished
goods sold.

IMPORTANCE OF INVENTORY MANAGEMENT

Inventory management serves several important functions and adds a great deal of flexibility to the
operations of a company. The five uses of inventory are as follows:

1. Decoupling function. One of the major functions of inventory is to decouple manufacturing

processes within the organization. If a company does not store up for a good inventory, delays and
inefficiencies will be inevitable.

2. Storing resources. Agricultural and seafood products often have definite seasons in which they can
be harvested or caught, but the demand for these food items are constant during the year. In such cases,
goods can be stored in an inventory.

3. Irregular supply and demand. When the supply or demand for an inventory item is irregular,
storing certain amounts on hand is important.
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz
4. Quantity discounts. Another use of inventory is to take advantage of quantity discounts. Many
suppliers offer discounts for bulk orders.

5. Avoiding stock-outs and shortages. Another important function of inventory is to avoid

shortages or stock-outs. If a company is repeatedly out of stock, customers will likely go elsewhere
to satisfy their needs.

Ways in Managing Inventories

Monitoring the inventory level is not the sole responsibility of the finance manager. Managing one the
most important assets of the company requires the concerted efforts of the operating units of the
organization. People from the production department to the marketing and purchasing departments
must be fully aware of the importance of the investment of funds in inventory.

Controlling inventories as part of financial management is of vital importance to the efficient allocation
capital. Some of the possible ways of managing an inventory are as follows:

1. Monitor inventory ratios. A declining trend of inventory ratios over time should set off a warning
signal for companies to look over the possibilities of deterioration.
2. Do not invest too much funds in an inventory whose price is volatile. Inventory must be
maintained at its optimum level.
3. Hedge. Hedging is done by the company to minimize risk exposure from the fluctuation of foreign
exchange. Foreign exchange risk exists if the company is an importer or exporter of goods.
4. Examine the degree of spoilage. A high volume of spoilage normally occurs due to the quality of
the materials or equipment used.
5. Examine the quantity of inventory with respect to sales. A small amount of ending inventory with
high purchases and low sales volume is likely to be a result of theft or spoilage.
6. Eliminate slow-moving inventories. This is done to avoid carrying costs and improve the cash flow.
7. Watch out for inventory risks. Inventory risks which are associated with technology, fashion, and
perishable products should always be avoided .
8. Forecast the price of the materials needed. If the prices are expected to increase, additional
purchase of materials may be required.

Types of Inventory Costs

There are two basic costs associated with inventory: the ordering cost and the carrying cost. B
Order Cost

Order cost, also known as purchase cost or set-up cost, is the sum of the fixed costs that are incurred
each time an item is ordered. This cost is not associated with the quantity ordered but primarily with
the physical activities required to process the order.

The total ordering cost is computed as:

Total ordering cost = Number of orders x OC

Where: OC = ordering cost per order

The ordering cost is not concerned with the number of units ordered but with the number of times an
order is placed.

2. Costs of carrying inventory

A. Cost of capital on investment

B. Space used
C. Wages of personnel in storage section
D. Personal property taxes
E. Fire and theft insurance
F. Clerical costs
G. Risk of obsolescence and deterioration
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

3. Cost of not having enough inventory (Stockout costs)

A. Lost contribution margin from sales

B. Quantity purchase discounts lost
C. Bottlenecks in production

For the intent of the economic order quantity measurement, if the amount does not adjust depending on
the quantity of inventory on hand, it will not be included in the carrying rate. Under the EOQ formula.
the carrying cost is the total number of units of inventory for the duration multiplied by the carrying
cost per unit.

Total carrying cost = Q/2 x CC

Where:
Q = quantity or the EOQ
CC carrying cost per unit

MODULE 19

 The Economic Order Quantity (EOQ) refers to the ideal order quantity a company should
purchase in order to minimize its inventory costs.
 A company's inventory costs may include holding costs, shortage costs, and order costs.
 The EOQ model seeks to ensure that the right amount of inventory is ordered per batch so a
company does not have to make orders too frequently and there is not an excess of inventory
sitting on hand.
 EOQ is necessarily used in inventory management, which is the oversight of the ordering. storing,
and use of a company's inventory.

Economic Order Quantity or EOQ is the point where the total ordering costs equal the total carrying
costs.

Assumptions of the EOQ Model:

1. Demand occurs year-round at a steady pace.
2. Lead time is constant upon receipt of the orders.
3. The entire ordered quantity is received at once.
4. The unit prices of the purchased products are constant; thus, there can be no discounts on the
amounts.
5. There are no limitations to inventory size.
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

Re-Order Point... When to place an order?

It is the level of inventory that should be placed to replenish the inventory. Under certainty, the firm
must define the following to assess the reorder point:

1. LEAD TIME - it usually takes time to obtain product delivery after placing the order.
2. LEAD TIME USAGE - number of units to be included in the lead period. This is a situation where
the company is currently using enough stocks until the new materials to be used arrive.

DEFINITION OF TERMS FOR INVENTORY MODELS

Stock-out costs are expenses arising from the company's inability toward contingencies such as
inaccurate consumption estimates, production delays, receipts of faulty goods and the like.

Safety storage is the minimum amount of inventory set for protecting the company from
contingencies such as inaccurate use figures, delays in production, receipts of faulty goods and the like.

WHEN IS THE PERFECT TIME TO PLACE AN ORDER?

"When to reorder" is a stock-out problem; the intention is to order at a point in time so as not to run
out of stock before obtaining the ordered inventory but not so early as to retain an excessive quantity of
safety stock.

LEAD TIME
• Normal (Average) Lead Time - It Applies To The Normal Time Delay In Delivering The Goods
Ordered.
• Maximum Lead Time - Adds A Reasonable Allowance For Further Delay To Normal Lead
Time.
• Normal Lead Time Usage = Normal Lead Time X Average Usage
• Safety Stock = (Maximum Lead Time - Normal Lead Time) X Average Usage
• Reorder Point (Without Safety Stock) = Normal Lead Time Usage
• Reorder Point (with safety stock) = Normal lead time usage + safety stock
= maximum lead time x average usage

JUST-IN-TIME INVENTORY
• Is an inventory system where goods are only completed as ordered by customers and materials are
delivered just in time for manufacture.
• The decreased volume of inventory held by a company after it installs a just-in-time fabrication
device is Just-In-Time inventory

Lean Production
— Lean development means doing something with less by following a 'light mindset.' There is much
going on in the manufacturing process which yields a lot of time and waste of resources. The aim in
lean manufacturing is to automate processes and remove all forms of waste that prove costly to the
manufacturing process.
— Lean manufacturing is a customer-focused methodology
— JIT development is an enterprise-centric ideology

MODULE #23

Topic # 1 Short-Term Financing

Short-term Financing (or Current Liabilities) is primarily intended to sustain operations involving
Short-term Investment (or Current Assets). As Current Assets are supposed to be recovered within a
limited period of time, usually not exceeding one year, it is supposed that the Current Liabilities will
be paid within one year.
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

Short-term Financing, as presented in the Balance Sheet, consists of all Current Liabilities. The
revised Philippine Accounting Standards No. 1 lays down the following conditions for existing liability
to be considered:

a. It is expected to be settled in the entity's normal operating cycle.

b. It is held primarily for the purpose of being traded.
c. It is due to be settled within 12 months after the balance sheet date.
d. The entity does not have an unconditional right to defer settlement of the liability for at least 12
months after the balance sheet date.

Examples:
1. Financial liabilities held for trading
2. Bank overdraft
3. Dividends payable
4. Current portion of non-current financial liabilities

Sources of Short-term Financing

1. Trade credit
This is a deal between two parties: the buyer and the seller. The buyer receives the seller's invoice
describing the purchased items, the selling price, the total amount payable and the terms of selling.

Accounts payable - the major source of unsecured short-term financing.

A. Credit terms: credit period, cash discount, cash discount period

B. Analysis of credit terms:

• Taking cash discount - The company should pay on the last day of the discount period, if cash
discount is to be taken.

• Giving up cash discount - If the company is required to give up the cash discount, it should pay on
the last day of the credit.
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

MODULE 24
 A loan is when money is given to another party in exchange for repayment of the loan principal
amount plus interest.
 Loan terms are agreed to by each party before any money is advanced.
 A loan may be secured by collateral such as a mortgage or it may be unsecured such as a credit
card.

INTEREST RATES

Prime rate is the common basis for calculating interest. The prime rate is the bank's lowest rate, and
offered only to its most valued customers.
Fixed interest rate - the rate charged is constant regardless of changes in the prime interest rate. no!
nagbabago
Floating interest rate - A rate charged on a loan that adjusts as the prime rate changes.

Topic #2 Methods of Interest Charging

1. Add-on interest. Based on the outstanding loan balance, the interest is calculated, and whatever
interest is calculated is added to the principal payment.
2. Discounted interest. The estimated interest is deducted directly from the principal amount of the
loan.

Cost of Commercial Bank Financing

The cost of borrowing for commercial banks is calculated against the effective interest rate. That is the
actual rate paid to the borrower by banks or other lending institutions. The effective interest rate is
calculated using the variables as follows:
1. Interest amount
2. Interest rate
3. Days loan outstanding
4. Method of interest charge
5. Type of loan

1. Banker's Acceptances
They are primarily used for transactions between the exporter and the importer to fund the shipping and
handling of the products. Acceptances by bankers are a form of short-term financing in a sense that
they mature in less than a year, usually less than 180 days. This type of security involves a small
amount of risk due to the bank backing of the importer.

2. Commercial Finance Company Loans

A business in dire financial straits needs to go to other banking or lending institutions at times when
credit is inaccessible from the banks. Because of the company's volatile nature, borrowing or lending
Institutions demand higher interest rates than commercial banks'. Often collateral such as receivable
accounts, inventories, or fixed assets are added for security purposes.
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

3. Commercial Papers
A sort of short-term funding, a commercial paper with unsecured promissory note is issued. Only
companies that have the highest credit ratings are allowed to issue commercial papers. Commercial
papers in the form of short-term promissory notes are sold at a discount and have a maturity date that
varies from one to nine months.

Commercial papers are also rated. The higher the credit rating, the lower the interest rate charged.

Discounting of Promissory Notes

A promissory note is an unconditional promise in writing to pay on demand, or at a future date, a
definite sum of money.

The important features of the promissory note are the following:

Face Value - it is the amount of loan to be paid on maturity date.

Date of note - it refers to the date in which the note is written.
Maturity date - it specifies the date of payment as agreed by the borrower and lender.
Interest rate - it is the cost of borrowing.
Creditor - it indicated the one who accepts the promissory note and to whom the payment will be
made.
Debtor - it identifies the borrower who signs the promissory note.

5. Inventory Financing

This occurs when a company does not have anything to give as collateral for a loan. Inventory as
leverage includes consideration of marketability, perishability, and market price stability to provide
confidence that these inventories will be liquidated to a sum sufficient to recover the loan in the event
of failure to pay.

Types of Inventory Financing

1. Floating lien
2. Warehouse receipt
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz

ALL FORMULA
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz
 FIN 004: FINANCIAL MANAGEMENT
AU-FB1-BSBAFM2-M1 | 1ST Semester, CFE Reviewer
Made by: Angel Dela Cruz